UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-KSB/A




(Mark
      One)X
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended December 31, 2007orTRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) of THE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from  ______________ to
      ______________





NATIONAL
DATACOMPUTER, INC.


(Name of Small Business Issuer in its
charter)





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





900 Middlesex Turnpike, Bldg. 5,
Billerica, Massachusetts01821


(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 Exchange Act: None


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





Common
Stock, $.001 par value per share


(Title of
class)





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act.  o




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





Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.   o




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes   oNo   x




The
registrant had revenues of approximately $1.8 million during the fiscal year
ended December 31, 2007. As of March 26, 2008, 35,742,438 shares of the
registrant’s common stock, $0.001 par value per share, were outstanding and the
aggregate market value of the common stock held by non-affiliates was
approximately $70,768 based on the closing price of $0.01 per share as reported
by the OTC Bulletin Board.





Transitional
Small Business Disclosure Format:  Yes   oNo   x


DOCUMENTS
INCORPORATED BY REFERENCE:


Portions
of the Company’s Proxy Statement to be delivered to the Company’s stockholders
in connection with the Company’s 2008 Annual Meeting of Stockholders, which the
Company plans to file with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934, on or
prior to April 29, 2008, are incorporated by reference in Part III (Items 9, 10,
11, 12 and 14) of this Form 10-KSB.





EXPLANATORY
NOTE





The
purpose of this amendment is to revise certain portions of the information
required by Part II of Form 10-KSB for our fiscal year December 31, 2007, as
originally filed  with the Securities and Exchange Commission on March
28, 2008.










PART
II





Item
7.    Financial Statements.





See Item
13 below and the Index therein for a listing of the financial statements and
supplementary data filed as part of this report.





Item
8A. 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 (its 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, 2007. Based on the aforementioned
evaluation, management has concluded that our disclosure controls and procedures
were not effective as of December 31, 2007 because of the existence of two
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, and
(ii) the potential inability of our accounting staff to handle certain complex
accounting issues.  Notwithstanding the existence of the material
weakness described below, management has concluded that the consolidated
financial statements in this Form 10-KSB fairly present, in all material
respects, the Company’s financial position, results of operations and cash flows
for the periods and dates presented.




(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, 2007. 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.


1


(iii)           Two
material weaknesses  were identified in our internal control over
financial reporting relative to accounting for the year ended December 31, 2007.
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.   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, 2007. 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, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




(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 2008 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.




2


Item
13.    Exhibits.





(a)(1) Financial
Statements. The financial statements required to be filed by Item 7
herewith are as follows:






PageReport of
      Independent Registered Public Accounting Firm
            
            5Balance Sheets as of
      December 31, 2007 and 2006
            
            6Statements of
      Operations for the years ended December
      31, 2007 and 2006
            
            7Statement of
      Stockholders’ Deficit for the years ended
      December 31, 2007 and 2006
            
            8Statements of Cash
      Flows for the years ended December
      31, 2007 and 2006
            
            9Notes to Financial
      Statements
            
            10






3


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:
      August 19, 2008
                By:
                /s/ William
      B. BerensWilliam
      B. BerensPresident
      and Chief Executive Officer
  
 
 
 4
 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, 2007 and 2006, 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, 2007 and 2006, 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 5 to the
financial statements, the Company has recurring operating losses and has
incurred an accumulated deficit of approximately $16.4 million at December 31,
2007. 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 5. The financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.





/s/
Carlin, Charron & Rosen LLP


Westborough,
Massachusetts


March 28,
2008




5




NATIONAL
DATACOMPUTER, INC.
 BALANCE
SHEETS
 
 December
      31,
              
              
              December
      31,2007
              
              
              2006AssetsCurrent
      Assets:Cash
              
              $
              257,019
              
              
              $
              162,783Accounts
      receivable, net of allowance for doubtful accounts of $3,000at
      December 31, 2007 and 2006
              
              
              76,158
              
              
              
              98,985Inventories,
      net
              
              
              2,401
              
              
              
              10,000Deferred
      hardware and software costs
              
              
              799,623
              
              
              
              15,064Prepaid
      expenses
              
              
              52,317
              
              
              
              8,785Total
      current assets
              
              
              1,187,518
              
              
              
              295,617Prepaid
      Expenses
              
              
              19,811
              
              
              
              —Property
      and equipment, net
              
              
              56,826
              
              
              
              22,539Capitalized
      software development costs, net
              
              
              9,289
              
              
              
              15,615Total
      Assets
              
              $
              1,273,444
              
              
              $
              333,771Liabilities
      and Stockholders' Deficit:Current
      Liabilities:Current
      obligations under capital lease
              
              $
              19,093
              
              
              $
              3,844Note
      payable, current portion
              
              
              18,125
              
              
              
              27,775Accounts
      payable
              
              
              1,422,629
              
              
              
              460,691Customer
      deposits
              
              
              9,964
              
              
              
              24,911Accrued
      payroll and related taxes
              
              
              52,535
              
              
              
              52,023Other
      accrued expenses
              
              
              98,210
              
              
              
              155,587Deferred
      revenues
              
              
              508,058
              
              
              
              248,913Total
      current liabilities
              
              
              2,128,614
              
              
              
              973,744Note
      payable, net of current portion
              
              
              —
              
              
              
              18,125Obligations
      under capital lease, net of current portion
              
              
              27,680
              
              
              
              6,420Total
      Liabilities
              
              
              2,156,294
              
              
              
              998,289Convertible
      Preferred Stock (Note 14)
              
              
              —
              
              
              
              —Commitments
      and contingencies (Note 15)Stockholders'
      Deficit:Preferred
      stock, $0.001 par value; 50,000 shares authorized;no
      shares issued or outstanding
              
              
              —
              
              
              
              —Common
      stock, $0.001 par value; 50,000,000 shares authorized;
      35,742,438and
      26,640,866 shares issued and outstanding at December 31, 2007 and 2006,
      respectively
              
              
              35,742
              
              
              
              26,641Capital
      in excess of par value
              
              
              15,518,308
              
              
              
              15,225,364Accumulated
      deficit
              
              
              (16,436,900
              )
              
              
              (15,916,523
              )Total
      Stockholders' Deficit
              
              
              (882,850
              )
              
              
              (664,518
              )Total
      Liabilities and Stockholders' Deficit
              
              $
              1,273,444
              
              
              $
              333,771
   The
accompanying notes are an integral part
 of these
financial statements.
  6
 
 NATIONAL
DATACOMPUTER, INC.
 STATEMENTS
OF OPERATIONS
 Years
      EndedDecember
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006Revenues:Product
                  
                  $
                  839,451
                  
                  
                  $
                  804,521Services
                  
                  
                  921,700
                  
                  
                  
                  1,240,931Total
      Revenues
                  
                  
                  1,761,151
                  
                  
                  
                  2,045,452Cost
      of revenues
                  
                  
                  1,230,061
                  
                  
                  
                  924,099Gross
      Profit
                  
                  
                  531,090
                  
                  
                  
                  1,121,353Operating
      expenses:Research
      and development
                  
                  
                  —
                  
                  
                  
                  75,596Selling
      and marketing
                  
                  
                  298,156
                  
                  
                  
                  296,292General
      and administrative
                  
                  
                  770,701
                  
                  
                  
                  902,9631,068,857
                  
                  
                  
                  1,274,851Loss
      from operations
                  
                  
                  (537,767
                  )
                  
                  
                  (153,498
                  )Other
      income (expense):Interest
      income
                  
                  
                  6,574
                  
                  
                  
                  1,958Gain
      on currency exchange
                  
                  
                  21,770
                  
                  
                  
                  6,747Interest
      expense
                  
                  
                  (10,954
                  )
                  
                  
                  (8,638
                  )Loss
      from continuing operations
                  
                  
                  (520,377
                  )
                  
                  
                  (153,431
                  )Income
      from discontinued operations (Note 3)
                  
                  
                  —
                  
                  
                  
                  134,115Loss
      on sale of discontinued operations
                  
                  
                  —
                  
                  
                  
                  (7,977
                  )Net
      loss
                  
                  $
                  (520,377
                  )
                  
                  $
                  (27,293
                  )Calculation
      of net loss per common share:Net
      loss
                  
                  $
                  (520,377
                  )
                  
                  $
                  (27,293
                  )Preferred
      stock preferences
                  
                  
                  —
                  
                  
                  
                  (244,750
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (520,377
                  )
                  
                  $
                  (272,043
                  )Basic
      and diluted net loss per share attributable tocommon
      stockholders:Loss
      from continuing operations
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )Income
      from discontinued operations
                  
                  
                  —
                  
                  
                  
                  0.01Preferred
      stock preferences
                  
                  
                  —
                  
                  
                  
                  (0.01
                  )Net
      loss attributable to common stockholders
                  
                  $
                  (0.02
                  )
                  
                  $
                  (0.01
                  )Weighted
      average shares
                  
                  
                  33,457,937
                  
                  
                  
                  25,141,373
  The
accompanying notes are an integral part
 of these
financial statements.
  7
 NATIONAL
DATACOMPUTER, INC.
 STATEMENT
OF STOCKHOLDERS' DEFICIT
 
  Common
      Stock
                  
                  
                  
                  
                  
                  Capital
      in
                  
                  
                  
                  
                  
                  TotalPar
                  
                  
                  Preferred
                  
                  
                  excess
                  
                  
                  Accumulated
                  
                  
                  stockholders'Shares
                  
                  
                  value
                  
                  
                  Stock
                  
                  
                  of par value
                  
                  
                  deficit
                  
                  
                  deficitBalance
      at January 1, 2006
                  
                  
                  22,586,681
                  
                  
                  $
                  22,587
                  
                  
                  
                  
                  
                  $
                  14,517,418
                  
                  
                  $
                  (19,183,201
                  )
                  
                  $
                  (4,643,196
                  )Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (27,293
                  )
                  
                  
                  (27,293
                  )Reclassification
      of Convertible Preferred Stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,538,721
                  
                  
                  
                  467,250
                  
                  
                  
                  —
                  
                  
                  
                  4,005,971Interest
      on preferred stock (Note 14)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  244,750
                  
                  
                  
                  (244,750
                  )
                  
                  
                  —Issuance
      of common stock in satisfaction of accrued
    interest
                  
                  
                  4,054,185
                  
                  
                  
                  4,054
                  
                  
                  
                  —
                  
                  
                  
                  (4,054
                  )
                  
                  
                  —
                  
                  
                  
                  —Retirement
      of Preferred Stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (3,538,721
                  )
                  
                  
                  —
                  
                  
                  
                  3,538,721
                  
                  
                  
                  —Balance
      at December 31, 2006
                  
                  
                  26,640,866
                  
                  
                  
                  26,641
                  
                  
                  
                  —
                  
                  
                  
                  15,225,364
                  
                  
                  
                  (15,916,523
                  )
                  
                  
                  (664,518
                  )Net
      loss
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (520,377
                  )
                  
                  
                  (520,377
                  )Issuance
      of stock in satisfaction of accrued interest
                  
                  
                  8,037,336
                  
                  
                  
                  8,037
                  
                  
                  
                  —
                  
                  
                  
                  (8,037
                  )
                  
                  
                  —
                  
                  
                  
                  —Additional
      capital raised, net of costs of $87,835 (Note
1)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  262,165
                  
                  
                  
                  —
                  
                  
                  
                  262,165Issuance
      of stock in satisfaction of accrued
compensation
                  
                  
                  564,236
                  
                  
                  
                  564
                  
                  
                  
                  —
                  
                  
                  
                  20,686
                  
                  
                  
                  —
                  
                  
                  
                  21,250Issuance
      of stock in satisfaction of deferred
    compensation
                  
                  
                  500,000
                  
                  
                  
                  500
                  
                  
                  
                  —
                  
                  
                  
                  14,500
                  
                  
                  
                  —
                  
                  
                  
                  15,000Stock
      based compensation related to options granted
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3,630
                  
                  
                  
                  —
                  
                  
                  
                  3,630Balance
      at December 31, 2007
                  
                  
                  35,742,438
                  
                  
                  $
                  35,742
                  
                  
                  $
                  —
                  
                  
                  $
                  15,518,308
                  
                  
                  $
                  (16,436,900
                  )
                  
                  $
                  (882,850
                  )
   The
accompanying notes are an integral part
 of these
financial statements.
  8
 
 NATIONAL
DATACOMPUTER, INC.
 STATEMENTS
OF CASH FLOWS
 Years
      EndedDecember
      31,
                  
                  
                  December
      31,2007
                  
                  
                  2006OPERATING
      ACTIVITIES:Net
      loss
                  
                  $
                  (520,377
                  )
                  
                  $
                  (27,293
                  )Less:
      Income from discontinued operations
                  
                  
                  —
                  
                  
                  
                  (134,115
                  )Plus:
      loss on sale of discontinued operations
                  
                  
                  —
                  
                  
                  
                  7,977Loss
      from continuing operations
                  
                  
                  (520,377
                  )
                  
                  
                  (153,431
                  )Adjustments
      to reconcile net loss to netcash provided by (used for) operating
      activities:Interest
      on loan
                  
                  
                  —
                  
                  
                  
                  2,033Depreciation
      and amortization
                  
                  
                  37,439
                  
                  
                  
                  31,155Stock
      based compensation related to options granted
                  
                  
                  3,630
                  
                  
                  
                  —Changes
      in assets and liabilities:Decrease
      in accounts receivable
                  
                  
                  22,827
                  
                  
                  
                  28,600Decrease
      (increase) in inventories
                  
                  
                  7,599
                  
                  
                  
                  (10,000
                  )Increase
      in deferred hardware and software costs
                  
                  
                  (784,559
                  )
                  
                  
                  (15,064
                  )(Increase)
      decrease in other prepaid expenses
                  
                  
                  (63,343
                  )
                  
                  
                  13,724Increase
      in accounts payable
                  
                  
                  884,399
                  
                  
                  
                  146,100(Decrease)
      in customer deposits
                  
                  
                  (14,947
                  )
                  
                  
                  (118,120
                  )(Decrease)
      increase in accrued expenses
                  
                  
                  56,924
                  
                  
                  
                  75,609Increase
      in deferred revenues
                  
                  
                  259,145
                  
                  
                  
                  6,711Net
      cash (used for) provided by continuing operations
                  
                  
                  (111,263
                  )
                  
                  
                  7,317Net
      cash provided by discontinued operations
                  
                  
                  —
                  
                  
                  
                  128,857Net
      cash (used for) provided by operating activities
                  
                  
                  (111,263
                  )
                  
                  
                  136,174Cash
      flows from investing activities:Purchases
      of property and equipment
                  
                  
                  (15,187
                  )
                  
                  
                  (17,152
                  )Purchase
      of capitalized software
                  
                  
                  (1,674
                  )
                  
                  
                  (11,285
                  )Net
      cash used for continuing operations
                  
                  
                  (16,861
                  )
                  
                  
                  (28,437
                  )Net
      cash used for discontinued operations
                  
                  
                  —
                  
                  
                  
                  (5,025
                  )Net
      cash used for investing activities - continuing operations
                  
                  
                  (16,861
                  )
                  
                  
                  (33,462
                  )Cash
      flows from financing activities:Net
      proceeds from additional capital raised
                  
                  
                  262,165
                  
                  
                  
                  —Principal
      payments on note payable
                  
                  
                  (27,775
                  )
                  
                  
                  (62,707
                  )Principal
      payments on obligationsunder capital lease
                  
                  
                  (12,030
                  )
                  
                  
                  (2,730
                  )Net
      cash provided by (used for) financing activities - continuing
      operations
                  
                  
                  222,360
                  
                  
                  
                  (65,437
                  )Net
      increase in cash
                  
                  
                  94,236
                  
                  
                  
                  37,275Cash,
      beginning of year
                  
                  
                  162,783
                  
                  
                  
                  125,508Cash,
      end of year
                  
                  $
                  257,019
                  
                  
                  $
                  162,783Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest
                  
                  $
                  10,954
                  
                  
                  $
                  8,638Non-cash
      investing and financing activities:Accrued
      compensation paid with stock
                  
                  $
                  21,250
                  
                  
                  $
                  —Deferred
      compensation paid with stock
                  
                  $
                  15,000
                  
                  
                  $
                  —Acquisition
      of property and equipment under capital lease
                  
                  $
                  48,539
                  
                  
                  $
                  —Accrued
      expenses converted to accounts payable
                  
                  $
                  77,539
                  
                  
                  $
                  —Accounts
      payable converted to note payable
                  
                  $
                  —
                  
                  
                  $
                  52,574Accrued
      interest on preferred stock charged toaccumulated
      deficit
                  
                  $
                  —
                  
                  
                  $
                  244,750Issuance
      of common stock in satisfaction ofaccrued interest
                  
                  $
                  —
                  
                  
                  $
                  400,500
  The
accompanying notes are an integral part
 of these
financial statements.


9
 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.
            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.





Reclassifications





Certain
accounts previously reported in the 2006 financial statements have been
reclassified to facilitate comparability with the current year presentation.
These reclassifications had no effect on 2006 net income as previously
reported.





Revenue
Recognition.





We
recognize the majority of our 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
transactions sometimes involve multiple elements (i.e. systems 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.





We
recognize revenue for software licenses 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. License
revenue is recognized upon customer acceptance, provided that  10
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




persuasive
evidence of an arrangement exists, no significant obligations with regards to
installation or implementation remain, fees are fixed or determinable, and
collectibility is probable.





Hardware
and software maintenance is marketed under annual and multi-year arrangements
and revenue 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.





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.  11
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS





Income
Taxes





The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred taxes for the
difference between the financial statement and tax bases of assets and
liabilities, utilizing current tax rates.  Deferred tax benefit or
expense is recognized as a result of the change in the deferred asset or
liability during the year. Valuation allowances are established, if necessary,
to reduce the deferred tax asset to the amount that will more likely than not be
realized.





Stock-Based
Compensation





In
December 2004, the Financial Accounting Standard Board (FASB) issued Statement
of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS
123R). SFAS 123R establishes accounting for equity instruments exchanged for
employee services. Under the provision of SFAS 123(R), share−based compensation
is measured at the grant date, based upon 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 accounts for its share-based compensation under the provisions of SFAS
123R. For the year ended December 31, 2007, share-based compensation expense
amounted to $3,630, and was recorded in general and administrative expenses in
the accompanying statement of operations.  There was no share−based
compensation expense recorded for the year ended December 31, 2006.





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, 2007.  Estimates
of fair values are not intended to predict actual future events or the value
ultimately realized by persons who receive equity awards.





The
weighted average grant date fair value of options granted was $0.03 for the year
ended December 31, 2007. There were no options granted for the year ended
December 31, 2006. The following assumptions were used to estimate the fair
market value of options granted using the Black-Scholes evaluation
method:






Expected option
      term (1)
            6.25
      yearsExpected
      volatility (2)
            99.6%Risk-free interest
      rate (3)
            4.57%Expected annual
      dividend rate
            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.




12
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




(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.





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.





Interest
payable to preferred stockholders, the fair value of inducements to convert
preferred stock into common stock, and any discounts implicit in the conversion
terms upon issuance of preferred stock (Note 14) are subtracted from the net
income (loss) to determine the amount of net income (loss) attributable to
common stockholders.





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.




3.
            Discontinued
      operations




On
November 29, 2006, the Company sold its audit business line to AST Inc. (“AST”)
in exchange for all our outstanding preferred stock. In early November 2006, AST
informed our Board of Directors that it had acquired approximately 90% of our
outstanding common stock and all of our outstanding preferred stock for $750,000
from Capital Bank Grawe Gruppe AG (“CapitalBank”) based on AST’s assessment that
the value of the Common Stock held by CapitalBank was $250,000 and the value of
the Preferred Stock held by CapitalBank was $500,000.




The
Company sold its audit business to better focus on its route accounting
business. The audit business has been reported as a discontinued operation in
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,”and all periods presented have been
revised to reflect the operations as discontinued.




Revenues
and income for the audit business for the calendar year 2006 were as
follow:




Total
      Sales
            $951,099Income
            134,115






4.
            Liquidity
      and Management Plans





We have
an accumulated deficit of approximately $16,437,000 through December 31, 2007.
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. In November 2006, in an
effort


13
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




to focus
solely on our route accounting business, we sold our audit business line to AST
in exchange for our Preferred Stock. In January 2007, a group of investors made
a cash investment of $600,000, of which they used $250,000 to purchase
30,339,236 shares of our common stock together with accrued but unpaid stock
dividends (representing approximately 90% of our common stock in the aggregate)
held by CapitalBank and provided us $350,000 to be used as working
capital.





We have
re-aligned our spending from administration and manufacturing to maintain 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, 2008. However, there are no assurances that these plans will be
successful or sufficient.




5.
            Recent
      Accounting Pronouncements




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), which clarifies the definition of fair
value, establishes guidelines for measuring fair value, and expands disclosures
regarding fair value measurements. SFAS No. 157 does not require any new
fair value measurements and eliminates inconsistencies in guidance found in
various prior accounting pronouncements. SFAS No. 157 will be effective for
the Company on January 1, 2008. The Company is currently evaluating the
impact of adopting SFAS No. 157 but does not believe that the adoption of
SFAS No. 157 will have any material impact on its financial position, cash
flows, or results of operations.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. SFAS No. 159 will be effective for the Company on January 1,
2008. The Company is currently evaluating the impact of adopting SFAS No.
159 on its financial position, cash flows, and results of operations.




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.





In
December 2007, the SEC issued SAB No. 110.  SAB 110 allows for the
continued use of a "simplified" method, as discussed in SAB No. 107, in
developing an estimate of expected term of "plain vanilla" share options in
accordance with SFAS 123 (revised 2004).  Originally the staff stated in
SAB 107 that it would not expect a company to use the simplified method for
share option grants after December 31, 2007.  Accordingly, the SEC staff
will continue to accept, under certain circumstances, the


14
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




use of
the simplified method beyond December 31, 2007.  The Company will evaluate
the use of the simplified method for determining the value of options granted
after December 31, 2007.





6.
            Inventories





Inventories
related to continuing operations consist of the following:




December
      31,
              2007
            
            
            December
      31,
              2006Raw
      materials
            
            $
            –
            
            
            $
            –Work-in-process
            
            
            2,401
            
            
            
            10,000Finished
      goods
            
            
            –
            
            
            
            –$
            2,401
            
            
            $
            10,000





7.
            Property
      and Equipment, net





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




Estimated
              Useful
      lives
              (in
      years)
            
            
            December
      31,
              2007
            
            
            December
      31,
              2006Production
      and engineering equipment
            
            3-5
            
            
            $
            277,795
            
            
            $
            277,795Furniture,
      fixtures and office equipment
            
            5
            
            
            
            606,573
            
            
            
            542,847Leasehold
      improvements
            
            Life
      of
              Lease
            
            
            
            39,564
            
            
            
            39,564923,932
            
            
            
            860,206Less
      – accumulated depreciation and amortization
            
            
            
            
            
            
            867,106
            
            
            
            837,667$
            56,826
            
            
            $
            22,539





Depreciation
expense from continuing operations was $29,439 and $25,819 for the years ended
December 31, 2007 and 2006, respectively


15
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS





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,
              2007
            
            
            December
      31,
              2006Internally
      developed software
            
            3
            
            
            $
            -
            
            
            $
            -Purchased
      software
            
            3
            
            
            
            24,559
            
            
            
            22,885$
            24,559
            
            
            $
            22,885Less
      – accumulated amortization
            
            
            
            
            
            
            15,270
            
            
            
            7,270$
            9,289
            
            
            $
            15,615





Amortization
expense from continuing operations was $8,000 and $5,336 for the years ended
December 31, 2007 and 2006, respectively.





9.
              Note
      Payable





On
December 31 2001, the Company signed an unsecured promissory note payable to a
vendor for a principal sum of $108,000 at an interest rate of 2% per annum. The
note required the Company to make eighteen principal payments of $6,000 per
month from January 2002 through June 2003. Upon default of payment, the
remaining principal balance will become immediately due and payable without
notice or demand. The Company was in default of this note at December 31, 2005;
however, the event of default was waived by the holder, and payments recommenced
in March 2006. The Company paid off the note by March 31, 2007.





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 is payable over the remaining
30 months of the lease. At December 31, 2007, the remaining note balance was
$18,125.





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, 2007.




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.


16
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS





Deferred
tax assets are comprised of the following:





December
      31,
              2007
            
            
            December
      31,
              2006Net
      operating loss carryforwards
            
            $
            2,922,000
            
            
            $
            2,909,000Business
      tax credit carryforwards
            
            
            5,000
            
            
            
            5,000Reserves
      and allowances
            
            
            338,000
            
            
            
            338,000Depreciation
      and amortization
            
            
            (80,000
            )
            
            
            (80,000
            )Accrued
      compensation
            
            
            21,000
            
            
            
            64,000Gross
      deferred tax asset
            
            
            3,206,000
            
            
            
            3,236,000Deferred
      tax asset valuation allowance
            
            
            (3,206,000
            )
            
            
            (3,236,000
            )$
            –
            
            
            $
            –





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





Year
      EndedDecember
      31,
              2007
            
            
            December
      31,
              2006Statutory
      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, 2007, the Company has federal net operating loss carryforwards for
federal tax purposes of approximately $8,293,000, which expire in various years
through 2027. The Company has state net operating loss carryforwards for tax
purposes of approximately $1,702,000, which expire in various years through
2012.





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


17
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS


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.





11.
            Stock
      Options





The
Company accounts for share-based payment arrangements under the provisions of
SFAS 123R, Share Based
Payment, which established accounting for equity instruments exchanged
for employee services.  Under SFAS 123R, 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).





For the
year ended December 31, 2007, share-based compensation expense amounted to
$3,630.  There was no share−based compensation expense recorded during
the year ended December 31, 2006.





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, 2007, there
were options to purchase 200,000 shares of common stock 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.
A maximum of 300,000 shares of common stock of the Company was reserved for
issuance in accordance with the terms of the 1998 Plan.  As of
December 31, 2007, there were options to purchase 20,000 shares of common stock
outstanding and 280,000 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 inventive and non-qualified stock options to employees, directors and
consultants. A maximum of 2,000,000 shares of common stock of the Company was
reserved for issuance in accordance with the terms of the 2007 Plan. As of
December 31, 2007, there were 1,125,000 options outstanding and 875,000 shares
available for grant under the 2007 Plan.





Upon
approval of the 2007 Plan, our 1997 Plan and our 1998 Plan were terminated. All
outstanding options under our 1997 and 1998 Plans will remain in effect, but no
additional options may be granted.





The
following table sets forth the stock option transaction for the year ended
December 31, 2007, as well as the average price and contractual life information
about options outstanding and exercisable at December 31, 2007:


18
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS





Number
      of shares
            
            
            Weighted
      average exercise price
            
            
            Remaining
      contractual life in years
            
            
            Aggregate
      intrinsic valueOutstanding
      at December 31, 2006
            
            
            220,000
            
            
            $
            0.75
            
            
            
            1.4
            
            
            $
            –Granted
            
            
            1,125,000
            
            
            
            0.04
            
            
            
            9.83Exercised
            
            
            –Cancelled/forfeited
            
            
            –Outstanding
      at December 31, 2007
            
            
            1,345,000
            
            
            
            0.15
            
            
            
            8.53
            
            
            $
            –Options
      vested or expected to vest at December 31, 2007 (1)
            
            
            1,007,500
            
            
            
            0.19
            
            
            
            7.92
            
            
            $
            –Options
      exercisable at December 31, 2007
            
            
            220,000
            
            
            $
            0.75
            
            
            
            .93
            
            
            $
            –





(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.







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 7,079,155 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 30,339,236 shares of our Common Stock. The resulting
per share purchase price was $.0197764 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  19
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




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 8,037,336 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 564,236 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 $0.038 for a
total of $21,250.





On May
17, 2007, the Company issued 500,000 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 $0.03 for a total of $15,000.





14.
              Convertible
      Preferred Stock





Until
November 30, 2006, CapitalBank acted as investment agent and held shares of our
capital stock in its name on behalf of a number of investors who purchased
shares of our Preferred Stock in a series of transactions between 1996 and 1998.
Holders of our Preferred Stock were entitled to, among other things, quarterly
interest payments based on the value of the Preferred Stock as determined
between the Company and the initial holders of the Preferred
Stock.  Such mandatory interest payments were payable in cash or in
shares of our common Stock. As the first shares of our Preferred Stock were
issued in 1996, and as a result of the Company’s poor operating performance,
which resulted in, among other things, limited cash assets, we issued a
substantial amount of shares of our Common Stock to CapitalBank as mandatory
interest payments.





On
November 30, 2006, CapitalBank held 22,301,900 shares of Common Stock, which
primarily consisted of shares of our Common Stock issued as interest payments
due through March 31, 2006. This amount excluded an additional 8,037,336 shares
of Common Stock that the Company became obligated to issue as interest payments
due for the period beginning April 1, 2006 and ending November 30,
2006.





During
November 2006, AST entered into an agreement with CapitalBank to acquire the
CapitalBank Shares for $750,000. On November 29, 2006, we entered into a written
agreement with AST to act as agent for certain investors to purchase the Common
Stock held by AST in exchange for $250,000. We also purchased the Preferred
Stock held by AST in exchange for the transfer of all the assets and liabilities
of our audit business. Upon receiving the Preferred Stock, our Board of
Directors voted in favor of retiring the stock.





Interest:





The
Company did not incur any interest in the year ended December 31, 2007 due to
the purchase and retirement of the Preferred Stock on November 30, 2006. Until
such time, the Series B convertible preferred shareholders were entitled to
receive interest equal to 8% per annum. Series C and Series D convertible
preferred shareholders were entitled to receive interest equal to 6% per
annum.





During
the year ended December 31, 2006, the Company incurred interest in the amount of
$244,750 for Series B, Series C, and Series D convertible preferred stock, for
which the Company recorded a


20
 NATIONAL
DATACOMPUTER, INC.
 NOTES
TO FINANCIAL STATEMENTS




charge to
accumulated deficit. During 2006, we issued 4,054,185 shares of common stock in
satisfaction of accrued interest for the last three quarter of 2004 and the
first three quarters of 2005.





As of
December 31, 2006 the Company owed $311,500 or 8,037,336 shares of Common Stock
in satisfaction of accrued interest for the period beginning October 1, 2005 and
ending November 29, 2006. These shares were issued March 30, 2007.





15.
              Commitments





The
Company leases its office facilities under an operating lease expiring September
30, 2008. 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 $153,996 and $140,343 for the years ended December 31, 2007
and 2006, 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, 2007
are as follows:




Year
      ending
              December 31,
            
            
            Operating
            
            
            Capital2008
            
            
            $
            124,740
            
            
            $
            26,1102009
            
            
            
            –
            
            
            
            24,0272010
            
            
            
            –
            
            
            
            7,038Total
      minimum lease payments
            
            
            
            $
            124,740
            
            
            
            57,175Less:
      amount representing interest
            
            
            
            
            
            
            
            
            10,402Present
      value of minimum lease payments
            
            
            
            
            
            
            
            
            46,773Less:
      Current obligations
            
            
            
            
            
            
            
            
            19,093Obligations
      under capital leases, net of current portion
            
            
            
            
            
            
            
            $
            27,680








16.
              Concentration
      of Credit Risk





The
Company sells its products to customers principally in the United States of
America. During 2007, four customers accounted for approximately 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
51% and 58% of total accounts receivable at December 31, 2007 and 2006,
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 revenues2007
            
            2006USA
            80%
            
            90%Japan
            –%
            
            1%Europe
            20%
            
            9%Total
            100%
            
            100%








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