##### Table of Contents



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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

(Mark One)

|    |  |                                                                                        
|--- |  | ---------------------------------------------------------------------------------------
|[X] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2001

OR

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

000-28745
(Commission File No.)

NATIONAL SCIENTIFIC CORPORATION
(Exact name of small business issuer as specified in its charter)

|                                                                                          |  |                                                
|----------------------------------------------------------------------------------------- |  | -----------------------------------------------
|Texas
(State or other jurisdiction of
incorporation or organization)                      |  | 86-0837077
(I.R.S. Employer
Identification No.)
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|4455 East Camelback Road, Suite E160
Phoenix, AZ
(Address of Principal Executive Offices) |  | 85018
(Zip Code)                               

(602) 954-1492
(Issuers telephone number)



| |  |  | Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Yes [X] No [   ]

There were 47,357,498 shares of Common Stock, par value $.01 per share, were
outstanding at May 11, 2001.

Transitional Small Business Disclosure Format (Check One): Yes   No X

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1



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TABLE OF CONTENTS



|                               |                                                                                                                                                                      |  |  |  |  |  |  | 
|------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I - Financial Information
|                               | Item 1. Financial Statements (unaudited)                                                                                                                            
|                               | Balance Sheet  March 31, 2001                                                                                                                                      
|                               | Statements of Operations - Three Months and Six Months ended March 31,
      2001, 2000 and Cumulative from October 1, 1997 (Inception) through March
      31, 2001
|                               | Statements of Cash Flows - Six Months ended March 31, 2001, 2000 and
      Cumulative from October 1, 1997 (Inception) through March 31, 2001                       
|                               | Statements of Changes in Shareholders' Equity - Six Months ended March
      31, 2001                                                                               
|                               | Notes to Financial Statements                                                                                                                                       
|                               | Item 2.  Management's Discussion and Analysis or Plan of Operation                                                                                                  
|Part II - Other Information   
|                               | Item 2.  Changes in Securities and Use of Proceeds                                                                                                                  
|                               | Item 6.  Exhibits and reports on Form 8-K                                                                                                                           
|Signatures                    
|EX-10.1                       
|EX-10.2                       



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##### Table of Contents



NATIONAL SCIENTIFIC CORPORATION

FORM 10-QSB

INDEX

Part I Financial Information

Item 1. Financial Statements (unaudited)



| |  |  | Balance Sheet  March 31, 2001                                                                                                                         
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Statements of Operations Three Months and Six Months ended March 31,
2001, 2000 and Cumulative from October 1, 1997 (Inception) through March
31, 2001
|
| |  |  | Statements of Cash Flows Six Months ended March 31, 2001, 2000 and
Cumulative from October 1, 1997 (Inception) through March 31, 2001                 
|
| |  |  | Statements of Changes in Shareholders Equity Six Months ended March
31, 2001                                                                         
|
| |  |  | Notes to Financial Statements                                                                                                                          

Item 2. Managements Discussion and Analysis or Plan of Operation

Part II Other Information

Item 1 Legal
Proceedings

Item 2 Changes in Securities and Use of Proceeds

Item 4 Submission
of Matters To A Vote of Security Holders

Item 6 Exhibits and reports on Form 8-K

Signatures

2



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##### Table of Contents


















PART I FINANCIAL INFORMATION
Item 1. Financial Statements

NATIONAL SCIENTIFIC CORPORATION

(A Development Stage Company)
Unaudited Condensed Balance Sheet
March 31, 2001

|                                                             |  |                                                                                                       |                                            |   |             |           | 
|------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | --------- | 
|                                                             |  |                                                                                                       |                                            |   | 2001        |          
|                                                             |  |                                                                                                       |                                            |   |             |          
|ASSETS                                                      
|                                                            
|                                                            
|                                                            
|                                                            
|Current assets:                                             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Cash and cash equivalents                                                                             |                                            | $ | 1,934,817   |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Loan to officer                                                                                       |                                            |   | 200,000     |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Notes receivable                                                                                      |                                            |   | 150,000     |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Other assets                                                                                          |                                            |   | 69,177      |          
|                                                             |  |                                                                                                       |                                           
|                                                             |  |                                                                                                       | Total current assets                       |   |             | 2,353,994 | 
|                                                             |  |                                                                                                       |                                           
|Property and equipment, net                                  |  |                                                                                                       | 123,564                                    |  
|                                                             |  |                                                                                                       |                                           
|                                                             |  |                                                                                                       | Total assets                               |   | $           | 2,477,558 | 
|                                                             |  |                                                                                                       |                                           
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)              
|                                                            
|                                                            
|                                                            
|                                                            
|Current liabilities:                                        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Accounts payable and accrued expenses                                                                 |                                            | $ | 42,923      |          
|                                                             |  |                                                                                                       |                                           
|                                                             |  |                                                                                                       | Total current liabilities                  |   |             | 42,923    | 
|                                                             |  |                                                                                                       |                                           
|Commitments, contingencies and subsequent events (see notes)
|                                                            
|                                                            
|                                                            
|                                                            
|Shareholders equity (deficit):                             
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Preferred stock, par value $.10; 4,000,000 shares authorized,                                        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | No shares issued and outstanding                                                                      |                                            |   |            |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Common stock, par value $.01; 120,000,000 shares authorized,
47,282,498 shares issued and outstanding |                                            |   | 472,825     |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Additional paid-in-capital                                                                            |                                            |   | 14,255,851  |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Add common stock options exercisable                                                                  |                                            |   | 1,835,442   |          
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Deficit accumulated during the development stage                                                      |                                            |   | (11,734,803 | )        
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             |  | Accumulated deficit                                                                                   |                                            |   | (2,394,680  | )        
|                                                             |  |                                                                                                       |                                           
|                                                             |  |                                                                                                       | 2,434,635                                  |  
|                                                             |  |                                                                                                       |                                           
|                                                             |  |                                                                                                       | Total liabilities and stockholders equity |   | $           | 2,477,558 | 
|                                                             |  |                                                                                                       |                                           

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

3



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NATIONAL SCIENTIFIC CORPORATION

(A Development Stage Company)
Unaudited Condensed Statements of Operations
For the Quarters Ended and Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |             |         |   |   |             |           |  
|-------------------------------------------- | ------------------------------ | - | -------------- | ------- |  | -------------- | -------- | ------- | -------------- | - | ---------- | -------------- |  | - | ----------- | ------- | - | - | ----------- | --------- | -
|                                             |                                |   | Three Months   |         |  | Three Months   |          |         | Six Months     |   |            | Six Months     |  |   | Cumulative  |        
|                                             |                                |   | Ended          |         |  | Ended          |          |         | Ended          |   |            | Ended          |  |   | Development |        
|                                             |                                |   | March 31, 2001 |         |  | March 31, 2000 |          |         | March 31, 2001 |   |            | March 31, 2000 |  |   | Stage       |        
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |             |        
|Revenues                                     |                                | $ | 317,780        |         |  | $              |         |         |                | $ | 317,780    |                |  | $ |            |         |   | $ | 317,780     |          
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |                                |   | 312,000        |         |  |                |         |         |                |   | 312,000    |                |  |   |            |         |   |   | 312,000     |          
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|                                             | Gross profit                   |   |                | 5,780   |  |                |          |        |                |   |            | 5,780          |  |   |             |        |   |   |             | 5,780     |  
|                                            
|                                            
|                                            
|                                            
|Operating expenses                          
|                                            
|                                            
|                                            
|                                            
|                                             | Salaries and benefits          |   |                | 181,802 |  |                |          |        |                |   |            | 311,433        |  |   |             |        |   |   |             | 385,139   |  
|                                            
|                                            
|                                            
|                                            
|                                             | Consulting fees, related party |   |                |        |  |                |          | 115,540 |                |   |            | 422,008        |  |   |             | 520,540 |   |   |             | 3,856,991 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Research and development       |   |                | 327,824 |  |                |          | 218,259 |                |   |            | 514,259        |  |   |             | 296,286 |   |   |             | 2,399,540 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Stock compensation             |   |                | 571,682 |  |                |          |        |                |   |            | 4,014,842      |  |   |             | 50,320  |   |   |             | 4,170,118 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Other                          |   |                | 344,292 |  |                |          | 41,291  |                |   |            | 558,981        |  |   |             | 103,615 |   |   |             | 1,028,778 |  
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|                                             |                                |   | 1,425,600      |         |  |                | 375,090  |         |                |   | 5,821,523  |                |  |   | 970,761     |         |   |   | 11,840,566  |          
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|Net loss from operations                     |                                |   | (1,419,820     | )       |  |                | (375,090 | )       |                |   | (5,815,743 | )              |  |   | (970,761    | )       |   |   | (11,834,786 | )        
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|Other income (expense)                      
|                                            
|                                            
|                                            
|                                            
|                                             | Interest and other income      |   |                | 29,163  |  |                |          | 9,086   |                |   |            | 71,907         |  |   |             | 13,160  |   |   |             | 144,854   |  
|                                            
|                                            
|                                            
|                                            
|                                             | Interest expense               |   |                |        |  |                |          | (2,439  | )              |   |            |               |  |   |             | (5,189  | ) |   |             | (16,316   | )
|                                            
|                                            
|                                            
|                                            
|                                             | Loss on disposal of assets     |   |                |        |  |                |          |        |                |   |            |               |  |   |             |        |   |   |             | (28,555   | )
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|                                             |                                |   | 29,163         |         |  |                | 6,647    |         |                |   | 71,907     |                |  |   | 7,971       |         |   |   | 99,983      |          
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|Net loss before income tax                   |                                |   | (1,390,657     | )       |  |                | (368,443 | )       |                |   | (5,743,836 | )              |  |   | (962,790    | )       |   |   | (11,734,803 | )        
|                                            
|                                            
|                                            
|                                            
|Provision for income taxes                   |                                |   |               |         |  |                |         |         |                |   |           |                |  |   |            |         |   |   |            |          
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|Net loss                                     |                                | $ | (1,390,657     | )       |  | $              | (368,443 | )       |                | $ | (5,743,836 | )              |  | $ | (962,790    | )       |   | $ | (11,734,803 | )        
|                                             |                                |   |                |         |  |                |          |         |                |   |            |                |  |   |            
|Net loss per common share, basic and diluted |                                | $ | (.03           | )       |  | $              | (.01     | )       |                | $ | (0.12      | )              |  |   | (.02        | )      
|                                             |                                |   |                |         |  |                |          |         |                |   |            |               

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

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NATIONAL SCIENTIFIC CORPORATION

(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |         |           |             |             |           |            |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------ | ----------------------------------------- | ---------- | -------------- | ---------- | --------- | -------------- | ------- | --------- | ----------- | ----------- | --------- | ---------- | -
|                                                     |                                                                             |                                                              |                                           |            | Six Months     |            |           | Six Months     |         |           | Cumulative  |            
|                                                     |                                                                             |                                                              |                                           |            | Ended          |            |           | Ended          |         |           | Development |            
|                                                     |                                                                             |                                                              |                                           |            | March 31, 2001 |            |           | March 31, 2000 |         |           | Stage       |            
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |         |           |             |            
|Cash flows from operating activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                    |                                                              | $                                         | (5,743,836 | )              |            | $         | (962,790       | )       |           | $           | (11,734,803 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net
cash used in operating activities:
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Depreciation                                                 |                                           |            | 7,433          |            |           |                | 668     |           |             |             | 17,452    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Loss on disposal of assets                                   |                                           |            |               |            |           |                |        |           |             |             | 28,555    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Stock and options issued for services                        |                                           |            | 952,342        |            |           |                | 598,289 |           |             |             | 7,210,257 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Amortization of deferred stock compensation                  |                                           |            | 3,062,500      |            |           |                |         |           |             |             | 1,000,000 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Decrease in receivables                                      |                                           |            |               |            |           |                |        |           |             |             | 30,000    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | (Increase) decrease in other assets                          |                                           |            | 36,379         |            |           |                | (4,174  | )         |             |             | (58,606   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Increase (decrease) in accounts payable and accrued expenses |                                           |            | 16,969         |            |           |                | 28,669  |           |             |             | 20,344    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                             | Increase (decrease) in accrued interest expense              |                                           |            |               |            |           |                | (8,530  | )         |             |             |          |           
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|                                                     |                                                                             |                                                              | Net cash used in operating activities     |            |                | (1,668,213 | )         |                |         | (347,868  | )           |             |           | (3,486,801 | )
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|Cash flows from investing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Loans issued                                                                |                                                              |                                           | (200,000   | )              |            |           |               |         |           |             | (400,000    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of loans                                                          |                                                              |                                           | 50,000     |                |            |           |               |         |           |             | 50,000      |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of property and equipment                                       |                                                              |                                           | (123,600   | )              |            |           |                |         |           |             | (129,449    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the sale of furniture and equipment                           |                                                              |                                           |           |                |            |           |               |         |           |             | 4,660       |          
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|                                                     |                                                                             |                                                              | Net cash used in investing activities     |            |                | (273,600   | )         |                |         |          |             |             |           | (474,789   | )
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|Cash flows from financing activities:               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of shareholder loans                                              |                                                              |                                           |           |                |            |           |               |         |           |             | (10,000     | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of notes payable                                                  |                                                              |                                           |           |                |            |           | (110,000       | )       |           |             | (110,000    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of capital lease obligations                                      |                                                              |                                           |           |                |            |           |               |         |           |             | (1,819      | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the issuance of common stock                                  |                                                              |                                           | 1,291,730  |                |            |           | 2,419,150      |         |           |             | 5,532,108   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the issuance of preferred stock                               |                                                              |                                           |           |                |            |           |               |         |           |             | 482,500     |          
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|                                                     |                                                                             |                                                              | Net cash provided by financing activities |            |                | 1,291,730  |           |                |         | 2,309,150 |             |             |           | 5,892,789  |  
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                              | (650,083                                  | )          |                |            | 1,961,282 |                |         |           | 1,931,199   |            
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                                             |                                                              | 2,584,900                                 |            |                |            | 62,185    |                |         |           | 3,618       |            
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        
|Cash and cash equivalents, end of period             |                                                                             | $                                                            | 1,934,817                                 |            |                | $          | 2,023,467 |                |         | $         | 1,934,817   |            
|                                                     |                                                                             |                                                              |                                           |            |                |            |           |                |        

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

5



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NATIONAL SCIENTIFIC CORPORATION

(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

Supplementary Disclosure of Cash Flow Information

|                                             |  |                |   |  |                |  |        |       |  |             |       | 
|-------------------------------------------- |  | -------------- | - |  | -------------- |  | ------ | ----- |  | ----------- | ----- | 
|                                             |  |                |   |  |                |  |        |       |  | Cumulative  |      
|                                             |  |                |   |  |                |  |        |       |  | Development |      
|                                             |  | March 31, 2001 |   |  | March 31, 2000 |  |        | Stage | 
|                                             |  |                |   |  |                |  |        |       | 
|Cash paid during the period for interest     |  |                |  |  |                |  | 13,720 |       |  |             | 2,597 | 
|                                             |  |                |   |  |                |  |        |       | 
|Cash paid during the period for income taxes |  |                |  |  |                |  |       |       |  |             |      | 
|                                             |  |                |   |  |                |  |        |       | 

Summary of Non-Cash Investing and Financing Activities

During the quarter-ended December 31, 1999, the Company issued 1,128,600 shares of restricted common stock to a Directors family member in
exchange for 580,000 shares of unrestricted common stock.

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

6



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##### Table of Contents



NATIONAL SCIENTIFIC CORPORATION

(A Development Stage Company)
Statements of Changes in Shareholders Equity (Deficit)
For the Six Months Ended March 31, 2001

|                                   |  |              |            |   |                 |  |         |            |           |  |        |  |  |         |             |         |         |  |             |         |  |       |            |   |  |  |             |   |  |  |            |  
|---------------------------------- |  | ------------ | ---------- | - | --------------- |  | ------- | ---------- | --------- |  | ------ |  |  | ------- | ----------- | ------- | ------- |  | ----------- | ------- |  | ----- | ---------- | - |  |  | ----------- | - |  |  | ---------- | -
|                                   |  | Common Stock |            |   | Preferred Stock | 
|                                   |  |              |            |   |                 |  |         | Additional |           |  |        |  |  |         | Development |        
|                                   |  | Number of    |            |   |                 |  |         |            | Number of |  |        |  |  |         |             | Paid-In |         |  | Accumulated |         |  | Stage |           
|                                   |  | Shares       |            |   | Amount          |  |         | Shares     |           |  | Amount |  |  | Capital |             |         | Deficit |  |             | Deficit |  |       | Total      |  
|                                   |  |              |            |   |                 |  |         |            |           |  |        |  |  |         |             |         |         |  |             |         |  |       |            |  
|Balance, September 30, 2000        |  |              | 47,195,768 |   |                 |  | 471,958 |            |           |  |       |  |  |         |            |         |         |  | 10,785,588  |         |  |       | (2,394,680 | ) |  |  | (5,990,967  | ) |  |  | 2,871,899  |  
|                                  
|                                  
|                                  
|                                  
|Stock issued for services          |  |              | 120,000    |   |                 |  | 1,200   |            |           |  |       |  |  |         |            |         |         |  | 115,700     |         |  |       |           |   |  |  |            |   |  |  | 116,900    |  
|                                  
|                                  
|                                  
|                                  
|Exercise of warrants and options   |  |              | 1,291,730  |   |                 |  | 12,917  |            |           |  |       |  |  |         |            |         |         |  | 1,278,813   |         |  |       |           |   |  |  |            |   |  |  | 1,291,730  |  
|                                  
|                                  
|                                  
|                                  
|Amortization of stock
compensation |  |              |           |   |                 |  |        |            |           |  |       |  |  |         |            |         |         |  | 2,062,500   |         |  |       |           |   |  |  |            |   |  |  | 2,062,500  |  
|                                  
|                                  
|                                  
|                                  
|Exchange of stock for options      |  |              | (1,325,000 | ) |                 |  | (13,250 | )          |           |  |       |  |  |         |            |         |         |  | 13,250      |         |  |       |           |   |  |  |            |   |  |  |           |  
|                                  
|                                  
|                                  
|                                  
|Common stock options exercisable   |  |              |           |   |                 |  |        |            |           |  |       |  |  |         |            |         |         |  | 1,835,442   |         |  |       |           |   |  |  |            |   |  |  | 1,835,442  |  
|                                  
|                                  
|                                  
|                                  
|Net loss                           |  |              |           |   |                 |  |        |            |           |  |       |  |  |         |            |         |         |  |            |         |  |       |           |   |  |  | (5,743,836  | ) |  |  | (5,743,836 | )
|                                   |  |              |            |   |                 |  |         |            |           |  |        |  |  |         |             |         |         |  |             |         |  |       |            |  
|Balance, March 31, 2001            |  |              | 47,282,498 |   |                 |  | 472,825 |            |           |  |       |  |  |         |            |         |         |  | 16,091,293  |         |  |       | (2,394,680 | ) |  |  | (11,734,803 | ) |  |  | 2,434,635  |  
|                                   |  |              |            |   |                 |  |         |            |           |  |        |  |  |         |             |         |         |  |             |         |  |       |            |  

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

7



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NATIONAL SCIENTIFIC CORPORATION

NOTES TO FINANCIAL STATEMENTS

|1. |  | Basis of Presentation
|-- |  | ---------------------



| |  | The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), pursuant to the
rules and regulations of the Securities and Exchange Commission (the
SEC), and are unaudited. In the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations and
cash flows for the periods presented have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or
omitted pursuant to the rules and regulations of the SEC. The results
of operations for the three and six months ended March 31, 2001, are
not necessarily indicative of the results to be expected for the full
fiscal year.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys annual
report on Form 10-KSB for the fiscal year ended September 30, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



|2. |  | Revenues
|-- |  | --------



| |  | We are a development stage company. Revenues generated during the
three month period ended March 31, 2001 totaled $317,780 and resulted from the export
of electronic products we purchased from a third party. The export of
purchased product is not representative of the principal operations of
the Company, which is the development and commercialization of patented
technology. Therefore, the Company remains in the development stage.
The profit margins are low on these exports, but generate some cash to
allow the Company to continue to grow its corporate infrastructure.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Employment Agreement
|-- |  | --------------------



| |  | The employment agreement with Dr. Hashemi became effective as of
December 1, 2000. The 1,325,000 shares of restricted common stock
previously granted to him have been exchanged for options to purchase
2,100,000 and 666,700 shares of common stock at per share exercise
prices of $.46 and $.29, respectively. These exercise prices
represented 25% of the fair market value of the common stock on
December 1, 2000 and January 1, 2001, respectively. Compensation
expense of $3,418,260 for these below market option grants was recorded
in the quarter ended December 31, 2000.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | Issuance of Common Stock
|-- |  | ------------------------



| |  | During the three months ended March 31, 2001, there were no issuances of
common stock. During the three months ended December 31, 2000, the
Company received $1,291,730 and issued 1,291,730 shares of restricted
common stock in connection with the exercise of its $1.00 common stock
warrants. The Company also issued 100,000 shares of restricted common
stock valued at $92,000 to consultants and principals as compensation
for services rendered. During the three months ended December 31,
2000, the Company issued 20,000 shares of restricted common stock
valued at $24,900 to consultants as compensation for services.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the quarter ended March 31, 2000, the Company received $750,000 from
a private placement of common stock. In conjunction with the private
placement, the Company issued 600,000 shares of restricted stock valued
at $72,000 to a principal and a consultant of the Company. The Company
also issued 500,000 shares of restricted common stock to consultants as
compensation for services.                                                                                                                                                                                                                                     

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|5. |  | Stock Options
|-- |  | -------------



| |  | The Company from time to time issues stock options for the purchase of
common stock to directors, officers, employees and consultants. The
Company adopted a qualified stock option plan for its executives and
employees in December 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company adopted Accounting Practices Bulletin (ABP) Opinion 25,
Accounting for Stock Issued to Employees and related interpretations
in accounting for the plan. Accordingly, for employees and directors
compensation expense is equal to the difference between the exercise
price of the options granted and the fair value of the common stock at
the date of grant. Compensation of $571,682 was recognized for the
quarter ended March 31, 2001. Under the terms of the Companys stock
options granted to certain directors, officers, employees and
consultants, the Board of Directors, at its sole discretion, determines
at the time of grant when certain options granted shall be fully vested
and exercisable. At March 31, 2001, vested options outstanding were
4,560,001 and non-vested outstanding options were 287,000.
|
| |  | In accordance with APB Opinion 25, the fair value of option grants is
estimated on the date of grant using the Black-Scholes option-pricing
model for pro forma footnote purposes with the following assumptions
used for grants in all years; dividend yield of 0%, risk-free interest
rate of 5%, and expected option life of 5 years. Expected volatility
was assumed to be 100% as of the date of issue.                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                        |           |  |           |           |   |          |          |      | 
|--------------------------------------- | --------- |  | --------- | --------- | - | -------- | -------- | ---- | 
|                                        |           |  |           |           |   |          | Weighted |     
|                                        |           |  | Number    |           |   | Average  |         
|                                        |           |  | Of        |           |   | Exercise |         
|                                        |           |  | Shares    |           |   | Price    |         
|                                        |           |  |           |           |   |          |         
|Options Outstanding, September 30, 2000 |           |  |          |           |   |          |         |     
|                                       
|                                       
|                                       
|                                       
|                                        | Granted   |  |           | 4,938,668 |   |          | $        | 0.87 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Forfeited |  |           | (91,667   | ) |          | $        | 0.84 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Exercised |  |           |          |   |          |          |     | 
|                                        |           |  |           |           |   |         
|Options Outstanding, March 31, 2001     |           |  | 4,847,001 |           |   | $        | 0.87     |     
|                                        |           |  |           |           |   |         



| |  | Had the Company fully adopted State of Financial Accounting Standards
No. 123, Accounting for Stock Based Compensation the loss from
operations for the second fiscal quarter ended March 31, 2001, would
have been approximately ($8.8) million and basic loss per share would
have been ($0.18).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | Loan to Officer
|-- |  | ---------------



| |  | During the quarter ended December 31, 2000, the Company renewed a loan with
a director and officer for $200,000, bearing interest at 10% per annum
and due on December 1, 2001. As of March 31, 2001, accrued interest on
this note totaled $19,275.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. |  | Notes Receivable
|-- |  | ----------------



| |  | In January 2001, the Company loaned $100,000 to Phoenix Semiconductor,
Inc., as part of a comprehensive business relationship. This loan
bears interest at the rate of 12% per annum and is due and payable in
two installments of $50,000 plus accrued interest in March and April
2001. At March 31, 2001, $50,000 of this loan plus accrued interest
was outstanding. See Note 9 below.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Also in January 2001, the Company loaned $100,000 to an entity bearing
interest at the rate of 12% per annum. The Chairman of the Board of
the entity is also a director of the Company. The loan is due and
payable in July 2001.                                                                                                                                                        

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|8. |  | Net Loss Per Share
|-- |  | ------------------



| |  | Net loss per share is computed by dividing the loss attributable to
common shareholders by the weighted average number of shares
outstanding during the period, which was assumed to be 47,474,131 and
41,898,332 for the six months ended March 31, 2001 and 2000,
respectively. Stock options and warrants are considered anti-dilutive
and were not considered in the calculation.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. |  | Subsequent Event
|-- |  | ----------------



| |  | In May 2001, we entered into an agreement with Phoenix Semiconductor,
Inc. (PSI) which grants the Company exclusive distribution rights for
certain Thyristor and Schottky wafer related products produced by PSI.
Under the terms of the agreement, PSI has agreed to manufacture wafers
containing these products for the Company. In return, the Company
intends to market and sell these wafers or packaged products to third
parties. The agreement has a one-year term and is renewable at the
option of the Company for additional one-year terms. We expect
production of wafers to begin in the third fiscal quarter of 2001 and
sales of these products to be recorded in the final quarter of fiscal
2001.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 2. Managements Discussion and Analysis or Plan of Operation

SAFE HARBOR STATEMENT

The statements contained in this report on Form 10-QSB that are not historical
fact are forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995). These statements can be identified
by the use of forward looking terminology such as believes, expects, may,
will, should, anticipates, or possible, or the negative thereof or
other written variations thereof or comparable terminology. The
forward-looking statements contained herein are based on current expectations
that involve a number of risks and uncertainties. Although the Company
believes that the assumptions underlying the forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in forward-looking statements
will be realized. In addition, the business and operations of the Company are
subject to substantial risks, which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, such information should not
be regarded as a representation by the Company, or any other person, that the
objectives or plans for the Company will be achieved.

Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

We are a development stage company. Revenues generated during the three month
period ended totaled $317,780 and resulted from the export of electronic
products we purchased from a third party. The export of purchased product is
not representative of the principal operations of the Company, which is the
development and commercialization of patented technology. Therefore, the
Company remains in the development stage.

In the next twelve months, we expect to continue research and development
expenditures. The purpose of these expenditures is to bring our existing
products closer to the point of market readiness by producing working
prototypes along with design and process specifications. Additionally, these
expenditures will be used for continued research into RF technologies that are
anticipated to provide wireless products into next generation electronic
devices. There can be no assurance that we will be successful in completing
these tasks in the time period estimated.

Operating expenses for the three months ended March 31, 2001, of approximately
$1.4 million are up from the comparable period ended March 31, 2000, which were
approximately $375,000. This increase was primarily due to the employment of
approximately 10 employees in the Companys corporate office, which constitute
the management team for the Company. In addition, in September 2000 we opened
our research and development facility in San Jose, California, which now
consists of five additional full time employees.

The employment agreement with Dr. Hashemi became effective as of December 1,
2000. The 1,325,000 shares of restricted common stock previously granted to
him have been exchanged for options to purchase 2,100,000 and 666,700 shares of
common stock at per share exercise prices of $.46 and $.29, respectively.
These exercise prices represented 25% of the fair market value of the common
stock on December 1, 2000 and January 1, 2001, respectively. Compensation
expense of $3,418,260 for these below market option grants was recorded in the
quarter ended December 31, 2000.

Compensation and benefits have increased by approximately $182,000 due to the
addition of the Chief Executive Officer, Chief Operating and Financial
Officers, the Global Director of Marketing, and other corporate support staff.
In addition, research and development costs increased approximately $110,000.
Research and development costs increased due primarily to our opening our San
Jose, California research facility and hiring an additional research scientist.

Liquidity and Capital Resources

For the three months ended March 31, 2001, no additional capital was received.
During the three months ended December 31, 2000, the Company received
$1,291,730 and issued 1,291,730 shares of restricted common stock in connection
with the exercise of its $1.00 common stock warrants. The Company also issued
100,000 shares of restricted common stock valued at $92,000 to consultants and
principals as compensation for services rendered.

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##### Table of Contents



During the three months ended December 31, 2000, the Company issued 20,000
shares of restricted common stock valued at $24,900 to consultants as
compensation for services.

Warrants to acquire 4,150,000 shares of restricted common stock at per share
exercise price of $1.50 were issued in conjunction with our August 1999 private
placement, at an exercise price of $1.50 per share. Prior to the fiscal
quarter ended March 31, 2001, 120,000 of these warrants were exercised,
yielding proceeds to the Company of $180,000. The warrants expire on December
31, 2001.

Cash used in operations was approximately $1,668,000 for the six months ended
March 31, 2001, compared with approximately $348,000 for the six month period
ended March 31, 2000. The increase in cash used in operations was primarily
attributable to the hiring of additional personnel, including the Chief
Operating and Financial Officers, both of whom were hired in October 2000, the
Global Director of Marketing who was hired on December 1, 2000 and a research
scientist in San Jose, California who was hired on November 1, 2000. In
addition, the Group President and Chief Technology Officer of NSC, as an
independent consultant, was engaged on September 1, 2000 and employed on
December 1, 2000.

We believe that our cash position of approximately $1.9 million as of March 31,
2001, combined with expected proceeds from the exercise of outstanding warrants
to be sufficient to continue operations for the next twelve months. Such future
requirements are based upon managements best estimates based upon current
conditions and the most recent results of operations. Should the stock price
not support the exercise of options, alternative financing will be pursued.
There can be no assurance that alternative financing will be available.







PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.







Item 2. Changes in Securities and Use of Proceeds

On December 31, 1999, we completed a private placement of 4,165,000 restricted
shares of common stock at an average per share price of $.20, yielding proceeds
to the Company of $830,000. Of these totals, $750,000 was raised and 3,765,000
shares were sold during the quarter ended December 31, 1999.

As part of this offering, we also issued warrants to purchase an aggregate of
4,150,000 shares of common stock at a per share price of $1.50. These warrants
are immediately exercisable and expire on December 31, 2001. One hundred
twenty thousand (120,000) of these warrants have been exercised as of the date
of this report. These securities were sold in reliance on the exemption
provided by Sections 4 (2) and 4 (6) of the Securities Act of 1933, as amended,
and Rule 506 of Regulation D promulgated thereunder.

During the three months ended December 31, 2000, approximately 1.3 million
warrants were exercised at $1.00 each. These represent a portion of the
9,650,000 warrants issued in conjunction with our March 15, 1998, primate
placement. The remaining and unexercised warrants issued in this private
offering expired on December 31, 2000. The shares were sold in reliance on the
exemption provided by Sections 4(2) and 4(6) of the Securities Act of 1933 and
Rule 506 of Regulation D.

In addition, during the three months ended December 31, 2000, 100,000
restricted shares of common stock were issued to the Chief Operating Officer,
in accordance with his employment agreement, and 15,000 shares were granted to
a consultant for services rendered

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

None.

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Item 6. Exhibits and reports on Form 8-K

(a) Exhibits



| |  |  | Exhibit 10.1 Employment Agreement- Majid Hashemi, Ph.D. dated December 1,
2000                                                           
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Exhibit 10.2 Letter Agreement Between National Scientific Corporation and
E4World Regarding Electronic Component Logistic Services (ECLS)

(b) Reports on Form 8-K No reports on Form 8-K were filed during the
quarter.







SIGNATURES



| |  |  | Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |                                                                 
|----------------- |  | ----------------------------------------------------------------
|                  |  | NATIONAL SCIENTIFIC CORPORATION                                 
|                 
|May 15, 2001
DATE |  | /s/ L.L. Ross
L.L Ross
Chairman of the Board, President & C.E.O.
|                 
|                  |  | /s/ Sam H. Carr
Sam H. Carr
Corporate Secretary                 

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INDEX TO EXHIBITS



| |  |  | Exhibit 10.1 Employment Agreement- Majid Hashemi, Ph.D., dated December
1, 2000                                                          
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Exhibit 10.2 Letter Agreement Between National Scientific Corporation and
E4World Regarding Electronic Component Logistic Services (ECLS)

[THIS SECTION LEFT BLANK INTENTIONALLY]

14