UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549


_________________





Form
10-K




ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
fiscal year ended December 31,
2008                                                Commission
file number 000-15885





NATIONAL
DATACOMPUTER, INC.





(Exact name of registrant as
specified in its charter)





Delaware
            04-2942832(State or other
      jurisdiction
            (IRS
      employerof incorporation or
      organization)
            Identification
      No.)


900 Middlesex Turnpike, Bldg. 5,
Billerica,
Massachusetts                                                                              01821


(Address of principal executive
offices)                                                                                              (Zip Code)




(978)
663-7677


(Issuer's
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act:





Common
Stock, $.001 par value per share


(Title of
class)







Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o    No
x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o    No
x




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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and 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-K or any amendment to this
Form 10-K.x





Indicate
by check mark whether the registrant is a large accelerated filer, and
accelerated files, a non-accelerated filer, or a smaller reporting
company.





Large
accelerated filer o           
Accelerated filer oNon-accelerated
filer o            Smaller
reporting companyx




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




The
aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant at June 30, 2008 was approximately
$479,804.





As of
March 27, 2009 there were 4,274,496 shares of Common Stock
outstanding.












TABLE
OF CONTENTS








PART I
                                    
                                    
                                    PAGEItem
      1.
                                    Description
      of Business
                                    3Item
      1A.
                                    Risk
      Factors
                                    7Item
      1B.
                                    Unresolved
      Staff Comments
                                    13Item
      2.
                                    Properties
                                    13Item
      3.
                                    Legal
      Proceedings
                                    13Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    13PART
      IIItem
      5.
                                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Small
      Business Issuer Purchases of Equity Securities
                                    14Item
      6.
                                    Selected
      Financial Data
                                    15Item
      7.
                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                    15Item
      7A.
                                    Quantitative
      and Qualitative Disclosure about Market Risk
                                    22Item
      8.
                                    Financial
      Statements and Supplementary Data
                                    22Item
      9.
                                    Changes
      in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                                    22Item
      9A.
                                    Controls
      and Procedures
                                    22Item
      9B.
                                    Other
      Information
                                    24PART
      IIIItem
      10.
                                    Directors,
      Executive Officers and Corporate Governance
                                    24Item
      11.
                                    Executive
      Compensation
                                    28Item
      12.
                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                    30Item
      13.
                                    Certain
      Relationships and Related Transactions and Director
      Independence
                                    31Item
      14.
                                    Principal
      Accountant Fees and Services
                                    31PART
      IVItem
      15.
                                    Exhibits
      and Financial Statement Schedules
                                    33SIGNATURES
                                    
                                    
                                    35








1


PART
I





FORWARD-LOOKING
STATEMENTS




Some of
the statements under the captions of this report on Form 10-K titled “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” or “Business,“ contained or incorporated by reference
elsewhere in this report, and in our other reports filed with the Securities
Exchange Commission (“SEC”) constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements that address activities, events or
developments that we expect, believe or anticipate may occur in the future,
including:





·
            adverse
      economic conditions;





·
            inability
      to raise sufficient additional capital to operate our business, if
      necessary;





·
            unexpected
      costs, lower than expected sales and revenues, and operating
      defects;





·
            adverse
      results of any legal proceedings;





·
            the
      volatility of our operating results and financial
    condition;





·
            inability
      to attract or retain qualified senior management personnel, including
      sales and marketing, and engineering personnel;
  and





·
            other
      specific risks that may be referred to in this
  report.





All
statements, other than statements of historical facts, included in this report
regarding our strategy, future operations, financial position, estimated revenue
or losses, projected costs, prospects and plans and objectives of management are
forward-looking statements. When used in this report, the words “may,”
“believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,”
“could,” “would” and similar expressions are intended to identify
forward-looking statements, although not all forward-looking statements contain
such identifying words. All forward-looking statements speak only as of the date
of this report. We do not undertake any obligation to update any forward-looking
statements or other information contained in this report. Existing stockholders
and potential investors should not place undue reliance on these forward-looking
statements. Although we believe that our plans, intentions and expectations
reflected in or suggested by the forward-looking statements in this report are
reasonable, we cannot assure our stockholders or potential investors that these
plans, intentions or expectations will be achieved. We disclose important
factors that could cause our actual results to differ materially from our
expectations under “Risk Factors” and elsewhere in this report. These risk
factors qualify all forward-looking statements attributable to us or persons
acting on our behalf.





Information
regarding market and industry statistics contained in this report is included
based on information available to us that we believe is accurate. It is
generally based on academic and other publications that are not produced for
purposes of securities offerings or economic analysis. We have not reviewed or
included data from all sources, and we cannot assure our stockholders or
potential investors of the accuracy or completeness of the data included in this
report. Forecasts and other forward-looking information obtained from these
sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue and market acceptance
of products and services. We have no obligation to update forward-looking
information to reflect actual results or changes in assumptions or other factors
that could affect those statements. See “Risk Factors” for a more detailed
discussion of uncertainties and risks that may have an impact on future
results.





2


Item
1.     Business





Description
of Business.





National
Datacomputer, Inc. (hereinafter referred to as the “Company”, “we”, “us” or
“our”) was organized as a Delaware corporation in 1986 and began active
operations in 1987 following our merger with an established computer systems
engineering business. We are engaged exclusively in providing solutions through
the use of mobile information systems in the distribution market segment within
the product supply chain. We design, market, sell, and service computerized
systems used to automate the collection, processing, and communication of
information related to product sales and inventory control. Our products and
services include data communication, application-specific software, handheld
computers, related peripherals, and accessories, as well as associated education
and support services for our products.





From the
very beginning we designed our software solution based on the customer’s unique
specifications. Our first entry into the market was a DOS-based Route Accounting
software solution named RouteRider® which we developed in 1988. The RouteRider
software, running on our first generation of rugged handheld Datacomputer®
(“Datacomputer”) the DC3.0, was originally designed and built for an office
coffee service company. Since that time multiple generations of Datacomputers
(DC3X, DC4 and DC4CE) were designed and brought to market and our software
application was improved customer by customer and market by market. Historically
we have provided dependable solutions for distribution markets such as baking,
dairy, beer, soda, water, wine and spirits.





Although
customers can still buy our Datacomputers running our original RouteRider
software, we have now channeled all of our experience into a new portable and
highly parameterized Route Accounting solution designed to run on the very
latest industry standard MicrosoftTMoperating systems and architectures which we believe increases our market
potential by running on industry preferred operating systems and handheld
devices.





During
the fiscal year ended December 31, 2006, we sold our audit business line in
connection with a transaction relating to shares of our preferred and common
stock held by a majority holder of our capital stock.  On November 29,
2006, we entered into an arrangement with A.S.T., Inc. (“AST”) and Phyle
Industries, Inc. (“Phyle”) pursuant to which we sold our audit business line to
AST in exchange for 4,150 shares of our preferred stock (representing all of our
issued and outstanding preferred stock).





During
January 2007 acting as agent for certain new investors interested in purchasing
shares of our common stock, we caused the transfer of 2,022,616 shares of our
common stock, together with accrued but unpaid stock dividends (representing
approximately 90% of our common stock in the aggregate) that Phyle had
previously purchased from Capital Bank Grawe Gruppe AG (“CapitalBank”). These
investors paid Phyle $250,000 for the purchase of our common stock and agreed to
also provide us $350,000 to be used as working capital.





Our goal
continues to be a leading supplier in the route accounting system markets and in
selected other market sectors which we may identify in the future. The key
elements of this strategy include: (i) listening to our customers and prospects
and then designing and building solutions that resolve their inventory and
supply chain product problems; (ii) continuously updating our software solutions
to remain current with customers’ needs as well as existing technology; and
(iii) hiring people with industry experience.





3


Products




We implement software solutions, such
as our MicrosoftTMDOS®-based RouteRider product and the
MicrosoftTMWindows Mobile®-based RouteRider LE product, for
companies that need the latest technology to manage and improve their business
operations to account for inventory in route based deliveries. Our Route
Accounting solution functions as a combined point of sale and a rolling
warehouse management system with all the technical and audit functionality
needed for today’s working environments.





In June
2004 we signed a distribution partnership with Micronet, LTD, giving us rights
to market, sell and support a new mobile accounting software product throughout
the United States, Canada and Mexico. Since that time we have worked with
Micronet to modify this software so that it conforms to the North American
market. We plan to expand our sales team in order to seek to increase revenues
and boost productive partnerships with software and hardware
partners.  In addition we also plan to design and develop ancillary
application software to go along with the existing Direct Store Delivery (“DSD”)
software.  Our goal in undertaking these projects is to:





·
            Expand
      the market into non DSD sales;


·
            Increase
      our margins;


·
            Increase
      our competitive capabilities; and


·
            Improve
      our overall position as a preferred vendor for these products and
      services.





Products
meeting these needs provide concurrent order taking, product delivery, signature
capture, inventory tracking, and asset control. Salespeople enter customer
orders in handheld computers and use portable printers to generate invoices that
are left with the customers’ orders at their locations. At the end of a route
delivery day, information stored in the handheld computer is transferred to the
host information system and instructional and control information for the next
day’s delivery routes is transferred back to the handheld computer.





Our
Tailored Software Solutions





1.
            RouteRider®LE




We have
accumulated over 18 years of experience by developing an installed base of well
over 100 clients. We believe that our experience and industry knowledge are a
competitive advantage as we seek to attain revenue growth. Also, our
distribution agreement with Micronet LTD, enables us to target major food and
beverage distributors, as well as distributors in other markets, by providing
them with an efficient solution which reduces costs, increases sales, tracks
operations more accurately, and enhances customer service.




The
software, named RouteRider®
LE, (“RouteRider LE”) is a mobile sales force automation application designed to
increase efficiency, improve productivity and make companies more profitable and
competitive by allowing sales and distribution personnel to gather, enter and
share data at the point of work.




4


We
believe that RouteRider LE utilizes state of the art technology to provide a
complete and comprehensive mobile solution for sales and route accounting
applications, including pre-sale; van sale (DSD) and distribution. The
sales/field force is equipped with handheld computers or PDA’s (Personal Digital
Assistants) and communicates to the host or back office system through a
dedicated communication server. RouteRider LE is designed to enable sales and
field representatives to receive timely and updated information needed to make
decisions and close transactions effectively and efficiently.




RouteRider
LE runs on standard MicrosoftTM
Windows®
operating systems. RouteRider LE software includes a communications server that
mediates between a back office system and the handheld computers. The server
implements a unique development that greatly increases communication data rates.
The software is designed to include all of the functions that a sales person
might perform during his or her work.




RouteRider
LE contains detailed information on customers, products, prices and promotions.
Historical information, down to the line item detail, can also be supplied.
Surveys, voice messages, notes, graphics, e-mails, business intelligence,
accounts receivable and other information are designed to improve the efficiency
of the sales person on a daily basis.




RouteRider
LE is a portable and highly parameterized Route Accounting solution, which is
designed to run on standard MicrosoftTM Windows
operating systems, databases and utilizes cellular, Wi-Fi, and Bluetooth
communications protocols.




2.
              RouteRider®


Our
Datacomputers can be equipped with our MicrosoftTMDOS-based version of RouteRider®
software, which is designed to be a powerful but easy-to-use route service
system that can be customized for customers based on how they run their
businesses. RouteRider-equipped Datacomputers allow
sales people to communicate orders electronically as often as they want
throughout the day, by modem or cellular phone.





Salespeople
returning to an office or warehouse at the end of the day can exchange
information by connecting their RouteRiderDatacomputer to a
communications server either directly or through NDINetTM, our
proprietary network software, which unattended, can receive information from
multiple RouteRiderDatacomputers at
multiple locations. Sales people who do not return to an office or warehouse at
the end of the day can call their home base every evening to communicate the
day’s activities and load the RouteRiderDatacomputer with
up-to-the-minute information on products, pricing, and the next day’s
customers.





Once the
results of daily activities are uploaded from the RouteRiderDatacomputer to the
communications server, the server uploads this new data to the customer’s host
system’s route accounting, sales, distribution, accounts receivable (“A/R”), and
inventory programs, thereby saving data-entry costs and eliminating
transcription and keying errors. The server also downloads to the salesperson’s
RouteRider Datacomputer all the updated information needed for the next day’s
work—route schedule, customer files, history updates, customer specific pricing
changes, promotions, updated A/R status, open invoices, and more. During the
day, at each route stop, the driver takes the customer’s inventory, calculates
what new stock needs to be added, prints out a delivery slip for each customer
and also captures customer signature.  At the end of the day, a
complete report of the driver’s deliveries can be printed. According to a number
of our customers, the use of our RouteRider Datacomputers has significantly
improved driver efficiency.





5


Marketing
and Distribution





Recognizing
the need to focus our marketing resources, we have targeted our business
strategy for our software solutions to a limited number of markets. We currently
focus on market sectors where businesses distribute their products through
routes. We believe that the route sales and service market is attractive
because: (i) customer acceptance of handheld computers has been established in
those sectors; (ii) customers have realized a substantial return on their
investment in handheld computers; and (iii) we enjoy a competitive advantage in
this market due to our software and related services.





Direct
Sales Force





We
primarily sell and distribute our products through a direct sales force, which
we believe offers the best method for marketing and selling our products. Direct
selling is our primary strategy in the route sales and inventory service market.
We believe that the key elements to successful direct selling
include:  (i) maintaining a well-qualified direct sales staff that is
experienced in marketing and selling solutions to medium and large accounts;
(ii) using a consultative sales approach; (iii) offering excellent service and
support; and (iv) maintaining outstanding customer references.





Service
and Support





Superior
service is a vital part of our competitive strategy and institutionally we
emphasize the quality of both our hardware and software service. Our customer
service department manages all installations, preparations and follow-up
support. We provide depot repair services for our own manufactured hardware as
well as other manufacturers’ handhelds.





We
typically offer industry standard 90-day warranties and several flexible service
arrangements and maintenance contracts to meet customer needs. In addition to
technical support of installed systems, we provide pre-installation site
surveys, installation services, customization and enhancements, user training,
technical training, application software support, and host information system
interface assistance.





Approximately
41%of our 2008
total revenue was attributed to service and support sales.





Key
Customers





During
2008, three customers accounted for approximately 83% of our total revenues. The
majority of our customers place orders with us on an “as needed basis”; however
there are times when a customer will place an order for delivery over a twelve
month period.





Competition





The
market for our route service products is highly competitive and acutely
influenced by advances in technology, new product introduction and price
competition. Our competitors include Trimble, Apacheta Corporation, BelTech
Systems and High Jump Software, all of which have greater financial, marketing
and technical resources than we do. In addition, larger corporations could enter
the direct store delivery sales and service segment of the hand-held computer
market.





Employees





As of
December 31, 2008, we had 6 full-time employees. Of these employees, two were
engaged in sales and marketing, two in service and customer support, and two in
administration and finance. Our employees are not represented by a labor union.
We believe that our relationship with our employees is good.





6


Item
1A.    Risk Factors.





RISKS RELATED TO OUR
BUSINESS




WE HAVE A HISTORY OF LOSSES AND
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.




We will
need to generate more revenues than we did in 2008 in order to become profitable
and sustain profitability and positive cash flow. Our ability to generate future
revenue and sustain profitability will depend on a number of factors, many of
which are described throughout this risk factor section. Although we believe
that many of the cost savings and other activities we undertook last year,
together with our expected levels of revenues for this year, will allow us to
generate cash flow from operations, we may not achieve profitability this year
or be able to sustain profitability in future years. Failure to achieve and
maintain profitability will likely adversely affect the price of our Common
Stock.





WE
MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO CONTINUE TO OPERATE OUR
BUSINESS, AND SUCH TRANSACTIONS MAY NOT BE AVAILABLE TO US ON FAVORABLE
TERMS, IF AT ALL.





Because
we have historically had losses and only a limited amount of cash has been
generated from operations, we have funded our operating activities to date
primarily from the sale of securities and from the sale of a product line in
2007. In order to continue to fund our operations, we may need to raise
additional capital, through the sale of securities. We cannot be certain that
any such financing will be available on acceptable terms, or at all. Moreover,
additional equity financing, if available, would likely be dilutive to the
holders of our common stock, and debt financing, if available, would likely
involve restrictive covenants and a security interest in all or substantially
all of our assets.  If we fail to obtain acceptable financing when
needed, we may not have sufficient resources to fund our normal operations which
would have a material adverse effect on our business.





IF
WE ARE UNABLE TO GENERATE ADEQUATE WORKING CAPITAL FROM OPERATIONS OR RAISE
ADDITIONAL CAPITAL THERE IS SUBSTANTIAL DOUBT ABOUT THE COMPANY’S ABILITY TO
CONTINUE AS A GOING CONCERN.





The
independent registered public accounting firm’s report on our financial
statements for the year ended December 31, 2008 contains an explanatory
paragraph about our ability to continue as a going concern. Although we have
been able to reduce our operating expenses by 8% in 2008, as compared to 2007,
we still have incurred an accumulated deficit of approximately $17.0 million
through December 31, 2008. As of December 31, 2008, we had approximately
$120,000 in cash and negative working capital of $1,120,000. The 2008 results
reflect significant cost reductions, which efforts we are continuing to
undertake. However, even with the additional working capital from equity
transactions during 2008, we have a current ratio of 0.46 as of December 31,
2008, which is slightly lower than our current ratio of 0.56 at December 31,
2007 and is significantly less than 1.00, which is generally considered to place
a company at higher financial risk.  In the event that we cannot
generate sufficient cash for working capital, we may have to reduce our level of
operations, which will make it more difficult for us to continue our business as
a going concern.









7


THE CURRENT FINANCIAL CRISIS AND
UNCERTAINTY IN GLOBAL ECONOMIC CONDITIONS COULD CONTINUE TO NEGATIVELY AFFECT
OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION.





The
current financial crisis and uncertainty in global economic conditions have
resulted in a tightening in the credit markets, a low level of liquidity in many
financial markets, and extreme volatility in credit, equity and fixed income
markets. There could be a number of follow-on effects from these economic
developments on our business, including unavailability of credit; insolvency of
key suppliers resulting in product delays; customer insolvencies; rapid changes
to the foreign currency exchange rates; decreased customer confidence; and
decreased customer demand.  Any of these events, or any other events caused
by the current financial crisis, may have a material adverse effect on our
business, operating results, and financial condition.





WE
HAVE ONLY A SMALL NUMBER OF CUSTOMERS IN FINITE FIELDS, AND THE LOSS OF ANY OF
THESE CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY’S
BUSINESS.





Approximately
41% of our 2008 total revenue was attributed to service and support sales.
During 2008, one customer accounted for approximately 65% of our total revenues.
Additionally, in 2008 our top three customers collectively accounted for 83% of
our total revenues.





OUR MARKETS ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, THEREFORE, OUR SUCCESS DEPENDS ON OUR ABILITY TO ADAPT
AND/OR INTRODUCE NEW PRODUCTS IN A TIMELY FASHION.





The life
cycle of the technology and any future products developed by us may be limited
by the emergence of new products and technologies, changes in customer
preferences and other factors. Our future performance will depend on our ability
to consistently:




·
            identify
      emerging technological trends in our
market;


·
            identify
      changing customer requirements;


·
            develop
      or maintain competitive technology, including new product
      offerings;


·
            improve
      the performance, features and reliability of our products, particularly in
      response to technological change and competitive
  offerings;


·
            bring
      technology to market quickly at cost-effective prices;
  and


·
            protect
      our intellectual property.




We may
not succeed in developing and marketing new products that respond to
technological and competitive developments and changing customer needs, and such
products may not gain market acceptance or be incorporated into the technology
or products of third parties. Any significant delay or failure to develop new
enhanced technologies, including new product offerings, and any failure of the
marketplace to accept any new technology and product offerings would have a
material adverse effect on our business, financial condition and results of
operations.





COMPETITION IN THE HANDHELD
COMPUTERIZED ROUTE ACCOUNTING INVENTORY SOLUTIONS INDUSTRIES COULD PREVENT US
FROM ACHIEVING PROFITABILITY.





The
computerized route accounting industries are highly competitive, and we expect
the intensity of the competition to increase. Many of our competitors have
greater financial, technical, research, marketing, sales, distribution, service
and other resources than we do. Moreover, our competitors may offer broader




8


product
lines and have greater name recognition than we do, and may offer discounts as a
competitive tactic, forcing intense pricing pressure on our products. In
addition, several development stage companies are currently creating or
developing technologies and products that compete with or are being designed to
compete with our technologies and products. Our competitors may develop or
market technologies or products that are more effective or more commercially
attractive than our current or future products, or that may render our
technologies or products less competitive or obsolete.





OUR QUARTERLY OPERATING RESULTS
MAY FLUCTUATE.





Due to
the nature of our business and our competitive role in the industry, we will
experience fluctuations in our quarterly operating results as we have in the
past and it is likely that these fluctuations will continue in the future. These
fluctuations are caused by many factors, including, but not limited
to:




·
            availability
      and pricing from our suppliers;


·
            changes
      in the demand for our products by
customers;


·
            introductions
      or enhancements of products, or delays in the introductions or
      enhancements of products, by us or our
  competitors;


·
            rate
      and success of new customer
development;


·
            changes
      in our pricing policies or those of our
  competitors;


·
            success
      in attracting, retaining and motivating qualified
    personnel;


·
            changes
      in general economic conditions; and


·
            obsolescence
      of inventory.




A
substantial portion of our operating expenses is related to personnel,
facilities, and sales and marketing programs and is fixed. Our expense level is
based in part on our expectations of future orders and sales, which are
extremely difficult to predict. Accordingly, we may not be able to adjust our
fixed expenses quickly enough to address any significant shortfall in demand for
our products in relation to our expectations.


Fluctuations
in our operating results may also result in fluctuations in our common stock
price. In such event, the trading price of our common stock would likely suffer
and adversely affect our ability to raise capital and the value of your
investment in the Company.





IF
WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MAY NOT BE ABLE TO
OPERATE OUR BUSINESS SUCCESSFULLY.





We may
not be successful in recruiting and retaining executive officers and other key
management and technical personnel. The competition for employees with the
necessary high level of technical expertise to design, market and sell our
products is intense, particularly in Massachusetts. We will need to hire
executives and a number of additional technical personnel if we are to sustain
the development of new products and our ability to sell those products. Because
competition for highly skilled technical personnel is so intense, companies in
the Company’s industry are subject from time to time to complaints brought by
competitors alleging interference with contractual relations or wrongful hiring
of employees. Such lawsuits may be costly, may divert management attention and
resources from the operation of our business, and may therefore adversely affect
our financial condition and results of operations. In addition, the loss of the
management and technical expertise of our senior management could seriously harm
us.









9


NEITHER
OUR DISCLOSURE CONTROLS AND PROCEDURES NOR OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING CAN PREVENT ALL ERRORS OR FRAUD.





Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent all errors or fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
will be attained. Furthermore, the design of a control system must reflect the
fact that there are resource constraints and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in a
cost-effective control system, no evaluation of controls can provide absolute
assurance that all misstatements due to error or fraud, if any, may occur and
not be detected on a timely basis. These inherent limitations include the
possibility that judgments in decision-making can be faulty and that breakdowns
can occur because of errors or mistakes. Our controls and procedures can also be
circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Furthermore, controls
may become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies or procedures. While we seek to design our
controls and procedures to provide reasonable assurance that information
required to be disclosed in our periodic filings is timely disclosed, these
inherent limitations expose us to breakdowns in such controls and
procedures.





AS A PUBLIC COMPANY, WE NEED TO
COMPLY WITH THE REPORTING OBLIGATIONS OF THE SECURITES EXCHANGE ACT OF 1934 AND
SECTION 404 OF THE SARBANES-OXLEY ACT OF 2002.  IF WE FAIL TO
COMPLY WITH THE REPORTING OBLIGATIONS OF THE EXCHANGE ACT AND SECTION 404
OF THE SARBANES-OXLEY ACT, OR IF WE FAIL TO MAINTAIN ADEQUATE INTERNAL CONTROLS
OVER FINANCIAL REPORTING, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION, AND INVESTORS’ CONFIDENCE IN US, COULD BE MATERIALLY AND ADVERSELY
AFFECTED.





As a
public company, we are required to comply with the periodic reporting
obligations of the Exchange Act, including preparing annual reports, quarterly
reports and current reports. Our failure to prepare and disclose this
information in a timely manner could subject us to penalties under federal
securities laws, expose us to lawsuits and restrict our ability to access
financing. We may identify areas requiring improvement with respect to our
internal control over financial reporting, and we may be required to design
enhanced processes and controls to address issues identified. This could result
in significant delays and cost to us and require us to divert substantial
resources, including management time, from other activities.





Our
management has identified three material weaknesses in our internal control over
financial reporting for the year ended December 31, 2008.  If we fail
to maintain the adequacy of our internal controls, we may not be able to ensure
that we can conclude on an ongoing basis that we have effective internal control
over financial reporting in accordance with the Sarbanes-Oxley
Act.  Moreover, effective internal controls are necessary for us to
produce reliable financial reports and are important to help prevent
fraud.







RISKS
RELATED TO OUR INTELLECTUAL PROPERTY





OUR INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO PROTECT OUR COMPETITIVE
POSITION.





Our
business depends, in part, on our ability to protect our intellectual property.
We rely primarily on patent, copyright, trademark and trade secret laws to
protect our proprietary technologies. We cannot be sure that such measures will
provide meaningful protection for our proprietary technologies and processes. We
cannot be sure that any existing or future patents will not be challenged,
invalidated or circumvented, or that any rights granted thereunder would provide
us meaningful protection. The failure of any patents to provide protection to
our technology would make it easier for our competitors to offer similar
products.




10


We also
generally enter into confidentiality agreements with our employees and strategic
partners, and generally control access to and distribution of our documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use our products or technology
without authorization, develop similar technology independently or design around
our patents. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries in which
we operate.





WE
MAY BE SUBJECT TO INTELLECTUAL PROPERTY RIGHTS DISPUTES WHICH COULD DIVERT
MANAGEMENT’S ATTENTION AND COULD BE COSTLY.





From time
to time, we may receive notices of claims of infringement, misappropriation or
misuse of other parties’ proprietary rights. We cannot be sure that we will
prevail in these actions, or that other actions alleging infringement by us of
third-party patents, misappropriation or misuse by us of third-party trade
secrets or the invalidity of one or more patents held by us will not be asserted
or prosecuted against us, or that any assertions of infringement,
misappropriation or misuse or prosecutions seeking to establish the invalidity
of our patents will not seriously harm our business. For example, in a patent or
trade secret action, an injunction could be issued against us requiring that we
withdraw particular products from the market or necessitating that specific
products offered for sale or under development be redesigned.




Irrespective
of the validity or successful assertion of various claims of infringement,
misappropriation or misuse of other parties’ proprietary rights, we would likely
incur significant costs and diversion of our management and personnel resources
with respect to the defense of such claims, which could seriously harm our
business. If any claims or actions are asserted against us, we may seek to
obtain a license under a third party’s intellectual property rights. We cannot
be sure that under such circumstances a license would be available on
commercially reasonable terms, if at all. Moreover, we often incorporate the
intellectual property of our strategic customers into our designs, and we have
certain obligations with respect to the non-use and non- disclosure of such
intellectual property. We cannot be sure that the steps taken by us to prevent
our or our customers’ misappropriation or infringement of the intellectual
property will be successful.







RISKS
RELATING TO OUR COMMON STOCK





A
SIGNIFICANT HOLDER OF SHARES OF OUR COMMON STOCK HAS SUFFICIENT OWNERSHIP TO
SINGULARLY DETERMINE THE RESULTS OF ANY STOCKHOLDER VOTE AND CONTROL OUR BOARD
OF DIRECTORS.





As of
March 27, 2009, Anthony Stafford and his four children beneficially own an
aggregate of 2,615,077 shares of our common stock, or 61.2%, and thus a
majority, of all outstanding shares of our common stock. Mr. Stafford has sole
voting authority over all of such shares and will thus be able to determine the
outcome of all corporate matters requiring stockholder approval, including the
election of all of our directors and transactions such as the sale of our
company. Mr. Stafford is also a member of our Board of Directors.





TRADING
ON THE OTC BULLETIN BOARD MAY BE VOLATILE AND SPORADIC, WHICH COULD DEPRESS THE
MARKET PRICE OF OUR COMMON STOCK AND MAKE IT DIFFICULT FOR OUR STOCKHOLDERS TO
SELL THEIR SHARES.




11


Our
common stock is quoted on the OTC Bulletin Board service of the National
Association of Securities Dealers. Trading in stock quoted on the OTC Bulletin
Board is often limited and characterized by wide fluctuations in trading prices,
due to many factors that may have little to do with our operations or business
prospects. This volatility could depress the market price of our common stock
for reasons unrelated to operating performance. Moreover, the OTC Bulletin Board
is not a stock exchange, and trading of securities on the OTC Bulletin Board is
often more sporadic than the trading of securities listed on a quotation system
like Nasdaq or a stock exchange. Accordingly, shareholders may have difficulty
reselling any of the shares.





OUR
STOCK IS A PENNY STOCK. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC’S
PENNY STOCK REGULATIONS AND THE NASD’S SALES PRACTICE REQUIREMENTS, WHICH MAY
LIMIT A STOCKHOLDER’S ABILITY TO BUY AND SELL OUR STOCK.





Our stock
is a penny stock. The Securities and Exchange Commission has adopted Rule 15g-9
which generally defines “penny stock” to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities are covered
by the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
“accredited investors”. The term “accredited investor” refers generally to
institutions with assets in excess of $5,000,000 or individuals with a net worth
in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly
with their spouse. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.




In
addition to the “penny stock” rules promulgated by the Securities and Exchange
Commission, the NASD has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable grounds for
believing that the investment is suitable for that customer. Prior to
recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, the NASD believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The NASD requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock.







12


FACTORS
UNRELATED TO OUR BUSINESS COULD NEGATIVELY IMPACT THE MARKET PRICE OF OUR COMMON
STOCK.




The stock
markets have experienced extreme price and volume fluctuations that have
affected and continue to affect the market prices of equity securities of many
technology companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of those companies. We expect that
the market price of our common stock will fluctuate as a result of variations in
our quarterly operating results, or for other reasons that are not related to
the performance of our business. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the
technology-intensive nature of our business, the market price for our common
stock may rise and fall in response to various factors, including:




·
            announcements
      of technological innovations or new products, or competitive
      developments;


·
              investor
      perceptions and expectations regarding our or our competitors’
      products;·
              acquisitions
      or strategic alliances by us or our competitors;
and


·
            the
      gain or loss of a significant customer or
order




In
addition, market fluctuations, as well as general economic, political and market
conditions such as recessions, interest rate changes or international currency
fluctuations, may negatively impact the market price of our common
stock.





IF
WE FAIL TO REMAIN CURRENT IN OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED
FROM THE OTC BULLETIN BOARD WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO
SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS TO SELL THEIR SECURITIES IN
THE SECONDARY MARKET.





Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current in our
reporting requirements, we could be removed from the OTC Bulletin Board. As a
result, the market liquidity for our securities could be severely adversely
affected by limiting the ability of broker-dealers to sell our securities and
the ability of stockholders to sell their securities in the secondary
market.





Item
1b.     Unresolved Staff
Comments.





Not
applicable





Item
2.       Properties.





We
maintain our principal offices and support operations in a leased 5,974 square
foot facility in Billerica, Massachusetts. Our lease expires on April 30,
2009.  The annual base rent for our leased facilities is approximately
$103,000.  The lease contains an option for renewal, and requires,
among other things, that we will pay to our landlord as additional rent our pro
rata share of certain operational and maintenance costs at the facility during
the term of the lease. We believe that our facilities are adequate for our
current needs and that additional space, if required, may be available at
competitive rates.





Item
3.       Legal
Proceedings.





We are
not a party to any legal proceedings.





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





Not
applicable.






13


PART
II





Item
5.       Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.





Our
common stock trades on the OTC Bulletin Board (“OTC”) under the symbol NDCP. On
March 27, 2009, the last traded price for our common stock as reported by OTC
was $0.10 per share.





For the
periods indicated below, the table sets forth the range of high and low last
sale prices for our Common Stock as reported by the OTC. The quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual retail transactions.  All information prior to July
31, 2008 and presented herein has been adjusted to reflect the reverse stock
split executed on July 31, 2008.





2007





High
                          
                          
                          LowFirst
      Quarter
                          
                          $
                          0.75
                          
                          
                          $
                          0.60Second
      Quarter
                          
                          
                          0.75
                          
                          
                          
                          0.45Third
      Quarter
                          
                          
                          0.45
                          
                          
                          
                          0.30Fourth
      Quarter
                          
                          
                          0.60
                          
                          
                          
                          0.30




2008





First
      Quarter
                
                $
                0.38
                
                
                $
                0.15Second
      Quarter
                
                
                0.90
                
                
                
                0.15Third
      Quarter
                
                
                0.90
                
                
                
                0.20Fourth
      Quarter
                
                
                0.20
                
                
                
                0.10





As of
March 27, 2009, there wereapproximately 928
stockholders of record of our common stock.





Since
many of the shares are held by brokers and other institutions on behalf of
stockholders, the Company is unable to estimate the total number of individual
stockholders represented by these holders of record.





Dividends





Since
inception, we have not paid any dividends on our common stock and we do not
anticipate the payment of any dividends to our common stockholders in the
foreseeable future. We currently intend to reinvest earnings, if any, in the
development and expansion of our business.  The declaration of
dividends in the future will be at the election of our Board of Directors and
will depend upon our earnings, capital requirements and financial position,
general economic conditions, and other pertinent factors.





Summary
of Equity Compensation Plans




We
maintain an equity compensation plans for employees, officers, directors and
others whose efforts contribute to our success. The table below sets forth
certain information as of our fiscal year ended December 31, 2008 regarding the
shares of our common stock available for grant or granted under stock option
plans that (i) were approved by our stockholders, and (ii) were not approved by
our stockholders.





14





Plan
      Category
                  Number
      of Securities to be issued upon exercise of outstanding options, warrants
      and rights
                  Weighted-average
      exercise price of outstanding options, warrants and rights
                  Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))(a)
                  (b)
                  (c)Equity
      compensation plans approved by security holders
                  200,000
                  $0.61
                  108,336Equity
      compensation plans not approved by security holders
                  0
                  
                  0Total
                  200,000
                  $0.61
                  108,336





Unregistered
Sales of Securities





The
following summarizes all sales of our unregistered securities during the fiscal
year ended December 31, 2008. The securities in each of the below-referenced
transactions were (i) issued without registration and (ii) were
subject to restrictions under the Securities Act and the securities laws of
certain states, in reliance on the private offering exemptions contained in
Sections 4(2), 4(6) and/or 3(b) of the Securities Act and on
Regulation D promulgated thereunder, and in reliance on similar exemptions
under applicable state laws as a transaction not involving a public
offering.  No placement or underwriting fees were paid in connection
with these transactions. Proceeds from the sales of these securities were used
for general working capital purposes.





On July
28, 2008, Anthony Stafford purchased 66,667 shares of our common stock for an
aggregate purchase price of $0.75.





On
September 18, 2008, members of our Board of Directors, along with one outside
investor purchases 1,825,000 shares of our common stock for an aggregate
purchase price of $0.20.





The
securities issued as set forth above were issued in reliance upon exemptions
from the registration provisions of the Securities Act set forth in Section 4(2)
thereof relative to sales by an issuer not involving any public offering, to the
extent an exemption from such registration was required.





Item
6.       Selected Financial Data.





Not
applicable.





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





Overview





Our total
revenues for the fiscal year ended December 31, 2008, were $1,820,196 as
compared to $1,761,151 for the fiscal year ended December 31, 2007, an increase
of 3%. Net loss for 2008 was $514,204, or $(0.18) per share, as compared to a
loss of $520,377 or $(0.23) per share for 2007.





During
January 2007 acting as agent for certain new investors interested in purchasing
shares of our common stock, we caused the transfer of 2,022,616 shares of our
common stock, together with accrued but unpaid stock dividends (representing
approximately 90% of our common stock in the aggregate) that Phyle Industries,
Inc. (“Phyle”) had previously purchased from Capital Bank Grawe Gruppe AG
(“CapitalBank”). These investors paid Phyle $250,000 for the purchase of our
common stock and agreed to also provide us $350,000 to be used as working
capital.





15


One of
these investors, Anthony Stafford, including his four children, invested
$400,000 for the purchase of shares of our common stock previously held by
CapitalBank. As a condition to his investment, Mr. Stafford requested that our
executive officers and members of our Board of Directors provide an aggregate of
$140,000 of the $600,000 (including Mr. Stafford’s $400,000) in funds which were
raised to acquire shares previously held by CapitalBank. Each of our executive
officers and the members of our Board of Directors, upon a majority approval
from our stockholders, agreed to make such an investment and therefore purchased
an aggregate of 471,944 shares of our common stock on the same terms on which
Mr. Stafford purchased his shares.





Starting
in 2006 we divested ourselves from our audit business to better concentrate our
efforts on our new Route Accounting solution. In 2006, we delivered our first
hand-held route solution, interfacing with the J.D. Edwards system, to an
internationally recognized company in the food services industry. The
implementation was successful and the company continued to deploy additional
routes in Europe during 2007 and 2008. During 2008, we delivered a comprehensive
RRLE Direct Store Delivery solution to a major bottling company and also
contracted to deliver a similar solution to a major national bakery. This
solution, with a value of approximately $1,000,000 is scheduled to be delivered
in 2009.





Results
of Operations





We
continue exploring all opportunities to improve our financial condition by
aggressively pursuing potential revenues. There is a possibility that we may not
realize adequate revenues in the near future to meet cash flow requirements, and
therefore might require us to implement further cost saving action or attempt to
obtain additional financing.  There can be no assurance that such
financing, if required, will be available on reasonable terms, if at
all.  We believe that based on our current revenue expectations, the
expected timing of such revenues, and our current level of expenses, we have
sufficient cash to fund our operations through the end of 2009.





The
following discussion and analysis of results of operation focuses on continuing
operations and should be read in conjunction with the financial statements and
notes thereto appearing elsewhere herein.





Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007





For the
year ended December 31, 2008, we reported a loss of $514,204, or $(0.18) per
share, as compared to a loss of $520,377 or $(0.23) per share for the comparable
prior year. The decreased net loss was a direct result of lower
expenses.





Revenue





Our total
revenue for the year ended December 31, 2008 increased 3% to $1,820,196 compared
to $1,761,151 for the comparable prior year.





Product
revenues for the year ended December 31, 2008 increased 29% to $1,082,647
compared to $839,451 for the prior year.





16


Service
revenues for the year ended December 31, 2008 decreased 20% to $737,549 compared
to $921,700 for the prior year. The decrease is a direct result of lower
maintenance and repair contracts for our Datacomputers, offset by higher
billings of our professional services for RRLE implementation
projects.





Our gross
profit was $471,239 or 26% of revenues for the year ended December 31, 2008,
compared to $531,090 or 30% of revenues from the prior year. The lower margin is
a direct result of lower service revenues combined with higher material
costs.





Operating
Expenses





Total
operating expenses of $982,420 decreased 8% for the year ended December 31, 2008
from $1,068,857 for the comparable prior year.





Selling
and marketing expenses for the year ended December 31, 2008 were $294,754
compared to $298,156 for the prior year, a decrease of 1%. The decrease is due
to lower marketing expense offset by higher commission expenses.





General
and administrative expenses for the year ended December 31, 2008 were $687,466
compared to $770,701 for the prior year, a decrease of 11%. The decrease is a
result of reduced legal and directors’ fees.





Liquidity
and Capital Resources





We used
cash of $498,797 and $111,263 for operating activities for the years ended
December 31, 2008 and 2007, respectively. For the year ended December 31, 2008,
our principal operating cash requirement was used to fund our loss from
operations along with a decrease in accounts payable and an increase in other
prepaid expenses, offset by an increase in deferred revenue and a decrease in
deferred hardware and software costs. For the year ended December 31, 2007, our
principal operating cash requirement was used to fund our loss from operations
along with an increase in deferred hardware and software costs and prepaid
expenses, offset by an increase in accounts payable and deferred
revenues.





We used
cash of $15,408 and $16,861 for investing activities for the years ended
December 31, 2008 and 2007, respectively. The cash was used for the purchase of
capital equipment. As of December 31, 2008, we had no material commitments for
capital expenditures.





We
generated cash of $376,735 and $222,360 from financing activities for the years
ended December 31, 2008 and 2007, respectively. For the year ended December 31,
2008, we raised capital in the amount of $415,000 and made payments on
obligations under our notes payables and capital leases. For the year ended
December 31, 2007, we raised capital, net of expenses in the amount of $262,165
and made payments on obligations under our notes payable and capital
leases.





The
independent registered public accounting firm’s report on our financial
statements for the year ended December 31, 2008 contains an explanatory
paragraph about our ability to continue as a going concern. Although we have
been able to reduce our operating expenses by 8% in 2008, as compared to 2007,
we still have incurred an accumulated deficit of approximately $17.0 million
through December 31, 2008. As of December 31, 2008, we had approximately
$120,000 in cash and negative working capital of $1,120,000. The 2008 results
reflect significant cost reductions, which efforts we are continuing to
undertake. However, even with the additional working capital from equity
transactions during 2008, we have a current ratio of 0.46 as of December 31,
2008, which is slightly lower than our current ratio of 0.56 at December 31,
2007 and is significantly less than 1.00, which is generally considered to place
a company at higher financial risk.  In the event that we cannot
generate sufficient cash for working capital, we may have to reduce our level of
operations, which will make it more difficult for us to continue our business as
a going concern.





17


At
December 31, 2008, approximately 66% of our accounts payable was comprised of
amounts due for services to our Directors and legal firm. Although no formal
payment plans have been established, we plan on making monthly payment based on
our availability of cash until such time as these amounts are paid in
full.





We are
exploring all opportunities to improve our financial condition by aggressively
pursuing potential revenues. There is a possibility that we may not realize
adequate revenues in the near future to meet cash flow requirements, and
therefore might require us to implement further cost saving action or attempt to
obtain additional financing. There can be no assurance that such financing, if
required, will be available on reasonable terms, if at all.  We
believe that based on our current revenue expectations, the expected timing of
such revenues, and our current level of expenses we have sufficient cash to fund
our operations through the end of 2009.





We
maintain adequate levels of inventory and have not experienced any interruption
of supplies or services from vendors.





Commitments,
Contractual Obligations and Off-Balance Sheet Arrangements





We lease
our office facilities under an operating lease expiring April 30, 2009. The
lease contains an option for renewal and requires the payment of taxes and other
operating costs.  Total rent expense under this operating lease was
$132,828 and $153,996 for the years ended December 31, 2008 and 2007,
respectively.





We also
lease certain equipment under capital leases expiring at various dates through
2010.





Minimum
future lease commitments under operating and capital leases at December 31, 2008
are as follows:





Year
      ending
                  December
      31,
                
                Operating
                
                
                Capital2009
                
                $
                34,000
                
                
                
                24,0272010
                
                
                —
                
                
                
                7,038Total
      minimum lease payments
                
                $
                34,000
                
                
                
                31,065Less:
      amount representing interest
                
                
                
                
                
                
                4,432Present
      value of minimum lease payments
                
                
                
                
                
                
                26,633Less:
      Current obligations
                
                
                
                
                
                
                20,310Obligations
      under capital leases, net of current portion
                
                
                
                
                
                $
                6,323





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
which changes how business acquisitions are accounted.  SFAS No. 141R
requires the acquiring entity in a business




18


combination
to recognize all (and only) the assets acquired and liabilities assumed in the
transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business
combination.  Certain provisions of this standard will, among other things,
impact the determination of acquisition-date fair value of consideration paid in
a business combination (including contingent consideration); exclude transaction
costs from acquisition accounting; and change accounting practices for acquired
contingencies, acquisition-related restructuring costs, in-process research and
development, indemnification assets and tax benefits.  SFAS No. 141R
is effective for the Company for business combinations and adjustments to an
acquired entity’s deferred tax asset and liability balances occurring after
December 31, 2008.  The Company is currently evaluating the future
impacts and disclosures of this standard.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51.” This
statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS No. 160 requires
the recognition of a noncontrolling interest (minority interest) as equity in
the consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS
No. 160 amends certain of ARB No. 51’s consolidation procedures for
consistency with the requirements of SFAS No. 141(R). This statement
requires changes in the parent’s ownership interest of consolidated subsidiaries
to be accounted for as equity transactions. This statement also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. The Company is currently evaluating the future impacts
and disclosures of this standard.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” which changes the disclosure requirements
for derivative instruments and hedging activities. SFAS No. 161 requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement’s
disclosure requirements are effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
future impacts and disclosures of this standard.





Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S.
GAAP). The preparation of these financial statements requires us to make
significant estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. These items are monitored and analyzed by management for
changes in facts and circumstances, and material changes in these estimates
could occur in the future. Changes in estimates are recorded in the period in
which they become known. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from our estimates if past experience
or other assumptions do not turn out to be substantially accurate.





A summary
of those accounting policies that we believe are most critical to fully
understanding and evaluating our financial results is set forth
below.  This summary should be read in conjunction with our financial
statements and the related notes included elsewhere in this Annual Report on
Form 10-K.





19


Revenue
Recognition.





We
recognize product revenue in accordance with SEC Staff Accounting Bulletin No.
104, “Revenue Recognition in
Financial Statements”.  Revenue related to product sales is
recognized upon shipment provided that title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, the sales price is
fixed or determinable, collection of the related receivable is reasonably
assured and customer acceptance criteria, if any, have been successfully
demonstrated. Where the criteria cannot be demonstrated prior to shipment, or in
the case of new products, revenue is deferred until acceptance has been
received. Our sales contracts provide for the customer to accept title and risk
of loss at the time of delivery of the product to a common carrier.





Our
revenue arrangements sometimes involve multiple elements (i.e. products and
services). Revenue under multiple arrangements is recognized in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 00-21,“Accounting for Revenue
Arrangements with Multiple Deliverables”.  Under this method,
if an element is determined to be a separate unit of accounting, the revenue for
the element is based on fair value and determined by verifiable objective
evidence, and recognized at time of delivery. If the arrangement has an
undeliverable element, we ensure that we have objective and reliable evidence of
the fair value of the undeliverable element. Fair value is determined based upon
the price charged when the element is sold separately.  When products
and services are sold together and fair values have been established, revenue
related to the hardware is generally recognized when title and risk of loss have
passed, and revenue related to services are recognized as the services are
provided.  If fair values of the various elements have not been
established, we defer all revenue until all elements have been
delivered.





For
revenue arrangements with multiple deliverables that include or represent
software products and services as well as any non-software deliverables for with
a software deliverable is essential to its functionality, we recognize revenue
in accordance with the American Institute of Certified Public Accountants
(“AICPA”)’s Statement of Position 97-2,“Software Revenue
Recognition”  (“SOP 97-2”). The application of SOP 97-2
requires judgment, including whether a software arrangement includes multiple
elements, and if so, whether vendor-specific objective evidence (VSOE) of fair
value exists, no significant obligations with regard to installation on
implementation remain, and customer acceptance, when applicable, is
obtained.  Our revenue arrangements may include hardware, software,
services and maintenance.  If software is essential to the
functionality of the hardware, we generally defer the recognition of revenue
related to the hardware until the software revenue can be
recognized.  If services are essential to the functionality of the
software, revenue related to the services are also deferred until the software
revenue can be recognized.  If the only undelivered element is
maintenance for which VSOE of fair value can be established, revenue related to
the software and the related elements is recognized upon customer acceptance of
the software.  The maintenance will then be recognized ratably over
the contract term.





Service
revenue that is not essential to the functionality of a software product is
recognized as the services are provided on a time and materials
basis.





Hardware
and software maintenance that is not sold as part of a multiple element
arrangement is recognized ratably over the contract maintenance
term.





Inventories





Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method. We evaluate our inventories to determine
excess or slow moving products based on quantities on hand, current orders and
expected future demand. For those items in which we believe we have an excess
supply or for those items that are obsolete, we estimate the net amount that we
expect to realize from the sale of such products and record an
allowance.





20


Long-Lived
Assets





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets,” we review the
carrying values of our long-lived assets for possible impairment whenever events
or changes in circumstances indicate that the carrying amounts of the assets may
not be recoverable.  Any long-lived assets held for disposal are
reported at the lower of their carrying amounts or fair values less costs to
sell.





Share-Based  Compensation





The
Company accounts for share-based compensation according to the provisions of
SFAS No. 123(R), “Share−based Payment”, which establishes accounting for equity
instruments exchanged for employee services. Under SFAS 123(R), share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the employee’s requisite service
period (generally the vesting period of the equity grant). The majority of the
Company’s share-based compensation arrangements vest over four
years.





The
Company estimates the fair value of stock options using the Black-Scholes
valuation model.  Key input assumptions used to estimate the fair
value of stock options include the exercise price of the award, the expected
option term, the expected volatility of the Company’s stock over the option’s
expected term, the risk-free interest rate over the option’s expected term, and
the Company’s expected annual dividend rate.  The Company believes
that the valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the Company’s
stock options granted in the year ended December 31,
2008.    Estimates of fair values are not intended to
predict actual future events or the value ultimately realized by persons who
receive equity awards.





Capitalized
Software Research and Development Costs.





Costs
associated with the development of computer software are charged to operations
prior to establishment of technological feasibility, as defined by Statement of
Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs
incurred subsequent to the establishment of technological feasibility and prior
to the general release of the products are capitalized.





Capitalized
software costs are amortized on a product-by-product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenue for a product bears to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. Amortization
begins when the product is available for general release to the
customer.





The
Company did not capitalize any software costs during
2008.  Amortization of capitalized software costs was $6,253 and
$8,000 for the years ended December 31, 2008 and 2007,
respectively.









21


Accounting
for Income Taxes.





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 9” (“FIN 48”), on January
1, 2007. FIN 48 requires that the of tax positions be recognized in the
financial statements if they are more likely than not to be sustained upon
examination, based on the technical merits of the position. The Company has a
valuation allowance against the full amount of its deferred tax assets. The
Company currently provides a valuation allowance against deferred tax assets
when it is more likely than not that some portion, or all of its deferred tax
assets, will not be realized. The implementation FIN 48 had no effect on the
Company’s financial position or results of operations and there is no interest
or penalties as management believes the Company has no uncertain tax position at
December 31, 2008.  The Company is subject to U.S. federal income tax
as well as well as income tax of certain state jurisdictions. The Company has
not been audited by the I.R.S. or any states in connection with income taxes.
The period from 2004-2007 remains open to examination by the I.R.S. and state
authorities.





Item
7A.    Quantitative and Qualitative Disclosure About Market
Risk.





Not
applicable.





Item
8.       Financial Statements and Supplemental
Data.





The
financial statements and supplementary data are listed under Part IV, Item 15 in
this Annual Report on Form 10-K.





Item
9.       Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.





None.





Item
9A.    Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





We have
conducted an evaluation under the supervision of the Chief Executive Officer and
Chief Accounting Officer (our principal executive officer and principal
financial officers, respectively), regarding the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) as of December 31, 2008. Based on the aforementioned
evaluation, management has concluded that our disclosure controls and procedures
were not effective as of December 31, 2008 because of the existence of three
material weaknesses in our internal control over financial reporting related to
(i) our finance group’s inability to perform the testing of internal controls on
financial reporting due to our limited number of personnel engaged in accounting
and finance functions and a resulting lack in the segregation of duties, (ii)
the potential inability of our accounting staff to handle certain complex
accounting issues, and (iii) as a result of the fact that our September 30, 2008
Form 10-Q was originally filed without a review having been performed by our
Independent Registered Public Accounting Firm, our Independent Registered Public
Accounting Firm has concluded that as of September 30, 2008 a material weakness
existed related to our disclosure controls and procedures, specifically with
regards disclosures and procedures mandated by Securities and Exchange
Commission regulations.  Notwithstanding the existence of the material
weaknesses described below, management has concluded that the consolidated
financial statements in this Form 10-K fairly present, in all material respects,
the Company’s financial position, results of operations and cash flows for the
periods and dates presented.





22


(b)           Management’s Annual Report on
Internal Control over Financial Reporting




(i)           Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system is designed to
provide reasonable assurance to our management and board of directors regarding
the reliability of financial reporting and the preparation of published
financial statements. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
reporting and financial statement preparation and presentation.




(ii)           We
have assessed the effectiveness of our internal control over financial reporting
as of December 31, 2008. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission,
or COSO, in Internal
Control—Integrated Framework.





(iii)         
Two material weaknesses were identified in our internal control over financial
reporting relative to accounting for the year ended December 31, 2007, which
still exist at December 31, 2008. The first material weakness was comprised of
inadequate segregation of duties to ensure a sufficient review of the work
performed by our Chief Accounting Officer (due to the limited number of
personnel we retain as employees).  The second material weakness was
the potential inability of our accounting staff to handle certain complex
accounting issues.  We believe a mitigating factor for this material
weakness is the active participation of our Audit Committee.   In
addition, as a result of the fact that our September 30, 2008 Form 10-Q was
originally filed without a review having been performed by our Independent
Registered Public Accounting Firm, our Independent Registered Public Accounting
Firm has concluded that as of September 30, 2008 a material weakness existed
related to our disclosure controls and procedures, specifically with regards
disclosures and procedures mandated by Securities and Exchange Commission
regulations.





These
material weaknesses did not result in the restatement of any previously reported
financial statements or any other related financial disclosure nor did they
disclose any errors or misstatements.


Because
of the material weaknesses described above, management has concluded that the
Company’s internal control over financial reporting was not effective as of
December 31, 2008. No other material weaknesses in our internal control over
financial reporting were identified.





A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Company’s annual or interim financial
statements will not be prevented or detected on a timely basis.





(iv)           This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this annual report.





(c)           Changes
in Internal Control over Financial Reporting





No
changes in our internal control over financial reporting occurred during the
quarter ended December 31, 2008 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




23


(d)           Remediation Plan for Material
Weakness




In
response to the identified material weaknesses described above, our management,
with oversight from our Audit Committee, intends to continue to enhance our
internal control over financial reporting relative to accounting during fiscal
year 2009 as follows:




·
            Interview
      and potentially retain third party consultants which may assist the
      Company’s accounting staff in providing review and analysis of complex
      accounting issues, and




·
            Engage
      additional expert resources to review material transactions so as to
      provide a review of what are otherwise unsegregated duties of finance and
      accounting staff.




·
            Engage
      additional expert resources and legal counsel to provide guidance on SEC
      reporting regulations.





Item
9B.  Other Information.





None.






PART
III





Item
10.  Directors, Executive Officers and Corporate Governance.





On March
30, 2007, our Board of Directors elected two new members, Anthony Stafford and
William Berens.  On February 12, 2008 and March 21, 2008, each of
William Smart and John Ward retired as Directors and became Directors Emeriti.
Each of our directors is elected for a period of one year and holds office until
his successor is elected and qualified. Vacancies may be filled by a majority
vote of the directors then remaining in office. Our officers are elected by, and
serve at, the discretion of our Board of Directors. The following table sets
forth the year each of our current directors was elected to our Board of
Directors and the age, positions and offices currently held by each
director.  For information about ownership of our voting securities by
each director, see Item 11 “Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.




Name
              
              Age
              
              Year
                First
      Became
                Director
              
              PositionAnthony
      Stafford
              
              67
              
              2007
              
              Chairman
      of the BoardWilliam
      B. Berens
              
              55
              
              2007
              
              Director,
      President and Chief Executive OfficerJohn
      H. MacKinnon
              
              68
              
              2004
              
              Director







Business
Experience and Backgrounds of the Directors





The
background of each of our current directors is as follows:





Anthony Staffordjoined our
Board of Directors on March 30, 2007 upon his election to Chairman. Mr. Stafford
is the principal founder, chairman and owner of Codec Systems Ltd.
(“Codec”). Codec is a European leader in performance management and
business intelligence software which was established in August 1985 and
currently has offices in Dublin, Warsaw, Cologne and London. Prior to the
establishment of Codec Mr. Stafford served as a financial controller in
multi-national organizations including General Foods, IBM and Toyota. Mr.
Stafford is also the co-founder and Board Member of Catalina Avalon S.p. z.o.o.,
a privately held Polish company which specializes in the construction industry
in Poland. Mr. Stafford is also a Fellow of the Chartered Institute of
Management Accountants.





24


William B. Berenshas served
as our President and Chief Executive Officer since March 2006 and was elected as
a director on March 30, 2007.  Mr. Berens joined us on May 2003 as a
consultant and then on March 1, 2004 became our Vice President of Sales and
Marketing. Prior to joining us, Mr. Berens served as business consultant to
high-tech companies. He was Vice President of business development for Tower
Technology from 2001 to 2002, and for Interleaf (later acquired by BroadVision)
from 1998 to 2000. Mr. Berens has spent the past 25 years in the information
processing industry in a variety of positions and industries.  From
1978 to 1991 Mr. Berens served in various management capacities with Wang
Laboratories, with his largest responsibility managing over 200 people and $60M
in revenue.  In 1991, he became Director of Business Systems for
Siemens Nixdorf Information Systems, and was responsible for image and data
entry sales in the U.S. market.  In 1996 he joined DSA - Software as
Vice President of Sales, but quickly became President of the warehouse
management systems company.  Mr. Berens graduated from Boston College
in 1976 with a BS in Computer Science and Economics.





John H. MacKinnon has served
as one of our directors and Chairman of the Audit Committee since March 2004.
Mr. MacKinnon joined PricewaterhouseCoopers LLP in 1968 and was a partner from
1978 until his retirement in 1999. Mr. MacKinnon served as a part-time
consultant to the Company under an arrangement that was terminated as of
February 27, 2004. Mr. MacKinnon also serves on the Boards of Directors of
LoJack Corporation and Biosphere Medical Inc. Mr. MacKinnon is a Certified
Public Accountant and is active in community affairs, including serving on the
Boards of Trustees of Emmanuel College, Laboure College and Blessed John XXIII
National Seminary.





Our Board
of Directors has determined that each of our directors, other than William B.
Berens, are “independent directors” in accordance with the rules of The NASDAQ
Stock Market, Inc.





Audit
Committee





The Audit
Committee of our Board of Directors consists of one member, John H. MacKinnon
(Chairman), who joined the committee upon his election to the Board on March 1,
2004. As a member of the Audit Committee, Mr. MacKinnon satisfies the current
independence standards promulgated by the Securities and Exchange Commission and
by the NASDAQ Stock Market, as such standards apply specifically to members of
audit committees.  Mr. MacKinnon qualifies as an Audit Committee
Financial Expert, as such term is defined under Item 401 of Regulation S-K, and
has been designated the committee’s financial expert. He is also the Audit
Committee Chairman.





The
functions of the Audit Committee include selecting, evaluating and replacing, if
needed, our independent registered public accountants; approving all audit and
non-audit services and fees related thereto; reviewing, in consultation with our
management and independent registered public accountants, the scope and results
of the interim reviews and the annual audit of our financial statements included
in our quarterly and annual reports filed with the SEC; and overseeing and
monitoring the processes and controls management has in place to maintain the
reliability and integrity of our accounting policies and financial reporting
process, to ensure the adequacy of internal accounting, financial reporting and
disclosure controls and to comply with legal and regulatory requirements that
may impact our financial reporting and disclosure obligations.





The Audit
Committee has furnished the Audit Committee Report set forth below. The Audit
Committee is governed by an audit committee charter, adopted by the Board of
Directors during 2007.




25


The Audit
Committee has met with the Company’s independent registered public accountants,
CCR LLP, to discuss the results of its audit, the adequacy of the Company’s
internal and external accounting controls, and the integrity of the Company’s
financial reporting.  The Audit Committee met four times in
2008.





Audit
Committee Report





This
Audit Committee Report reviews actions taken with respect to the Company’s
financial statements for the year ended December 31, 2008.





The
Company’s management is responsible for the preparation, presentation and
integrity of the Company’s financial statements and the reporting process,
including the system of internal and external controls. CCR LLP, the Company’s
independent registered public accounting firm, is responsible for auditing the
Company’s financial statements and expressing an opinion on the conformity of
those audited financial statements with accounting principles generally accepted
in the United States of America. In fulfilling its responsibilities for 2008,
the Audit Committee took the following actions:





·
            Reviewed
      and discussed the audit plan, audit scope, identification of audit risks
      and the audited financial statements for the year ended December 31, 2008,
      with management and CCR LLP;





·
            Discussed
      with CCR LLP the matters required to be discussed by Statement on Auditing
      Standards No. 61 relating to the conduct of the audit;
  and





·
            Received
      written disclosures and the letter from CCR LLP regarding its independence
      as required by Independence Standards Board Standard No. 1. The Audit
      Committee further discussed with CCR LLP its independence. The Audit
      Committee considered, with a view to maintaining the independence of its
      independent registered public accounting firm, the nature and scope of the
      non-audit services supplied to the Company by its independent registered
      public accounting firm.





·
            The
      Audit Committee also considered the status of pending litigation, taxation
      matters and other areas of oversight relating to the financial reporting
      and audit process that the Committee determined
    appropriate.





The
members of the Audit Committee are not professionally engaged in the practice of
auditing or accounting and are not employed by the Company for accounting or
financial management or for any aspects of the Company’s system of internal
accounting control. The members of the Audit Committee rely, without independent
verification, on the information provided to them and on the representations
made by management and the Company’s independent registered public accounting
firm. Accordingly, the Audit Committee’s oversight does not provide an
independent basis to determine that management has maintained procedures that
are designed to assure compliance with accounting standards and applicable laws
and regulations. In addition, the Audit Committee’s considerations and
discussions referred to above do not assure that the audit of the Company’s
financial statements has been carried out in accordance with auditing standards
of the Public Company Accounting Oversight Board (United States).





Based
upon the reports, discussions and reviews described in this Report, and subject
to the limitations on the role and responsibilities of the Committee referred to
above, the Committee has recommended to the Board and the Board has approved,
the audited financial statements for the year ended December 31, 2008 being
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008 to be filed with the Securities and Exchange Commission.





The Audit
Committee


John H.
MacKinnon, Chairman


26


Nominating,
Compensation and Governance Committee





The
Nominating, Compensation and Governance Committee of the Board of Directors
consists of two members, Anthony Stafford (Chairman) and John H. MacKinnon
The committee reviews, approves and makes recommendations regarding our
compensation policies, practices and procedures, including determination of the
compensation for our Chief Executive Officer.  The committee also
makes recommendations to the full Board as to the size and composition of the
Board and makes recommendations as to particular nominees.  The
committee considers nominations for our Board in accordance with our Restated
By-Laws, a copy of which is incorporated by reference as an exhibit to this
Annual Report on Form 10-K.  The Committee also reviews and makes
recommendations to the full Board concerning corporate governance
matters.  The members of the Nominating, Compensation and Governance
Committee qualify as independent under the definition promulgated by the NASDAQ
Stock Market.





Executive
Officers





Our
executive officers, their ages and positions with the Company are as
follows:


Name
            
            Age
            
            PositionWilliam
      B. Berens
            
            55
            
            President
      and Chief Executive OfficerBruna
      A. Bucacci
            
            55
            
            Chief
      Accounting Officer and Director of
Operations









Business
Experience and Backgrounds of the Executive Officers





The
following is a brief summary of the background of each of our executive officers
other than William B. Berens whose background is summarized above.





Bruna A. Bucacci has served as
our Chief Accounting Officer since November 2005.  Ms. Bucacci joined
us in May 1996 as our Controller. In April 2004 she also assumed the position of
Director of Operations. Prior to joining our Company, Ms. Bucacci was Corporate
Controller for Thermedics Detection, Inc. from 1991 to 1996. From 1984 to 1991
she held the position of Assistant Controller for Thermedics Inc. Prior to that
time Ms. Bucacci held various managerial positions for Thermo Electron, Inc. Ms.
Bucacci is a graduate of Boston College where she received a BS degree in
Mathematics and a graduate of Bentley College where she received a BS degree in
Accounting.





None of
our executive officers or directors is related to any other executive officer or
director.





27


Code
of Ethics





We have
adopted a code of ethics that applies to our chief executive officer and our
senior financial officers, including our principal financial and accounting
officer. The text of the code of ethics is filed as an exhibit to our Annual
Report on Form 10-K and will be made available to stockholders without charge,
upon request, in writing to our Corporate Secretary at National Datacomputer,
Inc., 900 Middlesex Turnpike, Bldg. 5, Billerica, Massachusetts
01821.  Disclosure regarding any amendments to or waivers from,
provisions of the code of ethics that apply to our financial officers will be
included in a Current Report on Form 8-K within four business days following the
date of the amendment or waiver.





Section
16(a) Beneficial Ownership Reporting Compliance





Section
16(a) of the Securities Exchange Act of 1934, as amended, requires executive
officers, directors, and persons who beneficially own more than ten percent
(10%) of our common stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission. Executive
officers, directors, and greater than ten percent (10%) beneficial owners are
required by SEC regulations to furnish us with copies of all Section 16(a) forms
they file.





To our
knowledge, based solely on a review of copies of any such forms furnished to us
and written representations from executive officers and directors, we believe
that all Section 16(a) filings applicable to our executive officers, directors,
and ten percent (10%) beneficial owners were complied with during the year ended
December 31, 2008.





Item
11.  Executive Compensation




The
following table sets forth all compensation paid or accrued during the last two
fiscal years ended December 31, 2008 and December 31, 2007 to our Chief
Executive Officer and to all other executive officers whose compensation
exceeded $100,000 for the fiscal year ended December 31, 2008.





SUMMARY
COMPENSATION TABLE





Name
      and Principal Position
                      Year
                      Salary
                        ($)
                      Bonus
                        ($)
                      Option
      Awards
                        ($)
                      Total
                        ($)William B.
      Berens,(1)
                        President
      and Chief Executive Officer
                      2008
                        2007
                      166,079
                        166,498(2)
                      -0-
                        -0-
                      -0-
                        -0-
                      166,498
                        166,498Bruna
      A. Bucacci, Chief Accounting Officer
                      2008
                        2007
                      105,017
                        101,138(3)
                      -0-
                        -0-
                      546(4)
                        287(4)
                      105,563
                        101,425







(1)
            Mr.
      Berens joined us as our Vice President of Sales on March 1, 2004 and he
      became our President and Chief Executive Officer on March 6, 2006. On
      March 6, 2006, Mr. Berens agreed to defer 13% of his annual compensation
      on an ongoing basis pending improvement in the Company’s operations and
      resulting cash position. Beginning in April 2007, Mr. Berens no longer
      deferred his salary and in the year ended December 31, 2007, the Company
      paid Mr. Berens all of the deferred compensation with cash and shares of
      common stock.




28


(2)
            Includes
      a bonus in the amount of $10,000 earned in the fiscal year ended December
      31, 2006, but paid in 2008.




(3)
            Includes
      a bonus in the amount of $5,000 earned in the fiscal year ended December
      31, 2006, but paid in 2008.




(4)
            Includes
      a stock option award of 6,666 shares of common stock at an exercise price
      of $0.03 per share. These options will vest and become exercisable ratably
      in four equal installments beginning on the first anniversary of the grant
      date. In the years ended December 31, 2008 and 2007, the amount of option
      award expense recognized for Ms. Bucacci was $546 and $287, respectively
      in accordance with SFAS 123R. See Note 2 to our Notes to Financial
      Statements for details as to the assumptions used to determine the fair
      value of the option award.





Mr.
Berens became our President and Chief Executive Officer on March 6, 2006. We
have not entered into a written employment agreement with him, but we have
arranged for him to receive an annual salary of $150,000. We have also agreed
that in the event of the termination of Mr. Berens’ employment by us for any
reason, provided that at the time of termination, he has not engaged in any
illegal wrongdoing or acted in a manner that was not in the best interest of the
Company, Mr. Berens will be entitled to receive as severance payment, a payment
equal to six months’ of his annual salary to be paid on a monthly basis. We will
also continue to pay for his medical and dental benefits for such six-month
period. We do not have any arrangements with Mr. Berens for any types of
additional compensation, including bonus payments, insurance premium payments,
and payments upon a termination following a change of control and retirement
benefits. We have not issued Mr. Berens any stock awards or options to purchase
shares of our common stock.





Ms.
Bucacci became our Chief Accounting Officer on November 21, 2005. We have not
entered into a written employment agreement with her, but we have arranged for
her to receive an annual salary of $101,000. We do not have any arrangements
with Ms. Bucacci for any types of additional compensation, including bonus
payments, severance payments, insurance premium payments, payments upon a
termination following a change of control and retirement benefits.





Outstanding
Equity Awards Table at Fiscal Year End




Name
                                      Equity Incentive Plan Awards: Number of
      Securities Underlying Unexercised Unearned Options (1)
                                      Option
      Exercise Price
                                        ($)
                                      Option
      Expiration DateBruna
      Bucacci
                                      6,666
                                      $0.03
                                      4/23/17




(1)
            All
      options vest and become exercisable ratably in four equal installments
      beginning on the first anniversary of the grant date, which was
      4/23/07.





We have
not issued Mr. Berens any stock awards or options to purchase shares of our
common stock.




Stock Option
Exercises




There
were no stock options exercised by the named executive officers for the fiscal
year ended December 31, 2008.




29


Director
Compensation Table




The
following table details the total compensation earned by the Company’s outside
Directors for the year ended December 31, 2008. Mr. Stafford received no
compensation for his services as a member of the Board of Directors in Fiscal
2008.


Name
                
                Fees Earned
                  or
      Paid in
                  Cash
                  ($)John
      H. MacKinnon
                
                $
                6,667Anthony
      Stafford
                
                
                -0-




Mr.
MacKinnon is schedule to receive an annual compensation of $20,000 for his
services, however due to our cash constraints, we only paid Mr. MacKinnon $6,667
during the year ended December 31, 2008. Mr. Stafford has elected to be
compensated only for expenses related to attending the Board of Directors and
Committee Meeting. Members of the Audit Committee and the Compensation Committee
of the Board of Directors of the Company were not compensated by the Company for
their services. Additionally, none of the non-employee Directors was paid for
attending board meetings. The Company reimbursed the non-employee Directors for
their reasonable out-of-pocket expenses related to attending meetings of the
Board of Directors or any of its committees. Management Directors did not
receive any compensation for their services as Directors.





Item
12.  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters







SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT





The
following table sets forth certain information with respect to the beneficial
ownership of our common stock as of March 27, 2009 for (a) each stockholder
known by us to own beneficially more than 5% of our common stock, (b) each
current member of the Board of Directors, (c) each executive officer named in
the Summary Compensation Table on page 7 hereof, and (d) all current directors
and executive officers as a group. Beneficial ownership is determined in
accordance with the rules of the SEC and includes voting or investment
power with respect to the securities.




Shares Beneficially
                                    Owned(1)Name
                                  
                                  
                                  Number
                                  
                                  
                                  
                                  PercentAnthony
      Stafford (2)
                                    c/o
      Codec Systems Limited
                                    Hyde
      House, Adelaide Road
                                    Dublin
      2, Ireland
                                  
                                  
                                  2,615,077
                                  
                                  
                                  
                                  61.2
                                  %Mary
      Lee Ingoldsby
                                    P.O.
      Box 647
                                    Hingham,
      MA 02043
                                  
                                  
                                  259,841
                                  
                                  
                                  
                                  6.1
                                  %William
      B. Berens
                                  
                                  
                                  543,174
                                  
                                  
                                  
                                  12.7
                                  %John H. MacKinnon(3)
                                  
                                  
                                  278,952
                                  
                                  
                                  
                                  6.5
                                  %Bruna
      Bucacci
                                  
                                  
                                  72,554
                                  
                                  
                                  
                                  1.7
                                  %All
      executive officers and directors as a group (4 persons)
                                  
                                  
                                  3,509,757
                                  
                                  
                                  
                                  82.1
                                  %
  30


(1)
            The
      number of shares of common stock issued and outstanding on March 27, 2009
      was 4,274,496. The calculation of percentage ownership of each listed
      beneficial owner is based upon the number of shares of common stock issued
      and outstanding on March 27, 2009, including shares of common stock
      subject to options and/or warrants held by such person at March 27, 2009
      and exercisable within 60 days thereafter. The persons and entities named
      in the table have sole voting and investment power with respect to all
      Shares shown as beneficially owned by them, except as noted
      below.




(2)
            Includes
      666,667 shares in the aggregate beneficially owned by Mr. Stafford’s four
      children: Conor Stafford, Paula Stafford, Fiona Stafford and Ronan
      Stafford. Mr. Stafford has voting control over all of such
      shares.




(3)
            Includes
      144,097 shares jointly owned by Mr. MacKinnon’s
  spouse.






Item
13.  Certain Relationships and Related Transactions.





The audit
committee is responsible for reviewing, approving or ratifying all material
transactions between us and related person. Related persons can include any of
our directors or executive officers, certain of our stockholders, and any of
their immediate family members. This obligation is set forth in our audit
committee charter. In evaluating related person transactions, the committee
members apply the same standard of good faith and fiduciary duty they apply to
their general responsibilities as a committee of the board and as individual
directors. In any transactions involving a related party, our audit committee
considers all available material facts and circumstances of the transaction,
including: (i) the direct and indirect interests of related party; (ii) if the
related party is a director (or immediate family member of a director or an
entity with which the director is affiliated), the impact such transaction would
have on the director’s independence; (iii) the risks, costs and benefit to us;
and (iv) whether any alternative transaction for comparable purposed are
available. Our audit committee then makes a determination as to whether the
proposed terms of the transaction are in the best interest of the Company and
otherwise consistent with arm’s-length dealings with unrelated
third-parties.





On July
28, 2008, Anthony Stafford purchased 66,667 shares of our common stock for an
aggregate purchase price of $0.75.





On
September 18, 2008, members of our Board of Directors, along with one outside
investor purchases 1,825,000 shares of our common stock for an aggregate
purchase price of $0.20.







Item
14.  Principal Accountant Fees and Services





CCR LLP
has been our independent registered public accounting firm since November 4,
2005.





Audit
Fees





For the
year ended December 31, 2008, CCR LLP billed us $51,054 for the audit of our
financial statements and its review of our Quarterly Reports on Form
10-Q.





For the
year ended December 31, 2007, CCR LLP billed us $65,959 for the audit of our
financial statements and its review of our Quarterly Reports on Form
10-QSB.





Audit-Related
Fees





For the
year ended December 31, 2008, CCR LLP billed us $1,315 for the review of our
proxy statement.





31


For the
year ended December 31, 2007, CCR LLP billed us $7,000 for the review of our
Form 8-K.





Tax Fees





For the
year ended December 31, 2008, CCR LLP billed us $3,950 for the preparation of
our 2007 corporate tax returns





For the
year ended December 31, 2007, CCR LLP billed us $5,500 for the preparation of
our 2006 corporate tax returns.





All Other
Fees





For the
year ended December 31, 2008, CCR LLP billed us $7,690 for the preparation of
correspondence related to comments from the SEC. We did not pay any additional
fees to CCR LLP, for other products or services during the year ended December
31, 2007.





Policy on Audit Committee
Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Certified Public Auditors





Consistent
with SEC policies regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of
the independent registered public accounting firm. In recognition of this
responsibility, the Audit Committee has established a policy to pre-approve all
audit and permissible non-audit services provided by the independent registered
public accounting firm.




Prior to
engagement of the independent registered public accounting firm for the next
year’s audit, management will submit an aggregate of services expected to be
rendered during that year for each of four categories of services to the Audit
Committee for approval.




Auditservices include audit work performed in the preparation of financial
statements, as well as work that generally only the independent registered
auditor can reasonably be expected to provide, including comfort letters,
statutory audits, and attest services and consultation regarding financial
accounting and/or reporting standards.




Audit-Related
services are for assurance and related services that are traditionally performed
by the independent registered auditor, including due diligence related to
mergers and acquisitions, employee benefit plan audits, and special procedures
required to meet certain regulatory requirements.




Tax
services include all services performed by the independent registered auditor’s
tax personnel except those services specifically related to the audit of the
financial statements, and includes fees in the areas of tax compliance, tax
planning, and tax advice.




Other Fees
are those associated with services not captured in the other categories. The
Company generally does not request such services from the independent registered
auditor.




Prior to
engagement, the Audit Committee pre-approves these services by category of
service. The fees are budgeted and the Audit Committee requires the independent
registered auditor and management to report actual fees versus the budget
periodically throughout the year by category of service. During the year,
circumstances may arise when it may become necessary to engage the independent
registered auditor for additional services not contemplated in the original
pre-approval. In those instances, the Audit Committee requires specific
pre-approval before engaging the independent registered auditor.  All
of the services performed by CCR LLP during fiscal 2008 were preapproved by the
Audit Committee.




The Audit
Committee may delegate pre-approval authority to one or more of its members. The
member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.








32


PART
IV





Item
15.  Exhibits and
Financial Statement Schedules





The
Company hereby furnishes the exhibits listed in the exhibit index. Exhibits,
which are incorporated herein by reference, may be inspected and copied at the
public reference facilities maintained by the SEC at Room 1580, Washington, D.C.
20549. Copies of such material may be obtained by mail from the Public Reference
Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549, at prescribed
rates. The SEC also maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at the address http://www.sec.gov.





(a)(1)       Financial
Statements




PageReport
      of Independent Registered Public Accounting Firm
                    36Balance
      Sheets as of December 31, 2008 and 2007
                    37Statements
      of Operations for the years ended December 31, 2008 and
    2007
                    38Statement
      of Stockholders’ Deficit for the years ended December 31, 2008 and
      2007
                    39Statements
      of Cash Flows for the years ended December 31, 2008 and
    2007
                    40Notes
      to Financial Statements
                    41







(a)(2)       Exhibits.





The following exhibits are filed
herewith:





Exhibit


No.                                          Description








3.1(a)
              Certificate
      of Incorporation filed by the Company with the Secretary of State of
      Delaware on December 17, 1986.3.2(a)
              Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on April 15, 1987 to increase the number of
      authorized shares.


3.3(b)
            Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on October 17, 1994 to increase the number
      of authorized shares.




33


3.3(c)
            Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on December 18, 1996 to increase the number
      of authorized shares.


3.4(c)
            Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on December 18, 1996 to affect a 1:4
      reverse split of common stock.


3.5(d)
              Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on May 22, 2000 to increase the number of
      authorized shares.





3.6(j)
              Certificate
      of Correction of Certificate of Amendment of Certificate of Incorporation
      filed by the Company with the Secretary of State of Delaware on June 5,
      2000.3.7(k)
              Certificate
      of Correction of Certificate of Amendment of Certificate of Incorporations
      filed by the Company with the Secretary of State of Delaware on June 5,
      2000.


3.8(e)
            Statement
      of Designation of Series B Convertible Preferred
  Stock.


3.9(e)
            Certificate
      of Increase of shares designated as Series B Convertible Preferred
      Stock.


3.10(f)
            Statement
      of Designation of Series C Convertible Preferred
  Stock.


3.11(f)
            Statement
      of Designation of Series D Convertible Preferred
  Stock.


3.12(g)
            Statement
      of Designation of Series E Convertible Preferred
  Stock.


3.13(m)
            Certificate
      of Amendment of Certificate of Incorporation filed by the Company with the
      Secretary of State of Delaware on July 31, 2008 to affect a 1:15 reverse
      split of common stock and reduce the number of shares of common stock
      authorized under the Certificate of
  Incorporation.


3.14(h)
              Restated
      By-Laws4.1
              Instruments
      defining the rights of security holders (see Exhibits 3.1 through
      3.12).








4.2(l)
              Specimen
      Certificate of Common Stock.10.1*(n)
              2007
      Employee, Director and Consultant Stock Plan, as
  amended.


10.2*(i)
            1998
      Stock Option Plan.


10.2(i)
            Sixth
      Amendment to Lease dated August 14, 2000 by and between the Company and
      Middlesex Technology Center Trust V for the Company’s principal
      offices.


14.1(l)
              Code
      of Ethics.31.1
              Certification
      of the Chief Executive Officer.31.2
              Certification
      of the Chief Accounting Officer.32.1
              Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.









(a)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Registration Statement on Form S-1 filed on April 17,
      1987 (File No. 033-13392)


(b)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Form 10-KSB for the fiscal year ended December 31,
      1994.


(c)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Form 10-KSB for the fiscal year ended December 29,
      1996.


(d)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, Form 10-QSB for the quarterly period ended June 30,
      2000.


(e)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Form 8-K filed September 16,
  1996.


(f)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Form 8-K filed March 3,
  1997.


(g)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Form 8-K filed March 6,
  1998.


(h)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, Form 10-QSB/A for the quarterly period ended September 30,
      1999.


(i)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 1998.


(j)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2000.


(k)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2001.


(l)
            Previously
      filed with the Commission as Exhibit to, and incorporated herein by
      reference from, the Company’s Annual Report on Form 10-KSB for the fiscal
      year ended December 31, 2003.


(m)
            Previously
      filed with the Commission as Exhibit 3.1 to, and incorporated herein by
      reference from, the Company’s Current Report on Form 8-K filed with the
      Commission on August 5, 2008.


(n)
            Previously
      filed with the Commission as Exhibit B to, and incorporated herein by
      reference from, the Company’s Proxy Statement filed with the Commission on
      May 8, 2008.


*
            Management
      contract or compensatory plan, contract or
  arrangement.








34


SIGNATURES





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.








NATIONAL
      DATACOMPUTER, INC.Date: 
      March 27, 2009
                  By:
                  /s/ William
      B. BerensWilliam
      B. BerensPresident
      and Chief Executive Officer










In
accordance with the Securities Exchange Act of 1934, as amended, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.





Name
                    
                    Capacity
                    
                    Date/s/ Anthony Stafford
                    
                    Chairman
      of the Board
                    
                    March
      27, 2009Anthony Stafford/s/ William B. Berens
                    
                    President
      and Chief Executive Officer
                    
                    March
      27, 2009William B. Berens
                    
                    (principal
      executive officer and director)/s/ Bruna A. Bucacci
                    
                    Chief
      Accounting Officer
                    
                    March
      27, 2009Bruna A. Bucacci
                    
                    (principal
      financial and accounting officer)/s/ John H. MacKinnon
                    
                    Director
                    
                    March
      27, 2009John H. MacKinnon
























































35


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM










Board of
Directors and Stockholders


National
Datacomputer, Inc.





We have
audited the accompanying balance sheets of National Datacomputer, Inc. as of
December 31, 2008 and 2007, and the related statements of operations,
stockholders’deficit and cash flows for the years then ended.  These
financial statements are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion of the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our 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 Datacomputer, Inc. as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has recurring operating losses and has
incurred an accumulated deficit of approximately $17.0 million at December 31,
2008. These conditions raise substantial doubt about the Company’s ability to
continue as a going concern.  Management’s plans regarding those
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.





/s/ CCR
LLP


Westborough,
Massachusetts


March 27,
2009











36
 
 NATIONAL
DATACOMPUTER, INC.
 BALANCE
SHEETS


December
      31,
                                            
                                            
                                            December
      31,2008
                                            
                                            
                                            2007AssetsCurrent
      assets:Cash
                                            
                                            $
                                            119,549
                                            
                                            
                                            $
                                            257,019Accounts
      receivable, net of allowance for doubtful accounts of
    $3,000at
      December 31, 2008 and 2007
                                            
                                            
                                            114,874
                                            
                                            
                                            
                                            76,158Inventories,
      net
                                            
                                            
                                            
                                            
                                            
                                            
                                            2,401Deferred
      hardware and software costs
                                            
                                            
                                            634,603
                                            
                                            
                                            
                                            799,623Prepaid
      expenses
                                            
                                            
                                            97,314
                                            
                                            
                                            
                                            52,317Total
      current assets
                                            
                                            
                                            966,340
                                            
                                            
                                            
                                            1,187,518Other
      assets
                                            
                                            
                                            109,257
                                            
                                            
                                            
                                            19,811Property
      and equipment, net
                                            
                                            
                                            38,926
                                            
                                            
                                            
                                            56,826Capitalized
      software development costs, net
                                            
                                            
                                            3,036
                                            
                                            
                                            
                                            9,289Total
      assets
                                            
                                            $
                                            1,117,559
                                            
                                            
                                            $
                                            1,273,444Liabilities
      and stockholders’ deficit:Current
      liabilities:Current
      obligations under capital lease
                                            
                                            $
                                            20,310
                                            
                                            
                                            $
                                            19,093Note
      payable, current portion
                                            
                                            
                                            
                                            
                                            
                                            
                                            18,125Accounts
      payable
                                            
                                            
                                            704,185
                                            
                                            
                                            
                                            1,422,629Customer
      deposits
                                            
                                            
                                            2,045
                                            
                                            
                                            
                                            9,964Accrued
      payroll and related taxes
                                            
                                            
                                            18,266
                                            
                                            
                                            
                                            52,535Other
      accrued expenses
                                            
                                            
                                            44,979
                                            
                                            
                                            
                                            98,210Deferred
      revenues
                                            
                                            
                                            1,296,483
                                            
                                            
                                            
                                            508,058Total
      current liabilities
                                            
                                            
                                            2,086,268
                                            
                                            
                                            
                                            2,128,614Obligations
      under capital lease, net of current portion
                                            
                                            
                                            6,323
                                            
                                            
                                            
                                            27,680Total
      liabilities
                                            
                                            
                                            2,092,591
                                            
                                            
                                            
                                            2,156,294Commitments
      and contingencies (Note 14)Stockholders’
      deficit:Preferred
      stock, $0.001 par value; 3,333 shares authorized;no
      shares issued or outstanding
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —Common
      stock, $0.001 par value; 6,000,000 shares authorized;
      4,274,496and
      2,382,829 shares issued and outstanding at December 31, 2008 and 2007,
      respectively
                                            
                                            
                                            4,275
                                            
                                            
                                            
                                            2,383Capital
      in excess of par value
                                            
                                            
                                            15,971,797
                                            
                                            
                                            
                                            15,551,667Accumulated
      deficit
                                            
                                            
                                            (16,951,104
                                            )
                                            
                                            
                                            (16,436,900
                                            )Total
      Stockholders’ deficit
                                            
                                            
                                            (975,032
                                            )
                                            
                                            
                                            (882,850
                                            )Total
      liabilities and stockholders’ deficit
                                            
                                            $
                                            1,117,559
                                            
                                            
                                            $
                                            1,273,444




The
accompanying notes are an integral part of these
financial statements.




37


NATIONAL
DATACOMPUTER, INC.


STATEMENTS
OF OPERATIONS





Years
      EndedDecember
      31,
                                      
                                      
                                      December
      31,2008
                                      
                                      
                                      2007Revenues:Product
                                      
                                      $
                                      1,082,647
                                      
                                      
                                      $
                                      839,451Services
                                      
                                      
                                      737,549
                                      
                                      
                                      
                                      921,700Total
      Revenues
                                      
                                      
                                      1,820,196
                                      
                                      
                                      
                                      1,761,151Cost
      of revenues
                                      
                                      
                                      1,348,957
                                      
                                      
                                      
                                      1,230,061Gross
      Profit
                                      
                                      
                                      471,239
                                      
                                      
                                      
                                      531,090Operating
      expenses:Selling
      and marketing
                                      
                                      
                                      294,754
                                      
                                      
                                      
                                      298,156General
      and administrative
                                      
                                      
                                      687,666
                                      
                                      
                                      
                                      770,701982,420
                                      
                                      
                                      
                                      1,068,857Loss
      from operations
                                      
                                      
                                      (511,181
                                      )
                                      
                                      
                                      (537,767
                                      )Other
      income (expense):Interest
      income
                                      
                                      
                                      2,395
                                      
                                      
                                      
                                      6,574Gain
      on currency exchange
                                      
                                      
                                      2,851
                                      
                                      
                                      
                                      21,770Interest
      expense
                                      
                                      
                                      (8,269
                                      )
                                      
                                      
                                      (10,954
                                      )Net
      loss
                                      
                                      $
                                      (514,204
                                      )
                                      
                                      $
                                      (520,377
                                      )Basic
      and diluted net loss per share
                                      
                                      $
                                      (0.18
                                      )
                                      
                                      $
                                      (0.23
                                      )Weighted
      average shares (basic and diluted)
                                      
                                      
                                      2,931,322
                                      
                                      
                                      
                                      2,230,529




The
accompanying notes are an integral part of these
financial statements.




38
 
 NATIONAL
DATACOMPUTER, INC.
 STATEMENT
OF STOCKHOLDERS’ DEFICIT


Common
      Stock
                                                      
                                                      
                                                      Capital
      in
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      TotalPar
                                                      
                                                      
                                                      excess
                                                      
                                                      
                                                      Accumulated
                                                      
                                                      
                                                      stockholders’Shares
                                                      
                                                      
                                                      value
                                                      
                                                      
                                                      of par value
                                                      
                                                      
                                                      deficit
                                                      
                                                      
                                                      deficitBalance
      at January 1, 2007
                                                      
                                                      
                                                      1,776,058
                                                      
                                                      
                                                      $
                                                      1,776
                                                      
                                                      
                                                      $
                                                      15,250,229
                                                      
                                                      
                                                      $
                                                      (15,916,523
                                                      )
                                                      
                                                      $
                                                      (664,518
                                                      )Net
      loss
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (520,377
                                                      )
                                                      
                                                      $
                                                      (520,377
                                                      )Issuance
      of stock in satisfactionof accrued interest
                                                      
                                                      
                                                      535,822
                                                      
                                                      
                                                      
                                                      536
                                                      
                                                      
                                                      
                                                      (536
                                                      )
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —Additional
      capital raised, netof costs of $87,835 (Note
    12)
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      262,165
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      262,165Issuance
      of stock insatisfaction of accrued
    compensation
                                                      
                                                      
                                                      37,616
                                                      
                                                      
                                                      
                                                      38
                                                      
                                                      
                                                      
                                                      21,212
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      21,250Issuance
      of stock insatisfaction of deferred
    compensation
                                                      
                                                      
                                                      33,333
                                                      
                                                      
                                                      
                                                      33
                                                      
                                                      
                                                      
                                                      14,967
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      15,000Stock
      based compensation related tooptions granted
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      3,630
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      3,630Balance
      at December 31, 2007
                                                      
                                                      
                                                      2,382,829
                                                      
                                                      
                                                      
                                                      2,383
                                                      
                                                      
                                                      
                                                      15,551,667
                                                      
                                                      
                                                      
                                                      (16,436,900
                                                      )
                                                      
                                                      
                                                      (882,850
                                                      )Net
      loss
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      (514,204
                                                      )
                                                      
                                                      $
                                                      (514,204
                                                      )Net
      proceeds from raised capital
                                                      
                                                      
                                                      1,891,667
                                                      
                                                      
                                                      
                                                      1,892
                                                      
                                                      
                                                      
                                                      413,108
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      415,000Stock
      based compensation related tooptions granted
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      7,022
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      $
                                                      7,022Balance
      at December 31, 2008
                                                      
                                                      
                                                      4,274,496
                                                      
                                                      
                                                      $
                                                      4,275
                                                      
                                                      
                                                      $
                                                      15,971,797
                                                      
                                                      
                                                      $
                                                      (16,951,104
                                                      )
                                                      
                                                      $
                                                      (975,032
                                                      )






The
accompanying notes are an integral part of these
financial statements.




39
 
 NATIONAL
DATACOMPUTER, INC.
 STATEMENTS
OF CASH FLOWS


Years
      EndedDecember
      31,
                                  
                                  
                                  December
      31,2008
                                  
                                  
                                  2007OPERATING
      ACTIVITIES:Net
      loss
                                  
                                  $
                                  (514,204
                                  )
                                  
                                  $
                                  (520,377
                                  )Adjustments
      to reconcile net loss to netcash
      used for operating activities:Depreciation
      and amortization
                                  
                                  
                                  39,561
                                  
                                  
                                  
                                  37,439Stock
      based compensation related to options granted
                                  
                                  
                                  7,022
                                  
                                  
                                  
                                  3,630Changes
      in assets and liabilities:(Increase)
      decrease in accounts receivable
                                  
                                  
                                  (38,716
                                  )
                                  
                                  
                                  22,827Decrease
      in inventories
                                  
                                  
                                  2,401
                                  
                                  
                                  
                                  7,599Decrease
      (increase) in deferred hardware and software costs
                                  
                                  
                                  165,020
                                  
                                  
                                  
                                  (784,559
                                  )Increase
      in other prepaid expenses
                                  
                                  
                                  (134,443
                                  )
                                  
                                  
                                  (63,343
                                  )(Decrease)
      increase in accounts payable
                                  
                                  
                                  (718,444
                                  )
                                  
                                  
                                  884,399Decrease
      in customer deposits
                                  
                                  
                                  (7,919
                                  )
                                  
                                  
                                  (14,947
                                  )(Decrease)
      increase in accrued expenses
                                  
                                  
                                  (87,500
                                  )
                                  
                                  
                                  56,924Increase
      in deferred revenues
                                  
                                  
                                  788,425
                                  
                                  
                                  
                                  259,145Net
      cash used for operating activities
                                  
                                  
                                  (498,797
                                  )
                                  
                                  
                                  (111,263
                                  )Cash
      flows from investing activities:Purchases
      of property and equipment
                                  
                                  
                                  (15,408
                                  )
                                  
                                  
                                  (15,187
                                  )Additions
      to capitalized software development costs
                                  
                                  
                                  —
                                  
                                  
                                  
                                  (1,674
                                  )Net
      cash used for investing activities
                                  
                                  
                                  (15,408
                                  )
                                  
                                  
                                  (16,861
                                  )Cash
      flows from financing activities:Net
      proceeds from additional capital raised
                                  
                                  
                                  415,000
                                  
                                  
                                  
                                  262,165Principal
      payments on note payable
                                  
                                  
                                  (18,125
                                  )
                                  
                                  
                                  (27,775
                                  )Principal
      payments on obligationsunder
      capital lease
                                  
                                  
                                  (20,140
                                  )
                                  
                                  
                                  (12,030
                                  )Net
      cash provided by financing activities
                                  
                                  
                                  376,735
                                  
                                  
                                  
                                  222,360Net
      (decrease) increase in cash
                                  
                                  
                                  (137,470
                                  )
                                  
                                  
                                  94,236Cash,
      beginning of period
                                  
                                  
                                  257,019
                                  
                                  
                                  
                                  162,783Cash,
      end of period
                                  
                                  $
                                  119,549
                                  
                                  
                                  $
                                  257,019Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
                                  
                                  $
                                  8,269
                                  
                                  
                                  $
                                  10,954Non-cash
      investing and financing activities:Accrued
      compensation paid with stock
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  21,250Deferred
      compensation paid with stock
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  15,000Acquisition
      of property and equipment under capital lease
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  48,539Accrued
      expenses converted to accounts payable
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  77,539




The
accompanying notes are an integral part of these
financial statements.




40


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS





1.
            Organization





We are
engaged in providing solutions through the use of mobile information systems in
the distribution market segment within the product supply chain. We design,
market, sell, and service computerized systems used to automate the collection,
processing, and communication of information related to product sales and
inventory control. Our products and services include data communication,
application-specific software, handheld computers, related peripherals, and
accessories, as well as associated education and support services for our
hardware and software products.





2.
            Liquidity
      and Management Plans





We have
an accumulated deficit of approximately $16,951,000 through December 31, 2008.
As a result of this deficit and our cash position, the report of our independent
registered public accounting firm contains an explanatory paragraph regarding
substantial doubt about the Company’s ability to continue as a going concern. We
have taken numerous steps to address this situation, such as re-aligning our
spending from administration and manufacturing to maintaining key development
programs while carefully managing our overall cash usage. We are exploring all
opportunities to improve our financial condition by aggressively pursuing
potential sales. There is a possibility that the latter might not result in
adequate revenues in the near future to meet cash flow requirements, and
therefore might require us to implement further cost saving action or attempt to
obtain additional financing. We believe that based on our current revenue
expectations, the expected timing of such revenues, and our current level of
expenses, we will have sufficient cash to fund our operations through December
31, 2009. However, there are no assurances that these plans will be successful
or sufficient.





3.
            Summary
      of Significant Accounting Policies





Use of
Estimates





The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires 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 these
estimates.





Revenue
Recognition.





We
recognize product revenue in accordance with SEC Staff Accounting Bulletin No.
104, “Revenue Recognition in
Financial Statements”.  Revenue related to product sales is
recognized upon shipment provided that title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, the sales price is
fixed or determinable, collection of the related receivable is reasonably
assured and customer acceptance criteria, if any, have been successfully
demonstrated. Where the criteria cannot be demonstrated prior to shipment, or in
the case of new products, revenue is deferred until acceptance has been
received. Our sales contracts provide for the customer to accept title and risk
of loss at the time of delivery of the product to a common carrier.





Our
revenue arrangements sometimes involve multiple elements (i.e. products and
services). Revenue under multiple arrangements is recognized in accordance with
Emerging Issues Task Force (“EITF”) Issue No. 00-21,“Accounting for Revenue
Arrangements with Multiple Deliverables”.  Under this method,
if an element is determined to be a separate unit of accounting, the revenue for
the element is based on fair value and determined by verifiable objective
evidence, and recognized at time of delivery.




41


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




If the
arrangement has an undeliverable element, we ensure that we have objective and
reliable evidence of the fair value of the undeliverable element. Fair value is
determined based upon the price charged when the element is sold
separately.  When products and services are sold together and fair
values have been established, revenue related to the hardware is generally
recognized when title and risk of loss have passed, and revenue related to
services are recognized as the services are provided.  If fair values
of the various elements have not been established, we defer all revenue until
all elements have been delivered.





For
revenue arrangements with multiple deliverables that include or represent
software products and services as well as any non-software deliverables for with
a software deliverable is essential to its functionality, we recognize revenue
in accordance with the American Institute of Certified Public Accountants
(“AICPA”)’s Statement of Position 97-2,“Software Revenue
Recognition”  (“SOP 97-2”). The application of SOP 97-2
requires judgment, including whether a software arrangement includes multiple
elements, and if so, whether vendor-specific objective evidence (VSOE) of fair
value exists, no significant obligations with regard to installation on
implementation remain, and customer acceptance, when applicable, is
obtained.  Our revenue arrangements may include hardware, software,
services and maintenance.  If software is essential to the
functionality of the hardware, we generally defer the recognition of revenue
related to the hardware until the software revenue can be
recognized.  If services are essential to the functionality of the
software, revenue related to the services are also deferred until the software
revenue can be recognized.  If the only undelivered element is
maintenance for which VSOE of fair value can be established, revenue related to
the software and the related elements is recognized upon customer acceptance of
the software.  The maintenance will then be recognized ratably over
the contract term.





Service
revenue that is not essential to the functionality of a software product is
recognized as the services are provided on a time and materials
basis.





Hardware
and software maintenance that is not sold as part of a multiple element
arrangement is recognized ratably over the contract maintenance
term.





Accounts
Receivable





The
Company records trade receivables at their principal amount, adjusted for
write-offs and allowances for uncollectible amounts.  The Company
reviews its trade receivables monthly, and determines, based on management’s
knowledge and the customer’s payment history, any write-off or allowance that
may be necessary.  The Company follows the practice of writing off
uncollectible amounts against the allowance provided for such
accounts.





Inventories





Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method. The Company evaluates its inventories to
determine excess or slow moving products based on quantities on hand, current
orders and expected future demand. For those items in which the Company believes
it has an excess supply or for those items that are obsolete, the Company
estimates the net amount that the Company expects to realize from the sale of
such products and records an allowance.





Property and
Equipment





Property
and equipment are recorded at cost and depreciated over the estimated useful
lives of the assets using the straight-line method. Leasehold improvements are
amortized over the shorter of the useful lives or the remaining terms of the
related leases. Maintenance and repair costs are charged to operations as
incurred.





42
 
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS


Long-Lived
Assets





In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144
“Accounting for the Impairment
or Disposal of Long-Lived Assets,” the Company reviews the carrying
values of its long-lived assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amounts of the assets may
not be recoverable.  Any long-lived assets held for disposal are
reported at the lower of their carrying amounts or fair values less costs to
sell.





Capitalized
Software Research and Development Costs.





Costs
associated with the development of computer software are charged to operations
prior to establishment of technological feasibility, as defined by Statement of
Financial Accounting Standards (SFAS) No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed”. Costs incurred
subsequent to the establishment of technological feasibility and prior to the
general release of the products are capitalized.





Capitalized
software costs are amortized on a product-by-product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenue for a product bears to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the remaining estimated economic life of the product. Amortization
begins when the product is available for general release to the
customer.





Income
Taxes





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 9” (“FIN 48”), on January
1, 2007. FIN 48 requires that the of tax positions be recognized in the
financial statements if they are more likely than not to be sustained upon
examination, based on the technical merits of the position. The Company has a
valuation allowance against the full amount of its deferred tax assets. The
Company currently provides a valuation allowance against deferred tax assets
when it is more likely than not that some portion, or all of its deferred tax
assets, will not be realized. The implementation FIN 48 had no effect on the
Company’s financial position or results of operations and there is no interest
or penalties as management believes the Company has no uncertain tax position at
December 31, 2008.  The Company is subject to U.S. federal income tax
as well as well as income tax of certain state jurisdictions. The Company has
not been audited by the I.R.S. or any states in connection with income taxes.
The period from 2004-2007 remains open to examination by the I.R.S. and state
authorities.




Fair
Value




The
Company has partially implemented SFAS No. 157, “Fair Value Measurements” for
financial assets and financial liabilities.  SFAS No. 157 defines fair
value, establishes a framework for measuring fair
value, expands disclosure about fair value measurements and is
effective for fiscal years beginning after November 15,
2007.  This standard only applies when other standards require or
permit the fair value measurement of assets and liabilities.  With regard
to nonfinancial assets and liabilities which are not recognized or
disclosed at fair value in the Company’s financial statements on a recurring
basis (at least annually), the standard is effective for fiscal years
beginning after November 15, 2008.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115” which permits entities to choose to measure eligible items at
fair value at specified election dates and report unrealized gains and losses on
items, for which the fair value option has been elected, in earnings at each
subsequent reporting date.  SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 159 in 2008 did
not have an impact on the Company’s results of operations or financial
position, as the Company has not elected the fair value option for any of its
eligible financial assets or liabilities




43


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS






Stock-Based
Compensation





The
Company accounts for share-based compensation according to the provisions of
SFAS No. 123(R), “Share−based Payment”, which establishes accounting for equity
instruments exchanged for employee services. Under SFAS 123(R), share-based
compensation cost is measured at the grant date, based on the fair value of the
award, and is recognized as an expense over the employee’s requisite service
period (generally the vesting period of the equity grant). The majority of the
Company’s share-based compensation arrangements vest over four
years.





During
years ended December 31, 2008 and 2007, share-based compensation expense
amounted to $7,022 and $3,630, respectively, and is included in general and
administrative expense.





The
Company estimates the fair value of stock options using the Black-Scholes
valuation model.  Key input assumptions used to estimate the fair
value of stock options include the exercise price of the award, the expected
option term, the expected volatility of the Company’s stock over the option’s
expected term, the risk-free interest rate over the option’s expected term, and
the Company’s expected annual dividend rate.  The Company believes
that the valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the Company’s
stock options granted in the year ended December 31,
2008.    Estimates of fair values are not intended to
predict actual future events or the value ultimately realized by persons who
receive equity awards.





Stock
options outstanding and related disclosures have been adjusted to reflect a 1
for 15 reverse stock-split which was effective July 31, 2008.





The
weighted average grant date fair value of options granted was $0.18 and $0.41
during the years ended December 31, 2008 and 2007, respectively. The fair value
of options at date of grant was estimated using the Black-Scholes option-pricing
model with the following assumptions during the years ended December
31:





2008
                      
                      2007Expected
      option term (1)
                      
                      6.25
      years
                      
                      6.25
      yearsExpected
      volatility factor (2)
                      
                      103.8%
                      
                      99.6%Risk-free
      interest rate (3)
                      
                      2.62%
                      
                      4.57%Expected
      annual dividend rate
                      
                      0%
                      
                      0%





(1)The option life
was determined using the simplified method for estimating expected option life,
which qualifies as “plain-vanilla” options.


(2)  The
stock volatility for each grant is determined based on the review of the
experience of the weighted average of historical monthly price changes of the
Company’s common stock over the most recent six years, which approximates the
expected option life of the grant of 6.25 years.


(3)  The risk-free interest
rate for periods equal to the expected term of the share option is based on the
U.S. Treasury yield curve in effect at the time of grant.





44


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS






Net Income (Loss) Per
Share





Basic and
diluted loss per share is calculated by dividing net loss attributable to common
stockholders by the weighted-average number of common shares outstanding.
Options to purchase 92,996 and 89,663 shares of common stock have not been
included in the computation of diluted net loss per share for the years ended
December 31, 2008 and 2007, respectively, because the effect would have been
anti-dilutive.





Warranty and Return
Policy





The
Company’s warranty policy provides 90-day coverage on all parts and labor on all
products.  The policy with respect to sales returns provides that a
customer may not return inventory except at the Company’s option. The Company’s
warranty costs have historically been insignificant.





Shipping and Handling
Costs





Shipping
and handling costs are classified as a component of cost of goods sold. The
Company accounts for shipping and handling costs passed on to customers as
revenues.





Fair Value of Financial
Instruments




Cash and
cash equivalents, accounts receivable, prepaid expenses, accounts payable and
accrued expenses are stated at carrying amounts that approximate fair value
because of the short maturity of those instruments.







4.
            Reverse
      Stock Split




On July
31, 2008, our Board of Directors approved a reverse stock split and established
a ratio of 1-for-15. This move followed a vote at our Annual Shareholders’
Meeting on June 24, 2008, in which shareholders authorized the Board to effect
the reverse stock split. Upon market open on July 31, 2008, our common stock
began trading on a split-adjusted basis under the new trading symbol
“NDCP.”





The
number of shares of our authorized common stock was reduced from 50,000,000
shares as of July 30, 2008, to 3,333,333 shares post-split. The number of shares
reserved for issuance under our stock option plans was also reduced
proportionately. As a result of the reverse stock split, every 15 shares of
common stock that was issued and outstanding was automatically combined into one
issued and outstanding share, without any change in the par value of such
shares. No fractional shares were issued in connection with the reverse stock
split. Stockholders who would be entitled to fractional shares received cash in
lieu of receiving fractional shares. The reverse stock split affected all shares
of common stock, stock options and warrants of NDI outstanding as of immediately
prior to the effective time of the reverse stock split.





All
shares of common stock have been adjusted to reflect a 1 for 15 reverse stock
split which was effective July 31, 2008.







5.
            Recent
      Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
which changes how business acquisitions are accounted.  SFAS No. 141R
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction and
establishes the acquisition-date fair value as the measurement objective for all
assets acquired and liabilities assumed in a business combination.  Certain
provisions of this standard will, among other things, impact the determination
of acquisition-date fair value of consideration paid in a business combination
(including contingent consideration); exclude transaction costs from acquisition
accounting; and change accounting practices for acquired contingencies,
acquisition-related restructuring costs, in-process research and development,
indemnification assets and tax benefits.  SFAS No. 141R is effective
for the Company for business combinations and adjustments to an acquired
entity’s deferred tax asset and liability balances occurring after
December 31, 2008.  The Company is currently evaluating the future
impacts and disclosures of this standard.





45
 
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS


In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51.” This
statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. SFAS No. 160 requires
the recognition of a noncontrolling interest (minority interest) as equity in
the consolidated financial statements and separate from the parent’s equity. The
amount of net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement. SFAS
No. 160 amends certain of ARB No. 51’s consolidation procedures for
consistency with the requirements of SFAS No. 141(R). This statement
requires changes in the parent’s ownership interest of consolidated subsidiaries
to be accounted for as equity transactions. This statement also includes
expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interest. The Company is currently evaluating the future impacts
and disclosures of this standard.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” which changes the disclosure requirements
for derivative instruments and hedging activities. SFAS No. 161 requires
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, “Accounting for Derivative Instruments
and Hedging Activities” and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement’s
disclosure requirements are effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
future impacts and disclosures of this standard.






6.
            Inventories





Inventories
related to continuing operations consisted of $2,401 for work-in-process at
December 31, 2007.







7.
            Property
      and Equipment, net





Property
and equipment related to continuing operations consist of the
following:





Estimated
                    Useful
      lives
                    (in
      years)
                  
                  December
      31,
                    2008
                  
                  December
      31,
                    2007Production
      and engineering equipment
                  3-5
                  
                  $277,795
                  
                  $277,795Furniture,
      fixtures and office equipment
                  5
                  
                  621,981
                  
                  606,573Leasehold
      improvements
                  Life
      of
                    lease
                  
                  39,564
                  
                  39,564939,340
                  
                  923,932Less
      – accumulated depreciation and amortization
                  
                  
                  900,414
                  
                  867,106$
      38,926
                  
                  $
      56,826





46


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




Depreciation
expense was $33,308 and $29,439 for the years ended December 31, 2008 and 2007,
respectively






8.
            Capitalized
      Software Development Costs, net





Capitalized
software development costs related to continuing operations consist of the
following:




Estimated
              Economic
      Lives
              (in
      years)
            
            December
      31,
              2008
            
            December
      31,
              2007Purchased
      software
            3
            
            $24,559
            
            $24,559$24,559
            
            $24,559Less
      – accumulated amortization
            
            
            21,523
            
            15,270$ 3,036
            
            $ 9,289





Amortization
expense was $6,253 and $8,000 for the years ended December 31, 2008 and 2007,
respectively.







9.
            Note
      Payable





On April
1, 2006, the Company signed an agreement with its landlord for past due rent
plus interest at 12% totaling $54,607. This amount was payable over the
remaining 30 months of the lease. At December 31, 2007, the remaining note
balance was $18,125. The Company paid off the note in September
2008.






10.
            Income
      Taxes





The
Company adopted the provisions of FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 9” (“FIN
48”), on January 1, 2007. FIN 48 requires that the impact of tax positions be
recognized in the financial statements if they are more likely than not to be
sustained upon examination, based on the technical merits of the
position.  The Company has a valuation allowance against
the full amount of its net deferred tax assets. The Company
currently provides a valuation allowance against deferred tax
assets when it is more likely than not that some portion, or all of its deferred
tax assets, will not be realized.  The implementation of FIN 48 had no
effect on the Company’s financial position or results of operations and there is
no interest or penalties as management believes the Company has no uncertain tax
position at December 31, 2008.




The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. The Company has not been audited by the Internal Revenue
Service or by any states in connection with income taxes.  The tax
returns for the years 2004 through 2007, and certain items carried forward from
earlier years and utilized in those returns, remain open to examination by the
IRS and various state jurisdictions.





47


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS






Deferred
tax assets are comprised of the following:





December
      31,
                      2008
                    
                    
                    December
      31,
                      2007Net
      operating loss carryforwards
                    
                    $
                    3,154,000
                    
                    
                    $
                    2,922,000Business
      tax credit carryforwards
                    
                    
                    5,000
                    
                    
                    
                    5,000Reserves
      and allowances
                    
                    
                    245,000
                    
                    
                    
                    338,000Depreciation
      and amortization
                    
                    
                    (30,000
                    )
                    
                    
                    (80,000
                    )Accrued
      compensation
                    
                    
                    8,000
                    
                    
                    
                    21,000Gross
      deferred tax asset
                    
                    
                    3,442,000
                    
                    
                    
                    3,236,000Deferred
      tax asset valuation allowance
                    
                    
                    (3,442,000
                    )
                    
                    
                    (3,236,000
                    )$
                    —
                    
                    
                    $
                    —







The
Company’s effective tax rate differs from the statutory U.S. federal tax rate as
follows:




Year
      EndedDecember
      31,
                        2008
                      
                      December
      31,
                        2007Statutory
      federal rate
                      
                      34.0%
                      
                      34.0%Change
      in valuation allowance on deferred tax assets
                      
                      (34.0%)
                      
                      (34.0%)—
                      
                      —





The
Company generated losses from operations in prior years. Although management’s
operating plans anticipate taxable income in future periods, such plans make
significant assumptions which cannot be reasonably assured, including continued
development and market acceptance of new products and expansion of the Company’s
customer base. Based on the weight of all available evidence, the Company has
provided a full valuation allowance for deferred tax assets since the
realization of these future benefits is not sufficiently assured. As the Company
achieves profitability, these deferred tax assets would be available to offset
future income tax liabilities and expense.





At
December 31, 2008, the Company has federal net operating loss carryforwards for
federal tax purposes of approximately $8,801,000, which expire in various years
through 2028. The Company has state net operating loss carryforwards for tax
purposes of approximately $2,400,000, which expire in various years through
2013.





Any
significant change in ownership, as defined in Section 382 of the Internal
Revenue Code, may result in an annual limitation on the amount of the net
operating loss and credit carryforwards which could be utilized in a single
year.





The
recapitalization of the Company in March 2007 will qualify as a significant
change of ownership, as defined in Section 382.  Therefore, the ability of
the Company to fully utilize its NOL carryforwards in future periods will be
limited.  At this time, the amount of the NOL limitation is unknown since
the Company has not completed their Section 382 study.







48
 
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS


11.
            Stock
      Options





Share-Based Incentive
Plans





On August
19, 1997, the Board of Directors adopted the 1997 Stock Option Plan (“1997
Plan”) which provided for issuance of both incentive stock options and
non-qualified options to employees. As of December 31, 2008, there were no
longer any options outstanding and no shares available for grant under the 1997
Plan.





On
January 1, 1998, the Board of Directors adopted the 1998 Stock Option Plan
(“1998 Plan”) which provides for issuance of non-qualified options to employees.
As of December 31, 2008, there were options to purchase 1,332 shares of common
stock outstanding and no shares available for grant under the 1998
Plan.





On March
30, 2007, the Board of Directors adopted the 2007 Employee, Director and
Consultant Stock Option Plan (“2007 Plan”) which provides for the issuance of
both incentive and non-qualified stock options to employees, consultants and
directors. A maximum of 133,333 shares of common stock of the Company was
reserved for issuance in accordance with the terms of the 2007 Plan. On June 24,
2008, upon stockholders approval the maximum number of shares reserved for
issuance under the 2007 Plan was increased to 200,000.





Upon the
approval of the 2007 Plan, our 1997 Plan and our 1998 Plan terminated. All
outstanding options under our 1998 Stock Option Plan will remain in effect, but
no additional option grants may be made. As of December 31, 2008, there were
91,664 options outstanding under the 2007 Plan and 108,336 shares available for
grant under the 2007 Plan.





The
following table summarizes information about stock options outstanding at
December 31, 2008:




Number
                      of
      shares
                    
                    
                    Weighted
      average exercise price
                    
                    
                    Remaining
      contractual life in years
                    
                    
                    Aggregate
                      intrinsic
      valueOutstanding
      at December 31, 2007
                    
                    
                    89,663
                    
                    
                    $
                    2.26Granted
                    
                    
                    16,666
                    
                    
                    
                    0.23Exercised
                    
                    
                    —Cancelled/forfeited
                    
                    
                    (13,333
                    )
                    
                    
                    11.25Outstanding
      at December 31, 2008
                    
                    
                    92,996
                    
                    
                    
                    0.61
                    
                    
                    
                    8.38
                    
                    
                    $
                    —Options
      vested or expected to vest at December 31, 2008 (1)
                    
                    
                    82,910
                    
                    
                    
                    0.63
                    
                    
                    
                    8.37
                    
                    
                    $
                    —Options
      exercisable at December 31, 2008
                    
                    
                    20,082
                    
                    
                    
                    1.22
                    
                    
                    
                    7.81
                    
                    
                    $
                    —





(1)  In addition to the
vested options, the Company expects a portion of the unvested options to vest at
some point in the future.  Options expected to vest are calculated by
applying an estimated forfeiture rate to the unvested
options.





At
December 31, 2008, stock-based compensation not yet recognized amounted to
$19,585 and is expected to be recognized over a weighted average period of 2
years.




49


NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




12.
            Equity
      Transactions




Anthony
Stafford, an investor who has joined our Board of Directors on March 30, 2007,
is now a majority stockholder of our Company after investing $400,000 for the
purchase of shares of our Common Stock previously held by CapitalBank. As a
condition to his investment, Mr. Stafford requested that our executive officers
and members of our Board of Directors provide an aggregate of $140,000 of the
$600,000 (including Mr. Stafford’s $400,000) in funds which were raised to
acquire shares previously held by CapitalBank. Each of our executive officers
and the members of our Board of Directors agreed to make such an investment by
purchasing an aggregate of 471,944 shares of our Common Stock (the “Management
Shares”) on the same terms on which Mr. Stafford purchased his
shares.





On March
30, 2007 our stockholders approved the sale and issuance of shares of Common
Stock to our executive officers and each member of our Board of Directors, and
in exchange for an aggregate of $600,000 capital contribution, the new investors
received an aggregate of 2,022,616 shares of our Common Stock. The resulting per
share purchase price was $.2966 per share.





Mr.
Stafford, together with his four children, agreed to invest $400,000 in the
Company, provided that at least a majority of the remaining $200,000 funds to be
raised be provided on an individual basis by our executive officers and the
members of our Board of Directors. Our executive officers and the members of our
Board of Directors agreed to invest an aggregate of $140,000 and two additional
investors were identified to provide the remaining $60,000. As described above,
these funds were used to pay AST $250,000 for our Common Stock held by
CapitalBank as partial consideration for the purchase of the CapitalBank Shares
and the remaining $350,000 will be used to provide us with needed working
capital and to pay transaction expenses. Moreover, Mr. Stafford agreed to
acquire only our Common Stock so that we would not have to re-issue shares of
our Preferred Stock, thereby ensuring that the holders of our Common Stock would
not be affected by any liquidation preferences and that we would no longer have
any obligation to make quarterly interest payments in cash or Common Stock with
respect to the Preferred Stock.





A result
of these transactions is the elimination of the outstanding shares of our
Preferred Stock, which results in no other stockholder having a liquidation
preference over the holders of our Common Stock as well as the cessation of our
obligation to issue cash or Common Stock as interest payments with regard to the
Preferred Stock, which would potentially further dilute the shares of our Common
Stock that are currently outstanding. Additionally, the stockholders will be
able to vote as a single class.







13.
            Common
      Stock





On March
30, 2007, the Company issued 535,822 shares of Common Stock in satisfaction of
accrued interest on Preferred Stock for the period beginning October 1, 2005 and
ending November 29, 2006.





On March
30, 2007, the Company issued 37,616 shares of Common Stock to the members of the
Board of Directors as part of their 2006 compensation. The shares, accrued as an
expense by the Company in 2006, had a per share fair value of $0.56492 for a
total of $21,250.





On May
17, 2007, the Company issued 33,333 shares of Common Stock to one of its
officers as partial payment for 2006 deferred compensation. The shares had a per
share fair value of $0.45 for a total of $15,000.





On July
28, 2008, Anthony Stafford purchased 66,667 shares of our common stock. On
September 18, 2008, members of our Board of Directors, along with one outside
investor purchases 1,825,000 shares of our common stock. Total proceeds from
these transactions were $415,000.




50


NATIONAL
DATACOMPUTER, INC. NOTES
TO FINANCIAL STATEMENTS


14.
            Commitments





The
Company leases its office facilities under an operating lease expiring April 30,
2009. The lease contains an option for renewal and requires the payment of real
estate taxes and other operating costs. Total rent expense under this operating
lease was $132,828 and $153,996 for the years ended December 31, 2008 and 2007,
respectively.





The
Company also leases certain equipment under capital leases expiring at various
dates through the year 2010.





Minimum
future lease commitments under operating and capital leases at December 31, 2008
are as follows:




Year
      ending
                    December
      31,
                  
                  Operating
                  
                  
                  Capital2009
                  
                  
                  34,000
                  
                  
                  
                  24,0272010
                  
                  
                  —
                  
                  
                  
                  7,038Total
      minimum lease payments
                  
                  $
                  34,000
                  
                  
                  
                  31,065Less:
      amount representing interest
                  
                  
                  
                  
                  
                  
                  4,432Present
      value of minimum lease payments
                  
                  
                  
                  
                  
                  
                  26,633Less:
      current obligations
                  
                  
                  
                  
                  
                  
                  20,310Obligations
      under capital leases, net of current portion
                  
                  
                  
                  
                  
                  $
                  6,323






15.
            Concentration
      of Credit Risk





The
Company sells its products to customers principally in the United States of
America. During 2008, three customers accounted for approximately 83% of our
total revenues. During 2007, four customers accounted for 68% of our total
revenues.





The
Company performs on-going credit evaluations of its customers, provides credit
on an unsecured basis, and maintains reserves for potential credit
losses.  Such losses, in the aggregate, have not exceeded management’s
expectations. Accounts receivable from one customer accounted for approximately
95% and 51% of total accounts receivable at December 31, 2008 and 2007,
respectively.  Management does not believe that the Company is subject
to any unusual credit risk beyond the normal credit risk attendant to operating
its business





The
Company’s total net revenues were generated by sales to customers in the
following countries:





Percentage
      of net revenues
            
            Percentage
      of net revenues2008
            
            2007USA
            84%
            
            80%Europe
            16%
            
            20%Total
            100%
            
            100%











51