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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

 (Mark One)

     [X]      ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934
              For the fiscal year ended December 31, 2005

     [_]      TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of THE
              SECURITIES EXCHANGE ACT OF 1934
              For the transition period from _________ to _________

                           NATIONAL DATACOMPUTER, INC.
                           ---------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

             DELAWARE                                         04-2942832
  (STATE OR OTHER JURISDICTION                              (IRS EMPLOYER
OF 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
              EXCHANGE ACT: NONE SECURITIES REGISTERED PURSUANT TO
                         SECTION 12(G) OF THE EXCHANGE ACT:

                     COMMON STOCK, $.08 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. |_|

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 |_|

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. |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|

The registrant had revenues of approximately $2.7 million during the fiscal year
ended December 31, 2005. As of May 1, 2006, 22,586,681 shares of the
registrant's common stock, $0.08 par value per share, were outstanding and the
aggregate market value of the common stock held by non-affiliates was
approximately $1,181,402 based on the closing price of $0.05 per share as
reported by the OTC Bulletin Board.

Transitional Small Business Disclosure Format:  Yes |_| No |X|
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                                TABLE OF CONTENTS


PART I                                                                      PAGE

         Item 1.   Description of Business                                    2
         Item 1A.  Risk Factors                                               8
         Item 2.   Description of Property                                   14
         Item 3.   Legal Proceedings                                         14
         Item 4.   Submission of Matters to a Vote of Security Holders       14

PART II

         Item 5.   Market for Common Equity, Related
                   Stockholder Matters and Small Business Issuer
                   Purchases of Equity Securities                            15
         Item 6.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       16
         Item 7.   Financial Statements                                      23
         Item 8.   Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure                       23
         Item 8A.  Controls and Procedures                                   23
         Item 8B.  Other Information                                         24

PART III

         Item 9.   Directors, Executive Officers, Promoters and
                   Control Persons; Compliance With Section 16(a)
                   of the Exchange Act                                       24
         Item 10.  Executive Compensation                                    28
         Item 11.  Security Ownership of Certain Beneficial Owners and
                   Management and Related Stockholder Matters                30
         Item 12.  Certain Relationships and Related Transactions            32
         Item 13.  Exhibits                                                  32
         Item 14.  Principal Accountant Fees and Services                    35
         Item 15.  Signatures                                                37


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                                     PART I

ITEM 1.      DESCRIPTION OF BUSINESS.

OVERVIEW

      National Datacomputer, Inc. (the "Company", "we", "us" or "our") is
providing solutions through the use of mobile information systems in the
distribution and inventory control market segment within the product supply
chain. We design, manufacture, 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, hand-held computers,
related peripherals, and accessories, as well as associated education and
support services for our hardware and software products. We were organized as a
Delaware corporation in 1986 and began active operations in 1987 following our
merger with an established computer systems engineering business. Since that
time we have delivered hardware and software solutions to the distribution and
inventory audit markets we have targeted.

      Although a challenging year in many respects, we have had some very
positive developments, such as an internationally recognized company in the food
services industry selecting one of our products, RouteRider LE, for route
accounting deployment throughout the United States and Europe. The handheld
solution will interface with the J.D. Edwards system and is currently underway
with a projected initial rollout in the second quarter of 2006. Another company,
Accurate Inventory & Calculating Service, Inc. ("AICS"), has agreed to
standardize on our inventory equipment. Our handheld computer, the DC5W, is a
wireless secure technology that will assist in improving productivity, hopefully
with results that will translate directly to AICS's bottom line. Further, AICS
has agreed to upgrade all of their existing non wireless DC5 units to this new
wireless technology. Along with our handheld computer, NDI-W.I.N. (Wireless
Inventory Network) software and base stations will be deployed on many existing
and future accounts.

      Our goal continues to be the leading supplier in the route accounting
system and inventory services markets and in selected other market sectors which
we may identify in the future. The key elements of this strategy include: (i)
performing effective market research to assess the key essential elements of
each sector; (ii) listening to our customers and prospects and then designing
and building solutions that resolve inventory and supply chain product problems;
and (iii) continuously updating hardware and software solutions to remain
current with customers' needs as well as existing technology.

OUR PRODUCTS

      We design, manufacture, service, and distribute rugged, programmable
hand-held computers, data collection devices, printers and associated
accessories. We are also a leading implementer of software solutions, such as
our Microsoft(TM) DOS(R)-based RouteRider product and the Microsoft(TM) Pocket
PC(R)-based RouteRider LE product, for people who need portable solutions in the
field rather than at a desk. We also provide additional software solutions
specific to the inventory service market.

      OUR HARDWARE PRODUCTS

      Our hand-held Datacomputer(R) ("Datacomputer") computers include a
microprocessor, keyboard, LCD displays, and full size alphabetic and numeric
character sets. Our Datacomputers are designed to be highly reliable, tolerant
to human error, and easy to use. They are shock and splash resistant, and
operate over a wide temperature range.

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      Application programs for our Datacomputers are written on conventional
desktop computers with commonly used programming languages and then executed on
the Datacomputer or other supported hand-held devices. Application programs and
data are stored in the Datacomputer's random access memory and can be readily
changed by communicating revisions or new programs to the Datacomputer through
the communications setup we provide. The Datacomputer can receive data from
bar-code readers, other computers (including other Datacomputers), over
telephone lines through a modem, and through the use of wireless technology. Our
Datacomputer product line includes various models of the Datacomputer, bar-code
readers, rugged printers, communication devices, carrying cases, cables, and
add-on memory boards.

      1. DATACOMPUTER MODEL DC5(TM)

      Launched in 2001, our Datacomputer Model DC5(TM) (the "DC5") is designed
as a rugged, Microsoft(TM) Windows(R) CE-based mobile Datacomputer with optional
radio frequency (RF) connectivity to provide fast, real-time, wireless
transmission of collected data to a host computer, a process that can greatly
reduce the cost of inventory data collection and management.

      We believe that the DC5 is an ideal inventory management solution for
inventory service companies where having employees on the clock uploading
collected data is an expensive, time-consuming task. An inventory service
company is an organization that contracts with businesses that maintain large
inventories, such as department or retail stores, to perform periodic physical
inventories. As mentioned above, AICS agreed to standardize their equipment with
our handheld computer, the DC5W. The DC5W is a wireless secure technology. AICS
has also agreed to upgrade all of their existing non wireless DC5 units to this
new wireless technology.

      The DC5 is designed to speed the inventory taking process by freeing
employees from manually uploading information. Therefore, employees count
continuously, increasing business productivity and cost effectiveness. It also
allows inventory service companies to streamline their business processes with
access to real-time data and real-time Stock Keeping Unit ("SKU") inventory
information.

      The DC5 can also be used as an application software development platform
to allow value added resellers and end-user customers to develop applications to
meet specific customer requirements. Approximately 32% of our 2005 total revenue
was attributed to sales of the DC5, down from 39% in 2004.

      2. DATACOMPUTER MODEL DC4(TM)

      Our Datacomputer Model DC4(TM) (the "DC4"), introduced in late 1997, is
designed for use by the route service market. The DC4 is an advanced version of
our now discontinued model DC3X in that it employs a faster processor and a
faster internal modem. Besides those enhancements, the DC4 also incorporates two
significant features not available in the DC3X, namely, a touch-screen for
signature capture capability and optical communication capability.

      We offer the DC4 usually with our RouteRider(R) software designed
specially for the DC4 Datacomputers. These solutions are typically called
Pre-Sales System ("PSS") and Driver Sales System ("DSS"). Hybrids of these two
systems have also become standard features, so that one set of software can
easily use PSS and DSS functionality without the need for two versions or two
computers. Typically the PSS includes a Datacomputer, software and various
peripherals for use by customers who sell their

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products on routes and book the sales orders through dedicated sales forces. The
DSS is used by customers who sell and invoice their products through delivery
drivers and includes a Datacomputer, a portable or truck-mounted printer,
peripherals and software.

      The PSS and DSS versions, along with the hybrid versions, allow the
salesman or delivery person to access all of the distributor's information on
the customer's account, as well as to input the customer's next delivery order.

      Approximately 4% of our 2005 total revenue was attributed to sales of the
DC4, up from 3% in 2004.

      3. ICAL MODEL 100R(TM)

      Our ICAL Model 100R(TM) (the "ICAL 100R") is designed for taking inventory
for financial and shrinkage control purposes. The ICAL 100R allows a user to
divide a store's inventory into a maximum of 128 separate departments and keep a
running total in each department. We have sold the ICAL 100R to the inventory
audit market for the past 15 years.

      The primary customers for the ICAL 100R are inventory service companies
that take inventory for retailers and other institutions on a contract basis,
and retailers such as convenience store chains or others selling large
quantities of relatively low priced items.

      Approximately 3% of our 2005 total revenue was attributed to the sale of
the ICAL 100R, down from 4% in 2004. Revenues generated by the ICAL 100R are
almost exclusively from customers who wish to continue to use their installed
base of ICAL devices. We intend to continue supporting the ICAL product line to
protect our customers' investment in this technology.

         OUR TAILORED SOFTWARE SOLUTIONS

      1. ROUTERIDER(R) LE

      On June 1, 2004, we announced a distribution agreement with Micronet LTD,
giving us rights to market, sell and support a new mobile accounting software
product throughout the United States, Canada and Mexico. The agreement 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(R) 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. Mentioned above,
an internationally recognized company in the food services industry, selected
RouteRider LE for deployment throughout the United States and Europe. The
handheld solution will interface with the J.D. Edwards system and is currently
underway with a projected initial rollout in the second quarter of 2006.

      We believe that RouteRider LE utilizes state of the art technology and 18
years of experience 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.

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      RouteRider LE runs on standard Microsoft(TM) Windows(R) operating systems.
RouteRider LE software includes a communications server that mediates between
the back office system and the PDAs. The server implements a unique development
that greatly enhances 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.

      2. ROUTERIDER(R)

      Our Datacomputers can be equipped with our Microsoft(TM) DOS-based version
of RouteRider(R) software, which is designed to be a powerful but easy-to-use
route service system that can be customized for customers based on the way 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 RouteRider Datacomputer to a
communications server either directly or through NDINet(TM), our proprietary
network software, which unattended, can receive information from multiple
RouteRider Datacomputers 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 RouteRider Datacomputer
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 RouteRider
Datacomputer 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.

      3. W.I.N.

      Our Wireless Inventory Network ("W.I.N.") software product is a Windows(R)
application designed for the inventory service market to provide faster and more
efficient inventory audits. W.I.N. is designed to deliver wireless connectivity
through a radio frequency carrier of 2.4 GHZ over line-of-sight distances of up
to 1,000 feet. Using our DC5 together with a PC base station allows the user to
transmit each inventory record in real-time from up to 62 simultaneous multiple
remote hand-helds. W.I.N. also delivers SKU scanning capability to allow the
user control of their inventory down to an individual item level.

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      4. WINTAKES

      Our Windows Inventory Taking System ("WINTAKES") software product is a
Windows(R) application designed for the inventory service market. It runs on the
DC5 and on a personal computer server, and is capable of generating over 45
specialized reports. WINTAKES gives the ability to import and edit the
customer's item master file, perform a physical SKU or financial inventory,
export the data into the customer's format, and generate specialized reports. It
was designed to provide the most flexible and highest quality inventory solution
for service companies, retailers, distributors, or anyone requiring a physical
or financial inventory.

      5. ENHANCED FINANCIAL AUDIT

      Our Enhanced Financial Audit Software ("Enhanced FinAud") product was
developed in 2002 to run on the DC5.

      For retailers and inventory service companies, Enhanced FinAud allows for
convenient entry of financial audit data with full Audit Trail Reporting,
Inventory Recap Reporting, and Department Recount for inventory reconciliation.
Four standard reports are available from the stand-alone DC5 to be printed on a
user-supplied printer. Data can be exported in fixed format ASCII characters,
which enables users to upload to their laptops the totals collected from
financial inventory audits, and then create their own reports.

      The ability to consolidate files from DC2.5s and DC5s onto a single
datacomputer enables users to print stand-alone summary reports or send data to
a PC. This feature allows users to combine NDI-manufactured equipment in one
inventory.

      Enhanced FinAud also provides a utility called Master File Maker through
which users can create on their PC, and download to the DC5, a Master File that
allows them to define the unique configuration of each inventory site and store
that configuration for future use.

OUR MARKETS

      We currently focus on two markets for sales of our Datacomputers and
software solutions:

      THE ROUTE ACCOUNTING SYSTEM MARKET. Route accounting involves concurrent
order taking, product delivery, signature capture, inventory tracking, and asset
control. Salespeople enter customer orders in our Datacomputers 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
Datacomputer is transferred to the host information system and instructional and
control information for the next day's delivery routes is transferred back to
the Datacomputer.

      THE INVENTORY SERVICES MARKET. This market has requirements for products
with smaller displays and larger keyboards, both of which run counter to the
modern trends of hand-held computers providing larger displays and smaller
keyboards. These markets demand intensive numerical input and large memory
storage. We offer hardware products that meet these needs, together with
financial audit software, and real-time wireless software that aids in the
collection of inventory data.

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MARKETING AND DISTRIBUTION

      Recognizing the need to focus our marketing resources, we have targeted
our business strategy for Datacomputers and 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 hand-held
computers has been established in those sectors; (ii) customers have realized a
substantial return on their investment in hand-held computers; and (iii) we
enjoy a competitive advantage in this market due to our software and related
services. We continue to believe that we have gained and maintain the leading
position in the office coffee service market, and are penetrating the beverage
distribution, bakery, snacks, and dairy markets.

      The DC5, both wireless and non-wireless, is sold to existing and new
inventory service customers as well as the Value Added Reseller market as an
application software development platform and/or as an inventory data collection
solution using our application software. As a Windows CE-based solution, the DC5
provides a wide array of communication functions, from wireless, to IrDA and
Ethernet 10 BaseT. Support for Bluetooth wireless is also included. Due to the
high-speed keyboard and extremely rugged design, we believe the DC5 is highly
suited to data collection in a wide range of environments.

      The ICAL 100R is sold principally to repeat inventory service customers
who already have a sizable investment in their use and applications for ICAL
products. We devote relatively few resources to generate additional sales of
ICAL units above those demanded by our existing customers.

      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' hand-helds.

      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 47% of our 2005 total revenue was attributed to service and
support sales.

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      KEY CUSTOMERS

      During 2005, one customer who has been one of our top customers since 1992
accounted for approximately 13% of our total revenues. Additionally, in 2005 our
top six customers collectively accounted for 48% of our total revenues. The
majority of our customers place orders with us on a "as needed basis"; however
there are times when a customer will place an order for delivery over a twelve
month period.

      SOURCES OF SUPPLY

      We maintain raw material inventories and have close working relationships
with our suppliers in order to ensure timely and reliable delivery of our raw
materials. However, prolonged supply shortages would materially and adversely
affect our manufacturing operations, business and financial performance.

      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 Eleven Technology, Apacheta Corporation,
BelTech Systems and Global Beverage Group, all of which have greater financial,
marketing and technical resources than we do. In addition, larger corporations
could enter the route sales and service segment of the hand-held computer
market. We compete in the hand-held computer market on the basis of product
features, software, quality and service.

      We enjoy a leadership position in the inventory service market and have
two known competitors, Inventory Science Systems Corporation ("ISS") and Palm
Quest. While ISS has been in business since 1996, we have not experienced any
negative impact on our business and see limited acceptance of their product in
the market. We compete in the inventory service market on the basis of product
features, software, quality and service.

EMPLOYEES

      As of December 31, 2005, we had 24 full-time employees and one
subcontractor. Of these employees and subcontractor, four were engaged in sales
and marketing, nine in service and customer support, three in hardware and
software development, four in manufacturing and five in administration and
finance. Our employees are not represented by a labor union. We believe that our
relationship with our employees is good.

ITEM 1A. RISK FACTORS.

                          RISKS RELATED TO OUR BUSINESS

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

      We will need financing to continue our operations, generate revenue, 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. If we
are unable to achieve and sustain profitability, the Company's share price would
likely decline.

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WE WILL NEED TO RAISE ADDITIONAL CAPITAL OR SELL ASSETS 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. In order to continue to fund the
development of our business, we will need additional capital, either through the
sale of securities or through the sale of assets. We cannot be certain that any
such financing or asset sales 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. If we sell assets that are currently used in the
conduct of our business, those assets would no longer be available to us as a
potential source of revenue generation. If we cannot raise sufficient additional
capital through means available to us, it would adversely affect our ability to
achieve our business objectives.

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

      Approximately 47% of our 2005 total revenue was attributed to service and
support sales. During 2005, one customer who has been one of our top customers
since 1992 accounted for approximately 13% of our total revenues. Additionally,
in 2005 our top six customers collectively accounted for 48% 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:

     o identify emerging technological trends in our market;

     o identify changing customer requirements;

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

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

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

     o 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 INVENTORY SOLUTIONS INDUSTRIES COULD
PREVENT US FROM ACHIEVING PROFITABILITY.

     The computerized inventory 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
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

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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:

     o availability and pricing from our suppliers;

     o changes in the demand for our products by customers;

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

     o rate and success of new customer development;

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

     o success in attracting, retaining and motivating qualified personnel;

     o changes in general economic conditions; and

     o 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.

                          RISKS RELATED TO OUR COMPANY

IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL THERE IS SUBSTANTIAL DOUBT ABOUT
THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN.

     The auditors' reports on our financial statements for the years ended
December 31, 2005 and 2004, contain explanatory paragraph about our ability to
continue as a going concern. The Company has incurred an accumulated deficit of
approximately $19.2 million through December 31, 2005, recorded a net loss of
approximately $768,000 and $494,000 during 2005 and 2004 and used approximately
$106,000 and $354,000 of cash in operations during 2005 and 2004. As of December
31, 2005, the Company had approximately $126,000 in cash and a negative working
capital of $729,070. In the event the Company's operations are not profitable or
do not generate sufficient cash to fund the business, or if the Company fails to
obtain additional financing, if required, management will have to substantially
reduce its level of operations. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern.

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

                                       10
<PAGE>

of operations. In addition, the loss of the management and technical expertise
of our senior management could seriously harm us.

WE DO NOT HAVE PRINTED CIRCUIT BOARD ASSEMBLY CAPABILITIES, AND AS A RESULT, WE
WILL RELY ON OUTSIDE CONTRACT ASSEMBLER TO PRODUCE OUR PRINTED CIRCUIT BOARDS.

     We do not have printed circuit board solder and assembly capabilities, nor
do we have plans to establish any such capabilities. Accordingly, we utilize
outside contract assembly houses to assemble our printed circuit boards. There
are significant risks associated with our reliance on these assembler that can
adversely affect our business, operating results and financial condition. These
risks include:

     o the ability to maintain manufacturing relationships, the failure of which
       could result in significant delays in product introduction due to the
       time necessary to establish new relationships;

     o delays in production or shortages in product delivery as a result of
       production problems at outside contractors;

     o the loss of manufacturing priority that may limit our ability to obtain
       products on schedule;

     o limited control over product quality that could result in product returns
       and the loss of customers;

     o inability to control manufacturing yield that could increase production
       costs, thereby reducing sales potential and operating margins; and

     o lack of access or control over new process and manufacturing technologies
       to maintain product competitiveness in the market.

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.

                   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.

                                       11
<PAGE>

     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 THAT 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

CAPITAL BANK GRAWE GRUPPE AG AND ITS CUSTOMERS OWN SUFFICIENT SHARES OF OUR
COMMON STOCK AND VOTING EQUIVALENTS TO SINGULARLY DETERMINE THE RESULTS OF ANY
STOCKHOLDER VOTE AND CONTROL OUR BOARD OF DIRECTORS.

      As of May 1, 2006, Capital Bank Grawe Group AG and its customers held
17,959,741 shares of our common stock and all of our 4,150 shares of preferred
stock. As discussed further under Item 11 of this Annual Report on Form 10-KSB,
these holdings by Capital Bank and its customers constitute approximately 97% of
our common stock on an as converted basis as of May 1, 2006. Accordingly,
Capital Bank and its customers can 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. In addition, since
we currently have only 30,000,000 shares of common stock authorized for
issuance, we would have to obtain stockholder approval before issuing shares of
common stock upon conversion of the preferred stock.

IF CAPITAL BANK AND ITS CUSTOMERS WERE TO CONVERT THEIR PREFERRED STOCK THEY
WOULD CURRENTLY CONTROL APPROXIMATELY 97% OF OUR COMMON STOCK AND WE WOULD BE
FORCED TO SEEK SHAREHOLODER APPROVAL FOR AN INCREASE IN OUR CAPITALIZATION.

      The Preferred Stock was convertible into approximately 130,500,000 shares
of our common stock on May 1, 2006, on the basis of an average closing bid price
for our common stock of approximately $0.053 per share in the five trading days
prior to that date. We currently have 30,000,000 shares of common stock
authorized for issuance; therefore we would have to obtain stockholder approval
before issuing the shares upon conversion. This percentage could increase if the
market for our shares continues to fall.

                                       12
<PAGE>

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 RESELL THEIR SHARES.

      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 like Amex. 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.

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

                                       13
<PAGE>

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:

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

     o investor perceptions and expectations regarding our or our competitors'
       products;

     o acquisitions or strategic alliances by us or our competitors; and

     o 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. We
received a notice from the OTC Bulletin Board dated April 21, 2006 concerning
our failure to timely file our Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2005. OTC Bulletin Board advised us that our common stock
would be removed from the OTC Bulletin Board if we failed to file our annual
report by May 19, 2006. In addition, under the rules of the OTC Bulletin Board,
if we fail to timely file our periodic reports with the SEC two more times
within 24 months, our common stock will be ineligible for quotation on the OTC
Bulletin Board for one year. 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 2.      DESCRIPTION OF PROPERTY.

      We maintain our principal offices and manufacturing operations in a leased
14,509 square foot facility in Billerica, Massachusetts. Our lease expires on
September 30, 2008. The annual base rent for our leased facilities is
approximately $98,000. 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.

      No matters were submitted to a vote of security holders during the quarter
ended December 31, 2005.

                                       14
<PAGE>

                                     PART II

ITEM 5.      MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
             BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

      Our common stock trades on the OTC Bulletin Board ("OTC") under the symbol
IDCP. On May 1, 2006, the last sale price for our common stock as reported by
OTC was $0.05 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.

                                                              HIGH      LOW
                                                              ----      ---
                                             2004

          First Fiscal Quarter                               $ 0.29   $ 0.15
          Second Fiscal Quarter                                0.26     0.12
          Third Fiscal Quarter                                 0.12     0.08
          Fourth Fiscal Quarter                                0.12     0.08

                                             2005

          First Fiscal Quarter                               $ 0.12   $ 0.10
          Second Fiscal Quarter                                0.10     0.09
          Third Fiscal Quarter                                 0.26     0.10
          Fourth Fiscal Quarter                                0.20     0.08

      As of May 1, 2006, there were approximately 2,289 stockholders of record
of our common stock.

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. Our outstanding preferred stock
requires that holders of preferred stock be entitled to receive dividends prior
to the payment of any dividends on our common stock.

UNREGISTERED SALES OF SECURITIES

      During the year ended December 31, 2005, in consideration of services
rendered and in lieu of salary increases, we issued an aggregate of 452,500
unregistered shares of our common stock valued at $.08 per share on date of
grant to the following:

                                       15
<PAGE>

                   NAME                     NUMBER OF SHARES       DATED
             William R. Smart                    93,750       December 29, 2005
             John H. MacKinnon                   93,750       December 29, 2005
             Estate of Kenneth B Brater          93,750       December 29, 2005
             Estate of Gerald S. Eilberg         96,250       December 29, 2005
             Bruna A. Bucacci                    75,000       December 29, 2005

      The offerings were conducted as private placements pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder.

ISSUER REPURCHASES OF EQUITY SECURITIES

      During the year ended December 31, 2005, we did not repurchase any shares
of our common stock.

ITEM 6.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS.

OVERVIEW

    We are a recognized leader in technology in two markets, Inventory Services
and Direct Store Delivery ("DSD") or Route Accounting. We have utilized our
expertise in these markets since our inception.

    Today we provide hardware and software solutions, both batch and wireless,
to the Inventory Services market. This market has a few large companies and many
smaller ones. We plan to continue providing our products, services and software
to this market primarily in North America but also to our Asian clients. This
market is characterized by the need to verify inventory accurately and quickly.
Future opportunities exist in our ability to work with the larger players in
this market. Being successful in this endeavor will be significantly beneficial
to us.

    In the DSD market we have accumulated over 18 years of experience by
developing an installed base of well over a hundred clients in the 1990's. This
experience or knowledge will be the driving force in our growth for this sector.
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.
Since that time we have worked with Micronet to modify this software so that it
conforms to the North American market. We plan to increase our sales team in
order to drive revenues. In the 1990's we grew the company based on our success
in this market. The increased revenues will give us the ability to 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 DSD software. By doing these two things we will be able to:

     o Expand the market into non DSD sales

     o Increase our margins

     o Increase our competitive capabilities

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

                                       16
<PAGE>

      In order to improve our cash position, we have taken a number of steps to
reduce and control our expenses. During the fourth quarter of 2005 and the first
quarter of 2006 we initiated cost reduction programs such as reducing our
manpower by approximately 21%, decreasing our facilities by approximately 25%
and diminishing our health insurance premiums by increasing employees'
contributions. These programs will be instrumental in reducing our annual
operating expenses by approximately $650,000. 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 2006.

     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. 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-KSB.

     REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE. We recognize revenue when
there is persuasive evidence of an arrangement, title and risk of loss have
passed, delivery has occurred or the services have been rendered, the sales
price is fixed or determinable and collection of the related receivable is
reasonably assured. Title and risk of loss passes to the customer at the time of
delivery of the product to a common carrier. At the time of the transaction, we
assess whether the sales price is fixed or determinable based upon the payment
terms of the arrangement. If a significant portion of the sales price is not due
with normal payment terms, the sales price may not be deemed fixed and revenue
would be recognized as the amounts become due.

     Our product revenue is recognized upon delivery provided that customer
acceptance criteria can be demonstrated prior to shipment. Where the criteria
cannot be demonstrated prior to shipment, or in the case of new products,
revenue is deferred until acceptance has been received. We recognize revenue for
maintenance services ratably over the contract term, which is generally one year
or less.

     We assess collectibility based on a number of factors, including past
transaction and collection history with a customer. If we determine that
collectibility of the sales price is not reasonably assured, revenue is deferred
until such time as collection becomes reasonably assured, which is generally
upon receipt of payment from the customer. Our normal payment terms are 30 days
from invoice date. We maintain allowances for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments.
We base our estimates on our historical collection experience, current trends,
credit policy and percentage of our accounts receivable by aging category. In
determining these estimates, we look at historical write-offs of our receivables
and review each customer's account to identify any specific collection issue.
While such credit losses have historically been within our

                                       17
<PAGE>

expectations and the allowances we established, we cannot guarantee that we will
continue to experience the same credit loss rates that we have in the past. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payment, additional allowances may be
required. Our failure to accurately estimate the losses for doubtful accounts
and ensure that payments are received on a timely basis could have a material
adverse effect on our business, financial condition and results of operations.
At December 31, 2005 and 2004, an allowance of $1,296 was provided for doubtful
accounts.

     INVENTORIES. Inventories, which include materials, labor and manufacturing
overhead, are stated at the lower of cost (first-in, first-out basis) or net
realizable value. We record a provision for excess and obsolete inventory when
impairment is identified through our review process. Obsolete inventory and
inventory in excess of estimated usage over the next 12 months is written down
to its estimated net realizable value, if less than cost. The excess and
obsolescence evaluation is based upon assumptions about future demand, product
mix and possible alternative uses. In 2005, we recorded an inventory provision
for excess and obsolete inventory of approximately $12,000, which has been
reflected in cost of revenues. If actual demand, product mix or possible
alternative uses are less favorable than those projected by management,
additional inventory write-downs may be required. At December 31, 2005 and 2004,
an allowance of $585,728 and $599,755, respectively, was provided for excess and
obsolete inventory.

     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.

     No software costs were capitalized or written down during 2005.
Amortization of capitalized software costs was $61,499 and $117,156 for the
years ended December 31, 2005 and 2004, respectively.

     ACCOUNTING FOR INCOME TAXES. We record income taxes using the liability
method. Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases and operating loss and tax credit carryforwards. Our financial
statements contain certain deferred tax assets that have arisen primarily as a
result of our history of operating losses incurred, as well as other temporary
differences between book and tax accounting. SFAS No. 109, "Accounting for
Income Taxes," requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. Significant management
judgment is required in determining our provision for income taxes, our deferred
tax assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. We evaluate the weight of all available evidence to
determine whether it is more likely than not that some portion or all of the
deferred income tax assets will not be realized. As a result of operating losses
incurred through 2005 and uncertainty as to the extent and timing of
profitability in future periods, we maintain a full valuation allowance of
$3,386,000 as of December 31, 2005. In the event that we are able to determine
the realization of our deferred tax assets in the future, an adjustment to the
deferred tax assets would increase net income in the period such

                                       18
<PAGE>

determination was made. The amount of the deferred tax asset considered
realizable is based on significant estimates, and it is at least reasonably
possible that changes in these estimates in the near term could materially
affect our financial condition and results of operations. Our effective tax rate
may vary from period to period based on changes in estimated taxable income or
loss, future expansion into areas with varying country, state, and local income
tax rates, deductibility of certain costs and expenses by jurisdiction and as a
result of acquisitions.

RESULTS OF OPERATIONS

      The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein.

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

      REVENUE

      Our total revenue for the year ended December 31, 2005 decreased 18% to
$2,672,472 compared to $3,248,236 for the comparable prior year.

      Product revenues for the year ended December 31, 2005 decreased 27% to
$1,410,128 compared to $1,939,051 for the prior year. The decrease in revenue is
primarily attributable to a large roll-out of our inventory service products,
the DC5, during the year ended December 31, 2004. We continue to experience
growth in sales of our route service products running our original RouteRider
software; we have also begun shipments of a new generation software product,
RouteRider LE ("RRLE"). RRLE is a portable and highly parameterized Route
Accounting solution, which is designed to run on industry standard operating
systems (e.g. Microsoft's PocketPC 2002, PocketPC 2003 and soon WindowsMobile
2005), databases and utilizes cellular, Wi-Fi, and Bluetooth communications
protocols. We ended 2005 with a backlog for RRLE of approximately $700,000 which
will be shipped in the first half of 2006.

      Service revenues for the year ended December 31, 2005 decreased 4% to
$1,262,344 compared to $1,309,185 for the prior year. This decrease is a result
of fewer support service contracts for our route service products offset by
revenue recognized for training and support of our new RRLE software.

      Our gross profit as a percentage of total revenues was 44% for the year
ended December 31, 2005, an increase from 41% for the year ended December 31,
2004. The improvement in gross profit, despite the overall decrease in sales, is
due to lower occupancy cost of our manufacturing department since their
relocation to smaller facilities, lower cost of material and the reduction in
amortization expenses on internally developed software.

      OPERATING EXPENSES

      Total operating expenses of $1,941,987 increased 7% for the year ended
December 31, 2005 from $1,821,691 for the comparable prior year.

Operating expenses consist of the following for the year ended:

                                       19
<PAGE>

                                2005         2004      VARIANCE IN   VARIANCE IN
                                                           $'S           %

Research and development     $  362,987   $  352,654   $   10,333        3%
Selling and marketing           529,790      489,055       40,735        8%
General and administrative    1,049,210      979,982       69,228        7%

             TOTAL           $1,941,987   $1,821,691   $  120,296        7%

      Research and development expenses increased $10,333 or 3% for the year
ended December 31, 2005 as compared to the prior year. Had we not utilized
research personnel and resources to build capitalized automated test fixtures
for each of our inventory products totally approximately $75,000 in 2004, our
research and development expenses would have actually decreased by 15% for the
year ended December 31, 2005 due to the reductions in 2005 in the use of outside
subcontractors as a result of diminished spending on internally developed
product software.

      Selling and marketing expenses increased $40,735 or 8% for the year ended
December 31, 2005 as compared to the prior year. The increase is primarily due
to increased sales personnel related to the launching of RouteRider LE, our new
mobile route accounting solution.

      General and administrative expenses increased $69,228 or 7% for the year
ended December 31, 2005 as compared to the prior year. The increase is primarily
attributable to a reallocation of occupancy charge of approximately $50,000 to
general and administrative for under utilized leased space during the first nine
months of 2005, and an increase in directors' fees of approximately $23,000.

      LIQUIDITY AND CAPITAL RESOURCES

      We had a negative working capital of $729,070 as of December 31, 2005 as
compared to a negative working capital of $92,228 as of December 31, 2004.
During the year ended December 31, 2005, we used cash of $106,242 for operating
activities. Our principal operating cash requirements were to fund our loss from
operations of $767,634, along with an increase in other current assets of
$35,188 due to prepayment for raw material inventories and a decrease in
deferred revenues of $24,580 due to non-renewal of some of our customer annual
maintenance contracts. These were partially offset by an increase in accounts
payable and accrued expenses of $170,124 due to cash constraints, an increase in
customer deposits of $228,567, and a decrease in trade receivables of $141,546.

      During the year ended December 31, 2005, we used cash of $24,139 for
investing activities. The cash was used for the purchase of capital equipment
and capitalized software. As of December 31, 2005, we had no material
commitments for capital expenditures.

      During the year ended December 31, 2005, we used cash of $10,574 to make
payments on obligations under capital leases.

      We have an accumulated deficit of approximately $19,183,000 through
December 31, 2005. As a result of this accumulated 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

                                       20
<PAGE>

ability to continue as a going concern. The Company's plans to address the
situation are presented below. However, there are no assurances that these plans
will be successful or sufficient.

      In order to improve our cash position, we have taken a number of steps to
reduce and control our expenses. During the fourth quarter of 2005 and the first
quarter of 2006 we initiated cost reduction programs such as reducing our
manpower by approximately 21%, decreasing our facilities by approximately 25%
and diminishing our health insurance premiums by increasing employees'
contributions. These programs will be instrumental in reducing our annual
operating expenses by approximately $650,000. 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 2006.

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

      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 have
recommenced in March 2006. At December 31, 2005, the note payable balance was
$54,000.

COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

      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 taxes and other operating costs. Total rent expense under this
operating lease was $212,846 and $237,527 for the years ended December 31, 2005
and 2004, respectively. On September 2005 we reduced our facilities by about 25%
and renewed our lease for another three years.

      The Company also leases certain equipment under capital leases expiring at
various dates through 2009. The total cost of equipment recorded under these
capital leases was $248,589 at December 31, 2005 and 2004.

       Minimum future lease commitments under operating and capital leases at
December 31, 2005 are as follows:

                                                  OPERATING       CAPITAL
                                                  ---------       -------

          2006                                   $  151,803     $    4,998
          2007                                      163,593          4,998
          2008                                      124,740          4,998
          2009                                         --            2,915
                                                 ----------     ----------

          Total Minimum Lease Payments           $  440,136         17,909
                                                 ==========
          Less: amount representing interest                         4,915
                                                                ----------
          Present Value                                         $   12,994
                                                                ==========

                                       21
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment", which revised SFAS No. 123 and
superseded APB Opinion No.25, "Accounting for Stock Issued to Employees". SFAS
No. 123(R) requires that companies recognize compensation expense associated
with grants of stock options and other equity instruments to employees in the
financial statements, effective for the Company as of January 1, 2006.
Compensation cost will be measured based on the fair value of the instrument on
the grant date and will be recognized over the vesting period. This
pronouncement applies to all grants after the effective date and to the unvested
portion of stock options outstanding as of the effective date. SFAS No. 123(R)
eliminates the ability to account for such transactions using the intrinsic
method currently used by the Company. SFAS 123R is effective for the Company
beginning January 1, 2006 at which time the Company will adopt the modified
prospective transition method. The impact of this requirement on the Company's
financial statements is not expected to be material.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107") regarding the SEC's interpretation of SFAS 123R and the valuation of
share-based payments for public companies. In accordance with this guidance, the
Company will adopt SFAS 123R in the first quarter of fiscal 2006 with the
methods required by SAB 107.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs", an
amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
spoilage. In addition, SFAS 151 requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of SFAS 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company
does not expect adoption of SFAS 151 to have a material impact on its results of
operations or financial position.

      In June 2005, the FASB issued SFAS No.154 "Accounting Changes in Error
Corrections" (SFAS No. 154) which replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements - An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and error corrections.
It establishes retrospective application, to prior years' financial statements,
as the required method for reporting a change in accounting principle and the
reporting of an error unless it is not practical to do so. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 and is required to be adopted by the Company
in the first quarter of 2006.

          CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

         THE SECURITIES AND EXCHANGE COMMISSION ENCOURAGES COMPANIES TO DISCLOSE
FORWARD-LOOKING INFORMATION SO THAT INVESTORS CAN BETTER UNDERSTAND A COMPANY'S
FUTURE PROSPECTS AND MAKE INFORMED INVESTMENT DECISIONS. THIS ANNUAL REPORT ON
FORM 10-KSB CONTAINS SUCH "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS MAY BE MADE
DIRECTLY IN THIS ANNUAL REPORT, AND THEY MAY ALSO BE MADE A PART OF THIS ANNUAL
REPORT BY REFERENCE TO OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WHICH IS KNOWN AS "INCORPORATION BY REFERENCE."

         WORDS SUCH AS "MAY," "ANTICIPATE," "ESTIMATE," "EXPECTS," "PROJECTS,"
"INTENDS," "PLANS," "BELIEVES" AND WORDS AND TERMS OF SIMILAR SUBSTANCE USED IN
CONNECTION WITH ANY DISCUSSION OF FUTURE OPERATING OR FINANCIAL PERFORMANCE,
IDENTIFY FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS

                                       22
<PAGE>

ARE MANAGEMENT'S PRESENT EXPECTATIONS OF FUTURE EVENTS AND ARE SUBJECT TO A
NUMBER OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. THESE RISKS
AND UNCERTAINTIES INCLUDE, AMONG OTHER THINGS: OUR INABILITY TO FURTHER
IDENTIFY, DEVELOP AND ACHIEVE COMMERCIAL SUCCESS FOR NEW PRODUCTS AND
TECHNOLOGIES; THE POSSIBILITY OF DELAYS IN PRODUCT DEVELOPMENT, MANUFACTURING
AND SHIPMENT; THE LEVELS AND TIMING OF PAYMENTS BY OUR CUSTOMERS; THE
DEVELOPMENT OF COMPETING PRODUCTS; OUR ABILITY TO PROTECT OUR PROPRIETARY
TECHNOLOGIES; PATENT-INFRINGEMENT CLAIMS; AND RISKS OF NEW, CHANGING AND
COMPETITIVE TECHNOLOGIES AND REGULATIONS IN THE UNITED STATES AND
INTERNATIONALLY, AND OTHER FACTORS DISCUSSED UNDER THE HEADING "RISK FACTORS"
CONTAINED IN ITEM 1A OF THIS ANNUAL REPORT.

         IN LIGHT OF THESE ASSUMPTIONS, RISKS AND UNCERTAINTIES, THE RESULTS AND
EVENTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL
REPORT OR IN ANY DOCUMENT INCORPORATED BY REFERENCE MIGHT NOT OCCUR.
STOCKHOLDERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY OF THE DATE OF THIS ANNUAL REPORT OR THE DATE OF
THE DOCUMENT INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT. WE ARE NOT UNDER
ANY OBLIGATION, AND WE EXPRESSLY DISCLAIM ANY OBLIGATION, TO UPDATE OR ALTER ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE. ALL SUBSEQUENT FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO
THE COMPANY OR TO ANY PERSON ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS CONTAINED OR REFERRED TO IN THIS
SECTION.

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 8.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE.

      As reported on a Current Report on Form 8-K filed November 14, 2005, BDO
Seidman, LLP resigned on November 4, 2005, as the Company's independent
registered public accounting firm. On that same date, the Audit Committee of the
Company's Board of Directors engaged Carlin, Charron & Rosen, LLP to serve as
the independent registered public accounting firm to audit the Company's
financial statements as of and for the fiscal year ended December 31, 2005.
There have been no disagreements with our accountants on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to our accountants'
satisfaction, would have caused our accountants to make reference thereto in
their report on our financial statements..

ITEM 8A.     CONTROLS AND PROCEDURES.

      (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Annual Report on Form 10-KSB, have concluded that, based on such evaluation, our
disclosure controls and procedures were adequate and effective. In designing and
evaluating our disclosure controls and procedures, our management recognizes
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and our management necessarily is required to apply its judgment in evaluating
the cost-benefit relationship of possible controls and procedures.

                                       23
<PAGE>

      (b) CHANGES IN INTERNAL CONTROLS. There were no changes in our internal
control over financial reporting, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

ITEM 8B.     OTHER INFORMATION.

      During the year ended December 31, 2005, in consideration of services
rendered and in lieu of salary increases, we issued an aggregate of 452,500
unregistered shares of our common stock, valued at $.08 par value per share on
the date of grant, to our directors and officers.

      On March 7, 2006 William B. Berens was named President and Chief Executive
Officer upon the retirement of John P. Ward who will continue as the Chairman of
the Board of Directors

                                    PART III

ITEM 9.      DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
             COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

      Our Board of Directors was reduced from five to three members due to the
passing of two of our directors Gerald S. Eilberg and Kenneth B. Brater in
November 2005. We are currently in the process of recruiting new members to fill
the vacancies. 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 the Board of Directors.
The following table sets forth the year each of our current directors was
elected to the Board and the age, positions and offices currently held by each
director. For information about ownership of our voting securities by each
director, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT."

                                   YEAR
                                   FIRST BECAME
NAME                    AGE        DIRECTOR            POSITION
----                    ---        --------            --------

John P. Ward            78         1967                Chairman of the Board

William R. Smart        84         1989                Director

John H. MacKinnon       65         2004                Director

BUSINESS EXPERIENCE AND BACKGROUNDS OF THE DIRECTORS

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

      JOHN P. WARD has served on our Board of Directors since our formation and
on the Board of our predecessor in interest since 1967, and has served as our
Chairman since April 2001. He also served as President and Chief Executive
Officer from April 2001 until March 2006. From February 1996, through March
2001, Mr. Ward served as founder, director, and Chairman Emeritus of MIDAS
Vision Systems, Inc., a privately held company specializing in machine vision
systems for automatic optical inspections. Prior to MIDAS, Mr. Ward served for a
period of fifteen years in the capacity of electronics design engineer for the
Raytheon Company. Mr. Ward has 34 years of experience as an entrepreneur during
which he co-founded three high-tech companies, while managing all aspects of new
venture operations.

                                       24
<PAGE>

Mr. Ward holds a Bachelor of Science degree in Electrical Engineering from the
Massachusetts Institute of Technology and a Master of Science degree in
Electrical Engineering from Northeastern University.

      WILLIAM R. SMART has served as one of our directors since December 1989.
He spent 32 years with the General Electric Company where his responsibilities
included distribution and marketing management and general management as a
division vice president. He spent nine years with Honeywell, Inc. where he
served as vice president in charge of European operations and Senior Vice
President of Honeywell Information Systems, responsible for international
operations as well as for the corporate staff. Mr. Smart holds a Bachelor of
Science degree in Electrical Engineering from Princeton University. Mr. Smart is
a director of American Petroleum Company and Hollingsworth & Vose Company.

      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 John H. MacKinnon and William
R. Smart 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 two members,
John H. MacKinnon (Chairman), who joined the committee upon his election to the
Board on March 1, 2004, and William R. Smart. The members of the Audit Committee
satisfy 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. The Board has determined that Mr.
MacKinnon is an "audit committee financial expert," as the Securities and
Exchange Commission has defined that term in Item 401 of Regulation S-B.

      The functions of the Audit Committee include selecting, evaluating and
replacing, if needed, our independent certified public accountants; approving
all audit and non-audit services and fees related thereto; reviewing, in
consultation with our management and independent certified 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 not governed by an audit committee charter;
however the Audit Committee and the Board of Directors anticipate adopting an
audit committee charter during 2006.

      The Audit Committee has met with the Company's independent registered
public accountants, Carlin, Charron & Rosen, 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
twice in 2005.


                                       25
<PAGE>

         AUDIT COMMITTEE REPORT

      This Audit Committee Report reviews actions taken with respect to the
Company's financial statements for the year ended December 31, 2005.

      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. Carlin, Charron & Rosen,
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 2005, the Audit Committee took the following actions:

   o    Reviewed and discussed the audit plan, audit scope, identification of
        audit risks and the audited financial statements for the year ended
        December 31, 2005, with management and Carlin, Charron & Rosen, LLP;

   o    Discussed with Carlin, Charron & Rosen, LLP the matters required to be
        discussed by Statement on Auditing Standards No. 61 relating to the
        conduct of the audit; and

   o    Received written disclosures and the letter from Carlin, Charron &
        Rosen, LLP regarding its independence as required by Independence
        Standards Board Standard No. 1. The Audit Committee further discussed
        with Carlin, Charron & Rosen, 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 auditors.

   o    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, 2005
being included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005 to be filed with the Securities and Exchange Commission.

                                       26
<PAGE>



                                                             The Audit Committee
                                                     John H. MacKinnon, Chairman
                                                                William R. Smart

NOMINATING, COMPENSATION AND GOVERNANCE COMMITTEE

      The Nominating, Compensation and Governance Committee of the Board of
Directors consists of two members, John H. MacKinnon (Chairman) and William R.
Smart. 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-KSB. 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       POSITION
----                      ---       --------

William B. Berens         52        President and Chief Executive Officer

Bruna A. Bucacci          52        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.

      WILLIAM B. BERENS has served as our President and Chief Executive Officer
since March 2006. 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.

      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 firm,
Ms. Bucacci was Corporate Controller for Thermedics Detection,

                                       27
<PAGE>

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.

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 officers. The text of the code of ethics is filed as an exhibit to
our Annual Report on Form 10-KSB 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, 2005, except that an Initial Statement of
Beneficial Ownership of Securities on Form 3 for Bruna A. Bucacci, who became an
executive officer on November 18, 2005, was filed late; and Statement of Changes
of Beneficial Ownership of Securities on Form 4 for our officers John P. Ward,
William B. Berens and Bruna A. Bucacci and for our directors John H. MacKinnon
and Bill Smart for stock grants on December 29, 2005 were not filed.

ITEM 10.     EXECUTIVE COMPENSATION

EXECUTIVE OFFICERS' COMPENSATION

      The following table sets forth the compensation paid during the three
years ended December 31, 2005, to (i) our Chief Executive Officer and (ii) up to
three of our next most highly compensated executive officers who earned total
compensation in excess of $100,000 during the year ended December 31, 2005.

                                       28
<PAGE>

                           SUMMARY COMPENSATION TABLE
                               ANNUAL COMPENSATION
<TABLE><CAPTION>
                                                                                 LONG TERM COMPENSATION
                                                                                          AWARDS
                                                                                                  NO. OF
                                                                                RESTRICTED      SECURITIES
                                                                 OTHER ANNUAL      STOCK        UNDERLYING
                                               SALARY    BONUS   COMPENSATION     AWARDS       OPTIONS/SARS
                                               ------    -----   ------------     ------       ------------
     NAME AND PRINCIPAL POSITION      YEAR       ($)      ($)
<S>                                   <C>     <C>          <C>     <C>            <C>          <C>
John P. Ward (1)                      2005    $126,180     -          -
   President and CEO                  2004     155,468     -       16,458(2)
                                      2003     174,205     -       16,614(3)

William B. Berens (4)                 2005    $130,580     -
   Vice President of Sales            2004     105,468     -
                                      2003        -        -

Gerald S. Eilberg (1), (5)            2005    $104,150     -                     7,700(6)
Senior Vice President of              2004    $117,321     -
Finance  and Admin and CFO            2003     119,453     -
</TABLE>

(1)   Effective August 16, 2004, Mr. Ward and Mr. Eilberg agreed to defer 20% of
      their annual compensation because of the Company's cash position.

(2)   Includes $12,064 for a corporate apartment and the balance for
      reimbursement of travel expenses from Mr. Ward's home.

(3)   Includes $12,677 for a corporate apartment and the balance for
      reimbursement of travel expenses from Mr. Ward's home.

(4)   Mr. Berens joined us as our Vice President of Sales on March 1, 2004.

(5)   Mr. Eilberg, our former Senior Vice President of Finance and
      Administration passed away on November 18, 2005.

(6)   The stock award consists of 96,250 shares valued at $.08 per share on the
      date of grant, December 29, 2005. These shares are not subject to a right
      of repurchase by the Company.

                        OPTION GRANTS IN FISCAL YEAR 2005

         We did not grant any stock options to our executive officers or
directors during the year ended December 31, 2005.

                 AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2005
                        AND FISCAL YEAR-END OPTION VALUES

      The following table shows information regarding exercises of options to
purchase our common stock by each executive officer named in the Summary
Compensation Table during the fiscal year ended December 31, 2005. The table
also shows the aggregate value of options held by each executive officer named
in the Summary Compensation Table as of December 31, 2005.

                                       29
<PAGE>

<TABLE><CAPTION>
                                                                      NUMBER OF
                                                                     SECURITIES
                                                                     UNDERLYING         VALUE OF
                                                                     UNEXERCISED       UNEXERCISED
                                                                      OPTIONS/        IN-THE-MONEY
                                                                        SARS             OPTIONS
                                                                      AT FY-END         AT FY-END
                                    SHARES ACQUIRED      VALUE      EXERCISABLE/      EXERCISABLE/
                                      ON EXERCISE       REALIZED    UNEXERCISABLE     UNEXERCISABLE
                  NAME                    (#)             ($)            (#)             ($)(1)
                  ----                    ---             ---            ---             ------
<S>                                       <C>             <C>         <C>                 <C>
John P.Ward,                               0               $0         10,000/0             $0
  President and CEO

The estate of Gerald S. Eilberg            0               $0         200,000/0            $0
  Senior Vice President Finance
  & Admin. and CFO (2)

William B. Berens                          0               $0            0/0               $0
   Vice President of Sales
</TABLE>

(1)   In-the-Money options are those options for which the fair market value of
      the underlying shares of common stock is greater than the exercise price
      of the option. There were no unexercised in-the-money options at year end,
      based on a value of $0.08 per share, the closing bid price of our common
      stock on the OTC Bulletin Board on December 31, 2005, less the per share
      exercise price. Mr. Eilberg's estate had exercisable options to purchase
      200,000 shares of our common stock at exercise prices of $0.75. These
      options are due to expire on November 18, 2008. Mr. Ward had exercisable
      options to purchase 10,000 shares of our common stock at exercise prices
      of $0.75 per share.

(2)   Mr. Eilberg, our former Senior Vice President of Finance and
      Administration and CFO passed away on November 18, 2005.

COMPENSATION OF DIRECTORS

      Our non-employee directors receive:

      o  an annual retainer of $12,000 for serving on the Board of Directors;
         and

      o  $1,000 plus reasonable travel and out-of-pocket expenses for attendance
         at each meeting of the Board of Directors.

      o  in addition the Directors each received a stock grant of 93,750 shares
         of our common stock with a value of $.08 per share on the date of
         grant.

ITEM 11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
             RELATED STOCKHOLDER MATTERS

      The following table sets forth certain information regarding the
beneficial ownership of our common stock as of May 1, 2006, by each person or
entity known by us to be the beneficial owner of more than 5% of the outstanding
shares of common stock, each of our directors and named executive officers, and
all of our directors and executive officers as a group. Beneficial ownership has
been determined in accordance with Rule 13d-3 of the Securities Exchange Act of
1934, as amended. Generally, a person is deemed to be the beneficial owner of a
security if he has the right to acquire voting or investment power within 60
days.

                                       30
<PAGE>

      As of May 1, 2006, there were 22,586,681 shares of our common stock and
4,150 shares of our preferred stock outstanding. Except as otherwise noted, each
named individual has sole voting and investment power with respect to the
securities set forth in the table.

      For the purpose of this table, the common stock and the 2,400 shares of
our Series B Convertible Preferred Stock, 900 shares of our Series C Convertible
Preferred Stock, 350 shares of our Series D Convertible Preferred Stock and 500
shares of our Series E Convertible Preferred Stock (collectively, the "Preferred
Stock") are treated as one class on as "as converted" basis, with each share of
Preferred Stock converted into an amount of shares of common stock equal to the
stated value of $1,000 per share of Preferred Stock divided by the conversion
price of $2.74 per share for the Series B, C and D and $0.75 per share for the
Series E. Based upon these conversion prices, the Preferred Stock would be
convertible into a total of 1,998,783 shares of our common stock.

      The conversion price for the Preferred Stock, however, is subject to
adjustment, as it is equal to the lesser of (i) the stated conversion price of
$2.74 per share for the Series B, C and D and $0.75 per share for the Series E,
or (ii) sixty percent of the average closing bid price of our common stock for
the five trading days prior to the conversion. Giving effect to this adjustment,
the Preferred Stock would have been convertible into approximately 130,503,000
shares of our common stock on May 1, 2006 on the basis of an average closing bid
price for our common stock of approximately $0.053 per share in the five trading
days prior to that date. We currently have 30,000,000 shares of common stock
authorized for issuance; therefore we would have to obtain stockholder approval
before issuing the shares upon conversion.

      All of the 4,150 shares of Preferred Stock issued and outstanding and
17,959,741 shares of common stock are registered in the name of Capital Bank
Grawe Gruppe or its predecessor in interest, RBB Bank AG ("Capital Bank").
Capital Bank has informed us that it holds all of our securities solely in the
capacity as custodian for the benefit of numerous other investors, none of which
either individually or in the aggregate with affiliated entities, beneficially
owns more than five percent (5%) of our issued and outstanding capital stock. On
an as converted basis, the shares of our common stock and Preferred Stock held
by Capital Bank for its investors would represent, in the aggregate,
approximately 97% of our common stock as of May 1, 2006.

      Pursuant to the rules of the Securities and Exchange Commission (the
"SEC"), shares of our securities that an individual or group has the right to
acquire within 60 days of May 1, 2006 pursuant to the exercise of options,
warrants or other securities convertible into such securities, are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.

                                                 NUMBER OF SHARES     PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER             BENEFICIALLY OWNED    OF CLASS
------------------------------------             ------------------    --------

Estate of Gerald S. Eilberg (1)................        304,267            *
John P. Ward (2)...............................         38,868            *
William R. Smart (3)...........................        106,250            *
John H. MacKinnon..............................         93,950            *
William B. Berens .............................              0            *
All Directors and Executive Officers as
 a Group (5 persons) (4).......................        316,068            *
* Less than 1%.

                                       31
<PAGE>

(1)   Includes 200,000 shares of common stock underlying currently exercisable
      options to purchase common stock. It also includes 8,017 shares held by
      the Estate of Gerald S. Eilberg. These options are due to expire on
      November 18, 2008. Mr. Eilberg, our former Senior Vice President of
      Finance and Administration and CFO passed away on Friday, November 18,
      2005.

(2)   Includes 10,000 shares of Common Stock underlying currently excercisable
      options to purchase common stock. It also includes 28,868 shares held by
      Mr. Ward.

(3)   Includes 10,000 shares of common stock underlying currently exercisable
      options to purchase common stock. It also includes 2,500 shares held by
      Mr. Smart.

(4)   Includes an aggregate of 20,000 shares of common stock underlying
      currently excercisable options to purchase common stock held by our
      current executive officers and directors, and 296,068 shares held by the
      executive officers and directors.

EQUITY COMPENSATION PLAN INFORMATION

      The following table provides certain aggregate information with respect to
all of the Company's equity compensation plans in effect as of December 31,
2005:
<TABLE><CAPTION>
                                                                                               NUMBER OF SECURITIES
                                                                                              REMAINING AVAILABLE FOR
                                                                                               FUTURE ISSUANCE UNDER
                                                                                             EQUITY COMPENSATION PLANS
                                  NUMBER OF SECURITIES TO BE    WEIGHTED AVERAGE EXERCISE      (EXCLUDING SECURITIES
                                    ISSUED UPON EXERCISE OF       PRICE OF OUTSTANDING          REFLECTED IN FIRST
           Plan Category              OUTSTANDING OPTIONS                OPTIONS                    COLUMN(A))
                                              (A)                          (B)                          (C)
<S>                                         <C>                           <C>                         <C>
Equity compensation plans not
approved by security holders (1)            220,000                       $0.75                       220,000
</TABLE>

(1)   These plans consist of our 1997 Stock Option Plan and 1998 Stock Option
      Plan, the terms of which are described in Note 10 to our audited financial
      statements for the year ended December 31, 2005 included in this Annual
      Report on Form 10-KSB. Additional terms of the 1997 Stock Option Plan and
      1998 Stock Option Plan are summarized as follows: Options may be granted
      to employees, directors and consultants of the Company. No options may be
      granted after the tenth anniversary of the date on which each plan was
      adopted by the Board of Directors. The term and vesting provisions of each
      option are determined by the Board of Directors. Upon cessation of
      employment, unless otherwise specified in the option award, options which
      have not vested are forfeited and options which have vested must be
      exercised within the earlier of three years or the original term of the
      option. Options to non-employees terminate upon termination of service
      unless otherwise specified in the award.

ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       None.

ITEM 13.     EXHIBITS.

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

                                       32
<PAGE>

                                                                           PAGE


Report of Independent Registered Public Accounting Firm for 2005            36

Report of Independent Registered Public Accounting Firm for 2004            37

Balance Sheets as of December 31, 2005 and
   December 31, 2004                                                        38

Statements of Operations for the years ended
   December 31, 2005 and December 31, 2004                                  39

Statement of Stockholders' Equity for the years
   ended December 31, 2005 and December 31, 2004                            40

Statements of Cash Flows for the years ended
   December 31, 2005 and December 31, 2004                                  41

Notes to Financial Statements                                               42

         (a)(2)   EXHIBITS.

         (i)      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.

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(h)   Restated By-Laws.

4.1       Instruments defining the rights of security holders (see Exhibits 3.1
          through 3.12).

4.2(l)    Specimen Certificate of Common Stock, $.08 par value per share.

10.1*(i)  1997 Stock Option Plan.

10.2*(i)  1998 Stock Option Plan.

                                       33
<PAGE>

10.3(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.

* Management contract or compensatory plan, contract or arrangement.

                                       34
<PAGE>

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

      Carlin, Charron & Rosen, LLP has been our independent registered public
accounting firm since November 4, 2005, and audited our financial statements for
the year ended December 31, 2005.

      BDO Seidman, LLP served as our independent registered public accounting
firm from March 31, 2003 through November 4, 2005, and audited our financial
statements for the year ended December 31, 2004.

      Audit Fees
      ----------

      For the year ended December 31, 2005, Carlin, Charron & Rosen, LLP will
bill us $46,000 for the audit of our financial statements and for its review of
our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2005.
BDO Seidman, LLP billed us $12,150 for its review of Quarterly Reports on Form
10-QSB for the first two quarters of 2005. For the year ended December 31, 2004,
BDO Seidman, LLP billed us $73,650 for the audit of our financial statements and
for its review of our 2004 Quarterly Reports on Form 10-QSB.

      Audit-Related Fees
      ------------------

      We did not pay any additional fees to our independent registered public
accounting firms for assurance and related services during the years ended
December 31, 2005 or 2004.

      Tax Fees
      --------

      For the year ended December 31, 2005, BDO Seidman, LLP billed us $4,500
for the preparation of our 2004 corporate income tax returns. For the year ended
December 31, 2004, BDO Seidman, LLP billed us $4,500 for the preparation of our
2003 corporate income tax return.

      All Other Fees
      --------------

      We did not pay any additional fees to Carlin, Charron & Rosen, LLP or BDO
Seidman, LLP for other products or services during the years ended December 31,
2005 or 2004.

      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.

      AUDIT services 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.

                                       35
<PAGE>

      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.

      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.

                                       36
<PAGE>

                                   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:  May 15, 2006                    By: /s/ William B. Berens
                                          -------------------------------------
                                          William B. Berens
                                          President 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/ John P. Ward        Chairman of the Board                      May 15, 2006
---------------------
John P. Ward

/s/ William B. Berens   President and Chief Executive Officer      May 15, 2006
---------------------   (principal executive officer)
William B. Berens

/s/ Bruna A. Bucacci    Chief Accounting Officer (principal        May 15, 2006
---------------------   and accounting officer)
Bruna A. Bucacci

/s/ William R. Smart    Director                                   May 15, 2006
---------------------
William R. Smart

/s/ John H. MacKinnon   Director                                   May 15, 2006
---------------------
John H. MacKinnon




                                       37
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
National Datacomputer, Inc.

We have audited the accompanying balance sheet of National Datacomputer, Inc. as
of December 31, 2005, and the related statements of operations, stockholders'
equity (deficit) and cash flows for the year 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 audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of National Datacomputer, Inc. as
of December 31, 2005, and the results of its operations and its cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial statements have been prepared assuming that 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 $19.2 million at December 31,
2005. 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 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

Carlin, Charron & Rosen, LLP
Westborough, Massachusetts
May 15, 2006

                                       38
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
National Datacomputer, Inc.

We have audited the accompanying balance sheet of National Datacomputer, Inc. as
of December 31, 2004 and the related statements of operations, stockholders'
deficit, and cash flows for the year 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 audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National
Datacomputer, Inc. at December 31, 2004, and the results of its operations and
its cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred an accumulated deficit of
approximately $18.1 million as of December 31, 2004 that raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

BDO Seidman, LLP
Boston, Massachusetts
March 25, 2005

                                       39
<PAGE>


                           NATIONAL DATACOMPUTER, INC.
                                 BALANCE SHEETS
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                                                         December 31,      December 31,
                                                                                             2005              2004
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C>
Assets
Current Assets:
      Cash                                                                               $    125,508      $    266,463
      Accounts receivable, net of allowance for doubtful accounts of
            $1,296                                                                            139,161           280,707
      Inventories                                                                             175,919           194,397
      Prepaid expenses                                                                         47,008            11,820
                                                                                         ------------      ------------
         Total current assets                                                                 487,596           753,387
Property and equipment, net                                                                    64,274           116,481
Capitalized software development costs, net                                                    37,021            86,920
                                                                                         ------------      ------------
         Total Assets                                                                    $    588,891      $    956,788
                                                                                         ============      ============

Liabilities and Stockholders' Equity (Deficit):
Current Liabilities:
      Current obligations under capital lease                                            $      3,544      $      6,604
      Note payable, current portion                                                            54,000            54,000
      Accounts payable                                                                        317,279           195,178
      Customer deposits                                                                       256,756            28,189
      Accrued payroll and related taxes                                                       157,627            95,300
      Other accrued expenses                                                                   78,174            92,478
      Deferred revenues                                                                       349,286           373,866
                                                                                         ------------      ------------
         Total current liabilities                                                          1,216,666           845,615
Obligations under capital lease, net of current portion                                         9,450            16,964
                                                                                         ------------      ------------
         Total Liabilities                                                                  1,226,116           862,579
                                                                                         ------------      ------------

Convertible Preferred Stock (Note 12)                                                       4,005,971         3,738,971

Commitments (Note 13)

Stockholders' Equity (Deficit):
      Preferred stock, Series A convertible, $0.001 par value; 20 shares
         authorized; no shares issued or outstanding                                             --                --

      Common stock, $0.08 par value; 30,000,000 shares authorized; 22,586,681
         and 22,134,181 shares issued and outstanding at December 31, 2005 and 2004,
         respectively                                                                       1,806,933         1,770,733

      Capital in excess of par value                                                       12,733,072        12,733,072
      Accumulated deficit                                                                 (19,183,201)      (18,148,567)
                                                                                         ------------      ------------
         Total Stockholders' Equity (Deficit)                                              (4,643,196)       (3,644,762)
                                                                                         ------------      ------------
         Total Liabilities and Stockholders' Equity (Deficit)                            $    588,891      $    956,788
                                                                                         ============      ============
</TABLE>
                   The accompanying notes are an integral part
                         of these financial statements.

                                       40
<PAGE>

                           NATIONAL DATACOMPUTER, INC.
                            STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                                                                  Years Ended
                                                                                         ------------------------------
                                                                                         December 31,      December 31,
                                                                                             2005              2004
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C>
Revenues:
    Product                                                                              $  1,410,128      $  1,939,051
    Services                                                                                1,262,344         1,309,185
                                                                                         ------------      ------------
       Total Revenues                                                                       2,672,472         3,248,236

Cost of revenues                                                                            1,496,792         1,920,512
                                                                                         ------------      ------------

       Gross Profit                                                                         1,175,680         1,327,724
                                                                                         ------------      ------------

Operating expenses:
    Research and development                                                                  362,987           352,654
    Selling and marketing                                                                     529,790           489,055
    General and administrative                                                              1,049,210           979,982
                                                                                         ------------      ------------
                                                                                            1,941,987         1,821,691
                                                                                         ------------      ------------
Loss from operations                                                                         (766,307)         (493,967)

Other income (expense):
    Interest income                                                                             2,913             4,437
    Loss on currency exchange                                                                  (1,036)             --
    Interest expense                                                                           (3,204)           (4,813)
                                                                                         ------------      ------------
Net loss                                                                                 $   (767,634)     $   (494,343)
                                                                                         ============      ============

Calculation of net loss per common share:

Net loss                                                                                 $   (767,634)     $   (494,343)
Preferred stock preferences                                                                  (267,000)         (267,000)
                                                                                         ------------      ------------
Net loss attributable to common stockholders                                             $ (1,034,634)     $   (761,343)
                                                                                         ============      ============
Basic and diluted net loss per share attributable to
    common stockholders                                                                  $      (0.05)     $      (0.03)
                                                                                         ============      ============
Weighted average shares                                                                    22,136,654        21,831,546
                                                                                         ============      ============
</TABLE>
                   The accompanying notes are an integral part
                         of these financial statements.

                                       41
<PAGE>

NATIONAL DATACOMPUTER, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                          Common Stock
                                          ----------------------------------------------
                                                                             Capital in                            Total
                                                               Par             excess          Accumulated      stockholders'
                                             Shares           value         of par value         deficit      equity (deficit)
                                          ------------     ------------     ------------      ------------      ------------
<S>                                         <C>            <C>              <C>               <C>               <C>
Balance at January 1, 2004                  21,302,765     $  1,704,220     $ 12,732,835      ($17,387,224)     ($ 2,950,169)

Net loss                                          --               --               --            (494,343)     ($   494,343)

Interest on preferred stock (Note 12)             --               --             66,750          (267,000)     ($   200,250)

Issuance of common stock
   in satisfaction of accrued
   interest                                    831,416           66,513          (66,513)             --                --
                                          ------------     ------------     ------------      ------------      ------------

Balance at December 31, 2004                22,134,181        1,770,733       12,733,072       (18,148,567)       (3,644,762)

Net loss                                          --               --               --            (767,634)     ($   767,634)

Interest on preferred stock (Note 12)             --               --               --            (267,000)     ($   267,000)

Issuance of compensatory stock
   grants (Note 11)                            452,500           36,200             --                --        $     36,200
                                          ------------     ------------     ------------      ------------      ------------

Balance at December 31, 2005                22,586,681     $  1,806,933     $ 12,733,072      ($19,183,201)     ($ 4,643,196)
                                          ============     ============     ============      ============      ============
</TABLE>
                   The accompanying notes are an integral part
                         of these financial statements.

                                       42
<PAGE>

                           NATIONAL DATACOMPUTER, INC.
                            STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
<TABLE><CAPTION>
                                                                                                  Years Ended
                                                                                         ------------------------------
                                                                                         December 31,      December 31,
                                                                                             2005              2004
                                                                                         ------------      ------------
<S>                                                                                      <C>               <C>
Cash flows from operating activities:
      Net loss                                                                           $   (767,634)     $   (494,343)
      Adjustments to reconcile net loss to net
          cash used for operating activities:
          Gain on sale of property and equipment                                                 --                 581
          Depreciation and amortization                                                       126,245           196,947
          Compensatory stock grants                                                            36,200              --
          Changes in assets and liabilities:
               Decrease (increase) in accounts receivable                                     141,546          (205,707)
               Decrease in inventories                                                         18,478           205,307
               (Increase) decrease in other current assets                                    (35,188)            4,202
               Increase in accounts payable                                                   122,101             9,029
               Increase in customer deposits                                                  228,567             9,283
               Increase in accrued expenses                                                    48,023             5,878
               Decrease in deferred revenues                                                  (24,580)          (85,110)
                                                                                         ------------      ------------
      Net cash used for operating activities                                                 (106,242)         (353,933)
                                                                                         ------------      ------------

Cash flows from investing activities:
      Purchases of property and equipment                                                     (12,539)          (48,780)
      Purchase of capitalized software                                                        (11,600)             --
                                                                                         ------------      ------------
      Net cash used for investing activities                                                  (24,139)          (48,780)
                                                                                         ------------      ------------

Cash flows from financing activities:
      Principal payments on obligations
          under capital lease                                                                 (10,574)          (21,650)
                                                                                         ------------      ------------
      Net cash used for financing activities                                                  (10,574)          (21,650)
                                                                                         ------------      ------------

Net decrease in cash                                                                         (140,955)         (424,363)
Cash, beginning of year                                                                       266,463           690,826
                                                                                         ------------      ------------

Cash, end of year                                                                        $    125,508      $    266,463
                                                                                         ============      ============

Supplemental Disclosure of Cash Flow Information:

      Cash paid for interest                                                             $      3,204      $      4,813
      Non-cash investing and financing activities:
          Accrued interest on preferred stock charged to
               accumulated deficit                                                       $    267,000      $    267,000
          Acquisition of property and equipment under capital lease                      $       --        $     15,859
          Common stock issued in satisfaction of interest on
               preferred stock                                                           $       --        $    267,000
</TABLE>


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

                                       43
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION

         National Datacomputer, Inc. (the "Company") designs, develops,
manufactures, markets and services a line of hand-held battery powered
microprocessor-based data collection products and computers and associated
peripherals for use in mobile operations. The Company's products and services
include data communications networks, application-specific software, hand-held
computers and related peripherals, associated training and support services.

2.   LIQUIDITY AND MANAGEMENT PLANS

      We have an accumulated deficit of approximately $19,183,000 through
December 31, 2005. As a result of this accumulated 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. The Company's plans to address
the situation are presented below. However, there are no assurances that these
plans will be successful or sufficient.

      In the event our operations continue to be unprofitable or do not generate
sufficient cash to fund the business, or if we fail to obtain additional
financing, management will have to substantially reduce its level of operations.
These circumstances raise substantial doubt about our ability to continue as a
going concern. These financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

      In order to improve our cash position, we have taken a number of steps to
reduce and control our expenses. During the fourth quarter of 2005 and the first
quarter of 2006 we initiated cost reduction programs such as reducing our
manpower by approximately 21%, decreasing our facilities by approximately 25%
and diminishing our health insurance premiums by increasing employees'
contributions. These programs have been instrumental in reducing our annual
operating expenses by approximately $650,000, and we believe that based on our
current level of expenses and sales we currently have sufficient cash to fund
our operations through the end of 2006.

      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 sales potentials. 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.

      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 have
recommenced in March 2006. At December 31, 2005, the note payable balance was
$54,000.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      REVENUE RECOGNITION
      -------------------

     We recognize revenue when there is persuasive evidence of an arrangement,
title and risk of loss have passed, delivery has occurred or the services have
been rendered, the sales price is fixed or determinable and collection of the
related receivable is reasonably assured. Title and risk of loss passes to the
customer at the time of delivery of the product to a common carrier. At the time
of the transaction, we assess whether the sales price is fixed or determinable
based upon the payment terms of the arrangement. If a significant portion of the
sales price is not due with normal payment terms, the sales price may not be
deemed fixed and revenue would be recognized as the amounts become due.

     Our product revenue is recognized upon delivery provided that customer
acceptance criteria can be demonstrated prior to shipment. Where the criteria
cannot be demonstrated prior to shipment, or in the

                                       44
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

case of new products, revenue is deferred until acceptance has been received. We
recognize revenue for maintenance services ratably over the contract term, which
is generally one year or less.

      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.

      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.

      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.

      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 DEVELOPMENT COSTS
      --------------------------------------

      Costs associated with the development of computer software are charged to
operations prior to establishment of technological feasibility, as defined by
SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased,
or Otherwise Marketed". Costs incurred subsequent to the

                                       45
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

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 bear to the total of current and
anticipated future gross revenues for that product or (b) the straight-line
method over the estimated economic life of the product (generally 3 years).
Amortization begins when the product is available for general release to the
customer.

      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.

      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.

      Common share equivalents consist of 2,328,784 and 2,380,209 shares of
common stock which may be issuable upon exercise of outstanding stock options
and the conversion of preferred stock at December 31, 2005 and 2004,
respectively. All common share equivalents have been excluded from the
calculation of weighted average shares outstanding, as their inclusion would be
anti-dilutive.

      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 12) are subtracted from
the net income (loss) to determine the amount of net income (loss) attributable
to common stockholders.

      STOCK-BASED COMPENSATION
      ------------------------

      The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related interpretations.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which amends SFAS
Statement No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value based method of accounting for stock-based employee compensation and
amends the disclosure provisions of SFAS 123 to require prominent disclosure
about the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. The Company
continues to account for stock-based compensation utilizing the intrinsic value
method. The additional disclosures required by SFAS 148 are as follows:

                                       46
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

<TABLE><CAPTION>
                                                                Year ended       Year ended
                                                               December 31,      December 31,
                                                                   2005              2004
                                                               ------------      ------------
<S>                                                            <C>               <C>
Net income (loss):
As reported                                                    $   (767,634)     $   (494,343)
Employee stock based compensation under fair
value method, net of tax                                               --              (1,628)
                                                               ------------      ------------
           Pro forma                                           $   (767,634)     $   (495,971)
                                                               ============      ============

Basic and diluted net income (loss) per share attributable
to common stockholders:
           As reported                                         $      (0.05)     $      (0.03)
           Pro forma                                           $      (0.05)     $      (0.03)
</TABLE>

      In calculating the pro forma effect of SFAS No. 123, the fair value of
each option grant was estimated on the date of grant using the Black-Scholes
option-pricing model with assumptions for dividend yield, expected volatility,
expected term and a risk free interest rate. There were no options granted in
2005 or 2004.

      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.

      RECLASSIFICATION
      ----------------

      Certain amounts in the Company's 2004 financial statements appearing
herein have been resclassified to conform to the current year's presentation.

4.    RECENT ACCOUNTING PRONOUNCEMENTS

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), "Share-Based Payment", which revised SFAS No. 123 and
superseded APB Opinion No.25, "Accounting for Stock Issued to Employees". SFAS
No. 123(R) requires that companies recognize compensation expense associated
with grants of stock options and other equity instruments to employees in the
financial statements, effective for the Company beginning January 1, 2006.
Compensation cost will be measured based on the fair value of the instrument on
the grant date and will be recognized over the vesting period. This
pronouncement applies to all grants after the effective date and to the unvested
portion of stock options outstanding as of the effective date. SFAS No. 123(R)
eliminates the ability to account for such transactions using the intrinsic
method currently used by the Company. SFAS 123R is effective for the Company
beginning January 1, 2006 at which time the Company will adopt the modified
prospective transition method. The impact of this requirement on the Company's
financial statements is not expected to be material.

      In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107") regarding the SEC's interpretation of SFAS 123R and the valuation of
share-based payments for public companies. In accordance with this guidance, the
Company will adopt SFAS 123R in the first quarter of 2006 with the methods
required by SAB 107.

                                       47
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 clarifies the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
spoilage. In addition, SFAS 151 requires that allocation of fixed production
overhead to the costs of conversion be based on the normal capacity of the
production facilities. The provisions of SFAS 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company
does not expect adoption of SFAS 151 to have a material impact on its results of
operations or financial position.

      In June 2005, the FASB issued SFAS No.154 "Accounting Changes in Error
Corrections" (SFAS No. 154) which replaces APB Opinion No. 20, "Accounting
Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements - An Amendment of APB Opinion No. 28". SFAS No. 154 provides guidance
on the accounting for and reporting of accounting changes and error corrections.
It establishes retrospective application, to prior years' financial statements,
as the required method for reporting a change in accounting principle and the
reporting of an error unless it is not practical to do so. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005 and is required to be adopted by the Company
in the first quarter of 2006.

5.   INVENTORIES

     Inventories consist of the following:
                                                    DECEMBER 31,   DECEMBER 31,
                                                        2005           2004
                                                     ----------     ----------

      Raw materials                                  $   84,496     $  148,793
      Work-in-process                                    79,232         12,438
                                                        633,491        535,316
      Finished goods                                     12,191         33,166
                                                        434,483        477,135
                                                     ----------     ----------

                                                     $  175,919     $  194,397
                                                     ==========     ==========


6.   PROPERTY AND EQUIPMENT, NET

     Property and equipment consist of the following:
<TABLE><CAPTION>
                                                         ESTIMATED      DECEMBER       DECEMBER
                                                       USEFUL LIVES        31,            31,
                                                        (IN YEARS)        2005           2004
                                                        ----------     ----------     ----------
<S>                                                         <C>        <C>            <C>
      Production and engineering equipment                  3-5        $  701,434     $  701,434
      Furniture, fixtures and office equipment               5            893,130        880,591
                                                          Life of
      Leasehold improvements                               Lease           29,749         29,749
                                                                       ----------     ----------
                                                                        1,624,313      1,611,774
                                                                        1,402,054      1,229,648

      Less - accumulated depreciation and amortization                  1,560,039      1,495,293
                                                                       ----------     ----------

                                                                       $   64,274     $  116,481
                                                                       ==========     ==========
</TABLE>

     Equipment under capital lease totaled $248,589 at December 31, 2005 and
2004. Related accumulated depreciation totaled $240,659 and $234,316,
respectively, at December 31, 2005 and 2004.

                                       48
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

Related depreciation expense was $6,343 and $1,586 for the years ended December
31, 2005 and 2004, respectively.

7.   CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET

     Capitalized software development costs consist of the following:
<TABLE><CAPTION>
                                                         ESTIMATED
                                                         ECONOMIC       DECEMBER       DECEMBER
                                                          LIVES            31,            31,
                                                        (IN YEARS)        2005           2004
                                                        ----------     ----------     ----------
<S>                                                     <C>            <C>            <C>
      Internally developed software                          3         $  257,913     $  257,913
      Purchased software                                     3            141,950        130,350
                                                                       ----------     ----------
                                                                          399,863        388,263
                                                                        1,402,054      1,229,648

      Less - accumulated amortization                                     362,842        301,343
                                                                       ----------     ----------

                                                                       $   37,021     $   86,920
                                                                       ==========     ==========
</TABLE>

      As of December 31, 2005, the Company has capitalized $257,913 of costs
incurred for the integration of Microsoft's Windows CE operating system into its
DC5. The Company has capitalized $141,950 of costs associated with the purchase
of software for the development of its W.I.N. Windows application, its Wintakes
application and RRLE application. Amortization expense was $61,499 and $117,156
for the years ended December 31, 2005 and 2004, respectively.

8.    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 have
recommenced in March 2006. At December 31, 2005, the note payable balance was
$54,000.

9.   INCOME TAXES

     Deferred tax assets are composed of the following:

                                                 DECEMBER 31,      DECEMBER 31,
                                                     2005              2004
                                                 ------------      ------------

      Net operating loss carryforwards           $  3,045,000      $  3,320,000
      Business tax credit carryforwards                 5,000             5,000
      Reserves and allowances                         377,000           383,000
      Depreciation and amortization                   (80,000)          (77,000)
      Accrued compensation                             39,000             9,000
                                                 ------------      ------------

      Gross deferred tax asset                      3,386,000         3,640,000

                                       49
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

      Deferred tax asset valuation allowance       (3,386,000)       (3,640,000)
                                                 ------------      ------------
                                                 $       --        $       --
                                                 ============      ============

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

                                                        YEAR ENDED
                                              DECEMBER 31,       DECEMBER 31,
                                                  2005               2004
                                              ------------       ------------

      Statutory 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, 2005, the Company has federal net operating loss
carryforwards for federal tax purposes of approximately $8,455,000, which expire
in various years through 2025. The Company has state net operating loss
carryforwards for tax purposes of approximately $2,711,000, which expire in
various years through 2010.

      Any significant change in ownership, as defined in 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.

10.   STOCK OPTIONS

      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. A maximum of 200,000 shares of common
stock was reserved for issuance in accordance with the terms of the 1997 Plan.
The 1997 Plan now only provides for the issuance of non-qualified options since
stockholder approval was not obtained. As of December 31, 2005, 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, 2005, there were options to purchase 20,000 shares of common stock
outstanding and 280,000 shares available for grant under the 1998 Plan.

         A summary of the status of the Company's stock option plans as of
December 31, 2005 and 2004 is as follows:

                                       50
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE><CAPTION>
                                         December 31, 2005              December 31, 2004
                                     --------------------------     --------------------------
                                                      Weighted                      Weighted
                                                       Average                       Average
                                     Number of        Exercise      Number of        Exercise
                                       Shares           Price        Shares           Price
                                     ----------      ----------     ----------      ----------

<S>                                     <C>          <C>               <C>          <C>
Outstanding at beginning of year        271,425      $     0.81        514,716      $     0.80
Granted                                    --              --             --              --
Exercised                                  --              --             --              --
Canceled/Expired                        (51,425)           1.05       (243,291)           0.79
                                     ----------      ----------     ----------      ----------

Outstanding at end of year              220,000      $     0.75        271,425      $     0.81
                                     ==========      ==========     ==========      ==========

Exercisable at end of year              220,000      $     0.75        271,425      $     0.81
                                     ==========      ==========     ==========      ==========
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 2005:

<TABLE><CAPTION>
                                                                                        Weighted
                                            Weighted average                        Average exercise
                                               Remaining            Number of           price of
                            Number         Contractual life,         Options             options
   Exercise price        Outstanding            In years           Exercisable         Exercisable
--------------------  -----------------  ---------------------  ------------------  ------------------
<S>   <C>                  <C>                    <C>                <C>                   <C>
      $ 0.75               220,000                2.9                220,000               $0.75
</TABLE>

11.   COMMON STOCK

      At December 31, 2005, the Company had reserved 86,458,333 shares of common
stock for issuance upon the exercise of common stock options and warrants and
the conversion of preferred stock. The Company does not currently have enough
shares authorized for conversion of the preferred and would have to obtain
stockholder approval before issuing the shares upon conversion.

      On December 29, 2005, the Company awarded an aggregate of 452,500 shares
of common stock to its officers and directors. The shares had a per share fair
value of $.08 for a total of $36,200, which was recognized by the Company as
stock compensation expense.

12.   CONVERTIBLE PREFERRED STOCK

      During 1996, the Company sold 4,200 shares of the newly designated Series
B convertible preferred stock for net proceeds of approximately $3,685,200. On
March 21, 2000, the Company issued 656,934 shares of its common stock, par value
$.08 per share, to Capital Bank Grawe Gruppe AG ("Capital Bank" and formerly RBB
Bank) upon the conversion by Capital Bank of 1,800 shares of the Company's
Series B convertible preferred stock at a conversion price of $2.74 per share.
There are presently 2,400 shares of Series B convertible preferred stock
outstanding.

      During 1997, the Company sold 900 shares of Series C convertible preferred
stock for net proceeds

                                       51
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

of approximately $867,000.

      During 1997, the Company sold 350 shares of Series D convertible preferred
stock for net proceeds of approximately $337,400.

      During 1998, the Company sold 500 shares of Series E convertible preferred
stock with attached warrants, which expired on January 1, 2001, to purchase up
to 700,000 shares of common stock at $.75 per share, for net proceeds of
approximately $487,880. The proceeds of this financing were allocated to the
preferred shares and warrants based on management's estimation of their relative
fair values. This resulted in $214,000 being ascribed to warrants, which was
recorded as additional paid-in-capital and $273,880 being recorded as preferred
stock.

      During 1998, Capital Bank, the holders of a convertible note payable to a
related party, converted the note payable with an outstanding principal balance
of $175,000 into 175 shares of Series F convertible preferred stock at a stated
value of $1,000 per share. On January 4, 2001, the Company issued 1,423,825
shares of its common stock, par value $.08 per share, to Capital Bank upon the
conversion by Capital Bank of 75 shares of the Company's Series F convertible
preferred stock at a conversion price of $1.00 per share. On January 9, 2001,
the Company issued 1,710,864 shares of its common stock, par value $.08 per
share, to Capital Bank upon the conversion by Capital Bank of 100 shares of the
Company's Series F convertible preferred stock at a conversion price of $1.00
per share. No underwriters were involved in the transaction. All of the shares
of Series F convertible preferred stock have been converted and are no longer
outstanding.

      The Series B, Series C, Series D, and Series E convertible preferred stock
have the following characteristics:

VOTING:

      Holders of the Series B, Series C, Series D, and Series E convertible
preferred stock are entitled to a number of votes equal to the number of shares
of common stock into which these shares of convertible preferred stock are then
convertible. All shares of convertible preferred stock are entitled to vote with
the holders of common stock as a single class.

DIVIDENDS:

      Holders of the Series B, Series C, Series D, and Series E convertible
preferred stock are entitled to receive dividends, when and if declared by the
Company's Board of Directors, prior and in preference to common shareholders,
equal to the amount of the per share dividend of common stock declared,
multiplied by the number of shares of common stock into which the convertible
preferred shares are then convertible.

INTEREST:

      In addition to the dividend preference, the holders of the Series B,
Series C and Series D convertible preferred stock shall receive interest per
annum based on the stated value of such shares. Series B convertible preferred
shareholders are entitled to receive interest equal to 8% per annum. Series C
and Series D convertible preferred shareholders are entitled to receive interest
equal to 6% per annum. Such interest will accrue from the original issuance
date, and shall be payable in cash or common stock, at the Company's option, on
a quarterly basis, commencing on the first quarter ended after issuance. Payment
of interest due with respect to those shares that remain issued and outstanding
at the end of the

                                       52
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

Company's quarters, shall be made within 15 days after the filing with the
Securities and Exchange Commission of the applicable report.

      During the years ended December 31, 2005 and 2004, the Company incurred
interest in the amount of $267,000 and $267,000, respectively for Series B,
Series C, and Series D convertible preferred stock, for which the Company has
recorded a charge to accumulated deficit. During 2005 no shares were issued in
satisfaction of the accrued interest. During 2004, 494,923 shares were issued in
satisfaction of the accrued interest due for the first quarter of 2004 and
336,493 shares were issued in satisfaction of the accrued and unpaid interest
due for the fourth quarter of 2003.

      As of December 31, 2005, the Company owes $467,250 or 4,054,185 shares of
common stock in satisfaction of accrued interest for the last three quarters of
2004 and all of 2005.

LIQUIDATION PREFERENCE:

      Upon liquidation of the Company, the holders of Series B, Series C, Series
D and Series E convertible preferred stock have preference over the common
stockholders to receive liquidating distributions which equal the stated value
of such shares of stock, plus all accrued and unpaid dividends.

CONVERSION:

      Each share of the Series B, Series C, Series D and Series E convertible
preferred stock is convertible at any time, at the option of the holders into
shares of common stock computed by dividing the stated value of $1,000 per share
of preferred stock by the current conversion price of such share of preferred
stock.

      In connection with the issuance of Series E convertible preferred stock,
the Company, with the approval of the shareholders of Series B, Series C, and
Series D convertible preferred stock, changed the conversion price of the Series
B, Series C, and Series D convertible preferred stock and provided these
shareholders with certain anti-dilution provisions. The current conversion price
for the Series B, Series C, and Series D convertible preferred stock is equal to
the lesser of $2.74 or sixty percent of the Corporation's average closing bid
price of its common stock for the five trading days prior to the conversion. The
current conversion price for the Series E convertible preferred stock is equal
to the lesser of $0.75 or sixty percent of the Corporation's average closing bid
price of its common stock for the five trading days prior to the conversion.

      Based on these current conversion prices, all outstanding shares of
preferred stock would have been convertible into approximately 86,458,000 shares
of our common stock on December 31, 2005 on the basis of an average closing bid
price for our common stock of approximately $0.08 per share in the five trading
days prior to that date. The Company does not currently have enough shares
authorized for conversion of the preferred and would have to obtain stockholder
approval before issuing the shares upon conversion. Therefore the outstanding
preferred stock is presented outside of permanent equity on the accompanying
balance sheets.

REDEMPTION:

      In the event that the price of the Company's common stock, as reported by
the NASDAQ SmallCap market or the OTC Bulletin Board equals or exceeds $20.00
per share for a period of twenty consecutive trading days, the Company may
redeem at its option the Series B, Series C and Series D convertible preferred
stock at a price of $1,000 per share, subject to certain anti-dilution
provisions.

      If the closing bid price of the Company's common stock as reported by the
principal stock exchange

                                       53
<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

in which the Corporation's common stock then trades equals or exceeds $5.00 for
twenty consecutive trading days, then the Company at its option may redeem the
then issued and outstanding shares of Series E convertible preferred stock at a
price of $1,000 per share, subject to certain anti-dilution provisions.

13.   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 expenses
under this operating lease was $212,846 and $237,527 for the years ended
December 31, 2005 and 2004, respectively.

      The Company also leases certain equipment under capital leases expiring at
various dates through the year 2009.

      Minimum future lease commitments under operating and capital leases at
December 31, 2005 are as follows:

                        Year ending
                        December 31,               Operating        Capital
                        ------------               ---------        -------

                           2006                  $    151,803     $      4,998
                           2007                       163,593            4,998
                           2008                       124,740            4,998
                           2009                          --              2,915
                                                 ------------     ------------

      Total minimum lease payments               $    440,136           17,909
                                                 ============
      Less: amount representing interest                                 4,915
                                                                  ------------

      Present value of minimum lease payments                           12,994
      Less: Current obligations                                          3,544
                                                                  ------------

      Obligations under capital leases, net
         of current portion                                       $      9,450
                                                                  ============

14.   CONCENTRATION OF CREDIT RISK

      The Company sells its products to customers principally in the United
States of America. 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 57% and 75% of total accounts receivable at December 31, 2005 and
2004, 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:

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<PAGE>

NATIONAL DATACOMPUTER, INC.
NOTES TO FINANCIAL STATEMENTS

                                  Percentage of        Percentage of
                                  net revenues         net revenues
                                      2005                 2004

             USA                       83%                  71%
             Japan                     12%                  25%
             Other                      5%                   4%

                      TOTAL           100%                 100%


15.      QUARTERLY FINANCIAL DATA

<TABLE><CAPTION>
                                       FIRST         SECOND           THIRD         FOURTH
    (Unaudited)                       QUARTER        QUARTER         QUARTER        QUARTER
                                    ----------     ----------      ----------      ----------
<S>                                 <C>            <C>             <C>             <C>
2005
Net Sales                           $  802,877     $  531,513      $  724,129      $  613,953
Gross Profit                           401,211        201,864         296,326         276,279
Net Loss                              (108,378)      (265,021)       (176,295)       (217,940)
Basic Loss per share                     (0.01)         (0.01)          (0.01)          (0.01)

2004
Net Sales                           $1,016,278     $  611,983      $  795,504      $  824,471
Gross Profit                           498,880        190,949         294,857         343,038
Net Income (loss)                       35,497       (253,309)       (157,362)       (119,169)
Basic Earnings (loss) per share           0.00          (0.01)          (0.01)          (0.01)
</TABLE>

                                       55