**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, 2005**
 **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.)**14505
                    North Hayden Road, Suite 305**
                ****
                ******Scottsdale,
                    AZ**
                ****
                **85260-6951**(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, 2005 were $73,226.
 
 The
          aggregate market value of voting stock held by non-affiliates of National
          Scientific Corporation’s (“NSC’s”) common stock, as of December 28, 2005 was
          approximately $3,487,462 (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 28, 2005, was 95,795,459
  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, 2005
 
 **TABLE
          OF CONTENTS**
  PagePart
                        IItem
                        1.
                    Description
                        of Business
                    3Item
                        2.
                    Properties
                    28Item
                        3.
                    Legal
                        Proceedings
                    28Item
                        4.
                    Submission
                        of Matters to a Vote of Security
                        Holders
                    29Part
                        IIItem
                        5.
                    Market
                        for Common Equity and Related Stockholder
                        Matters
                    29Item
                        6.
                    Management’s
                        Discussion
                        and Analysis of Financial Condition and Results of
                        Operations
                    34Item
                        7.
                    Financial
                        Statements
                    47Item
                        8.
                    Changes
                        in and Disagreements with Accountants on Accounting
                        and Financial Disclosure
                    47Item
                        8A.
                    Controls
                        and Procedures
                    47Item
                        8B.
                    Other
                        Information
                    48Part
                        IIIItem
                        9.
                    Directors,
                        Executive Officers, Promoters and Control
                        Persons; Compliance with Section 16(a) of the Exchange
                        Act
                    48Item
                        10.
                    Executive
                        Compensation
                    51Item
                        11.
                    Security
                        Ownership of Certain Beneficial Owners and
                        Management
                    58Item
                        12.
                    Certain
                        Relationships and Related
                        Transactions
                    59Item
                        13.
                    Exhibits
                        and Reports on Form 8-K
                    60Item
                        14.
                    Principal
                        Accountant Fees and Services
                    61Signatures
                    64
 
 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 products and devices that span a range
            of
            industries. The majority of our products are electronic location-determining
            devices and digital video recording devices. These devices typically
            use small,
            portable radios, in conjunction with equally small but power mobile computers,
            to help establish and report the physical location of people and objects
            to
            which these devices are attached. Some of our location technologies use
            Global
            Positioning System (GPS) technology to determine position. Others use
            small
            computers in conjunction with video cameras and other sensors to record
            incidents on school buses. We also have other products that use non-GPS
            technology to establish and then report position. We refer to our
            location-determining devices as our location tracking products, or as
            location
            tools.
 
 Our
            primary customer focus for these location-tracking products is the safety
            market, related in many cases to the safety of children. Our products
            and
            services help our customers keep better track of their children. Our
            products
            are also used to keep track of adults, and as well to help keep track
            of and
            monitor physical assets, such as equipment or vehicles. Our location
            tracking
            products are often sold as an integrated system, by using them in conjunction
            with software that displays maps and other pertinent information.
 
 We
            have
            focused extensively on developing location tools since early 2002, and
            our
            primary business objective is to generate revenue and profit from the
            sale of
            our location tracking products and related services. The sale of these
            products
            and services resulted in small amounts of revenue late in the fiscal
            year ended
            September 30, 2005.
 3
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 ·
                  Revenue
                      for the fiscal year ended September 30, 2004 was $77,994, all
                      derived from
                      the sale of location tracking products and
                      services;
 ·
                  Revenue
                      for the fiscal year ended September 30, 2005 was $73,226, all
                      derived from
                      the sale of location tracking products and
                      services;
 ·
                  Net
                      losses were $1,140,782 for the fiscal year ending September
                      30,
                      2005;
 ·
                  Net
                      losses were $951,780 for the fiscal year ending September 30,
                      2004.**
  Prior
            to
            2002 we developed products that are electronic components, 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.
            All 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 for their use. This strategy has not generated any revenue
            to date. In
            early 2002, our focus shifted away from further development of our electronic
            component products, but we continue to explore licensing opportunities
            for our
            component products from time to time, keeping in mind that our primary
            objective
            today is to sell our location tools products.
 
 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 14505
            North
            Hayden Road, Suite 305, Scottsdale, Arizona 85260-6951 and our telephone
            number
            is (480) 948-8324. Our Internet site is www.national-scientific.com .
 
 
 **Our
            Business**
 **Location
            Products**
 
 Most
            of
            our customers require tracking or monitoring of an object, asset, or
            person, and
            reporting this information back to a central location. Our location products
            use
            different technologies to determine position of the object and report
            it back to
            the user, usually determined by whether they are trying to track items
            outdoors
            or indoors. Our customers’ choice of the type of technology to use is primarily
            based on their environment. Our location tools products therefore fall
            into two
            different categories depending upon the type of application the customer
            requires. These are Outdoor Location Products and Indoor Location
            Products.
 
 Our
            current location 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.
 
 **Outdoor
            Location Products**
 
 *Overview
            of This Technology*
 
 We
            have
            developed a group of products with the capability to determine location
            using a
            technology called Global Positioning System or GPS. These products report
            the
            location information as well as other desired information such as taking
            digital
            video pictures from a camera 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 product 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 outdoor location products. The diagram below
            shows
            in a general way that the GPS system works with our outdoor location
            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 in a delivery truck. 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
            for
            limited commercial use first made GPS available in the 1980’s. The system
            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.
 
 One
            of
            the main drawbacks with GPS is that the GPS receiver requires a clear
            and
            unobstructed line of sight of the satellites to the GPS receiver. Thus,
            GPS
            receivers generally do not work indoors, where walls and roofs block
            reception.
            Even when the GPS receiver is outdoors, tall building, hills, and dense
            foliage
            such as trees may also block reception.
 
 Prior
            to
            May 2000, for reasons of national security, the U.S. Department of Defense
            intentionally degraded GPS signals to civilian users allowing civilian
            users to
            only obtain accurate information regarding their geographic locations
            accurate
            as to within a radius of about 100 meters. On May 2, 2000, the U.S. Department
            of Defense eased restrictions on civilian use of GPS technology, allowing
            civilian users to now calculate their geographical positions to accuracy
            of 10
            meters or better. Other government systems, such as the Federal Aviation
            Administration’s Wide Area Augmentation System (FAA WAAS) system, have further
            improved accuracy sine 2002 for civilian users in North America. These
            changes
            in policy significantly improves the utility of GPS for many
            applications.
 5
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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.
 
 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 could be, every time the delivery truck
            door
            is open, report its position and time the door was opened. This information
            can
            be used to detect and possibly deter theft from the vehicle. Another
            example
            could be to report every incident of when the car traveled faster than
            an
            allowed speed. This information could be used to deter unsafe driving.
            Another
            could be record the location of every child entering or leaving a school
            bus, as
            well as taking a video of the event. 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 often are less costly to manufacture than GPS devices, although
            due to
            their short range, they may not be as versatile as GPS, which can work
            at
            distances of many miles or more.
 
 Another
            kind of data collection technology we use in some of our products is
            called DVR,
            which stands for digital video recorder. DVR 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 typically 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 own
            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 and when and
            what data
            should be sent back to the user. As we 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
            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.
 6
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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. As of the date of this report,
            there
            are now more 1.5 billion GSM customers in the world in 210 different
            countries,
            according to a report published in September 2005 by the GSM Association.
            We
            believe the use of GSM in our products makes them more attractive to
            customers
            on an international basis.
 
 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 in
            orbit
            around 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 to 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 range the radio signal can go is limited to about 300
            feet.
 
 Since
            most of the time our product will operate 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 range of the base station 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 ** 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 TravadoTM Mini customers.
 
 We
            have
            produced and sold more than 100 units to date. We have presented informational
            samples to various school districts, which are evaluating and testing
            it. We
            have run several pilot projects using Travado IBUSTM with
            school districts in Massachusetts and Arizona and we are currently running
            or
            plan to run Travado IBUSTM demos in Arizona, California, Colorado, and New
            Mexico. We intend to market this product directly and through other sales
            channels. We have a few commercially significant sales of this product
            as of the
            date of this report, with total revenues from this area at approximately
            $131,000 since we introduced the product in December 2004 (this figure
            includes
            unaudited data from our fiscal first quarter for the year ending September
            30,
            2006 - see Subsequent Events below). Sales of the product have steadily
            increased over the last four quarters. However, we believe the sales
            cycle into
            school districts can take up to a year, 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. We do believe that there will be seasonal
            factors
            which can materially impact the sale of this product, primarily driven
            by school
            budget year cycles, but we are not able to assess the impact of these
            factors on
            future sales at this time, as our sales have been so limited to date.
            Our plan
            is to expand into markets beyond education, such as law enforcement and
            homeland
            security. **
 
 ***Travado
            Mini 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 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 new 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 $10,000 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.
 8
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  ***StationMasterTM.*** StationMasterTM
            is an outdoor location product based on GPS technology. It is designed
            to track
            and report the location of fleets of vehicles. We announced this product
            in
            March of 2003. The product contains a GPS and other sensor inputs as
            required by
            the customer. The product can be configured for either real time data
            communication or near time data communication again depending upon the
            customer’s requirements. By upgrading the embedded processor to a single board
            computer we can run applications specifically designed by our customers
            who
            require a mobile general-purpose computer that can also perform tracking
            and
            reporting functions. We have only developed prototypes of this product,
            and have
            not shipped commercial quantities as of this time, other than to a small
            number
            of potential development partners. We have presented samples to various
            customers, who gave us valuable feedback and as such this product evolved
            into
            the newly branded TravadoTM technology platform.
 
 ***Followit*** TM.
            FollowitTM is a small outdoor location product designed to track vehicles. We
            announced availability of this product in March of 2002. The unit contains
            a GPS
            to determine position, as well as a GSM cellular radio to transmit that
            position
            information back to a central location. This location information can
            be
            presented as map coordinates, or it can be shown on a map using our LoboTM
tracking software (see below). The unit is designed and manufactured
            for us in
            Sweden by Followit, AB. We currently have no units in stock as we have
            sold our
            entire inventory of the product, and we currently have no plans to replenish
            stock for this unit, although we will continue to support our existing
            customers. FollowitTM is a trademark of Followit AB of Sweden.
  ***Lobo
            Tracking Software*** TM ***.*** LoboTM
is
            an internet-based mapping application that can be used to display the
            location
            on a computer screen of our locator products in the field. LoboTM is not sold as
            a stand-alone product, but instead is a service we offer to purchasers
            of our
            cellular-phone based locators. We use LoboTM to make our locator product
            offerings more attractive to customers. LoboTM is in active use today by most
            customers using our FollowitTM products. We have generated revenue through the
            sale of service on our LoboTM server service for over two years; since LoboTM is
            part of an overall solution that includes FollowitTM, it is difficult to
            accurately separate the revenue generated solely from LoboTM software from the
            revenue generated from FollowitTM. We estimate that LoboTM has independently
            generated less than $5,000 in revenue over the last three years.
 
 **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.
 
 Most
            of
            our indoor positioning technology is based on measuring the strength
            or loudness
            of a radio signal between the transmitter and the receiver. We do this
            because
            the further away a transmitter is from a receiver, the weaker or quieter
            the
            signal is that you will detect. Many types of radios can measure this
“loudness”
phenomenon and convert it into a useful numerical value. If you have
            three or
            four radio sources spread over an area and you can detect their value
            you can
            then triangulate your position based on that information. This is similar
            to the
            concept used by GPS, but since it does not depend on distant satellites,
            it can
            be applied indoors. However, for this approach to work economically,
            a large
            number of transmitters are required throughout the indoor area. This
            cost has
            greatly limited the deployment of indoor location technology as of the
            date of
            this report.
 9
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  Today
            many organizations are connecting their computers using Wi-Fi technology,
            rather
            than running expensive network cables. Wi-Fi® is a trademark of the Wi-Fi
            Alliance. We often use Wi-Fi without the hyphen in our product names
            to avoid
            confusion with this trademark. We have developed a means of using these
            new
            Wi-Fi networks to provide the transmitters needed for indoor positioning.
            We
            call this ‘piggy backing’ on to the Wi-Fi network, a network which is composed
            of many mounted receiving devices called Wi-Fi access points. The diagram
            below
            shows how our Wi-Fi-based indoor tracking technology works:
 
   ***WiFi
            TrackerTM.*** WiFi
            TrackerTM is an indoor tracking product designed for tracking people and other
            assets. We announced this product in May of 2003. When used in conjunction
            with
            Wi-Fi enabled tracking software, the tags can be easily identified and
            located
            within the network. One of our software partners is a Finnish company,
            Ekahau,
            Inc. They have developed a software system that takes information determined
            by
            our tags and displays the tag’s position using Ekahau’s Positioning EngineTM
tracking software. The stage three version of the prototype, or “developer kit,”
of this product was completed in December of 2003. A newer version of
            the
            developer tag, version 1.2, was completed in August of 2004. We have
            presented
            samples to several customers, and have engaged in competitive field trials
            with
            prospective customers, including NASA, using early versions of this product.
            This product is targeted primarily at commercial users, and uses some
            RFID
            technology in its design. We have made a very small number of sales of
            this
            product as of the date of this report. The feedback from customer was
            that they
            require extended battery life (in excess of one year), and that the location
            signals generated from the Wi-Fi network can be dramatically influenced
            by
            changes in the environment and as such the overall accuracy of the technology
            can be degraded. In March 2005 we froze development of this product.
            We migrated
            the technology over 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. While we still
            receive
            requests for this product we have not found a worthwhile project to justify
            rejuvenating the development project or migrating this technology from
            Wi-Fi
            platforms to the newer ZigbeeTM standard, in order to improve battery
            life.
 10
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 
 ***Gotcha!®.*** Gotcha!®
is a small electronic product designed to alert parents or guardians
            when their
            small child wanders too far away from them. We announced this product
            in
            November of 2002, and began shipments of it during the summer of 2003
            to select
            distribution organizations. The product consists of two parts, one about
            the
            size of a small pager that attaches to a parent, and one the size of
            a key fob
            that attaches to a child. When the pre-set distance is exceeded, the
            child unit
            makes an audible sound to tell the parent that the child has wandered
            too far.
            It is then up to the parent to locate the wayward child by following
            the sound
            of the alert. The unit is designed to work well indoors or outdoors,
            although
            working through walls will tend to limit the unit’s range. We believe most of
            our customers will use this product indoors, in places like shopping
            malls. The
            tracker contains a small radio set used to transmit information between
            the
            parent and child, which are a form of RFID technology. The units are
            fully FCC
            certified and approved for operation in the U.S. The units are also certified
            for use in Canada. We plan to have these units certified for use in other
            countries as and when the business situation warrants. We have filed
            and
            received a successful trademark claim on Gotcha!®. We are currently marketing
            this product through various channels for an average price of approximately
            $35-$50 for a set that includes one parent unit and one child unit. This
            product
            was featured in December of 2003, and again in February 2004, on cable
            television’s Home Shopping NetworkTM, and on QVC in April 2004. We have
            manufactured this unit in quantity and have inventory available for delivery.
            We
            have 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. Accordingly, we marked down our inventory of Gotcha!® products, during
            the year ended September 30, 2005 by $46,775 for estimated obsolescence
            based on
            assumptions about age of the inventory and current demand.
  In
            March
            2005 we began a pilot program in the nuclear power industry of creating
            enhancements to security and safety through the use of a new product
            of ours
            tentatively called Asset Location Tool (ALT)-100, which is based on the
            same
            core active RFID technology as Gotcha!®, only with a much longer battery life.
            We have only produced samples of this alternative use Gotcha!®. We have not
            received any revenue from this project as of the date of this report.
 11
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **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.
 
 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.
            There
            are a number of end user evaluations planned for early 2006 in California
            and
            other places.
 
 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 currently in discussion with a
            number of potential distribution partners in North America and elsewhere.
            We
            have also recently entered non-disclosure agreements and into negotiations
            with
            new distributors for our Gotcha!® products, one for schools in the United
            States, one for distribution services in Canada, and one for distribution
            services in Europe.
 
 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.
 12
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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 and related markets.
 
 We
            exhibited our Travado IBUSTM product at a number of national and local education
            transportation tradeshows including: National Conference and Exhibition
            on
            Transporting Students with Disabilities and Preschoolers in Phoenix,
            AZ March
            15, 2005 that was attended by more than 500 buyers of school bus and
            transportation products and services; California Association of School
            Transportation Officials (CASTO) Annual Conference and Exhibition in
            Sacramento,
            CA March 19, 2005 that was attended by several hundred California school
            transportation officials; Colorado Association of School Business Officials
            (CASBO) / Colorado School Pupil Transportation Association (CSPTA) Vendor
            Show
            in Colorado Springs, CO April 13-14, 2005 that was attended by more than
            200
            Colorado school business and transportation officials; Transportation
            Administrators of Arizona’s Annual Summer Conference in Flagstaff, AZ June 22,
            2005 that was attended by more than 250 buyers of school bus and transportation
            products and services and where we demonstrated IBUSTM on a school bus configured
            for Scottsdale Unified School District and provided by our partner, Auto
            Safety
            House; and School Transportation News 12th Annual North American School
            Bus Expo
            in Reno, NV August 1-2, 2005 attended by more than 450 school transportation
            officials and school district buyers from all over the country. Prior
            to and
            during this particular exhibition we ran a number of promotional events
            that
            generated a significant number of leads from qualified school districts.
            From
            all of these tradeshows we identified a number of potential distributors
            and
            customers with whom the sales group has been following up with meetings,
            proposals, product demonstrations, and pilot programs.
 
 In
            May
            2003, we entered into a relationship with Ekahau to co-market Wi-Fi positioning
            products. In late 2002, we entered into an agreement with FutureCom Global
            of
            Arizona to assist in the distribution of some of our location tools.
            We have
            also entered into agreements with a small Connecticut-based software
            firm known
            as Verify Systems regarding marketing and software support for IBUSTM systems,
            Positus Corporation, to develop and help market the TrakJackTM design, and
            KidMapper for distribution of Gotcha!® to schools and youth organizations. We
            have de-emphasized these older relationships with smaller firms as they
            do not
            assist us in significantly penetrating the school transportation market
            or the
            law enforcement and homeland security markets, which comprise our current
            key
            focus area.
 
 **Location
            Tools and Location Services Industry**
 
 The
            market for Location Tools with GPS-enabled products is projected to grow
            during
            the next few years. The U.S. Department of Commerce reports that the
            compound
            annual growth rate of the GPS market has been approximately 22% over
            the last
            six years. The Department’s studies stated that worldwide GPS sales reached $4B
            by the end of 1998, $6.2B by 2000, and exceed $8B by 2002, the last year
            for
            which figures were available from them. 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:
 
 ·
                  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.
 13
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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.
 
 In
            the
            2002-03 School year it was estimated by School Bus Fleet that there were
            25.4
            million pupils transported daily by 470,395 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 41,699 new buses
            in 2004 an
            increase of 12.7% from 2003. It was further estimated by School Bus Fleet
            that
            in the school year 2004-05 only 19% 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. Regarding child tracking
            there are
            less than 3% of buses equipped with this technology.
 
 **Location
            Tools 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.
 
 Our
            general customers for location-based products include general consumers
            as well
            as businesses that need accurate tracking of people or assets. We have
            sold
            products to this group directly through our Internet website and through
            relationships with stores that specialize in tracking devices and related
            security technologies. We do not know the final destination of all of
            these
            retail sales, but we believe many have been to private investigators
            or law
            enforcement users in the U.S. and Canada. We have also sold products
            to
            developers who are exploring adapting our hardware to meet custom solutions
            for
            specific markets specifically first responders. We have also sold location
            products to customers of the Home Shopping Network and QVC through FutureCom
            Global, and implemented events on other direct marketing outlets, including
            radio commercials via FutureCom Global. We have provided samples and
            demonstration products to several dozen major U.S. retailers, as well
            as a few
            distribution firms outside the U.S., in Mexico, Canada, and Europe.
 14
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **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.
 
 **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.
 15
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **Location
            Tools Products - Research and Development**
 
 Over
            the
            last two full fiscal years, we have spent approximately $645,000 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
            Gotcha!® and 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 (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.
 16
 **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.
 17
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  In
            the
            Video Recording segment there are 22 competitors all offering a conventional
            tape recorder style product. When you look at those offering DVR this
            number
            drops to 12. These product all require the ‘video technician’ to go out to the
            bus to collect the hard drive and then download the contents at a special
            work
            station. 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.
 
 In
            Student Tracking we were only able to determine one competitor of note,
            Every
            Day Wireless.
 
 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.
 
 **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, web-based marketing in a semiconductor intellectual
            property sales organization named the Virtual Component Exchange, or
            VCX, and
            very limited direct sales efforts from time to time with prospective
            semiconductor technology licensees at trade shows and other industry
            events.
 18
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  Our
            long-term strategy is to develop significant new semiconductor products
            that
            build on our existing portfolio of patents in this area, and to tie this
            technology into our location tools products. We believe this may be possible
            because these product families have in common the fact that they both
            rely on
            radios. Our location tools products have radios built into them. Our
            semiconductor products are components that can be used in radios. We
            intend to
            use unique, patentable technologies and other proprietary technologies
            and
            provide these enhancements to the marketplace through joint venture licensing
            agreements with manufacturing firms. We do not intend to directly manufacture
            any of our own technologies. When resources are available we intend to
            continue
            research and development efforts, including simulations and creation
            of working
            prototypes, where possible. Our efforts in the location tools product
            area may
            delay this strategy’s implementation indefinitely.
 
 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:
 
 **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 Therefor
                  
                  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.
 
 19
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **Semiconductor
            Industry, Marketplace, and Competition**
 
 The
            semiconductor industry makes a wide variety of electrical component products
            found in literally millions of different devices in common use throughout
            the
            world. This includes everything from personal computers, to automobiles,
            to
            household appliances, cell phones, children’s toys, power systems, and much
            more. The Semiconductor Industry Association, or SIA, publishes regular
            reports
            on the projected size of this industry. In its October 2005 shipments
            reports,
            In 2004, SIA has estimated the overall size of the semiconductor products
            marketplace at in 2004 was approximately $213B per year, and that for
            2005
            year-to-date shipments through the first three calendar quarters were
            approximately $186B, putting this sector on a track to exceed prior year
            sales.
            SIA’s most current 2005 reports also show a regular trend for average annual
            growth in excess of 10% per year for the overall industry over the last
            twenty
            years, although there have been periods of much slower growth or even
            decline
            for significant portions of the semiconductor marketplace, such as the
            years
            2001 and 2002.
 
 The
            electronics products industry is intensely competitive. Our wireless
            and memory
            technologies experience intense competition from numerous domestic and
            foreign
            companies in all of our semiconductor products.
 
 Based
            on
            our research and development efforts over the last seven years, we believe
            our
            most promising semiconductor product in the near term is our TMOS® product. We
            consider our TMOS® memory technologies to be competitive with existing memory
            technologies in certain applications. The companies that make memory
            similar to
            our TMOS® product are both potential customers as well as potential competitors.
            This is because they can choose to license products we make, or to develop
            competitive technologies themselves or license competitive products from
            others.
            As competitors, the companies that make memory devices similar to ours
            are much
            larger firms and are much better funded. They include firms such as Samsung,
            Alliance Semiconductor Corporation, Cypress Semiconductor Corporation,
            Integrated Device Technology, Inc., Motorola, Inc., Hitachi,
            ST-Microelectronics, Toshiba, Fujitsu, Micron Technology, Inc., and others.
            They
            have substantially greater research and development resources than us.
            Because
            these companies are also potential licensees for our technology, they
            could also
            serve as sources of research and development support for our semiconductor
            products. However, we have been trying for the last three years to interest
            these kinds of large firms in licensing our semiconductor products, and
            to date,
            we have met with little or no success.
 
 **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.
 20
 **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.
                      2017Monolithic
                      Inductor
                  
                  On
                      October 31, 1997, we filed a U.S. Patent application for a
                      Monolithic
                      Inductor. The U.S. Patent Office issued a Notice of Allowance
                      for this
                      application on September 7, 1999. U.S. Patent 6,013,939 was
                      issued for
                      this device on January 11, 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 August 28,
                      2001 under
                      U.S. Patent 6,281,778. The assignments for these patents to
                      us are
                      recorded directly on the issued patent from the USPTO.
                  
                  Oct.
                      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 Therefor
                  
                  On
                      April 11, 2001, we filed a U.S. Patent application for a Communications
                      Receiver with Integrated IF Filter and Method Therefor. The
                      U.S. Patent
                      and Trademark Office issued us U.S. Patent 6,885,853 for this
                      device on
                      April 26, 2005.
                  
                  Pending
 
 21
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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. We expect to file more provisional
            patents on indoor tracking in 2006 as well. The commercial significance
            of this
            patent award and any new provisional patent filing are not known at this
            time.
  **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 $13,800 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.
 22
 **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**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
  **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
            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 and the City of Corpus Christi 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 2006.
 
 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.
 
 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. At the current
            time, we
            believe it is not likely that we would renew this agreement for
            2006.
 23
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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, an 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 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 comments 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, and we believe they plan to file
            another
            one soon.
 
 In
            October 2004, David Mandala also rejoined us as a full time employee,
            after a
            period when his work was limited to our technical advisory board. Mr.
            Mandala is
            focused on development of some of our embedded systems technology, in
            particular, our Travado IBUSTM technology.
 
 On
            October 8, 2004, we announced a new marketing program for our Gotcha!® child
            safety monitor. The plan was to market Gotcha!® to organizations arranging field
            trips, focusing on the product’s ability to monitor several child units
            simultaneously with only one parent unit. The company will target public
            and
            private schools, school districts, parent-teacher associations, and youth
            organizations nationwide. We entered into a contract in support of this
            effort
            with KidMapper, Inc. KidMapper is a privately owned Illinois corporation,
            which
            concentrates on marketing and distribution of a full array of child safety
            products into schools, youth groups, and parent-teacher associations
            (“PTAs”).
            The material terms of that agreement call for KidMapper to aggressively
            use its
            existing extensive network of sales representatives in the U.S. K-12
            marketplace
            to sell Gotcha!® as an adjunct for field trips. In exchange for these efforts,
            NSC will provide a period of exclusivity in the U.S. K-12 territory to
            KidMapper
            for a one-year period of time, and extended payment terms and discounts
            for
            products purchased by KidMapper for this market. The Gotcha!® configuration for
            this contract is 3 parent units and 15 child units. The contract specified
            a
            minimum of 100 sets that were shipped in September 2004. January 19-21,
            2005
            KidMapper exhibited our Gotcha!® child safety device at the Annual Wisconsin
            Education Convention held in Milwaukee, WI. This conference was attended
            by
            Wisconsin school teachers, administrators, and officials. January 27-28,
            2005
            KidMapper also exhibited our Gotcha!® child safety device at the Annual Illinois
            Education Conference held in Chicago, IL. This conference was attended
            by
            Illinois school teachers, administrators, and officials. To date, this
            group has
            not met expectations for developing the market for our Gotcha product
            This
            agreement has born little fruit, and we do not plan to continue it in
            the
            future.
 24
 **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 in calendar year 2005 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.
 25
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  In
            March
            of 2003, we entered into a non-binding Memorandum of Understanding with
            Positus
            Corporation (“Positus”) doing business as, Bike & Cycle Trak USA, Inc., of
            Minneapolis, MN., to develop and co-market tracking products for the
            power
            sports industry. We were later issued a $75,000 purchase order by Positus
            to
            develop the prototype version of this product. We began work in the spring
            of
            2003 to develop this product. A first proof of concept product was shipped
            in
            June of 2003, when the first payment of $10,000 was received on this
            order. A
            second prototype board was developed in the fall of 2003. Positus is
            a small
            privately held technology development company in its startup phase. The
            material
            terms of the agreement provide for us to deliver additional prototypes
            as
            payment is received. Positus is currently seeking additional funding
            for their
            company and as of the date of this report we have not received additional
            monies
            as such we have ceased development of their technology and we do not
            anticipate
            additional prototype development in the near term, although discussions
            regarding certain snow machine safety applications evolving from our
            initial
            design work are on-going.
  In
            January 2002, we signed an agreement with the Virtual Component Exchange
            (“VCX”)
            in which we made the majority of our semiconductor products available
            for
            licensure through their marketing service. VCX is an Internet based organization
            focused on producing Internet tools for trading intellectual property.
            We have
            not seen substantial results from this effort with VCX, and may choose
            to
            discontinue marketing our semiconductor products through this channel
            in the
            future. Our agreement required that we pay a fee of approximately $10,000
            to
            have our semiconductor intellectual property posted on their website
            through
            December of 2003, plus a future royalty of 5% or less should any licensing
            transaction result from such a posting. This vendor has dealt exclusively
            with
            our semiconductor products, and not our location tools products. VCX
            has
            continued to list our semiconductor intellectual property on their website,
            although they have received no additional payments from us since our
            first
            approximately $10,000 payment in 2002. We do however still receive periodic
            enquiries about our technology and follow them up as required.
 
 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.
 
 In
            June
            of 2002, we entered into an agreement with Followit AB, a Swedish technology
            firm, for international distribution of GPS products. The international
            distribution agreement, dated June 1, 2002, grants us non-exclusive distribution
            rights for the FollowitTM locator product in the United States, Canada, and
            Mexico. The FollowitTM locator product uses the Global Positioning System (GPS)
            and cellular technology, with a sophisticated mapping interface to provide
            tracking capabilities for a wide variety of assets or individuals. Distributor
            prices were defined in the agreement and payment terms are letter of
            credit and
            net thirty (30) days from the receipt by us of a correct invoice. The
            contract
            automatically renewed after one year unless either party provides written
            notice
            to end the agreement thirty (30) days prior to the automatic renewal
            period. At
            the current time, we do not anticipate that we will continue using their
            products other than on a rare special order basis, as we have developed
            our own
            tracking and location products, and our focus is not on markets that
            the
            Followit product is targeted at servicing. We continue to service existing
            FollowitTM customers who purchased units from National Scientific Corporation and
            plan to continue to do so for the foreseeable future. **
 26
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  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, and Netgear for Wi-Fi cards. We purchase most of our GPS chipsets
            and
            GPS modules from distributors of SiRf or Trimble products. Our primary
            video
            camera supplier is CCTV Imports. 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 four full time employees, four part time
            employees,
            as well as a number of part time relationships with contractors for certain
            services. Seven employees work in the Scottsdale, Arizona corporate office
            and
            one employee works out of his home in Murphy, Texas. Management believes
            employee relations are good. None of our personnel are covered by collective
            bargaining agreements.
 
 **Subsequent
            Events**
  TurboWorx
            addressed the SEC’s comments fully and filed an amended registration statement
            or Form SB-2/A on October 12, 2005. As of the date of this report, TurboWorx
            is
            expected to file an additional amendment shortly, though the date is
            uncertain.
  On
            November 1, 2005, as an important phase in the current years’ financing plan, we
            entered into a financing program with a U.S. investment fund. The terms
            of this
            program include a five-year Note payable at maturity in November 2010
            for
            $175,000, at an effective annual interest rate of 8%. The transaction
            also
            included 1,200,000 restricted common shares and a conversion/exchange
            option to
            convert the principal amount of the Note into 3,600,000 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 $0.041 (i.e. 90% of the five day average
            market
            closing price of our stock). We received funding of $151,000 from this
            program.
  On
            November 23, 2005, we issued 500,000 of the Company’s restricted common shares
            at an average market price of $0.036 to Mr. Michael Grollman in lieu
            of his
            partial forgiveness of the Company’s cash indebtedness to him.
  On
            November 23, 2005, National Scientific Corporation’s (the “Company’s”)
            independent auditors, Hurley & Company (“Hurley”), were dismissed and
            concurrently the Company has engaged Epstein Weber & Conover, PLC (“EWC”) as
            the Company’s independent auditors for the fiscal year ending September 30,
            2005. This decision was approved by the Audit Committee of the Board
            of
            Directors of the Company, and the Company’s Board of Directors.
 
 In
            November 2005 we began informal discussions with a division of Tyco to
            supply
            TravadoTM and TravadoTM Mini products to their mass transport bus fleets.
 27
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  In
            December 2005 we started informal discussions and development with a
            local
            Private Radio Network Provider to jointly develop and market a modem
            that would
            allow school districts to piggyback GPS telemetry onto their private
            radios and
            as such get real time tracking of their vehicles. Consummation of these
            discussions is expected to result in the sale of TravadoTM into several school
            districts.
 
 Between
            October 1, 2005 and December 28, 2005 we have delivered 62 units of our
            Travado
            IBUSTM and 2 units of our TravadoTM Mini and invoiced approximately $77,000 for
            the shipments for this first quarter of the fiscal year ending September
            30,
            2006. These figures are unaudited, but are included here because we believe
            this
            revenue trend may be useful to investors in evaluating the current status
            of our
            firm.
 
 
 **Item
            2.****Properties**
 
 NSC
            leases 1,927 square feet of office space at 14505 North Hayden Road,
            Suite 305
            Scottsdale, Arizona 85260-6951. The lease for the Scottsdale facility
            expires
            October 31, 2006 and is at a rental rate of $3,051 per month before taxes
            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
            Proceedings**
 
 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.
 28
 **Table
                  of Contents**
 **Index to 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.
 
 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 865 shareholders of record, also known as “registered shareholders,” of our
            common stock as of December 31, 2005. 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.
 29
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  National
            Scientific Corporation - Market for Common Equity:
 
 **High**
                  
                  **Low****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**Fiscal
                      2004**Fourth
                      Quarter (through September 30, 2004)
                  
                  $
                  0.170
                  
                  $
                  0.072Third
                      Quarter (through June 30, 2004)
                  
                  $
                  0.190
                  
                  $
                  0.115Second
                      Quarter (through March 31, 2004)
                  
                  $
                  0.210
                  
                  $
                  0.135First
                      Quarter (through December 31, 2003)
                  
                  $
                  0.230
                  
                  $
                  0.130**Fiscal
                      2003**Fourth
                      Quarter (through September 30, 2003)
                  
                  $
                  0.210
                  
                  $
                  0.140Third
                      Quarter (through June 30, 2003)
                  
                  $
                  0.280
                  
                  $
                  0.095Second
                      Quarter (through March 31, 2003)
                  
                  $
                  0.190
                  
                  $
                  0.085First
                      Quarter (through December 31, 2002)
                  
                  $
                  0.280
                  
                  $
                  0.065
 
 
 **Dividends**
 
 As
            of
            September 30, 2005, 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.
 30
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **Description
            of Securities**
 
 **Common
            Stock**
 
 As
            of
            September 30, 2005 we are authorized to issue up to 187,000,000 shares
            of common
            stock, par value $0.01 per share. As of September 30, 2005, there were
            94,095,459 shares of common stock outstanding. We had 859 shareholders
            of record
            of common stock on September 30, 2005. 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.
 
 **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.
 31
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **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.
 
 *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 will 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.
 32
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  *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.
 
 *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.
 33
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  *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, 2005, we have issued options to purchase an aggregate of
            3,789,257
            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 St ock
            Option Plan.
 
 
 **Item
            6.****Management’s
            Discussion and Analysis of Financial Condition and Results of
            Operation**
 
 **Overview**
 
 Our
            business focuses on the research, development, and sale of location tools
            used
            to track or monitor people or objects such as vehicles or other mobile
            equipment. We also own devices and designs that are used in the semiconductor
            and electronics industries.
 
 From
            1996
            to 2002, we engaged primarily in developing devices and designs that
            are used in
            the semiconductor and electronics industries. This resulted in a number
            of U.S.
            patents, but did not produce any significant amount of revenue. Additionally,
            during the period from 2000 to 2001 we engaged in the business of distributing
            electronic and other semiconductor-related products to customers in Asia
            and the
            United States in order to generate revenue. In 2001, we discontinued
            those
            activities because they did not produce the profit margins we had originally
            expected.
 
 In
            2002,
            we began to focus on applications of electronic devices in the location
            tools
            market. We also began to decrease our focus on semiconductor designs
            and
            devices, due primarily to difficult market conditions in the semiconductor
            industry. We plan to continue our focus on location tools for the foreseeable
            future.
 34
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  Our
            first
            shipment and sale of our consumer-oriented location tools began with
            the sale
            and shipment of our FollowitTM product in August 2002.
 
 In
            December of 2002, we entered into an agreement with Electroconnect of
            Scotland
            to produce a prototype and then manufacture our Gotcha!® product. This agreement
            is based on us paying for units as ordered, and does not require minimum
            purchase amounts.
 
 In
            December 2002, we entered into an agreement with FutureCom Global, Inc.
            (FCG) of
            Arizona (now doing business as 21st Century Technology) to assist us
            in the
            marketing and distribution of our location tools. The term of the agreement
            is
            two years and it is renewable for up to one additional year. The agreement
            allows FCG to market our FollowitTM, StarPilotTM, and Gotcha!® products through
            media and trade shows, as well as through networks of sales representatives
            in a
            variety of consumer marketplaces, including general retail. The agreement
            may be
            extended to the new company, but given the lack of current activity from
            this
            group in selling our products, we do not believe this is likely.
 
 Our
            sales
            during the fiscal year ended September 30, 2004, consisted largely of
            sales of
            our Gotcha!® child safety product through FutureCom Global, and to a lesser
            extent of our GPS related products, including IBUSTM to Verify Systems, and early
            prototype versions of the TrakJackTM product to Positus Corp.
 
 During
            fiscal year 2005, the Company increased its focus on its newer business-oriented
            products, such as Travado IBUSTM, which entered the market in March 2005, and
            decreased its focus on consumer products, such as Gotcha!® and FollowitTM. During
            the last two quarters of fiscal year 2005, we have generally seen a gradual
            increase in the sales of our business-oriented products, although we
            can make no
            assurance that this trend will continue into any future periods.
  **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 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.
 
 **Results
            of Operations**
 
 **Years
            Ended September 30, 2005 and 2004**
 
 We
            generated $73,226 and $77,994 of revenue for the fiscal years ending
            September
            30, 2005 and 2004, respectively. During the year ended September 30,
            2005, the
            Company increased its focus on its newer business-oriented products,
            such as
            Travado IBUSTM, which entered the market in March 2005. The initial deliveries to
            the Scottsdale Unified School District and Auto Safety House, in the
            last seven
            months of the fiscal year generated sales of approximately $64,000 while
            the
            consumer-oriented products such as Gotcha!® and FollowitTM generated sales of
            approximately $9,000 for the entire fiscal year. During the year ended
            September
            30, 2004 our Gotcha!® products generated revenues of approximately $74,000, and
            the WiFi TrackerTM and FollowitTM lines produced revenues of approximately
            $4,000.
 35
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  Gross
            profit increased to $24,446 in fiscal 2005 from $22,397 in fiscal
            2004.
  Costs
            and
            expenses increased to $1,047,937 in fiscal 2005 from $952,635 in fiscal
            2004.
 
 Salaries
            and benefits, of administration and marketing personnel decreased to
            $337,708 in
            fiscal 2005, from $393,308 in 2004. This decrease is mainly attributable
            to the
            reduction of hours worked by part-time employees.
 
 Research
            and development expenditures increased to $391,591 for the fiscal year
            ended
            September 30, 2005, from $253,257 for the previous fiscal year as we
            continued
            to engineer and develop new location tools.
 
 Stock
            compensation decreased to $16,173 in fiscal 2005 from $45,421 in fiscal
            2004. In
            fiscal 2004 the majority of the stock compensation expense related to
            the
            issuance of vested options to employees and consultants at an exercise
            price
            that was below the then-current market value. Many of these options were
            granted
            in fiscal 2004 in order to conserve operating cash. In fiscal 2005, warrants
            were recorded at the Black-Scholes value on the issue date. In prior
            years
            warrants that were issued were not recorded as an expense.
 
 Other
            expenses decreased in fiscal 2005 to $255,690 from $260,649 in fiscal
            2004 as a
            result of decreases in expenses such as rent, office costs, marketing
            and
            selling, legal costs, and professional fees. The expense reductions were
            somewhat offset by higher bad debt reserves and software expenses.
 
 We
            marked
            down our inventory of Gotcha!® products, during the year ended September 30,
            2005 by $46,775 for estimated obsolescence based on assumptions about
            age of the
            inventory and current demand.
  We
            have
            focused an increasingly significant amount of our time and energy on
            development
            of new sources of revenue through the building of new distributor and
            customer
            relationships. This has included increased attendance at trade shows,
            increased
            expenditures on promotional literature, Internet advertising and promotion
            through website listings, on-site customer product demonstrations, and
            other
            marketing related activities intended to foster customer acquisition.
            We have
            also developed plan to continue to develop strategic partnerships with
            other
            technology firms to assist our marketing efforts. We will continue to
            research
            and implement innovative ways to take our technology expertise and products
            to
            market, across our entire portfolio of semiconductor and electronics-related
            devices.
 
 In
            January, 2003 we initiated a restricted stock retainage program or plan
            (“Stock
            Retainage Program”) to retain key staff during a period of financial difficulty
            in calendar year 2002. Our board allocated approximately $150,000 in
            restricted
            common stock from this Stock Retainage Program 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 NSC 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 in order to retain key employees during
            this
            period of fiscal hardship. 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 and again in February of 2005, our board extended this
            program
            into 2006, and set new sales growth objectives for the year at a level
            50%
            higher than the previous year’s program for 2005, and unchanged for 2006, giving
            plan participants an additional two years 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. All of the stock under this
            program
            is restricted under SEC Section 144. As of September 30, 2005, none of
            these
            grants have been fully earned, and they remain subject to substantial
            risk of
            forfeiture.
 36
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  We
            expect
            to continue to increase our focus on sales and marketing of our Location
            ToolsTM
products for the foreseeable future. This includes significantly increased
            attendance at trade shows and other product marketing events as well
            as recent
            additional investment in product promotion through outreach programs
            with the
            trade press, using public relations resources. Partly as a result of
            these
            efforts and others, revenues have begun to be generated from operations.
            It is
            thus possible that we may emerge from its development stage status at
            sometime
            during the coming year.
 
 **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, 2005, NSC’s cash and cash equivalents totaled $1,616 and total
            current assets were $35,387. 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,
            2005, NSC has total liabilities of $994,860, including notes payable
            of
            $219,150, accounts payable of $256,578 and accrued expenses of $519,132.
            The
            accounts payables total of $256,578 includes invoices of approximately
            $80,000
            that are aged over three years. The accrued expenses total of $519,132
            includes
            approximately $269,000 of unpaid wages.
 
 We
            have
            an accumulated deficit of approximately $23.9 million as of September
            30, 2005
            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,
            2005 totaled approximately $8.4 million.
 
 Cash
            used
            in operations was approximately $599,498 for the year ended September
            30, 2005
            compared with approximately $880,334 for the year ended September 30,
            2004. The
            decrease in cash used in operations is attributable to the increased
            level of
            deferrals during fiscal 2005 of salaries and reimbursement of expenses
            to
            officers and employees for production supplies acquired on behalf of
            the
            Company.
 
 We
            have
            financed our operations primarily through the sale of common stock, granting
            of
            options and warrants, and through some debt financing. Those activities
            since
            2001 are summarized below.
 
 In
            March
            2001, we established a line of credit with Wells Fargo HSBC Trade Bank
            totaling
            $500,000. The line of credit was collateralized with deposits at Wells
            Fargo
            Bank. Borrowings under the line of credit bear interest at the prime
            rate of
            Wells Fargo Bank, National Association. At September 30, 2001, there
            was
            $430,000 outstanding under this line of credit. At September 30, 2002
            the entire
            line of credit had been repaid, and the line of credit had been
            terminated.
 37
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 In
            May
            2001, we entered into a common stock purchase agreement with Coriander
            Enterprises Limited, a British Virgin Islands corporation, for the future
            issuance and sale of shares of our common stock. A registration statement
            filed
            with the Securities and Exchange Commission was declared effective on
            October
            11, 2001. This stock purchase agreement established an equity line of
            credit.
            Under this arrangement, we at our sole discretion, were to make up to
            24 draw
            down requests over a two year period, pursuant to which Coriander Enterprises
            was obligated to purchase up to $24 million of our common stock, at prices
            that
            will vary based upon the market price of the common stock. As of August
            2002,
            changes in the market price and/or trading volume of our common stock
            have
            terminated our ability to draw down funds under the equity line of credit.
 
 On
            April
            29, 2002 Lou Ross, then-Chairman of the Board, sold 240,000 shares of
            common
            stock in the Company. The proceeds (net of sales commissions) of $41,125
            were
            loaned to the Company. The loan, which bears 6% interest per annum, is
            payable
            in twelve monthly installments of $3,649 beginning October 29, 2002.
            In July
            2002, Lou Ross, then-Chairman of the Board, sold 260,000 shares of common
            stock
            in the Company. The proceeds (net of sales commissions and approximately
            $4,000
            withheld by Mr. Ross for taxes) of approximately $34,000 were loaned
            to the
            Company. The loan, which bears 6% interest per annum, is to be repaid
            in twelve
            installments of $3,022 beginning February 28, 2003. This loan was restructured
            in June of 2003 to a three-year non-interest bearing loan, with no payments
            due
            until the end of the loan period. The Company has the option any time
            during the
            loan period to pay this Note early using restricted stock or cash.
 
 On
            June
            11, 2003, the Company issued a three-year interest free convertible note
            of
            $43,250, with no payments required of the Company until the end of the
            three-year period, to its then-Director Lou Ross for past services rendered
            (See
            10-KSB report for the year ended September 30, 2003). The Company can
            pay this
            note at any time before the three-year period elapses with either cash
            or its
            common restricted stock or a combination of cash and stock, at its sole
            discretion. Mr. Ross retired from the Company’s board on September 30, 2003.
            Based on the maturity date of the note, this note was classified as non-current
            liabilities at September 30, 2004 and as current liabilities at September
            30,
            2005.
 
 During
            the fiscal years ending September 30, 2004 and 2003, NSC issued 160,084
            and
            946,270 shares, respectively, of NSC common stock to consultants in lieu
            of cash
            compensation. During fiscal 2004, the Company granted 790,000 options
            to NSC
            consultants and employees to purchase shares of NSC’s 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 2003, substantially all option grants were
            issued
            to employees. During fiscal 2005, no options were granted to consultants
            or
            employees. The only options granted were issued to an outside director
            for board
            fees.
 
 In
            November 2002, the Company commenced a private offering of restricted
            common
            stock and common stock purchase warrants and raised approximately $470,000
            in
            cash and $30,000 in debt forgiveness from this effort. The Company issued
            11,625,000 shares of restricted common stock for the cash collected and
            500,000
            shares of restricted common stock for the forgiven debt, and granted
            4,800,000
            warrants to purchase common stock at a strike price of $0.30 and 200,000
            warrants at a strike price of $0.50 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. All of the 5,000,000 warrants
            issued
            in connection with this offering expired on December 31, 2004 without
            being
            exercised.
 38
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 In
            June
            2003, the Company commenced a private offering of restricted common stock
            and
            common stock purchase warrants. The Company raised from this offering
            in the
            fiscal year ending September 30, 2003, approximately $200,000 in cash,
            and
            issued 2,500,000 shares of restricted common stock and granted 2,000,000
            warrants to purchase common stock at exercise prices ranging from $0.35
            and
            $0.50 per share. The Company has continued to raise funds under this
            private
            offering after September 30, 2003. From June 2003 through December 31,
            2003, the
            Company had raised a total of approximately $280,000 in cash from this
            effort,
            and issued a total of 3,300,000 shares of restricted common stock and
            granted a
            total of 2,400,000 warrants to purchase common stock at exercise prices
            ranging
            from $0.35 to $0.75 per share. The warrants expire on June 30, 2006.
            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.
 
 In
            January of 2004, we entered into a financing program with a U.S. investment
            fund. The terms of this program include a six-month Note payable at maturity
            in
            July 2004 for $160,000, at an effective annual interest rate of 13%.
            The
            transaction also included 640,000 warrants good for three years to purchase
            the
            Company’s restricted stock, at $0.13 during the first and second year of the
            warrant’s lifetime, and $0.15 during the third and final year of the warrant’s
            lifetime. These warrants include anti-dilution provisions, as well as
            registration rights in the event that we file an appropriate registration
            statement with the SEC during the next three years. This $160,000 Note
            was
            repaid in full in May of 2004.
 
 During
            March 2004 we secured short-term loans in the aggregate principal amount
            of
            $36,000. The interest rate on the loan was less than 10% plus minor processing
            fees. The notes were repaid in full in April 2004.
 
 On
            March
            15, 2004, NSC commenced a private offering of restricted common stock
            units
            through a placement agent. The offer consisted of one share of common
            stock and
            a warrant to purchase three quarters of a share of common stock. On June
            14,
            2004, we completed this private placement with aggregate gross proceeds
            of
            approximately $1.1 million and issued 10,334,266 shares of restricted
            common
            stock and warrants to purchase 7,750,700 shares of our common stock at
            an
            exercise price of $0.11 per share. The warrants have a term of five years,
            and
            include certain registration rights. After deducting commissions and
            other
            expenses relating to the private placement, we received aggregate net
            proceeds
            of approximately $972,864. Additional disbursements by the Company related
            to
            the private placement further reduced the net proceeds to $935,044, the
            majority
            of which was spent by September 30, 2004. We invested part of the proceeds
            of
            the private placement to finance the continued development and marketing
            of
            Wi-Fi and RFID related Location ToolsTM products. We used part of the proceeds
            for expanded marketing and sales efforts, for further commercialization
            of our
            other Location ToolsTM product line, and for other corporate purposes. The Units
            were sold to accredited investors pursuant to an exemption from the registration
            requirements of the Securities Act of 1933 (the “Act”) and applicable state
            exemptions from registration. On June 24, 2004, we filed a Registration
            Statement on Form SB-2 with the Securities and Exchange Commission in
            connection
            to register the shares. The Securities and Exchange Commission declared
            the
            Registration Statement effective on July 7, 2004.
 
 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 the common stock of Turbo plus $240,000. 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.
 39
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 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.
            As of
            September 30, 2005, these loans were outstanding.
 
 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%. $1,100 was
            repaid in
            September 2005 leaving $16,900 outstanding at September 30, 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.
 
 At
            September 30, 2005 there were 15,434,197 outstanding warrants to purchase
            15,434,197 shares of common stock, at prices ranging from $0.062 to $0.75,
            with
            expiration dates from June 2006 to April 2011. There were 18,249,197
            outstanding
            warrants at September 30, 2004, 5,000,000 of those warrants expired during
            fiscal year 2005.
 
 We
            believe that our current cash position as of September 30, 2005, including
            cash
            funds arising from the exercise of outstanding options, and secured plant
            assets
            from legal settlements, from equity placement sales and other capital
            raising
            efforts, 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.
 40
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **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.
 
 **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, 2005, we had an accumulated deficit of $23,850,462.
            We had
            revenue for the fiscal year ended September 30, 2005 of $73,226 and a
            net loss
            for the same fiscal year of $1,140,782. 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, 2005 and 2004.
 41
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **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 Naturalization
            Service
            (INS) may at any time withdraw their permission to work in the United
            States for
            us. 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 a
            development stage company with limited revenue. 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 $151,220 in net revenue
            generated from this line of business for the two-years ending September
            30,
            2005. 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.
 
 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
            available
            on acceptable terms, if at all. If such financing is not available on
            satisfactory terms, we may be unable to continue, 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.
 42
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **We
            rely heavily on international third parties to manufacture our
            products.**
 
 We
            currently lack the facilities to manufacture our products on a commercial
            scale **.** If
            any of
            our customers require our location tools in commercial quantities in
            the near
            term, we will have to rely on one or more third-party contractors, some
            of which
            are outside the United States such as Electroconnect, Ltd., to manufacture
            the
            products 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, 2005, we derived approximately 88% of our
            total
            revenue from three 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.
  **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.
 43
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **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 Gotcha!® is used to help keep track of children 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 us and our customers 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.
 
 **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.
 44
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **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 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.
  **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.
 45
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **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 fiscal 2004, our stock
            price
            ranged from a high of $0.230 to a low of $0.072 per share, and in fiscal
            2005
            our stock price ranged from a high of $0.135 to a low of $0.034. 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.
 
 **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. ****
 46
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **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 multiple
            senior
            officers of National Scientific, at least one of whom operates outside
            of the
            corporate finance and accounting area, and one of whom operates within
            the area
            of corporate finance and accounting. This review process includes review
            of
            significant accounting records and source documents, such as general
            journal
            entry records, accounts payable records, and monthly bank statement
            reconciliations. Documentary records are kept of this review
            process.
 
 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 and its President, of the effectiveness,
            as
            of September 30, 2005, 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
            and
            its President concluded that the Company’s disclosure controls and procedures
            are effective.
  There
            have been no significant negative changes in the our internal control
            over
            financial reporting during the year ended September 30, 2005 that have
            materially affected, or are reasonably likely to materially affect, the
            Company’s internal control over financial reporting.
 
 These
            controls and procedures for our disclosure as well as our internal controls
            over
            financial reporting are processes designed by, or under the supervision
            of, the
            principal executive and principal financial officers, and effected by
            the board
            of directors, management and other personnel, to provide reasonable assurance
            regarding the reliability of financial reporting and the preparation
            of
            financial statements for external purposes in accordance with generally
            accepted
            accounting principles. We believe that a control system, no matter how
            well
            designed and operated, cannot provide absolute assurance that the objectives
            of
            the control system are met, and no evaluation of controls can provide
            absolute
            assurance that all control issues and instances of fraud, if any, within
            a
            company have been detected. However, our Chief Executive Officer and
            Acting
            Chief Financial Officer and our President have concluded that the Company’s
            disclosure controls and procedures and its internal controls and procedures
            are
            effective at providing that reasonable level of assurance.
 47
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 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, Epstein Weber & Conover, PLC have not issued an
            attestation report on management’s assessment of the Company’s internal control
            over financial reporting, as it is not yet required since the Company
            has less
            than $75 million in “public float.”
 
 
 **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
                  
                  44
                  
                  CEO,
                      Chairman of the Board of DirectorsGraham
                      L. Clark
                  
                  50
                  
                  President,
                      Director, SecretaryGregory
                      Szabo
                  
                  52
                  
                  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.
 
 *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.
 48
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 *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.
 
 *David
            Mandala.* Mr.
            Mandala is our Chief Systems Architect. Mr. Mandala serves as lead developer
            for
            several GPS tracking product lines and is responsible for research &
development, architecture, prototype creation and client product presentations.
            Most recently prior to joining NSC Mr. Mandala led a group of OLAP developers
            at
            Texas Instruments. Mr. Mandala previously worked for NSC during 2002
            and 2003.
            Prior to working for NSC he developed an on-line lab infrastructure for
            embedded
            computer hardware and server systems for DevelopOnline Corporation; he
            developed
            a number of database and courseware packages for Linuxcare, Inc., and
            has also
            made significant technological contributions to Ciba-Geigy, Dragon Medical
            Interactive Communications, and Sony Corporation. Mr. Mandala received
            his
            formal electronics education while serving in the United States
            Navy.
 
 *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.
 
 *Susan
            L. Regan, Esq.* Ms.
            Regan
            has been part-time legal counsel for us since 2002. 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 an
            in house
            counsel.
 
 *Karen
            A. Fuhre* .
            Ms.
            Fuhre is responsible for investor relations for us, and is involved as
            well in
            product marketing. She joined us in 2001. She is responsible for investor
            communications, certain matters surrounding parts of SEC compliance,
            and
            strategic planning. Ms. Fuhre is also responsible for our website, collateral
            materials, and media relations. Before joining us, Ms. Fuhre spent approximately
            five years with FINOVA, a publicly traded commercial lender, where she
            worked
            with the company’s financial and informational communications areas. Ms. Fuhre
            earned a Bachelor of Science Degree in Marketing from Northwest Missouri
            State
            University and a Paralegal Certificate in Civil Litigation from the University
            of San Diego.
 49
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 *Eric
            Himmer.* Mr.
            Himmer is a full-time senior wireless design systems engineer for us.
            Mr. Himmer
            has more than 25 years of systems and software engineering and programming
            experience. He is responsible for developing and designing tracking and
            other
            firmware and software used in many of the Company’s wireless location products
            such as WiFi TrackerTM and IBUSTM. Before joining NSC, Mr. Himmer was an embedded
            systems software engineer for GlobespanVirata, Inc. (formerly Intersil)
            where he
            designed and developed IEEE 802.11 wireless networking firmware and software
            systems in conjunction with hardware product development. Prior to that,
            Mr.
            Himmer served as a systems programmer and systems engineer for Datapoint
            Corporation for a number of years. Mr. Himmer has a B.S. in Systems Engineering
            from the University of Arizona.
 
 **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 2005.
            Each
            serving director attended 100% of the meetings held in 2005 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 2005. Michael A. Grollman
            has been a
            director since November of 2000. Graham L. Clark has been a director
            since
            August of 2002. Former director Mr. Lou Ross retired from the board on
            September
            30, 2003 for personal reasons, citing no conflicts with management or
            board
            policy. 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 2005.
 
 **Audit
            Committee**
 
 Our
            Board’s audit committee was established in December 2000. The audit committee
            met two (2) times during calendar year 2005. 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, 2005, as audited by Epstein Weber
&
Conover, PLC, National Scientific’s independent auditors. Epstein Weber &
Conover, PLC 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 calendar year 2004, and has met once in calendar
            year
            2005. 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, 2004
            and 2005, 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.
 50
 **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, 2005, 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 www.national-scientific.com or by
            writing to the Company and requesting one.
  **Item
            10.****Executive
            Compensation**
 
 The
            following table sets forth certain information regarding annual and long-term
            compensation for services rendered to us during the fiscal years ended
            September
            30, 2005, 2004, and 2003 to the Chief Executive Officer of National Scientific,
            and other named executive officers who served us in fiscal year 2005
            and whose
            total salary and non-cash compensation exceeded $100,000 for the applicable
            fiscal periods. The table below includes salary earned and paid in the
            fiscal
            year ended September 30, 2005.
 51
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **Summary
            Compensation Table**
  **Long-Term
                      Compensation****Annual
                      Compensation**
                  
                  **Awards**
                  
                  **Payouts****Other**
                  
                  **Restricted**
                  
                  **Securities****Annual**
                  
                  **Stock**
                  
                  **Underlying**
                  
                  **LTIP**
                  
                  **All
                      other****Name
                      and Principal**
                  
                  **Fiscal**
                  
                  **Salary**
                  
                  **Bonus**
                  
                  **Compensation**
                  
                  **Award(s)**
                  
                  **Options/**
                  
                  **Payout**
                  
                  **Compensation****Position**
                  
                  **Year**
                  
                  **($)****(1)**
                  
                  **($)**
                  
                  **($)**
                  
                  **($)****(2)**
                  
                  **SARs
                      (#)**
                  
                  **($)**
                  
                  **($)****(3)**Michael
                      A. Grollman
                  
                  
                  2005
                  
                  
                  69,200
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  110,800CEO,
                      Chairman(4)
                  
                  
                  2004
                  
                  
                  94,200
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  70,8002003
                  
                  
                  64,640
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  70,360Graham
                      L. Clark
                  
                  
                  2005
                  
                  
                  87,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  63,000President,
                      Director(5)
                  
                  
                  2004
                  
                  
                  101,100
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  41,4002003
                  
                  
                  69,639
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  50,360Lou
                      L. Ross
                  
                  
                  2005
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Former
                      CEO &
                  
                  
                  2004
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Chairman
                      (retired)(6)
                  
                  
                  2003
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  17,650
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Sam
                      H. Carr
                  
                  
                  2005
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Former
                      CFO(7)
                  
                  
                  2004
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –2003
                  
                  
                  –
                  
                  
                  –
                  
                  
                  32,362
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Gregory
                      Szabo
                  
                  
                  2005
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  1,000Director(8)
                  
                  
                  2004
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  2,250
 
 (1)
                  Unpaid
                      wages in this table are subject to Agreements with listed persons
                      that
                      allow for interest of approximately prime rate plus 2% accruing
                      on those
                      unpaid wages until paid. These accruals for interest are shown
                      as
                      approximate through fiscal year-end September 2005.(2)
                  Stock
                      grants included in this column are for common stock valued
                      at 90% of the
                      closing sales price for such shares on the date of grant. Closing
                      sales
                      price at fiscal year end September 2005 was approximately $0.045
                      per
                      share, and closing sales price at fiscal year end September
                      2004 was
                      approximately $0.075 per share.(3)
                  Includes
                      unpaid salary forgone at the election of executive officers
                      Grollman and
                      Clark pursuant to a registrant program under which stock, stock-based
                      or
                      other forms of non-cash compensation may be received by a named
                      executive
                      in lieu of a portion of annual compensation earned in a covered
                      fiscal
                      year.
 (4)
                    Salaries
                        of $110,800, $70,800, and $70,360 were not paid in cash,
                        but deferred to a
                        future period for fiscal years 2005, 2004, and 2003 respectively.
                        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 17, 2005, Mr. Grollman agreed to convert approximately
                        $34,500
                        of his back pay to our restricted common stock, the rate
                        of the average
                        market price per share of $0.046. 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. Also
                        subsequent to fiscal 2005 year-end, Mr. Grollman deferred
                        all of his
                        October and November monthly salary of $15,000 to a future
                        period. During
                        fiscal 2005 and up to November 2005, Mr. Grollman’s share of contributions
                        to the Company’s health insurance program of $10,951 were deducted from
                        the balance of wages owing, leaving as of the end of November
                        2005, unpaid
                        wages of $125,707 accrued vacation pay of $29,659 and accrued
                        interest on
                        deferred salary of approximately $18,530 for a combined total
                        of
                        approximately $173,896.
 52
 **Table
                      of Contents**
 **Index to Financial
                      Statements**
 (5)
                        Salaries
                            of $63,000, $41,400, and $50,360 were not paid in cash,
                            but deferred to a
                            future period for fiscal years 2005, 2004, and 2003 respectively.
                            On
                            August 17, 2005, Mr. Clark agreed to convert approximately
                            $23,000 of his
                            back pay to our restricted common stock, the rate of
                            the average market
                            price per share of $0.046. 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.
                            Also subsequent to
                            September 30, 2005 year-end, Mr. Clark deferred $7,350
                            of his November
                            monthly salary of $12,500 to a future period. During
                            fiscal 2005 and up to
                            November 2005, Mr. Clark’s share of contributions to the Company’s health
                            insurance program of $12,745 were deducted from the balance
                            of wages
                            owing, leaving as of the end of November 2005, unpaid
                            wages of $108,380,
                            accrued vacation pay of $30,917 and accrued interest
                            on deferred salary of
                            $18,190 for a combined total of approximately $157,487.(6)
                        Other
                            Compensation for 2003 includes common stock grants paid
                            as board service
                            fees. Mr. Ross resigned as an employee in January of
                            2002 and as a
                            director in September 2003.(7)
                        Other
                            Compensation for 2003 includes $32,362 of contractor
                            fees for services
                            rendered in the six months to March 2003, of which approximately
                            $31,137
                            remains unpaid. Mr. Carr resigned in July 2002 as an
                            employee and a
                            director. (See Employment Agreements below).(8)
                        Other
                            Compensation for 2005 and 2004 of $1,000 and $2,250 is
                            for board
                            fees.
 **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
                      2004Graham
                      L. Clark(3)
                  
                  
                  1,000,000
                  
                  
                  Dec
                      2004
 ____________
 (1)
                  All
                      grants in this table are based on our fiscal year 2002 Stock
                      Retainage
                      Program. This program was implemented by our board in September
                      2002, and
                      shares were granted at that time. Actual issuance of shares
                      for the named
                      executive participants took place in January of 2003. Our board
                      allocated
                      approximately $150,000 in common stock from this Stock Retainage
                      Program
                      pool of shares, to be granted to key employees during the year,
                      subject to
                      National Scientific exceeding sales growth objectives and expense
                      reduction objectives, and subject to the employees remaining
                      with us
                      through the next 15 months, or longer, if the awards were not
                      earned after
                      15 months. Failure to meet these objectives under the plan
                      can result in
                      the forfeiture by staff of some or all of the stock grants
                      by all
                      participants. These goals were the same for all plan participants,
                      which
                      included other non-executives, as well the named executives.
                      These goals
                      were not met in calendar year 2003. 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.
                      The plan
                      was extended in February 2005 to run through 2006, with goals
                      at the same
                      level as 2004.
 (2)
                    Mr.
                        Grollman was granted 750,000 shares of stock from this Stock
                        Retainage
                        Program 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 mat 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 - no final board
                        action has
                        been taken on this matter, however.(3)
                    Mr.
                        Clark was granted 500,000 shares of stock from our Stock
                        Retainage Program
                        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.
  53
 **Table
                    of Contents**
 **Index to Financial
                    Statements**
 **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, 2005,
            to any
            of the named executive officers, nor did any of the named executive officers
            exercise any options or SAR grants during that period.
  **Employee
            Stock Retainage Plan**
 
 In
            September 2002, by unanimous vote, our board initiated a restricted stock
            retainage program or plan (“Stock Retainage Program”) 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 Stock Retainage
            Program 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, Karen
            Fuhre,
            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. As of the date of this report none of these grants have been fully
            earned,
            and they remain subject to substantial risk of forfeiture.
 
 **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 at least calendar year
            2005. 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.
 54
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 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. Also subsequent to fiscal 2005 year-end, Mr. Grollman deferred
            all of his
            October and November salary of $15,000 to a future period. During fiscal
            2005
            and up to November 2005, Mr. Grollman’s share of contributions to the Company’s
            health insurance program of approximately $10,950 were deducted from
            the balance
            of wages owing, leaving as of the end of November 2005, unpaid wages
            of
            approximately $125,707 , accrued vacation pay of approximately $29,659
            and
            accrued interest on deferred salary of approximately $18,530 for a combined
            total of approximately $331,383.
 
 In
            September 2002, our board initiated a restricted stock retainage program
            (“Stock
            Retainage Program”) to retain key staff during a period of financial difficulty
            in calendar year 2002. The board allocated approximately $150,000 in
            common
            stock from this Stock Retainage Program pool of shares, to be granted
            to key
            employees during the year, subject to National Scientific 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. These goals were not met in calendar
            year 2003.
            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. As of the date of this report none of these grants
            have
            been fully earned, and they remain subject to substantial risk of
            forfeiture.
 
 Mr.
            Grollman was granted 750,000 shares of stock from this Stock Retainage
            Program
            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.
 
 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.
 55
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 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. Also subsequent to fiscal 2005 year-end, Mr. Clark deferred
            a
            total of $7,350 of his October and November salary to a future period.
            Mr.
            Clark’s share of contributions to the Company’s health insurance program of
            approximately $12,745 were deducted from the balance of wages owing,
            leaving as
            of the end of November 2005, unpaid wages of approximately $108,380,
            accrued
            vacation pay of approximately $30,917 and accrued interest on deferred
            salary of
            approximately $18,190 for a combined total of approximately
            $157,487.
 
 Mr.
            Clark
            was granted 500,000 shares of stock from our Stock Retainage Program
            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.
 
 Throughout
            fiscal 2000, Mr. Ross was engaged as an independent contractor for National
            Scientific. As such, Mr. Ross was paid a monthly fee of $9,500, subject
            to cash
            availability. Effective December 1, 2001, Mr. Ross became an employee
            of
            National Scientific. Throughout fiscal 2001 and continuing into 2003,
            Mr. Ross
            served without a written contract and was paid $9,500 monthly. In addition,
            in
            connection with an equity transaction involving Mr. Ross and his spouse
            in
            September 1999, the Board of Directors granted Mr. Ross the right to
            receive 4%
            of our gross revenues. In partial consideration for the forgiveness of
            this
            right to 4% of our future revenues, National Scientific agreed to issue
            500,000
            restricted shares of our common stock to Mr. Ross. The 500,000 shares
            are
            subject to the terms of a Restricted Stock Award Agreement, which required
            that
            the shares issued be released only when the market price of the stock
            exceeds
            $2.50 per share.
 
 Subsequent
            to fiscal year end 2001, National Scientific granted Mr. Ross options
            to
            purchase an aggregate of 750,000 shares of common stock. The options
            consist of
            ten separate groups of 75,000 shares each, whose exercise prices range
            from $1
            to $10 per share, which vest when the previous five day average market
            price
            exceeds even dollar levels beginning with $1 per share through $10 per
            share. On
            September 30, 2003, these options were forfeited and returned to
            us.
 
 In
            February of 2002, Mr. Ross resigned as an employee of National Scientific,
            and
            became a part-time contractor, paid at a rate of $10,000 per month, of
            which 20%
            would be deferred until a future date. The term of the agreement was
            two years
            and it required that Mr. Ross provide approximately 80 hours per month
            management-consulting services to us and serve as a director. In July
            2002
            National Scientific and Mr. Ross amended the contract to eliminate mandatory
            monthly minimum cash payments and minimum hours per month for on-going
            consulting duties other than his responsibilities as a director. Under
            this
            revised contract, Mr. Ross was paid a director’s fee of $2,500 per month in our
            restricted common stock. In February 2003 this contract was again revised,
            and
            from February 2003 to September 30, 2003 Mr. Ross agreed to take a reduction
            in
            his director’s fees and accept 50,000 shares of common stock in lieu of cash for
            board services for the entire six-month period. Mr. Ross retired from
            the board
            on September 30, 2003. His major contract duties as a consultant with
            us ended
            in February 2004, although some confidentiality provisions of this agreement
            continue into 2005.
 56
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 Mr.
            Carr
            served us as an independent contractor from October 15, 2000 until November
            30,
            2000. He was paid $13,750 monthly for his services. Effective December
            1, 2000,
            Mr. Carr became employed under a one year contract to serve as our Chief
            Financial Officer. The contract automatically renewed for additional
            one-year
            terms unless either party elected to terminate. Mr. Carr’s contract provided for
            an annual gross salary of $180,000, payable semi-monthly. Also in accordance
            with the contract, on December 1, 2000, we granted Mr. Carr 100,000 vested
            options to purchase common stock at a price equal to 25% of the closing
            price
            per share on December 1, 2000. Also on December 1, 2000, we granted Mr.
            Carr
            500,000 vested options to purchase common stock at the closing sales
            price of
            the shares on December 1, 2000. Additional option grants were included
            in Mr.
            Carr’s employment contract for each whole dollar amount increase in the market
            value of our Common Shares. 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. Carr would receive 75,000 options at the whole dollar
            amount
            option price. Mr. Carr was also entitled to additional options at various
            but
            declining levels for increases in stock value up to $50 per common
            share.
 
 From
            January of 2002 through July of 2002, Mr. Carr deferred 20% of his salary,
            subject to future cash availability, reducing his monthly salary cash
            payments
            to $12,000 per month.
 
 In
            July
            of 2002, Mr. Carr resigned as CFO and also as an employee and a company
            director, and became a full-time non-employee contractor for us. He signed
            a
            one-year contract, the terms of which were similar to his previous company
            employment contracts, although all employee-related benefits were eliminated,
            and his hourly rate of pay was changed to approximately $97 per hour,
            or
            approximately $17,000 per month. In November 2002, National Scientific
            and Mr.
            Carr amended this contract to eliminate mandatory monthly payments. Mr.
            Carr was
            retained on this basis during the month of December 2002 to assist with
            preparation of our annual report and other matters, for which he was
            paid
            approximately $12,000 in cash. In January 2003 Mr. Carr and National
            Scientific
            agreed to secure his services as a financial consultant for a minimum
            retainer
            of ten hours per month at a rate of $120 per hour. This retainer agreement
            ended
            on April 1, 2003.
 
 In
            January 2003, we, under our Restricted Stock Retainage Plan initiated
            in
            September 2002, 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.
 
 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.
 57
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **Item
            11.****Security
            Ownership of Certain Beneficial Owners and Management**
 
 The
            table
            below sets forth certain information, as of November 30, 2005, 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
                  
                  
                  5,750,000
                  (3)
                  
                  6.0%Graham
                      L. Clark
                  
                  
                  2,201,667
                  (4)
                  
                  2.3%Gregory
                      Szabo
                  
                  
                  157,240
                  (5)
                  
                  0.2%All
                      executive officers and directors as a group
                    (3
                      persons)
                  
                  
                  7,608,907
                  
                  
                  8.5%
  (1)
                  The
                      business address for all directors and officers is c/o National
                      Scientific
                      Corporation, 14505 North Hayden Road, Suite 305, Scottsdale,
                      Arizona
                      85260-6951.(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 95,795,459
                      shares of
                      Common Stock outstanding as December 28, 2005.(3)
                  Includes
                      1,050,000 shares underlying currently exercisable stock options
                      and
                      warrants, and 4,700,000 shares of restricted Common Stock including
                      2,000,000 shares subject to substantial risk of
                      forfeiture.(4)
                  Includes
                      326,667 shares underlying currently exercisable stock options
                      and warrants
                      and 1,750,000 shares of restricted Common Stock including 1,500,000
                      shares
                      subject to substantial risk of forfeiture.(5)
                  Includes
                      80,000 shares underlying currently exercisable stock options
                      and warrants
                      and 77,240 shares of restricted Common Stock subject to substantial
                      risk
                      of forfeiture.******
 
 58
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **Item
            12.****Certain
            Relationships and Related Transactions**
 
 In
            October 2002, Mr. Lou Ross, the former Chairman of the Board, and a Director
            until September 30, 2003, was paid for his services as an active member
            of the
            board in shares of restricted common stock, in lieu of cash. The former
            Chairman
            received 66,806 restricted common shares at an average price on the date
            of
            grant of $0.11 per share.
 
 In
            June
            2003, we entered into an agreement to restructure and repay an outstanding
            debt
            to Mr. Lou Ross, a Director of National Scientific. Together with Mr.
            Ross, we
            aggregated the value of all sums we currently owed to Mr. Ross. This
            included
            notes executed of approximately $75,000, all salary deferred by Mr. Ross
            in 2002
            of approximately $8,300, and all cash board fees deferred in 2002 by
            Mr. Ross of
            approximately $3,000, for a total amount payable to Mr. Ross as of June
            11, 2003
            of approximately $86,500. Mr. Ross agreed to accept one-half of this
            sum, or
            $43,250, in restricted common stock issued at the then-current market
            price of
            $0.15 cents per share, for a total share grant to Mr. Ross of 288,334
            shares.
            Mr. Ross also agreed to convert the remaining one-half of the total debt
            outstanding from us to him, or $43,250, into a three-year interest free
            note,
            with no payments required by us until the end of the three-year period,
            and
            which could be paid by us at any time before the three-year period elapses
            with
            either cash or its restricted common stock or a combination of cash and
            stock.
            With this agreement, we no longer have any outstanding delinquent notes
            to Mr.
            Ross, and our liabilities have been reduced by $43,250, though he remains
            a
            significant stockholder of ours.
 
 Mr.
            Ross
            also agreed to take a reduction in his Director’s fees for the period from
            February 2003 to the end of the fiscal year ending in September 2003,
            and to
            accept 50,000 shares of our restricted common stock in lieu of cash for
            these
            board services, which was paid to him in stock on June 11, 2003. On September
            30, 2003, at the point of his resignation from the Board, Mr. Ross surrendered
            all stock options he had received from us.
 
 On
            September 30, 2002 we started a restricted Stock Retainage Program 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 Stock Retainage Program 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. As of the date of this report, none of these grants have
            been
            fully earned, and they remain subject to substantial 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.
            As of
            September 30, 2005, these loans were outstanding.
 59
 **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
            and Reports on Form 8-K**
 
 (a)
                  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.
 (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.
 60
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 (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.
  
 (b)
                  Reports
                      on Form 8-K
 
 The
            Company filed one Report on Form 8-K on January 28, 2005, relating to
            a
            Securities Exchange Agreement with TurboWorx, Inc. An additional Form
            8-K
            regarding auditor rotation was filed on November 30, 2005, and an amended
            8-K/A
            was filed on December 8, 2005, on the same topic, which included a letter
            from
            our previous auditor indicating no disagreement with our management on
            accounting matters.
 
 
 **Item
                    14.**
                  **Principal
                      Accountant Fees And
                      Services**
 
 **Audit
            Fees**
 
 Fees
            paid
            or accrued due, for services performed by our principal accountants,
            Hurley
& Company, during the years ended September 30, 2005 and 2004 were as
            follows:
  **2005**
                  ****
                  **2004**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.
                  
                  $
                  23,350
                  
                  $
                  18,700Audit-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
                  
                  
                  -
                  
                  
                  1,500Total
                      fees paid or accrued to our principal accountants - Hurley
&
                      Company
                  
                  $
                  23,350
                  
                  $
                  20,200
 
 61
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  No
            fees
            were paid to Epstein Weber & Conover, PLC during the fiscal year ended
            September 30, 2005.
 
 Fees
            paid
            to the Hurley & Company were approved by the Audit Committee.
 
 **All
            other Fees**
 
 Hurley
            & Company billed us, approximately $1,500 for other services during the
            fiscal year ended September 30, 2004 for audit services in connection
            with the
            filing of a registration statement on Form SB-2 with the Securities and
            Exchange
            Commission.
 
 Fees
            paid
            to the auditors were approved by the Audit Committee.
 
 Hurley
            & Company, Certified Public Accountants, based in California, were our
            principal auditors for the year ended September 30, 2004 and for part
            of fiscal
            year 2005. This firm is licensed to practice public accounting by the
            State of
            California, and is also registered with the Public Company Accounting
            Oversight
            Board. The senior audit partner Mr. Michael Hurley is also licensed to
            practice
            public accounting in Arizona. Our shareholders in each of the previous
            three
            fiscal years have ratified the use of this firm. During fiscal year 2005,
            Hurley
& Company reviewed our unaudited financial statements as filed in our form
            10-QSB for the quarters ended December 31, 2004, March 31, 2005 and June
            30,
            2005.
 
 The
            Board
            of Directors believes that under newly adopted regulations and guidelines
            arising from the Sarbanes-Oxley Act, it may be required to rotate its
            independent auditors during fiscal year 2005. Accordingly, on November
            23 2005,
            the Company engaged Epstein Weber & Conover, PLC, Certified Public
            Accountants, of Scottsdale, Arizona, as the independent public accountants
            for
            the Company for fiscal 2005 to replace Hurley & Company. The shareholders
            voted to ratify such engagement at the Company’s Annual Meeting of Shareholders
            on April 27, 2005. This change in no way reflects on the quality of service
            provided in the past by Hurley & Company.
  During
            the Company’s two most recent fiscal years and any subsequent interim period
            preceding the departure of Hurley & Company, there were no disagreements
            with Hurley & Company which were not resolved 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
            Hurley & Company would have caused Hurley & Company to make reference to
            the subject matter of the disagreements in connection with its reports.
            Hurley
& Company 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.
 62
 **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 either Hurley & Company or Epstein Weber & Conover, PLC, to
            provide services to us regarding financial information systems design
            and
            implementation during the fiscal year ended September 30, 2005. The Board
            of
            Directors has considered whether the provision of non-audit services
            is
            compatible with maintaining Hurley & Company or Epstein Weber & Conover,
            PLC’s, independence, and has decided not to secure such services from Hurley
            & Company or Epstein Weber & Conover, PLC, at this time in that
            area.
 
 
 63
 **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: 
January
                        12, 2006
                      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
 64
 **Table
                        of Contents**
 **Index to Financial
                        Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 
 **AUDITED
            FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005, 2004 and Development
            Stage**
 
 **INDEX**
 
 **Page**Report
                      of Hurley & Company, Independent Registered
                      Public Accounting Firm
                  F-2Report
                    of Epstein Weber & Conover, PLC, Independent
                    Registered Public Accounting Firm
                  F-3Balance
                      Sheets (September 30, 2005 and
                      2004)
                  F-4Statements
                      of Operations (Years Ended September 30,
                      2005, 2004 and Development Stage)
                  F-5Statements
                      of Shareholders’ Equity (Seven Years Ended
                      September 30, 2005, and Development Stage)
                  F-6Statements
                      of Cash Flows (Years Ended September 30, 2005, 2004 and Development
                      Stage)
                  F-14Notes
                      to Financial Statements (Years Ended September 30,
                      2005, 2004 and Development Stage)
                  F-17
 
 F-1
 **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 sheets of National Scientific Corporation
            (a
            development stage company) as of September 30, 2004, and the related
            statements
            of operations, changes in shareholders’ equity (deficit) and cash flows for the
            year ended September 30, 2004 and from September 30, 1997 (inception
            of
            development stage) to September 30, 2004. 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 audits.
 
 We
            conducted our audits in accordance with auditing standards of the Public
            Company
            Accounting Oversight Board (United States). Those standards require that
            we plan
            and perform the audits to obtain reasonable assurance about whether the
            financial statements are free from 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
            audits 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, 2004, and the results of its operations and its cash
            flows for
            the year ended September 30, 2004 and from September 30, 1997 (inception
            of
            development stage) to September 30, 2004 in conformity with accounting
            principles generally accepted in the United State of America.
 
 The
            accompanying financial statements have been prepared assuming that the
            National
            Scientific Corporation will continue as a going concern. As discussed
            in Note 2
            to the financial statements, the National Scientific Corporation is in
            the
            development stage, has not yet generated significant revenues and is
            dependent
            upon raising capital from investors. Additionally, National Scientific
            Corporation has incurred aggregate losses during the past two of over
            $1,900,000
            and has a total shareholders’ deficit over $200,000. These matters raise
            substantial doubt about its ability to continue as a going concern. Management’s
            plans concerning these matters are also described in Note 2. The financial
            statements do not include any adjustments that might result from the
            outcome of
            this uncertainty.
 
 
 /s/
            Hurley & Company
 
 Granada
            Hills, CA
 October
            20, 2004
 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 sheets of National Scientific Corporation
            (a
            development stage Company) as of September 30, 2005 and the related statements
            of operations, changes in shareholders’ deficit and cash flows for the year
            ended September 30, 2005, and from September 30, 1997 (inception of development
            stage) to September 30, 2005. 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 provides
            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, 2005 and the results of its operations and its cash
            flows for
            the year ended September 30, 2005, 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 2
            to the financial statements, National Scientific Corporation is in the
            development stage, has not yet generated significant revenues, and is
            dependent
            upon raising capital from investors. Additionally, National Scientific
            Corporation has incurred aggregate losses during the past two years of
            over
            $2,090,000 and has a total shareholders’ deficit of over $660,000 at September
            30, 2005. 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 2. The financial statements do not include any
            adjustments that might result from the outcome of this uncertainty.
 
 /s/
            Epstein Weber & Conover, PLC
 
 Scottsdale,
            Arizona
 December
            29, 2005
 F-3
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
  **BALANCE
            SHEETS**
 **September
            30, 2005 and 2004**
  **2005**
                  
                  **2004****ASSETS**Current
                      Assets:Cash
                      and cash equivalents
                  
                  $
                  1,616
                  
                  $
                  160,214Trade
                      receivables, net
                  
                  
                  9,968
                  
                  
                  25,797Inventory,
                      net
                  
                  
                  23,735
                  
                  
                  66,150Other
                      assets
                  
                  
                  68
                  
                  
                  15,489Total
                      current assets
                  
                  
                  35,387
                  
                  
                  267,650Property
                      and equipment, net
                  
                  
                  7,680
                  
                  
                  21,021Deposits
                  
                  
                  2,000
                  
                  
                  5,031Investment
                  
                  
                  289,100
                  
                  
                  –$
                  334,167
                  
                  $
                  293,702**LIABILITIES
                      AND SHAREHOLDERS’ EQUITY (DEFICIT)**Current
                      Liabilities:Accounts
                      payable - related party
                  
                  $
                  72,914
                  
                  $
                  2,055Accounts
                      payable - other
                  
                  
                  183,664
                  
                  
                  146,132Accrued
                      expenses
                  
                  
                  519,132
                  
                  
                  340,984Notes
                      payable - related party
                  
                  
                  159,000
                  
                  
                  –Notes
                      payable - other
                  
                  
                  60,150
                  
                  
                  –Total
                      current liabilities
                  
                  
                  994,860
                  
                  
                  489,171Notes
                      payable, net of current portion
                  
                  
                  –
                  
                  
                  43,250Total
                      liabilities
                  
                  
                  994,860
                  
                  
                  532,421Commitments
                      and contingencies
                  
                  
                  –
                  
                  
                  –Shareholders’
                      equity (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 94,095,459 and 84,330,669 at September 30,
                      2005 and 2004,
                      respectively
                  
                  
                  940,955
                  
                  
                  843,307Additional
                      paid-in capital
                  
                  
                  22,248,814
                  
                  
                  21,627,654Accumulated
                      deficit prior to the development stage
                  
                  
                  (2,394,680
                  )
                  
                  (2,394,680
                  )Accumulated
                      deficit during the development stage
                  
                  
                  (21,455,782
                  )
                  
                  (20,315,000
                  )Total
                      shareholders’ equity (deficit)
                  
                  
                  (660,693
                  )
                  
                  (238,719
                  )$
                  334,167
                  
                  $
                  293,702
 *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**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF OPERATIONS**
 **For
            the Years Ended September 30, 2005, 2004, and Development
            Stage**
  **Development****2005**
                  
                  **2004**
                  
                  **Stage**Revenues
                  
                  $
                  73,226
                  
                  $
                  77,994
                  
                  $
                  1,1,00,428Cost
                      of Sales
                  
                  
                  48,780
                  
                  
                  55,597
                  
                  
                  1,001,864Gross
                      profit
                  
                  
                  24,446
                  
                  
                  22,397
                  
                  
                  98,564Costs
                      and expensesSalaries
                      and benefits
                  
                  
                  337,708
                  
                  
                  393,308
                  
                  
                  2,907,812Research
                      and development
                  
                  
                  391,591
                  
                  
                  253,257
                  
                  
                  4,357,983Stock
                      compensation
                  
                  
                  16,173
                  
                  
                  45,421
                  
                  
                  3,142,288Consulting
                      fees, related party
                  
                  
                  –
                  
                  
                  –
                  
                  
                  8,175,973Other
                  
                  
                  255,690
                  
                  
                  260,649
                  
                  
                  2,923,642Inventory
                      obsolescence charge
                  
                  
                  46,775
                  
                  
                  –
                  
                  
                  46,775Total
                      costs and expenses
                  
                  
                  1,047,937
                  
                  
                  952,635
                  
                  
                  21,554,473Loss
                      from operations
                  
                  
                  (1,023,491
                  )
                  
                  (930,238
                  )
                  
                  (21,455,909
                  )Other
                      income (expense)Interest
                      and other income
                  
                  
                  –
                  
                  
                  –
                  
                  
                  178,972Gain
                      on settlement
                  
                  
                  –
                  
                  
                  –
                  
                  
                  89,403Interest
                      expense
                  
                  
                  (25,946
                  )
                  
                  (21,542
                  )
                  
                  (81,756
                  )Loss
                      on disposal of assets
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (30,960
                  )Impairment
                      of investment
                  
                  
                  (91,344
                  )
                  
                  –
                  
                  
                  (91,344
                  )Loss
                      on impairment of equipment
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (64,187
                  )(117,291
                  )
                  
                  (21,542
                  )
                  
                  127Loss
                      before income taxes
                  
                  
                  (1,140,782
                  )
                  
                  (951,780
                  )
                  
                  (21,455,782
                  )Income
                      tax expense
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –Net
                      loss
                  
                  $
                  (1,140,782
                  )
                  $
                  (951,780
                  )
                  $
                  (21,455,782
                  )Net
                      loss per common share, basic and diluted
                  
                  $
                  (0.01
                  )
                  $
                  (0.01
                  )Weighted
                      average number of shares outstanding
                  
                  
                  89,338,638
                  
                  
                  78,212,528
 *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**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **For
            the Years Ended September 30, 2005, 2004, and Development
            Stage**
  **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      September 30, 2004
                  
                  
                  84,330,669
                  
                  $
                  843,307
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  21,627,654
                  
                  
                  (22,709,680
                  )
                  $
                  (238,719
                  )Stock
                      Issued for servicesPrice
                      per share ranged$0.1447
                  
                  
                  6,218
                  
                  
                  62
                  
                  
                  –
                  
                  
                  –
                  
                  
                  838
                  
                  
                  –
                  
                  
                  900$0.1305
                  
                  
                  13,770
                  
                  
                  138
                  
                  
                  –
                  
                  
                  –
                  
                  
                  1,659
                  
                  
                  –
                  
                  
                  1,797$0.0640
                  
                  
                  10,373
                  
                  
                  104
                  
                  
                  –
                  
                  
                  –
                  
                  
                  560
                  
                  
                  –
                  
                  
                  664$0.0792
                  
                  
                  25,429
                  
                  
                  254
                  
                  
                  –
                  
                  
                  –
                  
                  
                  1,760
                  
                  
                  –
                  
                  
                  2,014Common
                      stock options granted, net
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  6,108
                  
                  
                  –
                  
                  
                  6,108Shares
                      issued in exchange for accrued expenses
                  
                  
                  1,934,000
                  
                  
                  19,340
                  
                  
                  –
                  
                  
                  –
                  
                  
                  62,850
                  
                  
                  –
                  
                  
                  82,190Private
                      placement of common stockShares
                      issued for:$0.04
                  
                  
                  625,000
                  
                  
                  6,250
                  
                  
                  –
                  
                  
                  –
                  
                  
                  18,750
                  
                  
                  –
                  
                  
                  25,000Securities
                      Exchange Agreement ofcommon
                      stock Shares issued for:$0.074
                  
                  
                  7,150,000
                  
                  
                  71,500
                  
                  
                  –
                  
                  
                  –
                  
                  
                  457,600
                  
                  
                  –
                  
                  
                  529,100Warrants
                      issued as placement agent’s fee
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  66,344
                  
                  
                  –
                  
                  
                  66,344Warrants
                      issued with debt
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  4,691
                  
                  
                  –
                  
                  
                  4,691Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (1,140,782
                  )
                  
                  (1,140,782
                  )Balance,
                      September 30, 2005
                  
                  
                  94,095,459
                  
                  $
                  940,955
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  22,248,814
                  
                  
                  (23,850,462
                  )
                  $
                  (660,693
                  )
 *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**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 2004, 2003, and Development
            Stage**
  **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      September 30, 2003
                  
                  
                  70,633,819
                  
                  $
                  706,338
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  20,444,733
                  
                  $
                  (21,757,900
                  )
                  $
                  (606,829
                  )Exercise
                      of options
                  
                  
                  107,500
                  
                  
                  1,075
                  
                  
                  –
                  
                  
                  –
                  
                  
                  8,600
                  
                  
                  –
                  
                  
                  9,675Stock
                      Issued for servicesPrice
                      per share ranged$0.140
                  
                  
                  47,646
                  
                  
                  476
                  
                  
                  –
                  
                  
                  –
                  
                  
                  5,527
                  
                  
                  –
                  
                  
                  6,003$0.155
                  
                  
                  33,000
                  
                  
                  330
                  
                  
                  –
                  
                  
                  –
                  
                  
                  4,274
                  
                  
                  –
                  
                  
                  4,604$0.150
                  
                  
                  55,186
                  
                  
                  552
                  
                  
                  –
                  
                  
                  –
                  
                  
                  7,726
                  
                  
                  –
                  
                  
                  8,278$0.160
                  
                  
                  24,252
                  
                  
                  243
                  
                  
                  –
                  
                  
                  –
                  
                  
                  3,249
                  
                  
                  –
                  
                  
                  3,492Common
                      stock options granted, net
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  23,094
                  
                  
                  –
                  
                  
                  23,094Debt
                      to equity swap
                  
                  
                  1,500,000
                  
                  
                  15,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  135,000
                  
                  
                  –
                  
                  
                  150,000Private
                      placement of common stockShares
                      issued for:$0.100
                  
                  
                  1,100,000
                  
                  
                  11,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  99,000
                  
                  
                  –
                  
                  
                  110,000$0.110
                  
                  
                  10,334,266
                  
                  
                  103,343
                  
                  
                  –
                  
                  
                  –
                  
                  
                  831,701
                  
                  
                  –
                  
                  
                  935,044Stock
                      retainage program
                  
                  
                  500,000
                  
                  
                  5,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  64,750
                  
                  
                  –
                  
                  
                  69,750Stock
                      returned to treasury
                  
                  
                  (5,000
                  )
                  
                  (50
                  )
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (50
                  )Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (951,780
                  )
                  
                  (951,780
                  )Balance,
                      September 30, 2004
                  
                  
                  84,330,669
                  
                  $
                  843,307
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  21,627,654
                  
                  
                  (22,709,680
                  )
                  $
                  (238,719
                  )
 *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**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 2003, 2002, and Development
            Stage**
  **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      September 30, 2002
                  
                  
                  51,587,062
                  
                  $
                  515,871
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  19,517,719
                  
                  $
                  (20,805,336
                  )
                  $
                  (771,746
                  )Stock
                      issued for services @ $0.17
                  
                  
                  946,270
                  
                  
                  9,462
                  
                  
                  –
                  
                  
                  –
                  
                  
                  152,913
                  
                  
                  –
                  
                  
                  162,375Exercise
                      of options
                  
                  
                  637,153
                  
                  
                  6,372
                  
                  
                  –
                  
                  
                  –
                  
                  
                  22,686
                  
                  
                  –
                  
                  
                  29,058Stock
                      options granted
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  60,733
                  
                  
                  –
                  
                  
                  60,733Debt
                      equity swap
                  
                  
                  788,334
                  
                  
                  7,883
                  
                  
                  –
                  
                  
                  –
                  
                  
                  66,232
                  
                  
                  –
                  
                  
                  74,115Private
                      placement @ $0.04 to$0.08
                  
                  
                  14,125,000
                  
                  
                  141,250
                  
                  
                  –
                  
                  
                  –
                  
                  
                  528,750
                  
                  
                  –
                  
                  
                  670,000Stock
                      retainage program
                  
                  
                  2,550,000
                  
                  
                  25,500
                  
                  
                  –
                  
                  
                  –
                  
                  
                  95,700
                  
                  
                  –
                  
                  
                  121,200Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (952,564
                  )
                  
                  (952,564
                  )Balance,
                      September 30, 2003
                  
                  
                  70,633,819
                  
                  $
                  706,338
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  20,444,733
                  
                  $
                  (21,757,900
                  )
                  $
                  (606,829
                  )
 *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**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 2002, 2001, and Development
            Stage**
  **Common
                          Stock**
                      
                      **Preferred
                          Stock****Number**
                      
                      
                      
                      **Number**
                      
                      
                      
                      **Additional****of**
                      
                      **Par**
                      
                      **of**
                      
                      **Par**
                      
                      **Paid-In**
                      
                      **Accumulated****Shares**
                      
                      **Value**
                      
                      **Shares**
                      
                      **Value**
                      
                      **Capital**
                      
                      **Deficit**
                      
                      **Total**Balance,
                          September 30, 2001
                      
                      
                      47,367,498
                      
                      $
                      473,675
                      
                      
                      –
                      
                      $
                      –
                      
                      $
                      18,766,775
                      
                      $
                      (18,921,847
                      )
                      $
                      318,603Stock
                          issued for services @ $0.306
                      
                      
                      100,000
                      
                      
                      1,000
                      
                      
                      –
                      
                      
                      –
                      
                      
                      29,600
                      
                      
                      –
                      
                      
                      30,600Issuance
                          of stock under equity lineof
                          credit @ $0.12 to $0.27
                      
                      
                      2,122,064
                      
                      
                      21,221
                      
                      
                      –
                      
                      
                      –
                      
                      
                      393,603
                      
                      
                      –
                      
                      
                      414,824Exercise
                          of warrants
                      
                      
                      770,500
                      
                      
                      7,705
                      
                      
                      –
                      
                      
                      –
                      
                      
                      84,755
                      
                      
                      –
                      
                      
                      92,460Exercise
                          of options
                      
                      
                      1,477,000
                      
                      
                      14,770
                      
                      
                      –
                      
                      
                      –
                      
                      
                      154,762
                      
                      
                      –
                      
                      
                      169,532Loan
                          repayment by officer
                      
                      
                      (250,000
                      )
                      
                      (2,500
                      )
                      
                      –
                      
                      
                      –
                      
                      
                      (97,500
                      )
                      
                      –
                      
                      
                      (100,000
                      )Grants
                          of options and warrants, net
                      
                      
                      –
                      
                      
                      –
                      
                      
                      –
                      
                      
                      –
                      
                      
                      185,724
                      
                      
                      –
                      
                      
                      185,724Net
                          loss
                      
                      
                      –
                      
                      
                      –
                      
                      
                      –
                      
                      
                      –
                      
                      
                      –
                      
                      
                      (1,883,489
                      )
                      
                      (1,883,489
                      )Balance,
                          September 30, 2002
                      
                      
                      51,587,062
                      
                      $
                      515,871
                      
                      
                      –
                      
                      $
                      –
                      
                      $
                      19,517,719
                      
                      $
                      (20,805,336
                      )
                      $
                      (771,746
                      )
 *See
            accompanying and 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**
 **(A
            Development Stage Company)**
 
 **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 2001, 2000, and Development
            Stage**
  **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      September 30, 2000
                  
                  
                  47,195,768
                  
                  $
                  471,958
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  15,086,920
                  
                  $
                  (12,686,979
                  )
                  $
                  2,871,899Stock
                      issued for servicesStock
                      issued for services @ $1.66
                  
                  
                  100,000
                  
                  
                  1,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  164,600
                  
                  
                  –
                  
                  
                  165,600Stock
                      issued for services @ $1.55
                  
                  
                  15,000
                  
                  
                  150
                  
                  
                  –
                  
                  
                  –
                  
                  
                  23,070
                  
                  
                  –
                  
                  
                  23,220Stock
                      issued for services @ $4.32
                  
                  
                  5,000
                  
                  
                  50
                  
                  
                  –
                  
                  
                  –
                  
                  
                  21,550
                  
                  
                  –
                  
                  
                  21,600Stock
                      issued for services @ $1.32
                  
                  
                  75,000
                  
                  
                  750
                  
                  
                  –
                  
                  
                  –
                  
                  
                  98,475
                  
                  
                  –
                  
                  
                  99,225Stock
                      issued for services @ $0.51
                  
                  
                  10,000
                  
                  
                  100
                  
                  
                  –
                  
                  
                  –
                  
                  
                  5,030
                  
                  
                  –
                  
                  
                  5,130Exercise
                      of warrants and options
                  
                  
                  1,291,730
                  
                  
                  12,917
                  
                  
                  –
                  
                  
                  –
                  
                  
                  1,278,813
                  
                  
                  –
                  
                  
                  1,291,730Amortization
                      of stock
                    compensation
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  3,712,500
                  
                  
                  –
                  
                  
                  3,712,500Exchange
                      for stock options
                  
                  
                  (1,325,000
                  )
                  
                  (13,250
                  )
                  
                  –
                  
                  
                  –
                  
                  
                  (2,424,750
                  )
                  
                  –
                  
                  
                  (2,438,000
                  )Common
                      stock options exercisable
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  800,567
                  
                  
                  –
                  
                  
                  800,567Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (6,234,868
                  )
                  
                  (6,234,868
                  )Balance,
                      September 30, 2001
                  
                  
                  47,367,498
                  
                  $
                  473,675
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  18,766,775
                  
                  $
                  (18,921,847
                  )
                  $
                  318,603
 *See
            accompanying and notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-10
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 2000, 1999, and Development
            Stage**
  **Common
                        Stock**
                    
                    **Preferred
                        Stock****Number**
                    
                    
                    
                    **Number**
                    
                    
                    
                    **Additional****of**
                    
                    **Par**
                    
                    **of**
                    
                    **Par**
                    
                    **Paid-In**
                    
                    **Accumulated****Shares**
                    
                    **Value**
                    
                    **Shares**
                    
                    **Value**
                    
                    **Capital**
                    
                    **Deficit**
                    
                    **Total**Balance,
                        September 30, 1999
                    
                    
                    36,544,289
                    
                    $
                    365,443
                    
                    
                    –
                    
                    $
                    –
                    
                    $
                    3,678,315
                    
                    $
                    (4,111,680
                    )
                    $
                    (67,922
                    )Stock
                        issued for servicesPrice
                        per share ranged$0.18
                        to $0.85
                    
                    
                    775,000
                    
                    
                    7,750
                    
                    
                    –
                    
                    
                    –
                    
                    
                    397,620
                    
                    
                    –
                    
                    
                    405,370$1.74
                        to $2.70
                    
                    
                    606,797
                    
                    
                    6,067
                    
                    
                    –
                    
                    
                    –
                    
                    
                    1,071,028
                    
                    
                    –
                    
                    
                    1,077,095$3.26
                        to $4.50
                    
                    
                    139,000
                    
                    
                    1,390
                    
                    
                    –
                    
                    
                    –
                    
                    
                    457,884
                    
                    
                    –
                    
                    
                    459,274$5.12
                        to $6.92
                    
                    
                    236,832
                    
                    
                    2,369
                    
                    
                    –
                    
                    
                    –
                    
                    
                    1,411,591
                    
                    
                    –
                    
                    
                    1,413,960$7.43
                        to $8.80
                    
                    
                    1,060,000
                    
                    
                    10,600
                    
                    
                    –
                    
                    
                    –
                    
                    
                    7,929,921
                    
                    
                    –
                    
                    
                    7,940,521Exercise
                        of warrants and options
                    
                    
                    3,440,250
                    
                    
                    34,403
                    
                    
                    –
                    
                    
                    –
                    
                    
                    3,151,997
                    
                    
                    –
                    
                    
                    3,186,400Private
                        placement ofcommon
                        stockShares
                        issued for:$0.11
                    
                    
                    2,430,000
                    
                    
                    24,300
                    
                    
                    –
                    
                    
                    –
                    
                    
                    245,700
                    
                    
                    –
                    
                    
                    270,000$0.25
                    
                    
                    360,000
                    
                    
                    3,600
                    
                    
                    –
                    
                    
                    –
                    
                    
                    86,400
                    
                    
                    –
                    
                    
                    90,000$0.40
                    
                    
                    975,000
                    
                    
                    9,750
                    
                    
                    –
                    
                    
                    –
                    
                    
                    380,250
                    
                    
                    –
                    
                    
                    390,000Stock
                        converted by director’sfamily
                        member
                    
                    
                    1,128,600
                    
                    
                    11,286
                    
                    
                    –
                    
                    
                    –
                    
                    
                    (11,286
                    )
                    
                    –
                    
                    
                    –Common
                        stock to collateralizeloan
                        - retired
                    
                    
                    (500,000
                    )
                    
                    (5,000
                    )
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    (5,000
                    )Deferred
                        stock compensation
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    (3,712,500
                    )
                    
                    –
                    
                    
                    (3,712,500
                    )Net
                        loss
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    –
                    
                    
                    (8,575,299
                    )
                    
                    (8,575,299
                    )Balance,
                        September 30, 2000
                    
                    
                    47,195,768
                    
                    $
                    471,958
                    
                    
                    –
                    
                    $
                    –
                    
                    $
                    15,086,920
                    
                    $
                    (12,686,979
                    )
                    $
                    2,871,899
 *See
              accompanying and notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-11
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 1999, 1998, and Development
            Stage**
 
 **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      September 30, 1998
                  
                  
                  25,331,849
                  
                  $
                  253,318
                  
                  
                  15,000
                  
                  $
                  1,500
                  
                  $
                  2,823,491
                  
                  $
                  (3,167,225
                  )
                  $
                  (88,916
                  )Stock
                      issued for servicesPrice
                      per share ranged$0.09
                      to $0.18
                  
                  
                  3,020,000
                  
                  
                  30,200
                  
                  
                  –
                  
                  
                  –
                  
                  
                  528,239
                  
                  
                  –
                  
                  
                  558,439$0.20
                      to $0.29
                  
                  
                  145,000
                  
                  
                  1,450
                  
                  
                  –
                  
                  
                  –
                  
                  
                  33,110
                  
                  
                  –
                  
                  
                  34,560Preferred
                      stock offering
                  
                  
                  –
                  
                  
                  –
                  
                  
                  47,000
                  
                  
                  4,700
                  
                  
                  230,300
                  
                  
                  –
                  
                  
                  235,000Exercise
                      of warrants and options
                  
                  
                  496,000
                  
                  
                  4,960
                  
                  
                  –
                  
                  
                  –
                  
                  
                  27,490
                  
                  
                  –
                  
                  
                  32,450Private
                      placement ofcommon
                      stock
                  
                  
                  400,000
                  
                  
                  4,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  96,000
                  
                  
                  –
                  
                  
                  100,000Conversion
                      of preferred tocommon
                      stock
                  
                  
                  6,200,000
                  
                  
                  62,000
                  
                  
                  (62,000
                  )
                  
                  (6,200
                  )
                  
                  (55,800
                  )
                  
                  –
                  
                  
                  –Common
                      stock issued tocollateralize
                      loan
                  
                  
                  500,000
                  
                  
                  5,000
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  5,000Stock
                      converted by director’sfamily
                      member
                  
                  
                  451,440
                  
                  
                  4,515
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (4,515
                  )
                  
                  –
                  
                  
                  –Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (944,455
                  )
                  
                  (944,455
                  )Balance,
                      September 30, 1999
                  
                  
                  36,544,289
                  
                  $
                  365,443
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  3,678,315
                  
                  $
                  (4,111,680
                  )
                  $
                  (67,922
                  )
 *See
            accompanying and notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-12
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **STATEMENTS
            OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)**
 **(Continued)**
 **For
            the Years Ended September 30, 1998, 1997, and Development
            Stage**
  **Common
                      Stock**
                  
                  **Preferred
                      Stock****Number**
                  
                  
                  
                  **Number**
                  
                  
                  
                  **Additional****of**
                  
                  **Par**
                  
                  **of**
                  
                  **Par**
                  
                  **Paid-In**
                  
                  **Accumulated****Shares**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Value**
                  
                  **Capital**
                  
                  **Deficit**
                  
                  **Total**Balance,
                      October 1, 1997
                  
                  
                  17,847,292
                  
                  $
                  178,473
                  
                  
                  –
                  
                  $
                  –
                  
                  $
                  2,160,780
                  
                  $
                  (2,394,680
                  )
                  $
                  (55,427
                  )Stock
                      issued for services
                  
                  
                  3,487,557
                  
                  
                  34,875
                  
                  
                  –
                  
                  
                  –
                  
                  
                  335,473
                  
                  
                  –
                  
                  
                  370,348Private
                      placement ofpreferred
                      stock
                  
                  
                  –
                  
                  
                  –
                  
                  
                  49,500
                  
                  
                  4,950
                  
                  
                  242,550
                  
                  
                  –
                  
                  
                  247,500Exercise
                      of warrants andoptions
                  
                  
                  547,000
                  
                  
                  5,470
                  
                  
                  –
                  
                  
                  –
                  
                  
                  100,888
                  
                  
                  –
                  
                  
                  106,358Conversion
                      of preferred tocommon
                      stock
                  
                  
                  3,450,000
                  
                  
                  34,500
                  
                  
                  (34,500
                  )
                  
                  (3,450
                  )
                  
                  (31,050
                  )
                  
                  –
                  
                  
                  –Contributed
                      capital
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  14,850
                  
                  
                  –
                  
                  
                  14,850Net
                      loss
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (772,545
                  )
                  
                  (772,545
                  )Balance,
                      September 30, 1998
                  
                  
                  25,331,849
                  
                  $
                  253,318
                  
                  
                  15,000
                  
                  $
                  1,500
                  
                  $
                  2,823,491
                  
                  $
                  (3,167,225
                  )
                  $
                  (88,916
                  )
 *See
            accompanying and notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-13
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CASH FLOWS**
 **For
            the Years Ended September 30, 2005, 2004, and Development
            Stage**
 
 **Development****2005**
                  
                  **2004**
                  
                  **Stage**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (1,140,782
                  )
                  $
                  (951,780
                  )
                  $
                  (21,455,782
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Non
                      cash transactionsDepreciation
                  
                  
                  13,341
                  
                  
                  13,134
                  
                  
                  91,671Loss
                      on disposal of assets
                  
                  
                  –
                  
                  
                  –
                  
                  
                  30,960Impairment
                      loss on equipment
                  
                  
                  –
                  
                  
                  –
                  
                  
                  64,187Stock
                      and options issued for services, net
                  
                  
                  11,483
                  
                  
                  45,421
                  
                  
                  11,639,616Impairment
                      of inventory
                  
                  
                  46,775
                  
                  
                  –
                  
                  
                  46,775Impairment
                      of investment
                  
                  
                  91,344
                  
                  
                  –
                  
                  
                  91,344Warrant
                      expense
                  
                  
                  4,691
                  
                  
                  –
                  
                  
                  4,691Increase
                      in inventory
                  
                  
                  (4,360
                  )
                  
                  (56,450
                  )
                  
                  (70,510
                  )Increase
                      in deferred offering costs
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (85,171
                  )Decrease
                      in receivables
                  
                  
                  15,829
                  
                  
                  2,403
                  
                  
                  121,663Decrease
                      in other assets and deposits
                  
                  
                  18,452
                  
                  
                  1,437
                  
                  
                  6,872Increase
                      in accounts payable and accrued expenses
                  
                  
                  343,729
                  
                  
                  65,501
                  
                  
                  1,082,356Net
                      cash used in operating activities
                  
                  
                  (599,498
                  )
                  
                  (880,334
                  )
                  
                  (8,431,328
                  )Cash
                      flows from investing activities:Acquisition
                      of property and equipment
                  
                  
                  –
                  
                  
                  (2,074
                  )
                  
                  (155,766
                  )Repayment
                      of loans
                  
                  
                  –
                  
                  
                  –
                  
                  
                  200,000Proceeds
                      from the sale of furniture and equipment
                  
                  
                  –
                  
                  
                  –
                  
                  
                  6,050Loans
                      issued
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (400,000
                  )Net
                      cash provided by (used in) investing activities
                  
                  
                  
                  
                  
                  (2,074
                  )
                  
                  (349,716
                  )Cash
                      flows from financing activities:Increase
                      in notes payable
                  
                  
                  264,500
                  
                  
                  –
                  
                  
                  264,500Draws
                      on the line of credit
                  
                  
                  –
                  
                  
                  –
                  
                  
                  430,000Loan
                      from (to) officer
                  
                  
                  –
                  
                  
                  –
                  
                  
                  65,079Repayment
                      of notes payable
                  
                  
                  (88,600
                  )
                  
                  (10,000
                  )
                  
                  (208,600
                  )Repayment
                      of line of credit
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (430,000
                  )Repayment
                      of capital lease obligations
                  
                  
                  –
                  
                  
                  –
                  
                  
                  (1,819
                  )Proceeds
                      from the exercise of options
                  
                  
                  –
                  
                  
                  9,675
                  
                  
                  208,265Proceeds
                      from the exercise of warrants
                  
                  
                  –
                  
                  
                  –
                  
                  
                  92,460Proceeds
                      from equity line of credit
                  
                  
                  –
                  
                  
                  –
                  
                  
                  414,824Proceeds
                      from the issuance of preferred stock
                  
                  
                  –
                  
                  
                  –
                  
                  
                  482,500Deposits
                      from private placement
                  
                  
                  –
                  
                  
                  (20,000
                  )
                  
                  –Proceeds
                      from securities exchange agreement
                  
                  
                  240,000
                  
                  
                  –
                  
                  
                  240,000Proceeds
                      from issuance of common stock
                  
                  
                  25,000
                  
                  
                  1,045,044
                  
                  
                  7,221,833Net
                      cash provided by financing activities
                  
                  
                  440,900
                  
                  
                  1,024,719
                  
                  
                  8,779,042
 *See
            accompanying notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-14
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
  **STATEMENTS
            OF CASH FLOWS (Continued)**
 **For
            the Years Ended September 30, 2005, 2004, and Development
            Stage**
  **Development****2005**
                    
                    **2004**
                    
                    **Stage**Net
                        (decrease) increase in cash and cash equivalents
                    
                    
                    (158,598
                    )
                    
                    142,311
                    
                    
                    (2,002
                    )Cash
                        and cash equivalents, beginning of period
                    
                    
                    160,214
                    
                    
                    17,903
                    
                    
                    3,618Cash
                        and cash equivalents, end of period
                    
                    $
                    1,616
                    
                    $
                    160,214
                    
                    $
                    1,616
 Supplementary
                      Disclosure of Cash Flow InformationCash
                      paid for interest
                  
                  $
                  746
                  
                  $
                  10,493
                  
                  $
                  36,713Cash
                      paid for income taxes
                  
                  $
                  –
                  
                  $
                  –
                  
                  $
                  50Non-cash
                      investing and financing activities:Conversion
                      of accrued payroll to equity
                  
                  $
                  82,190
                  
                  $
                  –
                  
                  $
                  82,190Common
                      stock exchanged for investment
                  
                  $
                  289,100
                  
                  $
                  –
                  
                  $
                  289,100
 *See
            accompanying notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
 F-15
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **STATEMENTS
            OF CASH FLOWS (Continued)**
 **For
            the Years Ended September 30, 2005, 2004, and the period October 1,
            1997**
 **(Inception
            of Development Stage) through September 30, 2005**
 
 
 **Summary
            of Non-Cash Investing and Financing Activities**
 
 During
            1999, the Company issued 451,440 shares of restricted common stock to
            a
            Director’s family member in consideration of the family members’ transfer of
            320,000 shares of unrestricted common stock to investors in connection
            with the
            Company’s private placement that year.
 
 During
            fiscal year 2002, the Company’s Board Chairman repaid a $100,000 loan by
            returning 250,000 shares of the Company’s common stock valued at $0.40 per
            share.
 
 During
            fiscal year 2003, the Company issued Mr. Lou Ross, 288,334 shares of
            restricted
            common stock as part of its program to lower debt without expending cash
            resources, in exchange for the forgiveness of $43,250 of debt, or one-half
            of
            the total debt of $86,500 owed by the company to Mr. Ross. The debt forgiven
            included various disclosed notes, salary deferred in 2002 and board fees
            deferred in 2002. The shares were issued at an average market price per
            share of
            $0.15. The Company also issued Mr. Ross 50,000 shares of restricted common
            stock
            for reduced Director’s fees for February 2003 through the end of this fiscal
            year in September 2003. These shares were issued at an average market
            price per
            share of $0.15.
 
 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
            17, 2005, Mr. Grollman agreed to convert approximately $34,500 of his
            back pay
            to our restricted common stock, at the rate of the average market price
            per
            share of $0.046.
 
 On
            August
            17, 2005, Mr. Clark agreed to convert approximately $23,000 of his back
            pay to
            our restricted common stock, at the rate of the average market price
            per share
            of $0.046.
 
 On
            August
            31, 2005, Mr. Grollman agreed to convert approximately $15,190 of his
            back pay
            to our restricted common stock, at the rate of the average market price
            per
            share of $0.035.
 
 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.
 
 In
            connection with the Company’s investment in TurboWorx, the Company issued common
            stock for $240,000 and 360,000 shares of TurboWorx.
    *See
            accompanying independent auditors’ report and notes to*
 *financial
            statements, which are an integral part of the financial
            statements*
  F-16
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
  **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 
 
 **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.
 
 *a.*
                  *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. As such, management now considers us as being in the development
            stage.
            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.
 
 *b.*
                  *Cash
                      Equivalents*
 
 Cash
            equivalents include money market accounts and other short-term investments
            with
            an original maturity of three months or less.
 
 *c.*
                  *Inventory*
 
 Inventories,
            primarily finished goods, are stated at the lower of cost or market values.
            Cost
            is primarily determined on a FIFO (first-in, first-out) basis.
 
 *d.*
                  *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.
 
 *e.*
                  *Advertising
                      and Promotion Costs*
 
 Advertising
            and promotion costs, which totaled $13,233 in 2005 and $53,239 in 2004,
            are
            expensed as incurred.
  F-17
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
  **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 
 
 *f.*
                  *Stock
                      Based Compensation*
  The
            Company has elected to follow Accounting Principles Board Opinion No.
            25,
“ *Accounting
            for Stock Issued to Employees* ”
and
            related interpretations as permitted by SFAS 123 “Accounting for Stock-Based
            Compensation” as amended in accounting for its employee stock options. Under APB
            25, compensation expense is measured as the excess, if any, of the quoted
            market
            price of the Company’s stock at the date of grant over the exercise price.
 
 The
            following table illustrates the effect on net loss and loss per share
            if the
            Company applied the fair value recognition provisions of SFAS 123 to
            stock-based
            compensation:
  **2005**
                  
                  **2004**Net
                      loss as reported
                  
                  $
                  (1,140,782
                  )
                  $
                  (951,780
                  )Add:
                      stock based compensation recorded in the statement of
                      operations
                  
                  
                  16,173
                  
                  
                  –Deduct:
                      total stock based compensation expense as determined under
                      the fair value
                      method
                  
                  
                  (21,773
                  )
                  
                  (31,500
                  )Pro
                      forma net loss
                  
                  $
                  (1,146,382
                  )
                  $
                  (983,280
                  )Loss
                      per share as reported
                  
                  
                  (.01
                  )
                  
                  (.01
                  )Loss
                      per share, pro forma
                  
                  
                  (.01
                  )
                  
                  (.01
                  )
 
 As
            required by SFAS 123, as amended, the fair value of each grant is estimated
            on
            the date of grant using the Black-Scholes option pricing method for pro
            forma
            footnote disclosure with the following assumptions for the year ended
            September
            30, 2005; dividend yield of 0% and expected option life of 10 years.
            Expected
            volatility ranged from 88.2% to 94.6% as of the date of issue. Risk free
            interest rates ranged from 4.010% to 4.12% as of the date of issue. For
            the year
            ended September 30, 2004; dividend yield of 0% and expected option life
            of 10
            years, expected volatility 50% t risk free interest rate 5.0%.
 F-18
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2004 and 2003**
 
 *g.*
                    *Income
                        Taxes*
 
 Deferred
              tax assets and liabilities are recognized for the future tax consequences
              attributable to differences between the financial statement carrying
              amount of
              existing assets and liabilities and their respective tax bases, including
              operating loss and tax credit carry-forwards. Deferred tax assets and
              liabilities are measured using enacted tax rates expected to apply
              to taxable
              income in the years in which those temporary differences are expected
              to be
              recovered or settled. The effect in deferred tax assets and liabilities
              of a
              change in tax rates is recognized in income in the period that includes
              the
              enactment date. Valuation allowances are established when necessary
              to reduce
              deferred tax assets to the amount expected to be realized.
 *h.*
                  *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.
 
 *i.*
                  *Net
                      Loss Per Share*
 
 Net
            loss
            per share is computed by dividing the loss attributable to common shareholders
            by the weighted average number of shares outstanding during the period,
            which
            was 89,338,638 and 78,212,528 for the years ended September 30, 2005
            and 2004,
            respectively. Stock options outstanding of 3,789,257 and warrants outstanding
            of
            15,434,197 are considered anti-dilutive and were not considered in the
            calculation in the year ended September 30, 2005. Stock options outstanding
            of
            3,709,257 and warrants outstanding of 18,249,197 are considered anti-dilutive
            and were not considered in the calculation in the year ended September
            30,
            2004.
 
 *j.*
                  *Recently
                      Issued Accounting
                      Pronouncements*
 
 The
            Financial Accounting Standards Board has established new pronouncements.
            The
            Company does not expect the adoption of these pronouncements to have
            a material
            impact on its financial positions, results of operations or cash flows.
            This
            includes SFAS 144 accounting for impairment and disposition of long-term
            assets.
 
 In
            January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46, “ *Consolidation
            of Variable Interest Entities* .”
FIN
            No. 46 clarifies the application of Accounting Research Bulletin No.
            51,
“ *Consolidated
            Financial Statements* ,”
and
            applies immediately to any variable interest entities created after January
            31,
            2003 and to variable interest entities in which an interest is obtained
            after
            January 31, 2003. The Company holds no interest in variable interest
            entities.
 F-19
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 **NATIONAL
              SCIENTIFIC CORPORATION**
 **(A
              Development Stage Company)**
 
 **NOTES
              TO FINANCIAL STATEMENTS**
 **For
              the Years Ended September 30, 2005 and 2004**
 In
            April
            2003, the FASB issued SFAS No. 149, *“Amendment
            of Statement 133 on Derivative Instruments and Hedging
            Activities* .”
SFAS
            149 clarifies the accounting and reporting for derivative instruments,
            including
            certain derivative instruments embedded in other contracts and for hedging
            activities under SFAS No. 133, “ *Accounting
            for Derivative Instruments and Hedging Activities* .”
In
            particular, SFAS No. 149 clarifies under what circumstances a contract
            with an
            initial net investment meets the characteristic of a derivative as described
            in
            SFAS No. 133. SFAS No. 149 also clarifies when a derivative contains
            a financing
            component. SFAS No. 149 is generally effective for derivative instruments
            entered into or modified after June 30, 2003, and for hedging relationships
            designated after June 30, 2003. The company holds no derivative instruments
            and
            does not engage in hedging activities.
 
 In
            June
            2003, the FASB issued SFAS No. 150, “ *Accounting
            for Certain Financial Instruments with Characteristics of both Liabilities
            and
            Equity* .”
SFAS
            No. 150 requires certain financial instruments that have both equity
            and
            liability characteristics to be classified as a liability on the balance
            sheet.
            SFAS No. 150 is effective for the first interim period beginning after
            June 15,
            2003. The adoption of SFAS 150 did not have a material impact on the
            Company’s
            financial statements.
 
 In
            December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
            123(R), *“Share-Based
            Payment,”* which
            addresses the accounting for employee stock options. SFAS 123(R) revises
            the
            disclosure provisions of SFAS 123 and supersedes APB 25. SFAS 123(R)
            requires
            that the cost of all employee stock options, as well as other equity-based
            compensation arrangements, be reflected in the financial statements based
            on the
            estimated fair value of the awards. In March 2005, the Securities & Exchange
            Commission (the “SEC”) issued Staff Accounting Bulletin No. 107, *“Share-Based
            Payment,”* which
            summarizes the views of the SEC staff regarding the interaction between
            SFAS
            123(R) and certain SEC rules and regulations, and is intended to assist
            in the
            initial implementation. SFAS 123(R) is effective for all public companies
            that
            file as small business issuers as of the beginning of the first interim
            or
            annual reporting period that begins after December 15, 2005. The Company
            is
            currently evaluating the provisions of SFAS 123(R) and its effect on
            its
            financial statements. The Company does not expect the adoption of this
            statement
            to have a material impact on its financial statements.
 
 In
            December 2004, the FASB issued SFAS 153, *“Exchanges
            of Nonmonetary Assets, an amendment of APB 29, Accounting for Nonmonetary
            Transactions.”* This
            Statement’s amendments are based on the principle that exchanges of nonmonetary
            assets should be measured based on the fair value of the assets exchanged.
            Further, SFAS 153 eliminates the narrow exception for nonmonetary exchanges
            of
            similar productive assets and replaces it with a broader exception for
            exchanges
            of nonmonetary assets that do not have commercial substance. Provisions
            of this
            statement are effective for fiscal periods beginning after June 15, 2005.
            The
            Company does not expect the adoption of this statement to have a material
            impact
            on its financial statements.
 
 In
            November 2004, the FASB issued SFAS No. 151, *Inventory
            Costs, an amendment of ARB No.43, Chapter 4* .
            SFAS
            No. 151 clarifies the accounting for abnormal amounts of idle facility
            expense,
            freight, handling costs and wasted materials. SFAS No. 151 is effective
            for
            inventory costs incurred during fiscal years beginning after June 15,
            2005. The
            initial application of SFAS No. 151 will have no impact on the Company’s
            financial position or results of operations.
  In
            March
            2005, the FASB issued FASB Interpretation No. 47, *“Accounting
            for Conditional Asset Retirement Obligations”* (“FIN
            47”), which is an interpretation of SFAS 143, *“Accounting
            for Asset Retirement Obligations.”* FIN47
            clarifies terminology within SFAS 143 and requires an entity to recognize
            a
            liability for the fair value of a conditional asset retirement obligation
            when
            incurred if the liability’s fair value can be reasonably estimated. FIN 47 is
            effective for fiscal years ending after December 15, 2005. The Company
            does not
            expect the adoption of this statement to have a material impact on its
            financial
            statements.
 F-20
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 **NATIONAL
              SCIENTIFIC CORPORATION**
 **(A
              Development Stage Company)**
 
 **NOTES
              TO FINANCIAL STATEMENTS**
 **For
              the Years Ended September 30, 2005 and 2004**
 In
            May
            2005, the FASB issued SFAS 154, *“Accounting
            Changes and Error Corrections.”* SFAS 154
            replaces APB 20, *“Accounting
            Changes”* and SFAS
            3, *“Reporting
            Accounting Changes in Interim Financial Statements”* and
            establishes retrospective application as the required method for reporting
            a
            change in accounting principle. SFAS 154 provides guidance for determining
            whether retrospective application of a change in accounting principle
            is
            impracticable and for reporting a change when retrospective application
            is
            impracticable. The reporting of a correction of an error by restating
            previously
            issued financial statements is also addressed. SFAS 154 is effective
            for
            accounting changes and corrections of errors made in fiscal years beginning
            after December 15, 2005. The Company does not expect the adoption of
            this
            statement to have a material impact on its financial statements.
 
 
 **2.**
                  **Development
                      Stage Operations**
 
 Although
            the Company has been in operation since 1996, management considers NSC
            to be in
            the development stage. From September 30, 1997 through the year ended
            September
            30, 2001, the Company engaged its efforts in the research and development
            of
            semiconductor proprietary technology and processes and in raising capital
            to
            fund its operations and research. Beginning calendar 2002, the Company
            focused
            its efforts toward the development, acquisition, enhancement and marketing
            of
            location device technologies. Since its initiation of operations in 1996,
            the
            Company has not realized significant revenue, except for approximately
            $882,000
            generated through the export of electronic equipment, an isolated event,
            which
            occurred in fiscal 2001.
 
 The
            Company experienced significant operating losses during 2005 and 2004,
            of
            $1,140,782 and $951,780 respectively, which raise substantial doubt about
            the
            Company’s ability to continue as a going concern. Of the total net operating
            losses, approximately $16,173 and $45,000 are related to stock issued
            for
            services and compensation in 2005 and 2004, respectively. Additionally,
            $4,691
            relates to compensation expense recorded for warrants granted in fiscal
            2005.
            The Company also recorded an impairment in its investment in TurboWorx
            Inc. of
            $91,344 and wrote down its inventory by $46,775 in the current fiscal
            year.
            Management believes that its current cash position including cash funds
            arising
            from the exercise of outstanding options, and secured plant assets from
            legal
            settlements, equity private placement, 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
            accompanying financial statements do not include any adjustments relating
            to the
            recoverability and classification of the recorded asset amounts or the
            amounts
            and classification of liabilities that might be necessary should the
            Company be
            unable to continue in existence.
 F-21
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 **NATIONAL
              SCIENTIFIC CORPORATION**
 **(A
              Development Stage Company)**
 
 **NOTES
              TO FINANCIAL STATEMENTS**
 **For
              the Years Ended September 30, 2005 and 2004**
 **3.**
                  **Trade
                      Receivables**
 
 Trade
            receivables are net of reserves:
  **2005**
                  
                  **2004**Trade
                      receivables
                  
                  $
                  35,168
                  
                  $
                  35,797Less:
                      reserves
                  
                  
                  25,200
                  
                  
                  10,000$
                  9,968
                  
                  $
                  25,797
  An
            outstanding note payable at September 30, 2005 of $8,900 was secured
            by an
            invoice for $8,330 included in the trade receivables total of $35,168
            at
            September 30, 2005. The note was paid in full on November 3, 2005.
 
 
 **4.**
                  **Property
                      and Equipment**
 
 Property
            and equipment consists of the following at September 30, 2005 and
            2004:
 
 **2005**
                  
                  **2004**Computer
                      equipment
                  
                  $
                  60,880
                  
                  $
                  60,880Office
                      furniture
                  
                  
                  12,507
                  
                  
                  12,507Total
                      property and equipment
                  
                  
                  73,387
                  
                  
                  73,387Less:
                      accumulated depreciation
                  
                  
                  65,707
                  
                  
                  52,366Net
                      property and equipment
                  
                  $
                  7,680
                  
                  $
                  21,021
 Depreciation
                  expense for the years ended September 30, 2005 and 2004 was $13,341
                  and $13,134
                  respectively.
 F-22
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 **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 which 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. The Company’s investment in these equity securities is carried at is
            original cost at September 30, 2005. Management does not believe that
            there is
            any material change in the value of these securities since acquisition.
            The
            Company will regularly monitor this investment for impairment in the
            carrying
            value. The securities are considered available for sale.
  The
          Company intends 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
          has agreed to file such registration statement, and has agreed to use its
          best
          efforts to have such filed registration statement declared effective no
          later
          than 90 days following the filing date. Turbo has filed the SB-2 registration
          statement with the Securities and Exchange Commission on June 6, 2005.
          When the
          registration becomes effective, NSC will announce the distribution. The
          parties
          have 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.
 
 **6.**
                **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 2005
          and
          2004.
 F-23
 **Table
                of Contents**
 **Index to Financial
                Statements**
 **NATIONAL
              SCIENTIFIC CORPORATION**
 **(A
              Development Stage Company)**
 
 **NOTES
              TO FINANCIAL STATEMENTS**
 **For
              the Years Ended September 30, 2005 and 2004**
 **2005**
                
                **2004**Net
                    (loss)
                
                $
                (1,140,782
                )
                $
                (951,780
                )Weighted
                    average shares:Average
                    shares outstanding
                
                
                89,338,638
                
                
                78,212,528Effect
                    of diluted shares
                
                
                –
                
                
                –Average
                    Shares outstanding, adjusted for dilutive effect
                
                
                89,338,638
                
                
                78,212,528(Loss)
                    per share - basic
                
                $
                (0.01
                )
                $
                (0.01
                )(Loss)
                    per share - diluted
                
                $
                (0.01
                )
                $
                (0.01
                )
 Incremental
          common shares (not included in denominator of diluted earnings per share
          because
          of their anti-dilutive nature):
 
 **2005**
                
                **2004**Options
                
                
                3,789,257
                
                
                3,709,257Warrants
                
                
                15,434,197
                
                
                18,249,197Potential
                    common equivalents
                
                
                19,223,454
                
                
                21,958,454
  **7.**
                **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 expires October 31, 2006 and is at a rental rate of $3,051 per
          month
          before taxes for the remainder of the lease. F-24
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 
 Future
          minimum lease obligations at September 30, 2005 are as follows:
 
 **Year
                    ending September 30,**
                
                **Amount**2006
                
                
                36,4522007
                
                
                3,051$
                39,503
 
 Rent
          expense for the years ended September 30, 2005 and 2004 was approximately
          $33,000 and $60,000, respectively.
 
 
 **8.**
                **Income
                    Taxes**
 
 Deferred
          income taxes consist of the following at September 30, 2005 and
          2004:
 
 **2005**
                
                **2004**Tax
                    Benefit of net operating loss carry-forwards and start up
                    costs
                
                $
                6,343,000
                
                $
                5,941,000Impairment
                    reserve
                
                
                36,000
                
                
                –Compensation
                    payable
                
                
                26,000
                
                
                –Allowance
                    for doubtful accounts
                
                
                9,000
                
                
                –Total
                
                
                6,414,000
                
                
                5,941,000Valuation
                    allowance
                
                
                (6,414,000
                )
                
                (5,941,000
                )$
                –
                
                $
                –
 
 F-25
 **Table
                of Contents**
 **Index to Financial
                Statements**
 
 **NATIONAL
          SCIENTIFIC CORPORATION**
 **(A
          Development Stage Company)**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2005 and 2004**
 
 
 A
          reconciliation of expected to actual taxes follows:
 
 **2005**
                
                **2004**Expected
                    federal and state tax recovery at 40%
                
                $
                (456,000
                )
                $
                (380,000
                )Non-deductible
                    stock compensation
                
                
                –
                
                
                18,000Other
                
                
                (17,000
                )
                
                –(473,000
                )
                
                (362,000
                )Tax
                    benefits not realized - valuation allowance
                
                
                473,000
                
                
                362,000Realized
                    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 2005 and 2004,
          the
          valuation allowance increased by $473,000 and $362,000,
          respectively.
 
 The
          Company has net operating loss carry-forwards of approximately $15,900,000
          at
          September 30, 2005, which may be used to offset future federal taxable
          income
          through 2024 and state taxable income through 2010.
 
 
 **9.**
                **Related
                    Party Transactions**
 
 In
          October 2002, Mr. Lou Ross, the former Chairman of the Board, and a Director
          until September 30, 2003, was paid for his services as an active member
          of the
          board in shares of restricted common stock, in lieu of cash. The former
          Chairman
          received 66,806 restricted common shares at an average price on the date
          of
          grant of $0.11 per share *.*
 
 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 stock retainage
          program (“Stock Retainage Program”) to retain key staff during a period of
          financial difficulty. The Company allocated approximately $150,000 in restricted
          Common Stock from this Stock Retainage Program 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 Stock Retainage Program 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.
 F-26
 **Table
                of Contents**
 **Index to Financial
                Statements**
  **NATIONAL
          SCIENTIFIC CORPORATION**
 **(A
          Development Stage Company)**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **For
          the Years Ended September 30, 2005 and 2004**
  
 The
            Company CEO, Michael Grollman was granted 750,000 shares of stock from
            this
            Stock Retainage Program 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
            Stock Retainage Program 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 2006, 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 Stock Retainage Plan,
          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
          January 2003, Mr. Lou Ross, was paid for his services as an active member
          of the
          board in shares of restricted common stock, in lieu of cash. The former
          Chairman
          received 54,464 restricted common shares at an average market price on
          the date
          of grant of $0.14 per share. In June 2003, the Company issued Mr. Lou Ross,
          288,334 shares of restricted common stock as part of its program to lower
          debt
          without expending cash resources, in exchange for the forgiveness of $43,250
          of
          debt, or one-half of the total debt of $86,500 owed by the Company to Mr.
          Ross.
          The debt forgiven included various disclosed notes, salary deferred in
          2002 and
          board fees deferred in 2002. The shares were issued at an average market
          price
          per share of $0.15. The Company also issued Mr. Ross 50,000 shares of restricted
          common stock for reduced Director’s fees for February 2003 through the end of
          this fiscal year in September 2003. These shares were issued at an average
          market price per share of $0.15. Due to the continuously convertible nature
          of
          the interest free note for $43,250, we determined that is was more appropriate
          to list the Note at face value rather than applying a discount to the
          note.
 
 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.
 
 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. F-27
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 On
          February 24, 2005, March 28, 2005, May 2, 2005, and May 27, 2005 our Chairman
          Michael Grollman made new personal loans to the Company totaling $159,000
          to
          assist us with working capital needs. The loans are evidenced by a demand
          note
          that provides for repayment within five business days of a demand notice
          from
          Mr. Grollman, with interest of 6% compounded annually from June 1, 2005.
          As of
          September 30, 2005, these loans were outstanding.
 
 On
          August
          17, 2005, Mr. Grollman agreed to convert approximately $34,500 of his back
          pay
          to our restricted common stock, at the rate of the average market price
          per
          share of $0.046.
 
 On
          August
          17, 2005, Mr. Clark agreed to convert approximately $23,000 of his back
          pay to
          our restricted common stock, at the rate of the average market price per
          share
          of $0.046.
 
 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.
  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.
 
 The
          CEO
          and the President have employment contracts previously filed with the SEC
          that
          include termination clauses that fully vest their ownership of
          shares.
   **10.**
                **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, 2005, 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. Management believes the carrying value of its investment in
          TurboWorx approximates fair value at September 30, 2005. F-28
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
  **11.**
                **Stock
                    Options and Warrants**
  **Stock
          Options**
 
 As
          of
          September 30, 2005, the Company has a stock-based compensation plan wherein
          officers and employees were granted stock options. The Company applies
          APB 25
          and related interpretations in accounting for the plan. Accordingly,
          compensation expense is equal to the difference between the exercise price
          of
          the options granted and the fair value of the common stock at the date
          of the
          grant.
 
 Under
          the
          above-mentioned 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 the Company’s common stock.
  **Weighted**
                
                **Weighted****Number**
                
                **Average**
                
                **Average****of**
                
                **Exercise**
                
                **Fair****Shares**
                
                **Price**
                
                **Value**Options
                    Outstanding, September 30, 2003
                
                
                3,329,757
                
                $
                0.90
                
                $
                0.06Granted
                
                
                790,000
                
                
                0.13
                
                
                0.04Exercised
                
                
                (107,500
                )
                
                0.09
                
                
                0.09Expired
                
                
                (303,000
                )
                
                0.13
                
                
                0.09Options
                    Outstanding, September 30, 2004
                
                
                3,709,257
                
                $
                0.82
                
                $
                0.02Options
                    Outstanding September 30, 2004
                
                
                3,709,257
                
                $
                0.82
                
                $
                0.02Granted
                
                
                80,000
                
                
                0.10
                
                
                0.07Exercised
                
                
                –
                
                
                –
                
                
                –Expired
                
                
                –
                
                
                –
                
                
                –Options
                    Outstanding, September 30, 2005
                
                
                3,789,257
                
                $
                0.81
                
                $
                0.02
 F-29
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 
 As
            of
            September 30, 2005, we have issued options to purchase an aggregate of
            3,789,257
            shares of our common stock leaving a balance of 3,210,743 available for
            grant.
            Also as of September 30, 2005, 3,789,257 options are exercisable and
            3,789,257
            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. No options
            have
            been exercised or have expired during the year ended September 30,
            2005.
 
 The
          following table summarizes the status of stock options outstanding at September
          30,2005:
 
 **Stock
                    Options Outstanding**
                
                **Stock
                    Options Exercisable****Weighted****Average****Remaining**
                
                **Weighted**
                
                
                
                **Weighted****Contractual**
                
                **Average**
                
                
                
                **Average****Number**
                
                **Life**
                
                **Exercise**
                
                **Number**
                
                **Exercise****Range
                    of Exercise Prices**
                
                **Outstanding**
                
                **(In
                    Years)**
                
                **Price**
                
                **Outstanding**
                
                **Price**$0.05
                    to $0.46
                
                
                2,479,257
                
                
                7.5
                
                $
                0.18
                
                
                2,479,257
                
                $
                0.18$0.47
                    to $1.84
                
                
                1,000,000
                
                
                5.2
                
                $
                1.84
                
                
                1,000,000
                
                $
                1.84$1.85
                    to $3.00
                
                
                310,000
                
                
                5.3
                
                $
                2.49
                
                
                310,000
                
                $
                2.49Total
                
                
                3,789,257
                
                
                6.4
                
                $
                0.81
                
                
                3,789,257
                
                $
                0.81
 
 **Warrants**
  The
          warrants outstanding as of September 30, 2005 are as follows:
 
 **Warrants
                    Outstanding**
                
                **Warrants
                    Exercisable****Range
                    of Exercise Prices**
                
                **Number
                    of Shares**
                
                **Weighted
                    Average Exercise Price**
                
                **Weighted
                    Average Remaining Contractual Life (Years)**
                
                **Number
                    of Shares**
                
                **Weighted
                    Average Exercise Price**$0.062
                    to $0.062
                
                
                135,000
                
                
                0.062
                
                
                2.73
                
                
                135,000
                
                
                0.062$0.090
                    to $0.090
                
                
                1,250,000
                
                
                0.090
                
                
                2.72
                
                
                1,250,000
                
                
                0.090$0.100
                    to $0.100
                
                
                3,108,497
                
                
                0.100
                
                
                5.10
                
                
                3,108,497
                
                
                0.100$0.110
                    to $0.110
                
                
                7,750,700
                
                
                0.110
                
                
                3.52
                
                
                7,750,700
                
                
                0.110$0.130
                    to $0.130
                
                
                640,000
                
                
                0.130
                
                
                1.27
                
                
                640,000
                
                
                0.130$0.350
                    to $0.350
                
                
                1,000,000
                
                
                0.350
                
                
                0.75
                
                
                1,000,000
                
                
                0.350$0.500
                    to $0.500
                
                
                1,275,000
                
                
                0.500
                
                
                0.75
                
                
                1,275,000
                
                
                0.500$0.750
                    to $0.750
                
                
                275,000
                
                
                0.075
                
                
                0.75
                
                
                275,000
                
                
                0.07515,434,197
                
                
                
                
                
                
                
                
                15,434,197
 F-30
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 During
          the year ended September 30, 2005, the Company has issued 2,185,000 warrants
          for
          financing activities. Each warrant entitles its owner to purchase one common
          share of the Company at purchase prices ranging from of $0.062 to $0.10
          with
          expiry dates ranging from June 2008 to February 2010.
 
 No
          share
          purchase warrants have been exercised during the fiscal year 2005.
 
 In
          December 2004, 5,000,000 warrants with entitlements to purchase one common
          share
          of the Company at purchase prices ranging from of $0.30 to $0.50
          expired.
 
 
 **12.**
                **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.
 
 **13.**  **Notes
          Payable and Long Term Debt**
 
 As
          of
          September 30, 3005 all long-term debt consisted of the following notes
          payable:
 F-31
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 **2005**
                
                **2004**Note
                    payable to shareholder, unsecured, non-interestbearing,
                    matures in 2006. Repayment may be made by theCompany
                    with either cash or its restricted common stockor
                    a combination of cash and stock.
                
                $
                43,250
                
                $
                43,250Note
                    payable to an Officer of the Company. Interestat
                    6%. Principal and interest payable on demand. Unsecured.
                
                
                159,000
                
                
                –Note
                    payable to shareholder, unsecured, non-interestbearing.
                
                
                3,000
                
                
                –Note
                    payable to shareholder, unsecured. Interest at 6%
                
                
                5,000
                
                
                –Note
                    payable to an employee. Interest at 6%. Principal andinterest
                    payable on demand. Unsecured.
                
                
                8,900
                
                
                –$
                219,150
                
                $
                43,250
  An
          outstanding note payable at September 30, 2005 of $8,900 was secured by
          an
          invoice for $8,330 included in the trade receivables total of $35,168 at
          September 30, 2005. The note was paid in full on November 3, 2005. F-32
 **Table
                  of Contents**
 **Index to Financial
                  Statements**
 
 **NATIONAL
            SCIENTIFIC CORPORATION**
 **(A
            Development Stage Company)**
 
 **NOTES
            TO FINANCIAL STATEMENTS**
 **For
            the Years Ended September 30, 2005 and 2004**
 
 **14.**
                    **Inventory,
                        net**
 
 Inventory,
              net consists of the following at September 30, 2005:
  Inventory
                      , gross
                    
                    $
                    70,510Less:
                      reserve for obsolescence
                    
                    
                    (46,775
                    )Inventory,
                      net
                    
                    $
                    23,735
 
 We
              marked
              down our inventory of Gotcha!® products, during the year ended September 30,
              2005 by $46,775 for estimated obsolescence based on assumptions about
              age of the
              inventory and current demand.
 **15.**
                **Subsequent
                    Events**
  On
          November 1, 2005, as an important phase in the current years financing
          plan, we
          entered into a financing program with a U.S. investment fund. The terms
          of this
          program include a five-year Note payable at maturity in November 2010 for
          $175,000, at an effective annual interest rate of 8%. The transaction also
          included 1,200,000 restricted common shares and a conversion/exchange option
          to
          convert the principal amount of the Note into 3,600,000 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 $0.041 i.e. 90% of the five day average
          market
          closing price of our stock. We received funding of $151,000 from this
          program.
  On
          November 23, 2005, we issued 500,000 of the Company’s restricted common shares
          at an average market price of $0.036 to Mr. Michael Grollman in lieu of
          his
          partial forgiveness of the Company’s cash indebtedness to him.
  Between
          October 1, 2005 and December 28, 2005 we have delivered 62 units of our
          Travado
          IBUSTM and 2 units of our TravadoTM Mini and invoiced approximately $77,000 for
          the shipments for this first quarter of the fiscal year ending September
          30,
          2006. These figures are unaudited, but are included here because we believe
          this
          revenue trend may be useful to investors in evaluating the current status
          of our
          firm.
 F-33