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



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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: June 30, 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.)



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



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 86-0837077                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |  |                                     
|                                                              
|                                                              
|                                                              
|                                                              
|4455 East Camelback Road, Suite E160
Phoenix, AZ               |  | 85018                               
|                                                              
|                                                              
|                                                              
|                                                              
|(Address of Principal Executive Offices)                       |  | (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 47,367,498 shares of Common Stock, par value $.01 per share,
outstanding at August 14, 2001.

Transitional Small Business Disclosure Format (Check One):   Yes NoX



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TABLE OF CONTENTS



|                                                                  |                                                                   |  |  |  |  |  |  | 
|----------------------------------------------------------------- | ----------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION                                   
|                                                                  | Item 1. Financial Statements.                                    
|Unaudited Condensed Balance Sheets                               
|Unaudited Condensed Statements of Operations                     
|Unaudited Condensed Statements of Cash Flows                     
|Unaudited Statements of Changes in Shareholders Equity (Deficit)
|                                                                  | 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 3. Defaults Upon Senior Securities.                         
|                                                                  | Item 4. Submission of Matters to a Vote of Security Holders.     
|                                                                  | Item 5. Other Information.                                       
|                                                                  | Item 6. Exhibits and Reports on Form 8-K.                        
|SIGNATURES                                                       
|INDEX TO EXHIBITS                                                



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##### Table of Contents



National Scientific Corporation

INDEX

|                              |                                                                   |                                                                                                                                                    |    |    |   | 
|----------------------------- | ----------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | -- | -- | - | 
|PART I FINANCIAL INFORMATION |                                                                   |                                                                                                                                                    |    |   
|                             
|                             
|                             
|                             
|                              | Item 1. Financial Statements (unaudited)                          |                                                                                                                                                    |    | 1  |  
|                             
|                             
|                             
|                             
|                              |                                                                   | Balance Sheet  June 30, 2001 and September 30, 2000                                                                                               |    |    | 2 | 
|                             
|                             
|                             
|                             
|                              |                                                                   | Statements of Operations Three and Nine months ended
June 30, 2001 and 2000 and Cumulative from October 1, 1997 (Inception)
through June 30, 2001 |    |    | 3 | 
|                             
|                             
|                             
|                             
|                              |                                                                   | Statements of Cash Flows Nine Months ended June 30, 2001 and
2000 and Cumulative from October 1, 1997 (Inception)
through June 30, 2001           |    |    | 4 | 
|                             
|                             
|                             
|                             
|                              |                                                                   | Statements of Changes in Shareholders Equity  Nine Months
ended June 30, 2001                                                                    |    |    | 6 | 
|                             
|                             
|                             
|                             
|                              |                                                                   | Notes to Financial Statements                                                                                                                      |    |    | 7 | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements Discussion and Analysis or Plan of Operation |                                                                                                                                                    |    | 11 |  
|                             
|                             
|                             
|                             
|PART II  OTHER INFORMATION   |                                                                   |                                                                                                                                                    |    |   
|                             
|                             
|                             
|                             
|                              | Item 1  Legal Proceedings                                        |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 2  Changes in Securities and Use of Proceeds                |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 3  Defaults Upon Senior Securities                          |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 4  Submission of Matters to a Vote of Security Holders      |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 5  Other Information                                        |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|                              | Item 6  Exhibits and Reports on Form 8-K                         |                                                                                                                                                    |    | 14 |  
|                             
|                             
|                             
|                             
|Signatures                    |                                                                   |                                                                                                                                                    | 15 |   

i



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1. Financial Statements.

1



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##### Table of Contents






NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Balance Sheets
At June 30, 2001 and September 30, 2000

|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |             |           |  | 
|------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------- | ---------------------------------------------- | ------------- | --------- | - | --------- | ----------- | --------- |  | 
|ASSETS                                                                                                                          |                                                                                                       | June 30,                  |                                                | September 30,
|                                                                                                                                |                                                                                                       | 2001                      |                                                | 2000         
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |          
|Current assets:
Cash and cash equivalents                                                                                       |                                                                                                       | $                         | 835,411                                        |               |           | $ | 2,584,900 |            
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Advances to affiliates                                                                                |                           |                                                | 240,000       |           |   |           |            |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Inventory                                                                                             |                           |                                                | 264,500       |           |   |           |            |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Loan to officer                                                                                       |                           |                                                | 200,000       |           |   |           | 200,000     |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Notes receivable                                                                                      |                           |                                                | 100,000       |           |   |           |            |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Other assets                                                                                          |                           |                                                | 78,914        |           |   |           | 105,556     |          
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       | Total current assets      |                                                |               | 1,718,825 |   |           |             | 2,890,456 | 
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|Property and equipment, net                                                                                                     |                                                                                                       |                           | 138,647                                        |               |           |   | 7,397     |            
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|Deferred offering costs                                                                                                         |                                                                                                       |                           | 100,265                                        |               |           |   |           |            
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       | $                         | 1,957,737                                      |               |           | $ | 2,897,853 |            
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       |                           | LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |               |           |   |           |             |           |  | 
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|Current liabilities:
Accounts payable and accrued expenses                                                                      |                                                                                                       | $                         | 279,781                                        |               |           | $ | 25,954    |            
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Line of credit                                                                                        |                           |                                                | 200,000       |           |   |           |            |          
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       | Total current liabilities |                                                |               | 479,781   |   |           |             | 25,954    | 
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|Shareholders equity (deficit):
Preferred stock, $.10 par value; 4,000,000 shares authorized   No
shares issued and outstanding |                                                                                                       |                           |                                               |               |           |   |          |            
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Common stock, par value $.01; 120,000,000 shares authorized,
47,357,498 shares issued and outstanding |                           |                                                | 473,575       |           |   |           | 471,958     |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Additional paid-in-capital                                                                            |                           |                                                | 20,399,178    |           |   |           | 18,799,420  |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Less deferred stock compensation                                                                      |                           |                                                |              |           |   |           | (3,712,500  | )        
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Add common stock options exercisable                                                                  |                           |                                                | 1,853,817     |           |   |           |            |          
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                               
|                                                                                                                                | Accumulated deficit                                                                                   |                           |                                                | (21,248,614   | )         |   |           | (12,686,979 | )        
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       |                           | 1,477,956                                      |               |           |   | 2,871,899 |            
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            
|                                                                                                                                |                                                                                                       | $                         | 1,957,737                                      |               |           | $ | 2,897,853 |            
|                                                                                                                                |                                                                                                       |                           |                                                |               |           |   |           |            

See
accompanying notes to financial statements

2



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##### Table of Contents






NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Operations
For the Quarters Ended and Nine Months Ended June 30, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through June 30, 2001

|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |           |  
|-------------------------------------------- | ------------------------------ | - | ------------- | ------- | ------------- | - | ------------- | ------- | ------------- | - | ----------- | --------- | - | - | ---------- | --------- | - | - | ----------- | --------- | -
|                                             |                                |   | Three Month   |         | Three Month   |   | Nine Months   |         | Nine Months   |   | Cumulative 
|                                             |                                |   | Ended         |         | Ended         |   | Ended         |         | Ended         |   | Development
|                                             |                                |   | June 30, 2001 |         | June 30, 2000 |   | June 30, 2001 |         | June 30, 2000 |   | Stage      
|                                             |                                |   |               |         |               |   |               |         |               |   |            
|Revenues                                     |                                | $ | 299,000       |         |               |   |              |         |               | $ | 616,780     |           |   |   |           |           |   |   | 616,780     |          
|                                            
|                                            
|                                            
|                                            
|Cost of sales                                |                                |   | 293,250       |         |               |   |              |         |               |   | 605,250     |           |   |   |           |           |   |   | 605,250     |          
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|                                             | Gross profit                   |   |               | 5,750   |               |   |               |        |               |   |             | 11,530    |   |   |            |          |   |   |             | 11,530    |  
|                                            
|                                            
|                                            
|                                            
|Operating expenses                          
|                                            
|                                            
|                                            
|                                            
|                                             | Salaries and benefits          |   |               | 332,464 |               |   |               |        |               |   |             | 717,497   |   |   |            |          |   |   |             | 791,203   |  
|                                            
|                                            
|                                            
|                                            
|                                             | Consulting fees, related party |   |               |        |               |   |               | 500,450 |               |   |             | 422,008   |   |   |            | 2,630,457 |   |   |             | 8,158,323 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Research and development       |   |               | 506,345 |               |   |               | 706,768 |               |   |             | 1,020,606 |   |   |            | 1,003,054 |   |   |             | 2,905,887 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Stock compensation             |   |               |        |               |   |               |        |               |   |             | 5,664,842 |   |   |            | 50,320    |   |   |             | 5,820,118 |  
|                                            
|                                            
|                                            
|                                            
|                                             | Other                          |   |               | 260,449 |               |   |               | 47,530  |               |   |             | 839,084   |   |   |            | 151,145   |   |   |             | 1,308,881 |  
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|                                             |                                |   | 1,099,258     |         |               |   | 1,254,748     |         |               |   | 8,664,037   |           |   |   | 3,834,976  |           |   |   | 18,984,412  |          
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|Net loss from operations                     |                                |   | (1,093,508    | )       |               |   | (1,254,748    | )       |               |   | (8,652,507  | )         |   |   | (3,834,976 | )         |   |   | (18,972,882 | )        
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|Other
income (expense)                      
|                                            
|                                            
|                                            
|                                            
|                                             | Interest and other income      |   |               | 19,198  |               |   |               | 26,628  |               |   |             | 91,105    |   |   |            | 39,788    |   |   |             | 164,052   |  
|                                            
|                                            
|                                            
|                                            
|                                             | Interest expense               |   |               | (233    | )             |   |               |        |               |   |             | (233      | ) |   |            | (5,189    | ) |   |             | (16,549   | )
|                                            
|                                            
|                                            
|                                            
|                                             | Loss on disposal of assets     |   |               |        |               |   |               |        |               |   |             |          |   |   |            |          |   |   |             | (28,555   | )
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|                                             |                                |   | 18,965        |         |               |   | 26,628        |         |               |   | 90,872      |           |   |   | 34,599     |           |   |   | 118,948     |          
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|                                            
|                                            
|                                            
|                                            
|Net loss before income tax benefit           |                                |   | (1,074,543    | )       |               |   | (1,228,120    | )       |               |   | (8,561,635  | )         |   |   | (3,800,377 | )         |   |   | (18,853,934 | )        
|                                            
|                                            
|                                            
|                                            
|Provision for income taxes (benefit)         |                                |   |              |         |               |   |              |         |               |   |            |           |   |   |           |           |   |   |            |          
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|Net loss                                     |                                | $ | (1,074,543    | )       |               | $ | (1,228,120    | )       |               | $ | (8,561,635  | )         |   | $ | (3,800,377 | )         |   | $ | (18,853,934 | )        
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |   |             |          
|Net loss per common share, basic and diluted |                                | $ | (0.02         | )       |               | $ | (0.03         | )       |               | $ | (0.18       | )         |   | $ | (0.09      | )         |   |   |             |          
|                                             |                                |   |               |         |               |   |               |         |               |   |             |           |   |   |            |           |   |  







See accompanying notes to financial
statements

3



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##### Table of Contents






NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended June 30, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through June 30, 2001

|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |           |            |            |   | 
|---------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------- | ----------------------------------------- | --------- | ------------- | ---------- | ------------- | --------- | ----------- | ----------- | --------- | ---------- | ---------- | - | 
|                                                     |                                                    |                                                              |                                       |                                           |           | Nine Months   |            | Nine Months   |           | Cumulative 
|                                                     |                                                    |                                                              |                                       |                                           |           | Ended         |            | Ended         |           | Development
|                                                     |                                                    |                                                              |                                       |                                           |           | June 30, 2001 |            | June 30, 2000 |           | Stage      
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |            
|Cash
flows from operating activities                
|Net loss                                             |                                                    | $                                                            | (8,561,635                            | )                                         |           |               | (3,800,377 | )             |           | $           | (18,853,934 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to net loss:                           |                                                              |                                       |                                           |           |               |            |               |           |             |             |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Depreciation                                                 |                                       |                                           | 13,345    |               |            |               | 1,002     |             |             |           | 23,364     |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Loss on disposal of assets                                   |                                       |                                           |          |               |            |               |          |             |             |           | 28,555     |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Stock and options issued for services                        |                                       |                                           | 2,163,462 |               |            |               | 3,138,287 |             |             |           | 14,423,029 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Deferred stock compensation                                  |                                       |                                           | 3,712,500 |               |            |               |          |             |             |           |           |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Advances to affiliate                                        |                                       |                                           | (240,000  | )             |            |               |          |             |             |           | (240,000   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | (Increase) in inventory                                      |                                       |                                           | (264,500  | )             |            |               |          |             |             |           | (264,500   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Deferred offering costs                                      |                                       |                                           | (100,265  | )             |            |               |          |             |             |           | (100,265   | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Decrease in receivables                                      |                                       |                                           |          |               |            |               |          |             |             |           | 30,000     |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | (Increase) decrease in other assets                          |                                       |                                           | 26,642    |               |            |               | (76,568   | )           |             |           | (68,343    | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Increase (decrease) in accounts payable and accrued expenses |                                       |                                           | 253,827   |               |            |               | 2,946     |             |             |           | 257,202    |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                    | Increase (decrease) in accrued interest expense              |                                       |                                           |          |               |            |               | (8,530    | )           |             |           |           |           
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|                                                     |                                                    |                                                              | Net cash used in operating activities |                                           |           | (2,996,624    | )          |               |           | (743,240    | )           |           |            | (4,764,892 | )
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|Cash flows from investing activities:               
|Loans issued                                         |                                                    |                                                              | (200,000                              | )                                         |           |               |           |               |           |             | (200,000    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of loans                                 |                                                              |                                       | 100,000                                   |           |               |            |              |           |             |             | 100,000   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Acquisition of property and equipment              |                                                              |                                       | (144,595                                  | )         |               |            |              |           |             |             | (150,444  | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the sale of furniture and equipment  |                                                              |                                       |                                          |           |               |            |              |           |             |             | 4,660     |           
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|                                                     |                                                    |                                                              | (244,595                              | )                                         |           |               |           |               |           |             | (245,784    | )        
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|Cash flows from financing activities:               
|Draws on the line of credit                          |                                                    |                                                              | 200,000                               |                                           |           |               |           |               |           |             | 200,000     |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Loan to officer                                    |                                                              |                                       |                                          |           |               |            | (200,000      | )         |             |             | (210,000  | )         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | 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                                 |           |               |            | 2,773,000     |           |             |             | 5,481,788 |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the issuance of preferred stock      |                                                              |                                       |                                          |           |               |            |              |           |             |             | 482,500   |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the exercise of common stock options |                                                              |                                       |                                          |           |               |            | 32,150        |           |             |             |          |           
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|                                                     |                                                    |                                                              |                                       | Net cash provided by financing activities |           | 1,491,730     |            |               |           | 2,495,150   |             |           |            | 5,842,469  |  
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|Net (decrease) increase in cash and cash equivalents |                                                    |                                                              | (1,749,489                            | )                                         |           |               | 1,751,910  |               |           |             | 831,793     |          
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                    |                                                              | 2,584,900                             |                                           |           |               | 62,185     |               |           |             | 3,618       |          
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          
|Cash and cash equivalents, end of period             |                                                    | $                                                            | 835,411                               |                                           |           |               | 1,814,095  |               |           |             | 835,411     |          
|                                                     |                                                    |                                                              |                                       |                                           |           |               |            |               |           |             |             |          



See accompanying notes to financial
statements

6



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##### Table of Contents



NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Nine Months Ended June 30, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through June 30, 2001

Supplementary Disclosure of Cash Flow Information

|                                           |  |               |     |               |  |       |   |  |  |             |       | 
|------------------------------------------ |  | ------------- | --- | ------------- |  | ----- | - |  |  | ----------- | ----- | 
|                                           |  |               |     |               |  |       |   |  |  | Cumulative 
|                                           |  |               |     |               |  |       |   |  |  | Development
|                                           |  | June 30, 2001 |     | June 30, 2000 |  | Stage
|                                           |  |               |     |               |  |      
|Cash paid during the year for interest     |  |               | 233 |               |  |       |  |  |  |             | 2,830 | 
|                                           |  |               |     |               |  |       |   |  |  |             |       | 
|                                          
|                                          
|                                          
|                                          
|Cash paid during the year for income taxes |  |               | 50  |               |  |       |  |  |  |             | 50    | 
|                                           |  |               |     |               |  |       |   |  |  |             |       | 

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.













See accompanying notes to financial
statements

5



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##### Table of Contents






NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Statements of Changes in Shareholders Equity (Deficit)
For Nine Months Ended June 30, 2001

|                                   |  |              |            |                 |  |          |         |           |  |         |   |         |  |         |   |             |  |  |            |  |  |  |             |   |  |  |            |  
|---------------------------------- |  | ------------ | ---------- | --------------- |  | -------- | ------- | --------- |  | ------- | - | ------- |  | ------- | - | ----------- |  |  | ---------- |  |  |  | ----------- | - |  |  | ---------- | -
|                                   |  | Common Stock |            | Preferred Stock |  |          |         |           |  |         |   |         |  |         |   |            
|                                   |  |              |            |                 |  | Addition |         |           |  |         |   |         |  |        
|                                   |  | Number of    |            |                 |  |          |         | Number of |  |         |   |         |  | Paid-In |   | Accumulated |  |  |            | 
|                                   |  | Shares       |            | Amount          |  | Shares   |         | Amount    |  | Capital |   | Deficit |  | Total  
|                                   |  |              |            |                 |  |          |         |           |  |         |   |         |  |        
|Balance, September 30, 2000        |  |              | 47,195,768 |                 |  | $        | 471,958 |           |  |         |  |         |  |         |  |             |  |  | 15,086,920 |  |  |  | (12,686,979 | ) |  |  | 2,871,899  |  
|                                  
|                                  
|                                  
|                                  
|Stock issued for services @ $0.92  |  |              | 100,000    |                 |  |          | 1,000   |           |  |         |  |         |  |         |  |             |  |  | 164,600    |  |  |  |             |   |  |  | 165,600    |  
|                                  
|                                  
|                                  
|                                  
|Stock issued for services @ $0.86  |  |              | 15,000     |                 |  |          | 150     |           |  |         |  |         |  |         |  |             |  |  | 23,070     |  |  |  |             |   |  |  | 23,220     |  
|                                  
|                                  
|                                  
|                                  
|Stock issued for services @ $2.40  |  |              | 5,000      |                 |  |          | 50      |           |  |         |  |         |  |         |  |             |  |  | 21,550     |  |  |  |             |   |  |  | 21,600     |  
|                                  
|                                  
|                                  
|                                  
|Stock issued for services @ $0.74  |  |              | 75,000     |                 |  |          | 750     |           |  |         |  |         |  |         |  |             |  |  | 98,475     |  |  |  |             |   |  |  | 99,225     |  
|                                  
|                                  
|                                  
|                                  
|Exercise of warrants and options   |  |              | 1,291,730  |                 |  |          | 12,917  |           |  |         |  |         |  |         |  |             |  |  | 1,278,813  |  |  |  |            |   |  |  | 1,291,730  |  
|                                  
|                                  
|                                  
|                                  
|Amortization of stock compensation |  |              |           |                 |  |          |        |           |  |         |  |         |  |         |  |             |  |  | 3,712,500  |  |  |  |            |   |  |  | 3,712,500  |  
|                                  
|                                  
|                                  
|                                  
|Exchange of stock for options      |  |              | (1,325,000 | )               |  |          | (13,250 | )         |  |         |  |         |  |         |  |             |  |  | 13,250     |  |  |  |            |   |  |  |           |  
|                                  
|                                  
|                                  
|                                  
|Common stock options exercisable   |  |              |            |                 |  |          |         |           |  |         |  |         |  |         |  |             |  |  | 1,853,817  |  |  |  |            |   |  |  | 1,853,817  |  
|                                  
|                                  
|                                  
|                                  
|Net loss                           |  |              |           |                 |  |          |        |           |  |         |  |         |  |         |  |             |  |  |           |  |  |  | (8,561,635  | ) |  |  | (8,561,635 | )
|                                   |  |              |            |                 |  |          |         |           |  |         |   |         |  |         |   |             |  |  |            |  |  |  |             |   |  |  |            |  
|Balance, June 30, 2001             |  |              | 47,357,498 |                 |  | $        | 473,575 |           |  |         |  |         |  |         |  |             |  |  | 22,252,995 |  |  |  | (21,248,614 | ) |  |  | 1,477,956  |  
|                                   |  |              |            |                 |  |          |         |           |  |         |   |         |  |         |   |             |  |  |            |  |  |  |             |   |  |  |            |  



See accompanying notes to financial
statements

6



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##### Table of Contents



NATIONAL SCIENTIFIC CORPORATION

NOTES TO FINANCIAL STATEMENTS

June 30, 2001
(Unaudited)



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

The accompanying unaudited 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). In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows for the periods presented have
been included. 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-month and nine-month periods ended June 30, 2001, are
not necessarily indicative of the results to be expected for the full fiscal
year.

In conjunction with the Company's filing a
registration statement on Form SB-2, certain adjustments were
required to account for the fair value of stock issued to officers
and consultants during the two fiscal years ended September 30, 2000
and the nine months ended June 30, 2001. The Company is in the
process of restating financial statements during these periods. As a
result of these adjustments, additional compensation expense was
recorded increasing the accumulated deficit. An equal amount has
correspondingly been recorded to increase additional paid in capital,
leaving the total equity of the Company unchanged.



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
and nine month periods ended June 30, 2001, totaled $299,000 and $616,780,
respectively, 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 and implement its business plan.



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

The Company previously entered into an employment agreement with Dr.
Hashemi 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 approximately $3.4 million for
these below market option grants was recorded in the fiscal quarter ended
December 31, 2000.

Effective December 1, 2000, the Company began
employing it's management team. During the two fiscal years ended
September 30, 2000, the Company engaged the services of its
management team, researchers and others on an independent contractor
basis. Effective December
1, 2000, the Company began employing a total of eight individual,
including the executive team. Compensation to the independent
contractors prior to December 1, 2000 has been reported as
"Consulting fees, related party" in the accompanying financial
statements. Effective December 1, 2000, compensation paid to all
employees is included in "Salaries and benefits".

In connection with an equity transaction in
September 1999, the Board of Directors granted the Company's
Chairman, Mr. Lou Ross, the right to receive four percent (4%) of the
Company's gross revenue. Mr. Ross has waived his right to collect any of these
amounts through the date of these financial statements.

7



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##### Table of Contents





|4. |  | Line of Credit
|-- |  | --------------

In March 2001, the Company established a line of credit with Wells Fargo
HSBC Trade Bank totaling $500,000. The line of credit is collateralized with
deposits at Wells Fargo Bank. Borrowings under the line of credit bear
interest at the prime rate for Wells Fargo Bank, National Association. At June
30, 2001, there was $200,000 outstanding under the line of credit.



|5. |  | Equity Line of Credit
|-- |  | ---------------------

In May 2001, the Company entered into a common stock purchase agreement
with Coriander Enterprises Limited, a British Virgin Islands corporation, for
the future issuance and sale of shares of the Companys common stock. This
stock purchase agreement establishes an equity line of credit. Under this
arrangement, the Company, at its sole discretion, may make up to 24 draw down
requests over a two year period, pursuant to which Coriander Enterprises
Limited is obligated to purchase up to $24 million of the Companys common
stock, at prices that will vary based upon the market price of the common
stock, but will be below the market price of the common stock at the time of
any issuance. Changes in the market price and/or trading volume of the
Companys common stock may limit the Companys ability to draw down all $24
million under the equity line of credit. In June 2001, the Company filed a
registration statement on Form SB-2 for the resale of the securities issuable
pursuant to the purchase agreement was filed with the SEC. The Form SB-2 is
currently under review by the SEC and has not been declared effective by the
SEC.

Costs incurred to establish the equity line of credit, including legal,
accounting, SEC filing fees, and other financing related costs totaling
$100,265 have been accumulated in deferred offering costs on the balance sheet.
These costs will be amortized over the 24 month life of the equity line of
credit when the financing has been declared effective by the Securities and
Exchange Commission.



|6. |  | Issuance of Common Stock
|-- |  | ------------------------

During the three months ended June 30, 2001, the Company issued 75,000
shares of restricted common stock valued at $99,225 to a consultant for
services rendered. 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 outstanding $1.00 common
stock warrants. The Company also issued 100,000 shares of restricted common
stock valued at $165,600 to consultants and principals as compensation for
services rendered. Also during the three months ended December 31, 2000, the
Company issued 20,000 shares of restricted common stock valued at
$44,820 to
consultants as compensation for services rendered.

During the nine months ended June 30, 2000, the Company received $750,000
from the private placement of common stock. In conjunction with the private
placement, the Company issued 600,000 shares of restricted stock valued at
$1,062,720 to a principal and a consultant of the Company. Also during the nine
months ended June 30, 2000, the Company issued 1,078,151 shares of restricted
common stock to consultants as compensation for services rendered. The stock
was valued at 90% of the market price of the stock on the dates issued and
earned.

8



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##### Table of Contents





|7. |  | 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 Plan).

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 $55,125 was recognized for the fiscal quarter ended June 30,
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 June 30, 2001, there were
outstanding vested options to purchase an aggregate of 4,560,001 shares of
common stock at exercise prices ranging from $0.29 to $3.00 and un-vested
options to purchase an aggregate of 334,500 shares of common stock at exercise
prices ranging from $0.34 to $2.06.

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.

|                                        |           |  |           |           |                  |   |      |      | 
|--------------------------------------- | --------- |  | --------- | --------- | ---------------- | - | ---- | ---- | 
|                                        |           |  | Number of |           | Weighted Average
|                                        |           |  | Shares    |           | Exercise Price  
|                                        |           |  |           |           |                 
|Options Outstanding, September 30, 2000 |           |  |          |           |                  |   |     |     
|                                       
|                                       
|                                       
|                                       
|                                        | Granted   |  |           | 5,006,168 |                  |   | $    | 1.00 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Forfeited |  |           | (111,667  | )                |   | $    | 0.95 | 
|                                       
|                                       
|                                       
|                                       
|                                        | Exercised |  |           |          |                  |   |      |     | 
|                                        |           |  |           |           |                  |   |      |     
|Options Outstanding, June 30, 2001      |           |  | 4,894,501 |           |                  | $ | 1.00 |     
|                                        |           |  |           |           |                  |   |      |     

Had the Company fully adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock Based Compensation the loss from operations for
the fiscal quarter and nine months ended June 30, 2001, would have increased
approximately $30,000 and $3.0 million, respectively. The resulting basic loss
per share would have increased by $0.00 and $0.06 for the three-month and the
nine-month periods ended June 30, 2001, respectively.



|8. |  | Loan to Officer
|-- |  | ---------------

During the fiscal quarter ended December 31, 2000, the Company renewed a
loan payable to a director and officer for $200,000, bearing interest at 10%
per annum and due on December 1, 2001. As of June 30, 2001, accrued interest on
this note totaled $24,275.

9



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##### Table of Contents





|9. |  | Advances to Affiliate
|-- |  | ---------------------

In May, 2001, we entered into an exclusive distribution agreement with
Phoenix Semiconductor, Inc. (PSI), which grants us the exclusive right to
purchase and distribute power management electronic devices using Thyristor
and related technologies. Thyristors are electronic components that are needed
for protection of electronic circuits in virtually all telecommunications and
computer equipment. We have engaged PSI to manufacture the thyristors, and
intend to sell the products to retailers, wholesalers and other customers under
our own brand name. Our agreement calls for us to advance funds to PSI for the
purchase of raw material and to fund manufacturing costs for a period of time
until the sales of the products provide cash flow. The contract also provides
that we pay to PSI a license fee based on a percentage of revenue that we earn
on the sales of the licensed products.



|10. |  | Notes Receivable
|--- |  | ----------------

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 currently due.



|11. |  | Net Loss Per Share
|--- |  | ------------------

Net loss per common share is based upon the weighted average shares
outstanding. Outstanding stock options and warrants are treated as common
stock equivalents, but are anti-dilutive, for purposes of computing diluted net
loss per common share. The following is a summary of the computation of net
loss per common share (amounts in thousands except shares and per share
amounts):

|                                          |                                |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |            |  
|----------------------------------------- | ------------------------------ |  | ------------------ | ---------- | ----------------- |  | ---- | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                          |                                |  | Three months ended |            | Nine months ended
|                                          |                                |  | June 30,           |            | June 30,         
|                                          |                                |  |                    |            |                  
|                                          |                                |  | 2001               |            | 2000              |  | 2001 |            | 2000
|                                          |                                |  |                    |            |                   |  |      |            |     
|Basic net income (loss) per common
share: |                                |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |           
|                                         
|                                         
|                                         
|                                         
|                                          | Net income (loss)              |  | $                  | (1,074,543 | )                 |  | $    | (1,228,120 | )    |  | $ | (8,561,635 | ) |  | $ | (3,800,377 | )
|                                          |                                |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |           
|                                          | Weighted average common shares |  |                    | 47,339,366 |                   |  |      | 44,656,261 |      |  |   | 47,508,804 |   |  |   | 42,794,744 |  
|                                          |                                |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |           
|                                          | Basic per share amount         |  | $                  | (0.02      | )                 |  | $    | (0.03      | )    |  | $ | (0.18      | ) |  | $ | (0.09      | )
|                                          |                                |  |                    |            |                   |  |      |            |      |  |   |            |   |  |   |           

10



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##### Table of Contents






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

SAFE HARBOR STATEMENT

Certain statements made herein, in future filings by the Company with the
Securities and Exchange Commission and in the Companys written and oral
statements made by or with the approval of an authorized executive officer,
constitute forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, and the Company intends that such forward-looking statements be subject
to the safe harbors created thereby. 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. Forward-looking
statements are made based upon our belief as of the date that such statements
are made. These forward-looking statements are based on our current
expectations and are subject to a number of risks and uncertainties, many of
which are beyond our control. 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. The Company undertakes
no obligation to publicly update or revise any forward-looking statements
whether as a result of new information, future events, or otherwise.

Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000

We are a development stage company. Revenues for the three months ended
June 30, 2001, totaled $299,000, compared to $0 of revenue for the comparable
three-month period in fiscal 2000. This increase is primarily attributable to
the export of electronic products we purchased from a third party. The export
of purchased products is not representative of the principal operations of the
Company, which is the development and commercialization of the Companys
portfolio of patented technology. Accordingly, 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 expedite our existing
products to the point of market readiness by producing working prototypes along
with design and process specifications. 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 June 30, 2001, totaled
approximately $1.1 million, compared to operating expenses of approximately $1.2 million for the
comparable three-month period in fiscal 2000. This increase was primarily due
to the employment of approximately eight employees in the Companys corporate
office, which constitute the management team for the

11



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##### Table of Contents



Company. In addition, in September 2000 we opened our research and
development facility in San Jose, California, which now employs three
additional full time employees.

Salaries and benefits increased by approximately $332,000 during the three
months ended June 30, 2001, compared to the three months ended
June 30, 2000 due to the addition of the Companys current Chief
Executive Officer, Chief Operating and Financial Officers, the Global Director
of Marketing, and other corporate support staff. In addition, research and
development costs have decreased between the three month periods
ended June 30, 2001 and 2000 by approximately $200,000 due primarily to the
issuance of stock in the quarter ended June 30, 2000, which was a non-cash expense, to consultants for services
rendered.

Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30, 2000

Revenues generated during the nine month period ended June 30, 2001,
totaled approximately $617,000, compared to $0 of revenue for the comparable
nine-month period in fiscal 2000. This increase is primarily attributable to
the Companys export of electronic products 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 the Companys
portfolio of patented technology. Accordingly, the Company remains in the
development stage.

Operating expenses for the nine months ended June 30, 2001, totaled
approximately $8.7 million, compared to $3.8 million of operating expenses for
the comparable period in fiscal 2000. Approximately $5.6 million of
the increase was incurred due to the issuance of stock and options to
consultants and officers. During 2001 we
employed an additional eight 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 three additional full time employees. An
employment agreement with Dr. Hashemi became effective as of December 1, 2000.
Prior to his employment, Dr. Hashemi served as a consultant to the Company. In
December 2000, Dr. Hashemi agreed to exchange 1,325,000 shares of restricted
common stock previously granted to him in consideration for the grant of
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 approximately
$3.4 million for these below market option grants was recorded in the fiscal
quarter ended December 31, 2000.

Salaries and benefits increased by $717,497 for the nine months ended June
30, 2001, compared to $0 in the comparable nine-month period in fiscal 2000 due
to the addition of the Companys current Chief Executive Officer, Chief
Operating and Financial Officers, the Global Director of Marketing, and other
corporate support staff during the first fiscal quarter in 2001. In addition,
research and development costs have decreased for the nine months ended June
30, 2001, over the same period in fiscal 2000 to approximately $17,000 due primarily to the issuance of stock to consultants for services
rendered, which was accounted for as a non-cash expense.

12



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##### Table of Contents



Liquidity and Capital Resources

For the three months ended June 30, 2001, the Company did not generate any
cash from financing activities. During such period, the Company issued 75,000
shares of restricted common stock valued at $99,225 to a consultant for
services rendered.

During the three months ended December 31, 2000, the Company received
$1,291,730 in connection with the exercise of its outstanding warrants to
purchase 1,291,730 shares of restricted common stock with a per share exercise
price of $1.00. The Company also issued 100,000 shares of restricted common
stock valued at $165,600 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 $44,820 to
consultants as compensation for services rendered.

In March 2001, the Company established a line of credit with Wells Fargo
HSBC Trade Bank totaling $500,000. The line of credit is collateralized with
deposits at Wells Fargo Bank. Borrowings under the line of credit bear
interest at the prime rate of Wells Fargo Bank, National Association. At June
30, 2001, there was $200,000 outstanding under this line of credit.

In May 2001, the Company entered into a common stock purchase agreement
with Coriander Enterprises Limited, a British Virgin Islands corporation, for
the future issuance and sale of shares of the Companys common stock. This
stock purchase agreement establishes an equity line of credit. Under this
arrangement, the Company, at its sole discretion, may make up to 24 draw down
requests over a two year period, pursuant to which Coriander Enterprises
Limited is obligated to purchase up to $24 million of National Scientific
Corporation common stock, at prices that will vary based upon the market price
of the common stock, but will be below the market price of the common stock at
the time of issuance. Changes in the market price and/or trading volume of the
Companys common stock may limit the Companys ability to draw down all $24
million under the equity line of credit. In June 2001, a registration
statement on Form SB-2 registering the resale of the securities issuable under
the purchase agreement was filed with the Securities and Exchange Commission.
The Form SB-2 has not yet been declared effective by the Securities and
Exchange Commission.

Warrants to acquire
4,250,000 shares of restricted common stock at a 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 remaining unexercised
warrants expire on December 31, 2001.

At June 30, 2001, the Companys cash balance was approximately $835,000,
compared to approximately $2,585,000 at September 30, 2000. Cash used in
operating activities of $3.0 million and approximately $743,000 for the nine months ended
June 30, 2001 and 2000, respectively, 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 on September
1, 2000, the Company engaged its

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current President and Chief Technology Officer, as an independent
consultant, and then employed him on December 1, 2000.

We believe that our cash position of approximately $835,000 as of June 30,
2001, anticipated proceeds from the equity line of credit and potential
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 sufficient access to
cash under the equity line of credit, or 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.

The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management, there is no legal proceeding pending or asserted
against or involving the Company the outcome of which is likely to have a
material adverse effect upon the financial position or results of operations of
the Company.




Item 2. Changes in Securities and Use of Proceeds.

Not applicable.




Item 3. Defaults Upon Senior Securities.

Not applicable.




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

Not applicable.




Item 5. Other Information.

Not applicable.




Item 6. Exhibits and Reports on Form 8-K.



| | (a) |  | Exhibits.           
| | --- |  | --------------------
|
| | (b) |  | Reports on Form 8-K.



| |  |  | No reports on Form 8-K were filed during the fiscal quarter
ended June 30, 2001.
| |  |  | --------------------------------------------------------------------------------

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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                                 
|                     
|                      |  |                                                                 
|                     
|Date: August 14, 2001 |  | /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

[THIS SECTION LEFT BLANK INTENTIONALLY]

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