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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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                                   FORM 10-KSB

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                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                   THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
                      FISCAL YEAR ENDED SEPTEMBER 30, 2003

                                    000-28745
                              (Commission File No.)

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                         NATIONAL SCIENTIFIC CORPORATION
                 (Name of Small Business Issuer in its Charter)

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           TEXAS                                                 86-0837077
(State or Other Jurisdiction of                               (I.R.S. Employer
Incorporation or Organization)                               Identification No.)

   14455 NORTH HAYDEN ROAD, SUITE 202
             SCOTTSDALE, AZ                                          85260
(Address of Principal Executive Offices)                          (Zip Code)

                                 (480) 948-8324
                 (Issuers Telephone Number, Including Area Code)

              SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:
                        PREFERRED STOCK, $0.10 PAR VALUE

              SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
                          COMMON STOCK, $0.01 PAR VALUE

     Indicate  by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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


<PAGE>

     Revenues for the fiscal year ended September 30, 2003: $63,579.

     The  aggregate  market  value of voting  stock  held by  non-affiliates  of
National Scientific  Corporation's ("NSC's") common stock, as of January 9, 2004
was  approximately  $12,032,848  (based on the last sale  price of such stock as
reported  by OTCBB  Stock  Market).  The  number  of shares  outstanding  of the
registrant's common stock, as of January 9, 2004 was 72,981,465.

     A portion of the  Registrant's  Proxy Statement for the 2004 Annual Meeting
of Shareholders is incorporated into Part III as set forth therein.

     Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]


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                                     PART I

FORWARD LOOKING INFORMATION

     This Form 10-KSB contains  certain  forward-looking  statements  within the
meaning  of the  Private  Securities  Litigation  Reform  Act of 1995.  For this
purpose, any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing,  words such as "may," "will," "expect," "believe,"  "anticipate,"
"estimate,"  or "continue" or  comparable  terminology  are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties and actual results may differ materially  depending on a
variety of factors,  many of which are not within NSC's  control.  These factors
include,  but are not  limited  to,  economic  conditions  generally  and in the
industries in which NSC's future customers participate; competition within NSC's
industry,  including  competition  from much larger  competitors;  technological
advances which could render NSC's products less competitive or obsolete; failure
by  NSC to  successfully  develop  new  products  or to  anticipate  current  or
prospective  customers' product needs; price increases or supply limitations for
components purchased by NSC for use in its products; and delays,  reductions, or
cancellation  of orders that may be placed with NSC.  There can be no  assurance
that NSC will be able to develop its products or markets for its products in the
future.

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

     National  Scientific  Corporation,   a  Texas  corporation  ("NSC"  or  the
"Company")  is focused on the  research and  development  of devices and designs
that are intended to enhance the performance of various  products  commonly used
in the  semiconductor  and  electronics  industries in general,  and in location
services  devices in particular.  We primarily  design  products that we believe
will  have a broad  application  and  acceptance  in the  commercial  electronic
component marketplace

     We currently  hold U.S.  Patents on seven  devices and designs.  We plan to
continue to develop our existing  patented  technologies  as well as develop new
performance-enhancing  devices  and  designs  for use in the  semiconductor  and
electronics industries when appropriate funding is available.

     The Company was  originally  formed in 1953 as American  Mortgage  Company,
Inc. In 1993, NSC became a subsidiary of A.F.M.S.,  Inc. In 1994,  U.S.  Network
Funding,  Inc.  acquired  A.F.M.S.,  Inc.,  including a controlling  interest in
American  Mortgage  Company,  Inc. In 1995, U.S. Network Funding,  Inc. divested
itself of A.F.M.S.,  Inc. and made a dividend  distribution of its common shares
of American  Mortgage Company,  Inc. to its  shareholders.  On May 16, 1996, the
Company  changed  its name to  National  Scientific  Corporation  and  began its
operations in it current form.

     The Company remained focused on primarily  semiconductor  development up to
February  of 2002.  In  February  of 2002,  we  began to focus  specifically  on
applications  of electronic  devices in the location  services  market.  We also
began  to  decrease  our  focus  on  semiconductor  intellectual  property,  due
primarily to difficult market conditions in the  semiconductor  area. We plan to


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continue our focus on wireless location devices for the foreseeable future. Much
of our efforts since February 2002 have been devoted to licensing and developing
technologies  related to  location  services.  The  Company's  embedded  systems
location  tools  strategy  began to yield small  amounts of revenue  late in the
fiscal year ending  September  30, 2002.  This small  revenue  stream  increased
$63,579 for the fiscal year ending  September  30,  2003.  We expect to continue
product development in 2004, and to develop new sales channels and new customers
for  our  location  services  products.  NSC's  net  losses  were  $952,564  and
$1,883,489 for the years ended  September 30, 2003 and 2002,  respectively.  See
"Part II, Item 7-Financial Statements."

PRODUCTS

     Our  location  services  products  are  made  from  several  dozen  or more
semiconductor chips mounted on small boards and sold as complete products. These
products are designed to provide the product user with information regarding the
unit's current  location.  Some of the products report this  information back to
central locations, so that people or objects in the field can be tracked as they
move from place to place. Many of our location  products use Global  Positioning
Systems technology,  commonly referred to as GPS technology.  GPS technology was
originally  developed  by the U.S.  Military,  but is now in common  use in many
commercially available products, including some of those designed, manufactured,
and sold by NSC.

     Our  present  offering  of  semiconductor  devices  and designs is based on
principles and applications in the electronics and semiconductor industries. The
majority of these  devices and  designs are based on  semiconductor  technology.
Semiconductors  are materials that are used in the manufacture of a wide variety
of electronic devices.  Semiconductors are usually manufactured in large batches
and built upon platters  referred to as wafers.  Manufacturing of semiconductors
using wafers is generally  conducted in a facility known as a fabrication  plant
or a "fab."  This  manufacturing  process  of placing  semiconductors  on wafers
results in a product better known as a silicon chip. Silicon chips are used in a
variety of electrically  powered and controlled  devices,  including  computers,
cell phones, domestic appliances and many other similar devices.  Generally, the
products described below are intended to reduce the power requirements or reduce
the size of various electronic devices, and thus make them more efficient.

     The  following   paragraphs   describe  our  existing  location  tools  and
semiconductor devices and designs, their intended function and the status of our
present research and development efforts with regard to these  technologies.  No
assurance  can be  made  that we will be  able  to  complete  our  research  and
development  activities  within the timeframes  described  below. It is possible
that our research  will reveal  certain  facts that will lead to our  commercial
abandonment  of  some or all of the  technologies  described  below.  It is also
possible that other entities may produce  technologies  and/or products superior
to our  technologies  and  products  before we are able to bring our products to
market.  Although  we believe  our patents  provide  protection  for some of our
inventions  and ideas and prevent other  entities from  exploiting  our patented
technologies,  our patents cannot prevent other  entities from  developing  more
innovative and superior technologies with greater commercial appeal.


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     LOCATION TOOL PRODUCTS

     OVERVIEW OF THE GLOBAL POSITIONING SYSTEM (GPS)

     Many of NSC's location products utilize Global Positioning  System, or GPS,
technology.  GPS, first made available by the U.S. government for commercial use
in 1983,  is a worldwide  navigation  support  system  that allows  users of GPS
devices to  determine  their  precise  geographic  locations  using  established
satellite  technology.  The system consists of a number of satellites that orbit
the earth.  The network of satellites  and their ground  control and  monitoring
stations are maintained and operated by the United States Department of Defense,
which maintains an ongoing satellite  replenishment program to ensure continuous
global system coverage. Access to the system for all users is currently provided
free of charge by the U.S. government.

     Reception  of  GPS  signals  from  the  satellites  requires   unobstructed
visibility between the satellites and the receiver.  GPS receivers  generally do
not work  indoors  and when a receiver is  outside,  buildings,  hills and dense
foliage may block reception. GPS receivers typically are very compact; it is not
necessary to have a large dish antenna to receive GPS signals.

     Prior to May 2000, for reasons of national security the U.S.  Department of
Defense  intentionally  degraded GPS signals to civilian users allowing civilian
users to only obtain accurate  information  regarding their geographic locations
accurate  as to  within  a  radius  of 100  meters.  On May 2,  2000,  the  U.S.
Department  of Defense  eased  restrictions  on civilian use of GPS  technology,
allowing  civilian  users  to now  calculate  their  geographical  positions  to
accuracy of 10 meters or less. This change in policy significantly  improves the
utility of GPS for many applications.

     Some of NSC's  products can derive  location  from sources  other than GPS.
This includes the Company's Gotcha!(TM) products,  which measure the strength of
a radio signal  emitted from a unit attached to a parent  relative to a receiver
attached to a child. This technique allows the Gotcha!(TM)  product to establish
approximately  when a child is beyond a safe distance from a parent. The Company
also  produces a device based on the WiFi(TM)  radio  standard.  WiFi is a radio
technology  used to allow  different  types of computers to communicate  without
cabling,  and is  promulgated by the WiFi  Alliance,  a nonprofit  international
association  formed in 1999 to certify  interoperability  of wireless Local Area
Network products based on IEEE 802.11 specification.  WiFi(TM) is a trademark of
the WiFi Alliance.  The Company's WiFi products  determine position by measuring
signal  strength of the radio beacon within the WiFi  network.  The Company uses
components  and  subassemblies  in  its  products  wherever  possible  that  are
certified by the WiFi Alliance.

     FOLLOWIT(TM).  Followit(TM) is a small  electronic  device designed for the
tracking of people or vehicles at a distance. NSC announced this device in March
of 2002.  The device  fits in the palm of the hand.  The unit  contains a Global
Positioning  System  (GPS) that allows it to determine  its current  location by
examining the current location of GPS satellites originally deployed by the U.S.
Department  of Defense.  Like most current GPS  products,  this product does not
track well indoors,  and is intended  mainly for use outdoors.  The tracker also
contains a small cellular  telephone to transmit  information  back to a central
location.  This location information can be presented as map coordinates,  or it
can be shown on a map using NSC's Lobo(TM)  tracking  software (see below).  The


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unit is designed and manufactured for NSC in Sweden by Followit,  AB. NSC has no
patent   claims  on  this  device,   and  chooses  to  use  a   combination   of
confidentiality  agreements  and other trade  secret  management  to protect the
technology.  This unit is primarily used for tracking vehicles,  but can be used
to track people and other assets as well.

     GOTCHA!(TM).  Gotcha!(TM)  is a small  electronic  device  designed for the
tracking  of children in indoor and  outdoor  environments  at short  distances,
typically  less than 75 feet from the parent or  guardian.  NSC  announced  this
device in November of 2002, and began  shipments of it during the summer of 2003
to select  distribution  organizations.  The device  consists of two parts,  one
about the size of a handheld pager that attaches to a parent and one the size of
a key fob  that  attaches  to a  child.  The  unit  does  NOT  contain  a Global
Positioning  System  (GPS),  and is not  effective  at tracking  location in all
environments. Instead, the unit only reports a problem when the parent and child
are  separated by a distance that the parent sets up as "outside the safe zone."
When the safe distance is exceeded, the unit sounds an audible alert to tell the
parent  that the  child has  wandered  too far.  It is then up to the  parent to
locate the wayward child. The unit is designed to work well indoors or outdoors,
although working through walls will limit the unit's range. The tracker contains
a small  radio set used to  transmit  information  between the parent and child.
Because this unit does not contain a cellular  telephone  but instead  relies on
other  forms of radio  communication,  it is able to  transmit  its  information
without incurring the same message charges as devices that are based on cellular
phone technology.  As such, the unit can be less expensive to operate.  The unit
is designed by NSC, with some components by other suppliers in the United States
and  elsewhere,  including  Scotland,  which is currently  the primary  place of
manufacture for this unit. NSC has no patent claims on this device,  and chooses
to use a  combination  of  confidentiality  agreements  and other  trade  secret
management to protect the technology  from copying,  although it may file patent
claims at a future date. NSC has filed a trademark  claim on  Gotcha!(TM).  This
unit is  primarily  intended  for  parents  trying to keep track of  children in
hectic environments,  such as shopping malls. NSC intends to market this product
through retail mass-market channels for around $60. This product was featured in
December of 2003 on cable television's Home Shopping Network(TM). As of December
of 2003, NSC has manufactured  this unit in quantity and has stock available for
delivery of this device.

     IBUS(TM).  IBUS(TM) is a small electronic  device designed for the tracking
of school  buses at a distance  as well  logging the  children  riding on school
buses.  NSC announced  this device in April of 2003. The device fits in the palm
of the hand, but is larger than a Followit(TM)  unit by  approximately  40%. The
unit contains a Global  Positioning System (GPS) that allows it to determine its
current location by examining the current location of GPS satellites  originally
deployed by the U.S.  Department  of Defense.  The tracker also contains a small
radio to transmit  information back to a nearby central  location.  Because this
unit does not contain a cellular  telephone but instead relies on other forms of
radio  communication,  it is able to transmit its information  without incurring
the same message charges as devices that are based on cellular phone technology.
As such, the unit can be significantly less expensive to operate, as long as the
buses stay within the campus environment, due to the limited range of the radios
in use. NSC can offer repeaters that can extend this range. Cellular service and
satellite  phone  service is  planned  as an option  for this unit.  The unit is
designed and manufactured by NSC, with some components by other suppliers in the


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United States and  elsewhere.  This unit is designed to interface  with software
made by Verify Systems, Inc., that can provide formatted reporting to schools on
the whereabouts of buses and students.  NSC has no patent claims on this device,
and chooses to use a combination of  confidentiality  agreements and other trade
secret management to protect the technology from copying. This unit is primarily
intended for tracking  school buses and students.  NSC has only  produced  small
numbers  of this  device,  and has  presented  informational  samples to various
customers,  who are  evaluating  it and  testing it. The Company has run several
pilot projects in conjunction  with Verify  Systems,  Inc. with this device with
school  districts  in  Massachusetts  and  Arizona.  NSC  intends to market this
product  directly  and through  other sales  channels,  including  its  software
partner Verify Systems, Inc.

     LOBO  TRACKING   SOFTWARE(TM).   Lobo(TM)  is  an  internet-based   mapping
application that can be used to display the location on a computer screen of NSC
locators in the field. Lobo(TM) is not sold as a standalone product, but instead
is a service offered by NSC to purchasers of its cellular-phone  based locators.
NSC uses Lobo(TM) is make its locator  offerings  more  attractive to customers.
Lobo(TM)  is in active  use today by most  customers  using  NSC's  Followit(TM)
products.

     SHUTTLEFINDER(TM).  Shuttlefinder(TM)  is an electronic device designed for
tracking and reporting  the location of shuttle  buses in a campus  environment.
NSC  announced  this  device in November  of 2002.  The device is  intended  for
mounting  inside a bus. The unit regularly  reports the bus location using small
license-free  radios via relay to a central location.  The unit contains a small
computer  with a hard disk drive that  operates  on the  commercially  available
Linux operating system. The unit also contains a Global Positioning System (GPS)
that allows it to  determine  its  current  location  by  examining  the current
location  of GPS  satellites  originally  deployed  by the  U.S.  Department  of
Defense.  Like most  current  GPS  products,  this  product  does not track well
indoors,  and is intended  mainly for use outdoors.  The tracker uses 802.11x or
WiFi wireless  technology to transmit  information  back to a central  location.
Because this unit does not contain a cellular  telephone  but instead  relies on
other  forms of radio  communication,  it is able to  transmit  its  information
without incurring the same message charges as devices that are based on cellular
phone technology. As such, the unit can be less expensive to operate, as long as
the users stay within the field  environment,  due to the  limited  range of the
radios in use. NSC can offer repeaters that can extend this range. This location
information  can be  presented as map  coordinates,  or it can be shown on a map
using NSC's  Lobo(TM)  tracking  software (see above).  The unit is designed and
manufactured  by NSC,  with some  components  by other  suppliers  in the United
States and  elsewhere.  NSC has no patent claims on this device,  and chooses to
use  a  combination  of  confidentiality   agreements  and  other  trade  secret
management to protect the  technology  from  copying.  This unit is intended for
tracking vehicles,  and for running  applications  designed by NSC customers who
require a mobile  general-purpose  computer  that can also perform  tracking and
reporting functions.  We have only developed prototypes of this device, and have
not chosen to ship  commercial  quantities  as of this time.  We have  presented
samples to various interested parties.

     STARPILOT(TM). StarPilot(TM) is an electronic device designed for reporting
locations at a distance.  NSC announced  this device in June of 2002. The device
is  approximately  eight inches long by three  inches wide,  and is intended for
mounting  inside a car or truck.  The unit contains a small computer with a hard


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disk drive that operates on the commercially  available Linux operating  system.
The unit also  contains a Global  Positioning  System  (GPS)  that  allows it to
determine  its  current  location  by  examining  the  current  location  of GPS
satellites  originally  deployed by the U.S.  Department  of Defense.  Like most
current GPS products,  this product does not track well indoors, and is intended
mainly for use outdoors. The tracker also contains a small cellular telephone to
transmit  information back to a central location.  This location information can
be  presented  as map  coordinates,  or it can be  shown  on a map  using  NSC's
Lobo(TM) tracking software (see above). The unit is designed and manufactured by
NSC, with some components by other suppliers in the United States and elsewhere.
NSC has no patent  claims on this device,  and chooses to use a  combination  of
confidentiality  agreements  and other trade  secret  management  to protect the
technology from copying.  This unit is intended for tracking  vehicles,  and for
running   applications   designed  by  NSC   customers   who  require  a  mobile
general-purpose computer that can also perform tracking and reporting functions.
We have only  developed  prototypes of this device,  and have not chosen to ship
commercial quantities as of this time, other than to a small number of potential
development  partners.  We have presented samples to various customers,  who are
evaluating it for inclusion in their own products.

     STARPILOT(TM)  SENTINEL.  StarPilot(TM)  Sentinel is an  electronic  device
designed  for  tracking  and  reporting  the  location of field  personnel  at a
distance.  NSC announced this device in April of 2003. The device  consists of a
vehicle-mounted  satellite/RF location and communications  platform with a small
personal RF  transmitter  (PRT).  The unit contains a small computer with a hard
disk drive that operates on the commercially  available Linux operating  system.
The unit also  contains a Global  Positioning  System  (GPS)  that  allows it to
determine  its  current  location  by  examining  the  current  location  of GPS
satellites  originally  deployed by the U.S.  Department  of Defense.  Like most
current GPS products,  this product does not track well indoors, and is intended
mainly for use  outdoors.  The tracker  also  contains a small radio to transmit
information back to a nearby central location.  This location information can be
presented as map  coordinates,  or it can be shown on a map using NSC's Lobo(TM)
tracking  software  (see  above).  Because this unit does not contain a cellular
telephone but instead relies on other forms of radio  communication,  it is able
to transmit  its  information  without  incurring  the same  message  charges as
devices that are based on cellular  phone  technology.  As such, the unit can be
less  expensive  to  operate,  as  long  as the  users  stay  within  the  field
environment,  due to the  limited  range of the  radios  in use.  NSC can  offer
repeaters  that can  extend  this  range.  StarPilot(TM)  Sentinel  uses a radio
technology  that can operate well in many  difficult and remote  locations.  The
unit is  designed  and  manufactured  by NSC,  with  some  components  by  other
suppliers in the United States and  elsewhere.  NSC has no patent claims on this
device, and chooses to use a combination of confidentiality agreements and other
trade secret management to protect the technology from copying, but may file for
such claims in the future.  This unit is primarily intended for tracking people.
NSC has only  developed  prototypes  of this device,  has  presented  samples to
several  customers,  and has also  engaged  in  competitive  field  trials  with
prospective  customers using this product. This product is targeted primarily at
military training related uses.

     STATIONMASTER(TM).  StationMaster(TM)  is an electronic device custom built
to customer  specifications  designed for tracking and reporting  locations at a
distance for fleets of vehicles. NSC announced this device in March of 2003. The
device consists of two units, one of which is intended for mounting inside a car


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or truck and the other is installed  at a base  station.  The system  contains a
small  computer  with  a hard  disk  drive  that  operates  on the  commercially
available Linux operating  system.  The unit also contains a Global  Positioning
System (GPS) that allows it to determine  its current  location by examining the
current location of GPS satellites originally deployed by the U.S. Department of
Defense.  Like most  current  GPS  products,  this  product  does not track well
indoors,  and is  intended  mainly for use  outdoors.  The tracker can contain a
small cellular  telephone to transmit  information back to a central location or
can work with various license-free and other forms of radio communication.  This
location information can be presented as map coordinates,  or it can be shown on
a map using NSC's Lobo(TM) tracking  software (see above).  The unit is designed
and  manufactured  by NSC, with some components by other suppliers in the United
States and  elsewhere.  NSC has no patent claims on this device,  and chooses to
use  a  combination  of  confidentiality   agreements  and  other  trade  secret
management to protect the  technology  from  copying.  This unit is intended for
tracking vehicles,  and for running  applications  designed by NSC customers who
require a mobile  general-purpose  computer  that can also perform  tracking and
reporting functions.  We have only developed prototypes of this device, and have
not chosen to ship commercial  quantities as of this time, other than to a small
number of potential  development  partners. We have presented samples to various
customers, who are evaluating it for inclusion in their own products.

     TRAKFORCE(TM).  TrakForce(TM) is a small electronic device designed for the
tracking of power sports devices at a distance in a remote environment. Examples
of power sports  devices are  motorcycles  or  snowmobiles.  NSC announced  this
device in March of 2003 along with its development partner Positus  Corporation,
formerly   known  as  Bike  &  Cycle  Trak  USA,  Inc.  (see  "Other   Strategic
Relationships").  The device fits in the palm of the hand, and is about the size
of two packs of playing  cards.  The unit contains a Global  Positioning  System
(GPS) that allows it to determine its current  location by examining the current
location  of GPS  satellites  originally  deployed  by the  U.S.  Department  of
Defense.  Like most  current  GPS  products,  this  product  does not track well
indoors,  and is intended  mainly for use outdoors.  The tracker also contains a
small cellular radio to transmit  information back to a nearby central location.
This location  information can be presented as map coordinates,  it can be shown
on a map using NSC's Lobo(TM)  tracking  software (see above), or it may be used
with mapping software from other vendors.  The unit is designed and manufactured
by NSC,  with some  components  by other  suppliers  in the  United  States  and
elsewhere.  NSC has no  patent  claims  on this  device,  and  chooses  to use a
combination of  confidentiality  agreements and other trade secret management to
protect  the  technology  from  copying.  This unit is  primarily  intended  for
tracking power sports devices. NSC has only developed prototypes of this device,
and has presented informational samples to various customers, who are evaluating
it. NSC has not yet shipped commercially  significant numbers of this product to
customers.  NSC intends to market this product  directly and through other sales
channels, especially Positus Corporation.

     TRACKER  IIR(TM)/TRACKER  IIIR(TM).  Tracker  IIR(TM) and its  replacement,
Tracker  IIIR(TM),  are small  electronic  devices  designed for the tracking of
field  personnel  at a distance  in a closed  training  field  environment.  NSC
announced  this  device in October of 2002.  The device  fits in the palm of the
hand.  The unit  contains a Global  Positioning  System  (GPS) that allows it to
determine  its  current  location  by  examining  the  current  location  of GPS
satellites  originally  deployed by the U.S.  Department  of Defense.  Like most
current GPS products,  this product does not track well indoors, and is intended


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mainly for use  outdoors.  The tracker  also  contains a small radio to transmit
information back to a nearby central location.  This location information can be
presented as map  coordinates,  or it can be shown on a map using NSC's Lobo(TM)
tracking  software  (see  above).  Because this unit does not contain a cellular
telephone but instead relies on other forms of radio  communication,  it is able
to transmit  its  information  without  incurring  the same  message  charges as
devices that are based on cellular  phone  technology.  As such, the unit can be
less  expensive  to  operate,  as  long  as the  users  stay  within  the  field
environment,  due to the  limited  range of the  radios  in use.  NSC can  offer
repeaters that can extend this range.  Tracker  IIR(TM) uses a radio  technology
that can  operate  well in many  difficult  and  remote  locations.  The unit is
designed and manufactured by NSC, with some components by other suppliers in the
United States and elsewhere.  The Tracker IIIR(TM)  replaced the Tracker IIR(TM)
in the fall of 2003,  when NSC upgraded all its GPS boards to a 40% smaller form
factor.  NSC  has  no  patent  claims  on  this  device,  and  chooses  to use a
combination of  confidentiality  agreements and other trade secret management to
protect the technology from copying, but may file for such claims in the future.
This unit is  primarily  intended for tracking  people.  NSC has only  developed
prototypes of this device, and has presented samples to several  customers,  and
has also engaged in competitive  field trials with  prospective  customers using
this product.  This product is targeted  primarily at military  training related
uses.

     TRACKER III(TM).  Tracker III(TM) is a small electronic device designed for
the tracking of people or vehicles at a distance.  NSC announced  this device in
September of 2003.  The device fits in the palm of the hand. The unit contains a
Global Positioning System (GPS) that allows it to determine its current location
by examining the current location of GPS satellites  originally  deployed by the
U.S.  Department of Defense.  Like most current GPS products,  this product does
not track well indoors,  and is intended  mainly for use  outdoors.  The tracker
also  contains a small  cellular  telephone  to transmit  information  back to a
central location. This location information can be presented as map coordinates,
or it can be shown on a map using NSC's Lobo(TM)  tracking software (see above).
The unit is designed and  manufactured  by NSC,  with some  components  by other
suppliers in the United States and  elsewhere.  NSC has no patent claims on this
device, and chooses to use a combination of confidentiality agreements and other
trade secret  management to protect the technology.  This unit is primarily used
for tracking vehicles, but can be used to track people and other assets as well.
This product is in the development  stage. An operational  prototype is expected
to be completed in 2004.

     URBANTRACKER  II(TM).  UrbanTracker  II(TM)  is a small  electronic  device
designed for the  tracking of people,  assets or vehicles.  NSC  announced  this
device in July of 2002.  The device is the size and shape of a sunglasses  case.
The unit contains a Global  Positioning System (GPS) that allows it to determine
its  current  location by  examining  the  current  location  of GPS  satellites
originally  deployed by the U.S.  Department  of Defense.  Like most current GPS
products,  this product does not track well indoors,  and is intended mainly for
use outdoors.  The tracker also contains a small cellular  telephone to transmit
information  back  to a  central  location.  This  location  information  can be
presented as map  coordinates,  or it can be shown on a map using NSC's Lobo(TM)
tracking  software (see above).  The unit is designed and  manufactured  by NSC,
with some components by other suppliers in the United States and elsewhere.  NSC
has no  patent  claims on this  device,  and  chooses  to use a  combination  of
confidentiality  agreements  and other trade  secret  management  to protect the


                                       9
<PAGE>

technology.  This  unit is  primarily  used  for  tracking  people,  assets  and
vehicles.  We have only developed prototypes of this device, and have not chosen
to ship commercial  quantities as of this time,  other than to a small number of
potential development partners.

     URBANTRACKER  IIK(TM).  UrbanTracker  IIK(TM) is a small electronic  device
designed for the tracking of children at a distance.  NSC announced  this device
in October of 2002. The device is integrated into a child's  backpack.  The unit
contains a Global  Positioning  System  (GPS) that  allows it to  determine  its
current location by examining the current location of GPS satellites  originally
deployed by the U.S. Department of Defense. Like most current GPS products, this
product does not track well  indoors,  and is intended  mainly for use outdoors.
The tracker also  contains a small  cellular  telephone to transmit  information
back to a central  location.  This location  information can be presented as map
coordinates,  or it can be shown on a map using NSC's Lobo(TM) tracking software
(see above).  The unit is designed and manufactured by NSC, with some components
by other suppliers in the United States and elsewhere.  NSC has no patent claims
on this device, and chooses to use a combination of  confidentiality  agreements
and other  trade  secret  management  to protect  the  technology.  This unit is
primarily used for tracking children.  We have only developed prototypes of this
device, and have not chosen to ship commercial quantities as of this time, other
than to a small  number of potential  development  partners.  We have  presented
samples to various interested parties.

     WIFI  TRACKER(TM).  WiFi Tracker(TM) is a small electronic  device designed
for the tracking  people and other assets.  NSC announced  this device in May of
2003.  The  device  fits in the palm of a hand.  The device  does not  contain a
Global  Positioning  System  (GPS) unit,  but  provides  tracking  data  through
interaction with local area networks known as WiFi. The tracking device contains
a small radio also based on WiFi  technology to transmit  information  back to a
nearby central location.  WiFi Tracker(TM) work indoors and outdoors,  typically
over short ranges of several  hundred  meters,  due to the limited range of WiFi
radio signals. This location information can be presented as map coordinates, or
it can be shown on a map using Ekahau Positioning  Engine(TM) tracking software,
a product made by Ekahau,  Inc. (see "Other Strategic  Relationships").  Because
this unit does not contain a cellular telephone but instead relies on WiFi radio
communication, it is able to transmit its information without incurring the same
message charges as devices that are based on cellular phone technology. As such,
the unit can be less expensive to operate in some  environments,  as long as the
users stay within the field WiFi  environment,  due to the limited  range of the
radios in use. Many manufactures offer devices that can extend the range of WiFi
networks.  The unit is designed and manufactured by NSC, with some components by
other  suppliers in the United States and  elsewhere.  NSC has no current patent
claims on this  device,  and  chooses to use a  combination  of  confidentiality
agreements  and other trade secret  management  to protect the  technology  from
copying,  but may file for such claims in the future. The stage three version of
the prototype,  or "developer  kit," of this device was completed in December of
2003. NSC has presented  samples to several  customers,  and has also engaged in
competitive  field  trials  with  prospective   customers  using  this  product.
Additionally,  we have been doing application design work with iTrack of Ireland
for  wireless  traffic  management.   This  product  is  targeted  primarily  at
commercial users.


                                       10
<PAGE>

     PATENTS AND SEMICONDUCTOR PRODUCTS

     In addition to the more recent development of our location devices,  during
the past  several  years the  Company  has  brought  seven  major  research  and
development  projects  to the patent or patent  application  stage.  NSC's first
patent was awarded June 15, 1999.  NSC's primary  semiconductor  and  electronic
device parent filings relate to the following invention areas:

           DEVICE NAME                         USE AND FUNCTION OF DEVICE
-----------------------------------    -----------------------------------------
Heterojunction Bipolar Transistor      Used   in  the  manufacture  of   digital
                                       circuits that  are found in  devices such
                                       as  cellular  phones, personal  computers
                                       and  automotive  circuitry.   Transistors
                                       provide electronic  control over  current
                                       flow,  and are a part of many  electronic
                                       circuits.    Heterojunction       bipolar
                                       transistors are used most  frequently  in
                                       power   amplifiers,   radio     frequency
                                       integrated circuits and other circuits.
-----------------------------------    -----------------------------------------
Monolithic Inductor                    Used  in  a  wide  range  of   electronic
                                       circuits      for      telecommunications
                                       applications.   The   inductor's     most
                                       common application is as a component of a
                                       radio   frequency    circuit   used    to
                                       manipulate radio waves into certain other
                                       electrical  signals.  The  inductor  does
                                       this,  usually  in  conjunction  with   a
                                       capacitor,  by   producing  an  amplified
                                       current when  stimulated  by  a  specific
                                       frequency  of  radio signal.
-----------------------------------    -----------------------------------------
Distributed Amplifier                  Used  in  all  electronic  products  that
                                       require some level of power increase such
                                       as     telecommunications,     microwave,
                                       internet communications,  automotive  and
                                       biomedical products as well as  automated
                                       manufacturing products.
-----------------------------------    -----------------------------------------
Static Random Access Memory (SRAM)     Used in digital computing devices such as
and TMOS(TM) Memory Core               microcomputers   and   workstations   and
                                       battery powered devices such as  personal
                                       data appliances and cellular phones  that
                                       require a memory function.
-----------------------------------    -----------------------------------------
Mode Dielectric Resonator              Used  in   many   applications  including
                                       microwave     oscillators,     narrowband
                                       microwave   filters,  radar    detectors,
                                       speed   guns,   automatic  door  openers,
                                       cellular  portable   phones   and  global
                                       positioning satellites.  The  resonator's
                                       most   common    application   is  as   a
                                       component  of a  radio frequency  circuit


                                       11
<PAGE>

                                       used  to   manipulate  radio  waves  into
                                       certain other  electrical  signals.   The
                                       resonator  does   this   by  producing  a
                                       current   of   predictable   size    when
                                       stimulated  by  a  specific  frequency of
                                       radio signal.
-----------------------------------    -----------------------------------------
High Frequency Wireless Transceiver    Allows  the  transmission  and  reception
                                       of   radio   waves  and  are  used  in  a
                                       variety of wireless devices.
-----------------------------------    -----------------------------------------

         We have applied for patents relating to these technologies, a number of
which have already been issued. These include the following:

     1.   On  September  29, 1997,  NSC filed a U.S.  Patent  application  for a
Hetrojunction Bipolar Transistor (HBT).

          U.S. Patent  5,912,481 was issued for this device on June 15, 1999. We
were also successful in our Continuation in Process  application on this device,
as the United States  Patent and Trademark  Office issued us a patent on January
9, 2001 under U.S. Patent 6,171,920,  covering intellectual property required to
manufacture the transistor.

     2.   NSC  filed a U.S.  Patent  application  on  October  31,  1997,  for a
Monolithic Inductor.  The inductor is compatible with current integrated circuit
manufacturing  technology and requires no additional steps to be included in the
manufacturing process.

          The  U.S.  Patent  Office  issued  a  Notice  of  Allowance  for  this
application  on September 7, 1999.  U.S.  Patent  6,013,939  was issued for this
device on January 11,  2000.  We were also  successful  in our  Continuation  in
Process  application  on this device,  as the United States Patent and Trademark
Office issued us a patent on August 28, 2001 under U.S. Patent 6,281,778.

     3.   On December 17, 1997, a U.S.  Patent  application was filed for a High
Performance  N-Channel  Metal-Oxide-Semiconductor  (NMOS)  Static  Random Access
Memory (SRAM).

          U.S. Patent 6,104,631 was received for this device on August 15, 2000.
We were also  successful  in our  Continuation  in Process  application  on this
device,  as the United States Patent and Trademark  Office issued us a patent on
October 9, 2001 under U.S. Patent 6,301,147.

     4.   NSC filed its fourth U.S.  Patent  application on June 18, 1998, for a
Mode Dielectric Resonator.  Resonators are used in many applications,  including
microwave  oscillators,  narrowband  microwave filters,  radar detectors,  speed
guns,   automatic  door  openers,   cellular  and  portable  phones  and  global
positioning satellites.

          The  U.S.  Patent  Office  issued  a  Notice  of  Allowance  for  this
application  on August 1, 2000. The U.S.  Patent and Trademark  Office issued us
U.S. Patent 6,169,467 for this device on January 2, 2001.


                                       12
<PAGE>

     5.   On July 10, 1998, the Company filed its fifth U.S. Patent  application
for a Distributed Amplifier.

          The  U.S.   Patent  Office  issued  a  Notice  of  Allowance  on  this
application on September 29, 1999. U.S.  Patent  6,008,694 was received for this
device on December 28, 1999.

     NSC has filed patent applications for other  semiconductor-related  patents
since 2000,  including some improvement to the above existing devices as well as
on related devices. The commercial  importance of these inventions and the final
disposition of these applications are uncertain.  NSC is not currently active in
pursuing patent protection outside the United States.

OTHER STRATEGIC RELATIONSHIPS

     In May of  2003  the  Company  announced  a  strategic  co-development  and
co-marketing  program with Ekahau,  Inc. of Finland  ("Ekahau"),  to develop and
co-market  tracking  devices  based on WiFi  technology.  Ekahau has developed a
software  application called the Ekahau Positioning  Engine(TM) that can be used
to  determine  location  of WiFi  devices in a  standard  WiFi  network.  NSC is
developing a hardware  device to interface  with  Ekahau's  software that can be
attached to people or assets that are moving within WiFi  networks,  in order to
establish  the location in real time of those  people or assets.  In December of
2003,  the  Company  completed  its first  prototype  of this WiFi  device,  and
demonstrated it at the WiFi Planet Conference and Expo in San Jose,  California.
Additional  development  of this  device  will be  required  in 2004 before full
commercialization  of the device can occur (see  "Products").  NSC and Ekahau do
not  have any  exclusive  contract  in force  between  them.  Ekahau  is a small
privately held technology development company with a limited customer base.

     In May  2003  the  Company  entered  into a  six-month  agreement  with New
York-based Stanton, Walker & Company to perform business advisory and consulting
services.  Stanton,  Walker  was  contracted  to  assist in  expanding  existing
strategies  for NSC  business  growth as well as  developing  new ones,  such as
merger and acquisition planning. The Company has not determined what services it
may procure from Stanton, Walker & Company in calendar year 2004 and beyond.

     In October of 2003 the Company  entered into a three-month  agreement  with
the strategic  marketing and  communications  firm of Owens/Depoy to help define
and position  corporate and product  brands and to develop  strategic  marketing
communications. The agreement automatically renews quarterly unless either party
provides  written  notice to end the  agreement  thirty  (30) days  prior to the
automatic renewal period.

     In March of 2003,  the  Company  received  a  blanket  Purchase  Order  for
$250,000 of IBUS(TM) technology from Verify Systems of Connecticut,  planned for
delivery before June of 2004. Shipments began against this order in May of 2003,
for pilot  testing in  Massachusetts  over the summer of 2003 at a major  school
district. Testing was continued through two pilots using this equipment. A third
pilot is underway in Arizona in November  and  December of 2003.  The product is
still being  demonstrated  and developed,  and additional  sales are expected in
2004 by NSC's partner Verify Systems,  particularly during the spring and summer
months of 2004. Verify Systems is a small privately held technology  development
company with a limited customer base.


                                       13
<PAGE>

     In March of 2003 the Company  entered  into a Memorandum  of  Understanding
with  Positus  Corporation  ("Positus")  dba  Bike & Cycle  Trak  USA,  Inc.  of
Minneapolis,  MN, to develop and co-market tracking devices for the power sports
industry.  Later the Company was issued a $75,000  purchase  order by Positus to
develop the prototype version of this product.  Work began in the spring of 2003
to develop this product.  A first proof of concept device was shipped in June of
2003, when the first payment against this Purchase Order was received.  A second
prototype  board was developed in the fall of 2003,  and is currently in testing
for us in this project. Positus is a small privately held technology development
company in its startup phase.

     In January 2002, we signed an agreement with the Virtual Component Exchange
("VCX")  whereby the bulk of our core  designs  and patents for Radio  Frequency
("RF")  devices will be available for purchase or licensure.  VCX is an Internet
based organization  focused on producing Internet tools for trading intellectual
property.  The Company has not seen  substantial  results  from this effort with
VCX, and may choose to discontinue to market its  semiconductor  devices through
this channel in the future.

     In December of 2002 the Company entered into a  manufacturing  relationship
with  Electroconnect  Ltd of  Scotland  ("Electroconnect")  to  manufacture  its
Gotcha!(TM)  child  safety  device.  The  relationship  is based on NSC  issuing
purchase orders and specifications on an order by order basis to Electroconnect,
and Electroconnect  fulfilling those orders by shipping Gotcha!(TM) units to NSC
in Scottsdale,  typically offering net 30 terms for payment. Electroconnect is a
small to mid-sized  privately held  manufacturing  company with a broad customer
base.

     In December of 2002 the Company entered into a distribution  agreement with
FutureCom Global,  Inc.  ("FCG"),  a firm  headquartered in Scottsdale,  AZ. The
two-year  agreement covers the  non-exclusive  distribution of products from NSC
such  as   Gotcha!(TM),   Followit(TM),   and   StarPilot(TM).   The   agreement
automatically renews for the third year unless terminated by one of the parties.
FutureCom   Global  is  a  small  privately  held  technology   development  and
distribution company.

     We  executed  an  agreement  in June of 2002  with  Followit  AB, a Swedish
technology firm, for international distribution.  The international distribution
agreement,  dated June 1, 2002, grants us non-exclusive  distribution rights for
the Followit(TM)  locator product in the United States,  Canada and Mexico.  The
Followit(TM)  locator  product  uses the  Global  Positioning  System  (GPS) and
cellular technology,  with a sophisticated mapping interface to provide tracking
capabilities  for a wide variety of assets or  individuals.  Distributor  prices
were  defined in the  agreement  and payment  terms are letter of credit and net
thirty  (30) days from the  receipt  by the  Company of a correct  invoice.  The
contract  automatically  renews  after one year  unless  either  party  provides
written  notice to end the  agreement  thirty  (30) days prior to the  automatic
renewal period.

SALES AND MARKETING

     We have researched the products and  manufacturing  processes  available to
the major locator and semiconductor  manufacturing  companies.  The results have
generally  confirmed our belief that the increased  performance and efficiencies


                                       14
<PAGE>

inherent in our  products  that are  currently  in various  stages of design and
development   should  be  of  interest  to  many  sectors  of  the  locator  and
semiconductor manufacturing industry. However, we believe that the semiconductor
market  is still  very  depressed,  and that  timing is poor for  licensing  our
current semiconductor products. Thus we have redirected resources after February
of 2002 to markets that we believe are experiencing growth today and that we can
more effectively develop with our limited resources.

MARKETING LOCATION BASED PRODUCTS

     We believe the products we are developing may become marketable  quicker by
licensing and/or partnering with companies that have complementary technologies.
We have  undertaken a search for candidates and are in the process of conducting
investigations,   technology  evaluations  and  preliminary   negotiations  with
potential licensees/partners. In April of 2003 we entered into an agreement with
TMobile(TM) to provide us with messaging services for some of our location-based
products.  In late 2002, we entered into an agreement with  FutureCom  Global of
Arizona  to  assist in the  distribution  of some of our key  location  services
products.  We have also  entered  into  agreements  with Verify  Systems to help
market our IBUS(TM)  systems,  as well Positus  Corporation,  to help market our
TrakForce(TM) design (see "Other Strategic Relationships").

     We  believe  that  maintaining  a close  relationship  with  customers  and
providing  customers  with  ongoing  technical  support is essential to customer
satisfaction in the RF wireless and semiconductor  communications  industry. Our
staff  interacts  with  customers  during key  stages of design and  production,
provides customers with current product  application notes and engineering data,
maintains regular contact with customer  engineers and assists in the resolution
of technical  problems.  We intend to assign a contract  account  manager to our
largest  customers,  whose role will be to  maintain  regular  contact  with the
customer  to  determine  its  product  needs  and  concerns.  Members  of senior
management also intend to be involved in managing relationships with significant
customers. As is typical of other new technologies, similar to the semiconductor
industry,  our technologies can require lengthy  "design-in" cycles for customer
applications and extensive application engineering support. We support potential
customers'  design-in  activities and consider such support an important element
of our sales and marketing efforts.

     We are  marketing our  technologies  worldwide  through our internal  sales
resources  including our web site and other  contract-based  marketing resources
located  throughout the U.S., Europe and Asia.  Additionally,  senior management
devotes  substantial time and effort to developing  customer  relationships  and
contracts.

MARKETING SEMICONDUCTOR PRODUCTS

     We believe that the increased  performance and efficiencies inherent in our
devices,  designs and processes, if successfully developed,  will be of interest
to many key sectors of the  semiconductor  industry when that industry  recovers
more fully from its current  depressed  state. We believe our location  products
have a more  immediate  market in the  current  environment,  because we believe
these applications are less directly tied to the current depressed semiconductor
industry  environment.  We  therefore  are focused  today on  location  services
products.  We believe this industry is poised for growth that NSC may be able to
participate  in, at our current  level of  resources.  This belief is based on a


                                       15
<PAGE>

number of factors.  First, FCC regulations  regarding using the 911 systems with
cellular phones to determine location  accurately are becoming effective in 2003
and  2004.  These  regulations  are  forcing  technology  providers  to  develop
technologies  to achieve  location  services for mass markets.  Second,  current
competition in this market is highly  fragmented,  creating many points of entry
for a new participant such as NSC. Third, margins remain reasonably high, due to
a lack of market  consolidation  and the  complexity  and  diversity of customer
requirements  in the market.  Fourth,  NSC has  experience in wireless and other
radio based  technologies,  creating some competitive  advantage in this market.
Finally,  as  technology  costs  lower,  we believe the market  will  experience
continued growth.

     We intend to  maintain  key  elements  of our  portfolio  of  semiconductor
intellectual  property because we believe there is substantial potential for the
devices we might offer,  if they are developed.  According to the  Semiconductor
Industry  Association (SIA) Annual Worldwide Market Forecast from November 2003,
the total  semiconductor  market is expected to increase  15.8 percent to $163.0
billion in 2003.  The SIA forecasts  growth of 19.4 percent to $194.6 billion in
2004,  5.8 percent to $206.0  billion in 2005, and 6.6 percent to $219.6 billion
in 2006.  The largest  target market for our products is the  electronic  memory
market,  where  worldwide  sales  of  electronic  memory  devices  (which  could
incorporate  our  products)  are expected to be  approximately  $31.5 billion in
2003,  according to SIA. Our other patents tend to fall into the discreet device
market, which SIA defines as discrete components including power transistors and
radio  frequency (RF) solutions  that are found in wireless  consumer  products.
This  segment is forecast  by SIA to grow 5.9 percent to $13.1  billion in 2003.
Discrete  components  are then forecast to grow 12.7 percent to $14.7 billion in
2004,  9.3 percent to $16.1 billion in 2005, and 2.4 percent to $16.5 billion in
2006.  However,  we believe  substantial  markets  exist for these  devices  and
designs.  The market sizes for our other devices and designs are more  difficult
to  quantify,  due  to the  numerous  diverse  applications  and  products  that
incorporate such devices and designs.

INDUSTRY

     The market for location based or a GPS-enabled product is projected to grow
rapidly  during the next few years.  We believe that the following are among the
key factors  underlying  the  projected  industry  growth in both  business  and
consumer markets:

     o    improved  accuracy of GPS will lead to an increase in the functions of
          devices using GPS;
     o    additional  functions capable of being installed in devices addressing
          GPS  applications;
     o    increased  efficiencies in being able to track valuable  assets;
     o    the ability to provide  relevant  information  (e.g.  traffic reports,
          weather  reports,  location of stores and restaurants  relative to the
          location of the vehicle) to occupants  of  passenger  vehicles;
     o    the ongoing  miniaturization of technology  products;  and
     o    the trend towards combining navigation, communications and information
          technologies in a single device for use in vehicles.

     We have concentrated primarily on vehicle or asset tracking segments of the
markets  associated  with providing  information to owners of vehicles or assets


                                       16
<PAGE>

because of the current market  opportunity.  We believe that GPS technology will
be  fundamental to delivering  the next  generation of mobile vehicle  services,
including relevant and timely information and emergency assistance.

     Real time  tracking  information  of a  vehicle  or asset is  delivered  by
linking a GPS  receiver to a device  that is  connected  to a cellular  network,
allowing  location of the vehicle or asset to be automatically  transmitted to a
base station via the Internet  twenty-four hours a day. The user can, if needed,
immediately contact an appropriate provider of emergency services.  In addition,
this allows  those  parties who are  monitoring  the  location of the vehicle or
asset to ensure that  delivery and service fleet  operations  are using the most
effective method of getting to a location,  or to dispatch  roadside  assistance
and emergency services, such as police or ambulances.  The primary users include
owners  of  expensive  vehicles.  This  market  is a  component  of the  overall
Telematics services market. Market consulting firm Frost and Sullivan in October
of 2002 has reported  that revenue from this market  should  exceed  exceeded $1
billion  in  2003,  and that the  market  will  surpass  $2.1  billion  by 2008.
Emergency  assistance  mandates,   such  as  the  U.S.  Federal   Communications
Commission's  E911 initiative that require the  manufacturers of cell phones and
the  providers of wireless  communication  to ensure that the location of a cell
phone user can be determined with relative accuracy in emergency  situations may
also expand GPS wireless product opportunities.

     The electronics products industry is intensely competitive.  NSC's wireless
and memory  technologies  experience intense  competition from numerous domestic
and foreign  companies.  The Company may be at a disadvantage  in competing with
many of these competitors having  significantly  greater  financial,  technical,
manufacturing  and marketing  resources,  as well as more diverse  product lines
that can provide cash flows counter  cyclical to fluctuations  in  semiconductor
memory  operations.  The Company considers its TMOS(TM) Memory SRAM technologies
to be competitive  with existing SRAM CMOS memory  technologies  in high-density
applications.  Both low-density and high-density nonvolatile memory technologies
are manufactured and marketed by major corporations  possessing  worldwide wafer
manufacturing  and integrated  circuit  production  facilities  (e.g.,  Samsung,
Alliance   Semiconductor   Corporation,   Cypress   Semiconductor   Corporation,
Integrated    Device    Technology,     Inc.,    Motorola,     Inc.,    Hitachi,
ST-Microelectronics,  Toshiba, Fujitsu, Hyundai Electronics Industries Co. Ltd.,
and Micron Technology, Inc.) and by specialized product companies.

     Numerous companies, including major corporations possessing worldwide wafer
manufacturing and integrated  circuit  production  facilities,  manufacture DRAM
products.   Because   NSC's  SRAM  designs  have  certain   higher   performance
characteristics  (but at higher costs) than standard DRAM products,  the Company
considers only SRAM products by some select memory makers to be competitive with
the Company's SRAM technologies. NSC considers its products to be competitive in
certain  applications with its SRAM technologies,  such as those manufactured by
major  corporations,   including  Alliance  Semiconductor  Corporation,  Cypress
Semiconductor Corporation,  Integrated Device Technology,  Inc., Motorola, Inc.,
Hitachi,  ST-Microelectronics,  Toshiba,  Fujitsu,  Samsung, Hyundai Electronics
Industries Co. Ltd., and Micron Technology, Inc.

     NSC's prospective licensees may market technologies that compete with NSC's
wireless  and  memory  products.  To the extent  that any of NSC's  technologies
achieve market acceptance, there can be no assurance that NSC's competitors will
not be able to develop and offer  competitive  technologies or implement pricing


                                       17
<PAGE>

strategies  for memory and wireless  technologies  that could  adversely  affect
NSC's  business and operating  results.  NSC's  ability to compete  successfully
depends on its ability to develop low-cost volume production of its technologies
permitting its  technologies to be sold at a price that is both  competitive and
profitable to NSC and on its ability to design  technologies  which successfully
address  customer  requirements.  NSC's  ability  to compete  successfully  also
depends on factors  beyond its control,  including  the rate at which  customers
incorporate the Company's technologies into their own technologies,  the success
of such  customers in selling their  technologies,  the success of the Company's
protection  of  its   intellectual   property,   the  success  of   competitors'
technologies  and general  market and economic  conditions.  Many  companies are
researching  and  developing   semiconductor  memory  technologies  and  product
configurations that could reduce or eliminate any future competitive  advantages
of NSC's technologies.  There can be no assurance that NSC's memory and wireless
technologies  will not be  supplanted  in the future by competing  technology or
that NSC  will  have the  technical  capability  or  financial  resources  to be
competitive  in  the   semiconductor   industry  with  respect  to  the  design,
development or manufacture of either memory or wireless technologies.

BUSINESS STRATEGY

     NSC's  strategy  is  to  develop  significant   enhancements  for  existing
semiconductor,  integrated  circuit  and other  electronic  component  products,
processes and markets.  NSC intends to utilize unique,  patentable  technologies
and other technologies and provide these enhancements to the marketplace through
joint venture licensing agreements with manufacturing firms. We do not intend to
directly  manufacture  any of our own  technologies.  NSC  intends  to  continue
research and development efforts,  including simulations and creation of working
prototypes,  where  possible.  Research  and  development  will be  accomplished
through our own labs, as well as on-going  association with independent lab, and
test  facilities  at a major  Arizona  university,  as well as  through  various
partner organizations.

     NSC  intends  to  draw  upon  its  expertise  in  mixed-signal   processing
technology   and   memory   systems   to  deliver   circuit   technologies   and
component-level  solutions  for a broad  range  of  communications  and  related
applications.  These technologies  facilitate  communications  worldwide through
voice and data communications networks, cordless and cellular wireless telephony
systems and emerging cable and wireless broadband communications networks.

     The  Wireless   Communications   product  platform   provides   components,
subsystems and  system-level  semiconductor  technologies for wireless voice and
data communications.  NSC has designed and patented silicon and gallium arsenide
("GaAs")-based  components and systems for potential use in personal  computers,
digital cordless telephones,  digital cellular handsets,  base stations,  Global
Positioning  System  (GPS)  receivers,  LAN and WAN systems,  and other  related
markets. NSC holds patents including certain designs for resonators, amplifiers,
transistors,   and  inductors.  These  elements  are  currently  in  common  and
widespread  use in the  communication  industry  and in the case of NSC's memory
technology,  in the communication  industry and in many other technology sectors
as well.

     NSC intends to grow through  internal  research and development and through
strategic  investments,  alliances and  acquisitions.  Although NSC has invested
significant  resources  in  research  and  development  activities,  our limited


                                       18
<PAGE>

resources,  nominal  revenue and continued  losses make it  impractical  for the
Company to pursue  development  of all  technological  solutions  independently.
Accordingly,  NSC conducts ongoing  analyses as a basis of investment,  alliance
and  acquisition  prospects that would  compliment  NSC's existing  intellectual
property or enhance NSC's technological capabilities.

     NSC's  goal  is to  provide  customers  with  a  synergistic  portfolio  of
component-level and device-level  semiconductor and electronic solutions for the
industry's  highest  growth  communications  and  related  applications.   NSC's
strategic  intent is to provide  differentiated  technologies for voice and data
communications,  cordless and cellular  wireless  telephony systems and emerging
telephony,  cable and wireless broadband  communications  networks by leveraging
competencies in signal conversion, signal processing,  communications algorithms
and protocols and applications software.

     NSC's  long-term  strategy  is  to  develop  significant  enhancements  for
existing  semiconductor,  integrated  circuit  and  other  electronic  component
products,  processes and markets.  Our change in focus to the location  services
market will delay this strategy.

CUSTOMERS

     NSC customers for  location-based  products  include general  consumers and
businesses that focus on tracking.  NSC has sold products to this group directly
though its Internet  website and through  relationships  with retail stores that
specialize in tracking devices and related security  technologies.  NSC has also
sold  products to  developers  who are  exploring  adapting NSC hardware to meet
custom solutions for specific markets,  including Positus Corporation and Verify
Systems  (see  "Other  Strategic  Relationships).  NSC has also sold  product to
customers  of the Home  Shopping  Network  through  its  distributor,  FutureCom
Global, and plans events on other direct marketing outlets,  including QVC. Also
through  FutureCom  Global,  the Company has provided samples and  demonstration
products to several dozen major U.S.  retailers,  as well as a few  distribution
firms  outside  the U.S.  in Mexico,  Canada,  and  Europe.  Its  customers  are
primarily  organizations  operating  in the United  States and Canada,  although
samples have been issued for review to  customers  in Mexico,  Central and South
America,  Africa, and Europe. NSC has also issued proposals, but not consummated
sales  transactions,  to a  variety  of other  prospective  customers  including
hospitals, airports and the U.S. Military.

PATENTS

     Please  refer  to the  "Products"  section  of  this  report  for  specific
information on the status of NSC's existing patents and applications.

     NSC endeavors to protect  intellectual  property rights through patents and
patents pending.  However, there can be no assurance NSC will be able to protect
its  technology   adequately  or  that  competitors  will  not  develop  similar
technology. There can be no assurance that any patent applications NSC has filed
or will  file will be issued or that  foreign  intellectual  property  laws will
protect NSC's  intellectual  property rights.  Other companies and inventors may
receive patents that contain claims  applicable to NSC's products and processes.
The use of NSC's  products and  processes  covered by such patents could require
licenses that may not be available on acceptable terms, if at all.


                                       19
<PAGE>

     Although  there are no pending  claims or lawsuits  against  NSC  regarding
possible infringement claims, there can be no assurance that infringement claims
by third parties,  or claims for  indemnification  resulting  from  infringement
claims, will not be asserted in the future. Any such assertions, if proven to be
true, may materially  adversely affect NSC's business,  financial  condition and
results of operations. In the future, NSC may be required to litigate to enforce
its patents,  or to protect NSC's trade  secrets or know-how  owned by NSC or to
defend NSC against claimed infringement of the rights of others and to determine
the scope and validity of the proprietary  rights of others. Any such litigation
could result in substantial  cost and diversion of resources by NSC, which could
have a material adverse effect on the Company's  financial condition and results
of operations.

     Adverse determinations in any such litigation could result in the Company's
loss of proprietary rights, subject NSC to significant liabilities,  and require
us to seek  licenses  from third parties or prevent us from selling or licensing
NSC products  and/or  processes.  This could have a material  adverse  effect on
NSC's financial condition and results of operations.  In addition,  there can be
no assurance that a license under a third party's  intellectual  property rights
will be  available  on  reasonable  terms,  if at all.  See  "FACTORS  AFFECTING
OPERATING RESULTS--PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS."

COMPETITION

     The  market  for  communications   and  information   products  related  to
location-based   services  is  highly   competitive   and  the  Company  expects
competition  to increase.  The Company  believes that the principal  competitive
factors that will differentiate the various competitors in this marketplace will
be product  features,  quality,  customer  service,  brand,  advertising,  price
positioning,  time-to-market and availability. The market for GPS-based products
is relatively recent as a direct result of the U.S.  Government's removal of the
GPS based filters in May 2000 to allow for more accurate  tracking.  Most of the
mid-size  to larger  companies  in the  vehicle  tracking  market  have  larger,
cumbersome  and more expensive  devices and systems than the Company's.  Many of
the companies in the vehicle  navigation  market have expensive systems that are
permanently  installed  into the vehicle and often  involve a fee-based  monthly
subscription  service.  In addition,  traditional  GPS device  vendors have been
offering  products  to the marine,  aviation  and  outdoors  markets for several
years. For its personal safety and locating products,  the Company considers its
principal competitors in the consumer market to be Wherify, Digital Angel, Angel
Alert,  and  Child  Guard.  A large  group of other  small  firms is  trying  to
penetrate this market.  For the Company's  vehicle and asset tracking  products,
its principal competitors include Axiom Navigation,  ALK, and Thales Navigation.
There  are  approximately  100  smaller  companies  offering  components  of the
products and services that the Company  presently  offers.  There is significant
competition  from large  competitors  in the  GPS/Navigation  market,  including
General  Motors-OnStar system. NSC has no current plans to directly compete with
major automotive suppliers for in-vehicle navigation solutions, due to the level
of resources required to successfully compete.

     NSC's competitors in the semiconductor  sector are well established and, in
some cases, have significantly greater resources. Although NSC believes that its
products and processes are  proprietary  and protected by patents and/or patents
pending,  there  is no  assurance  that  NSC  can  compete  successfully  in the


                                       20
<PAGE>

semiconductor  and  electronics   markets.   See  "FACTORS  AFFECTING  OPERATING
RESULTS--PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS."

RESEARCH AND DEVELOPMENT

     NSC has conducted several  simulations  and/or developed working prototypes
of its  products  and  processes  that have  yielded  results  that NSC believes
differentiate  NSC's products from those currently in the  marketplace.  NSC has
successfully developed and sold several location products,  most prominently its
Gotcha!(TM)  child  safety  device (see  "Products").  NSC  continues to conduct
research in several areas,  including  especially for enhanced location services
products.  Part of that research effort includes  additional testing and product
refinement. There is no assurance that the test results will prove successful or
that NSC will be able to develop new products or processes.

PERSONNEL

     As of the date of this  report,  NSC has three full time  employees,  three
part  time  employees,  as well as a  number  of part  time  relationships  with
contractors for certain services. Six employees work in the Scottsdale,  Arizona
corporate office. Management believes employee relations are good. None of NSC's
personnel are covered by collective bargaining agreements.

ITEM 2. PROPERTIES

     NSC leases  2,945  square feet of office  space at 14455 North  Hayden Rd.,
Suite 202  Scottsdale,  Arizona  85260.  The lease for the  Scottsdale  facility
expires  October  31,  2004 and is at a rental  rate of $5,031 per month  before
taxes.

     Currently, the Company does not have a policy regarding investments in real
estate,  interests in real estate,  real estate  mortgages or  securities  of or
interests in persons primarily engaged in real estate activities.

ITEM 3. LEGAL PROCEEDINGS

     The Company is not currently a defendant in any lawsuits.

     The Company was a defendant in a landlord-tenant lawsuit of leased property
in San Jose,  California vacated by the Company in 2001 as part of its corporate
consolidation.  The  Company  and  the  Landlord  settled  this  matter  without
admitting  any fault.  Four  payments  from the  Company to the former  landlord
totaling $10,000 over the next year remain in order to fulfill the terms of this
settlement.

     The  Company  was a defendant  in a lawsuit  filed by Bowne of  Phoenix,  a
financial  printing  company.  The Company and Bowne finalized in October 2003 a
settlement in this matter without either side admitting any fault.  All terms of
the settlement have been met.

     The Company is currently a plaintiff in three active lawsuits.

     Mr. Ross  assigned his rights to certain  amounts  that may be  recoverable
from  NetMind as partial  payment  for an amount  advanced  to him in 1999.  The
Company  has filed a suit  against  NetMind  to  recover  the  investment,  plus


                                       21
<PAGE>

damages.  It has settled with some of the  defendants.  Management  is unable to
determine the outcome of the suit.

     In January 2002, the Company  initiated legal  proceedings  against Phoenix
Semiconductor,  Inc. (PSI) for breach of contract.  The Company had engaged PSI,
and advanced  approximately  $400,000 to PSI, to build thyristors (an electronic
component) to be sold by the Company.  At the time PSI was engaged,  the Company
obtained a security  interest in a portion of the assets of PSI.  Subsequent  to
the Company's legal actions,  both PSI and its principal  shareholder  Chongkook
John  Rhee  filed  for  bankruptcy  protection  under  Chapter  11 of  the  U.S.
Bankruptcy Code. In December 2002, PSI and the Company agreed to a settlement of
the  secured  claim  against  PSI in the form of  receiving  a cash  payment  of
approximately  $100,000  together with certain other unsecured claims remaining.
The cash  payment is subject to a  contracted  sale of  substantially  all fixed
assets of PSI and formal approval of the bankruptcy  court.  The sale has yet to
occur. Management is unable to determine the outcome of the suit.

     The Company was  awarded a judgment of  approximately  $179,000 in May 2003
against  E4World  Corporation.  However,  there is no assurance that any of this
amount will be collected by NSC.  Since  collection  of this  judgment by NSC is
uncertain,  this positive  judgment is not reflected in NSC's current  financial
statements.  The Company  continues to press its claim to secure  assets held by
E4World in a separate  legal matter,  although  there is no assurance  that this
claim  will be  collected  by NSC,  and thus this  claim is not shown in the NSC
financial statements.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  principal  United  States  market  for NSC's  common  stock is the OTC
Bulletin  Board.  The  following is the high and low closing sale prices for NSC
common stock:

FISCAL 2003

                                                           HIGH           LOW
                                                        ---------      ---------

Fourth Quarter (through September 30, 2003)..........   $   0.210      $   0.145
Third Quarter (through June 30, 2003)................   $   0.225      $   0.095
Second Quarter (through March 31, 2003)..............   $   0.170      $   0.085
First Quarter (through December 31, 2002)............   $   0.220      $   0.065

FISCAL 2002

Fourth Quarter (through September 30, 2002)..........   $   0.160      $   0.078
Third Quarter (through June 30, 2002)................   $   0.205      $   0.140
Second Quarter (through March 31, 2002)..............   $   0.265      $   0.135
First Quarter (through December 31, 2001)............   $   0.390      $   0.220


                                       22
<PAGE>

     The  Company  has not paid any  dividends  during the last three (3) fiscal
years.

     There were 754 shareholders of record of NSC's common stock as of September
30, 2003.

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

OVERVIEW

     NSC's  business  focuses on the  research  and  development  of devices and
designs  that are  intended  to enhance  the  performance  of  various  products
commonly used in the  semiconductor  and electronics  industries and in location
services devices. We primarily design products that we believe will have a broad
application and acceptance in the commercial marketplace.

     We  currently  hold U.S.  patents on several  devices  and designs and have
several domestic and international patent applications pending, although most of
our patent work is focused on protection in the United States today,  due to the
high cost of acquiring  and  maintaining  patents in other  markets.  We plan to
continue to develop our existing  patented  technologies  as well as develop new
performance-enhancing  devices  and  designs  for use in the  semiconductor  and
electronics  industries.  Our business plan  contemplates  that we will generate
revenue  by  entering  into  strategic  joint  venture   licensing   agreements,
manufacturing  agreements,  development  agreements and other  arrangements with
manufacturing  firms and/or entities that will incorporate our technologies into
their products.  We believe our  decentralized  business model will enable us to
add  other  operating  divisions  as  we  grow  from  our  purely  research  and
development roots into a research, development and production organization.

     Beginning in calendar 2002, we began to focus  specifically on applications
of electronic devices in the location services market. We also began to decrease
our focus on  semiconductor  intellectual  property,  due primarily to difficult
market  conditions in the  semiconductor  area. We plan to continue our focus on
location services devices for the foreseeable future.

     In  order to  generate  revenue  to fund our  business  and  implement  our
business  plan, we had engaged in the business of  distributing  electronic  and
other semiconductor-related products to customers in Asia and the United States.
In 2001 we discontinued  those activities because they did not yield the margins
we had originally  projected.  In the two fiscal years ended September 30, 2003,
we have  focused on  generating  revenue  through  the  development  and sale of
electronic design and devices for the location services market.

     Our revenue from  operations  for the fiscal year ended  September 30, 2003
was $63,579, compared with revenue of $2,914 for the fiscal year ended September
30, 2002.  The over  20-fold  increase was  attributable  to our locator  device
business.  At September 30, 2003, we had an accumulated  deficit of $21,757,900.
Our net losses were $952,564 and $1,833,489 for the fiscal years ended September
30, 2003, and 2002, respectively.

     The introduction of our location-based products during fiscal 2002 has been
a primary focus for the Company for approximately the last 2 years.


                                       23
<PAGE>

     Shipment and sales of our Followit(TM) product began in the last quarter of
fiscal  2002.  We  are  continuing  to  focus  on  marketing,  modification  and
development of our location-based products.  Management is devoting the majority
of its effort  toward  location  product  development  and  marketing,  and will
continue to do so in the foreseeable future.

     In  December  of  2002,   the  Company   entered  into  an  agreement  with
Electroconnect  of  Scotland  to produce a prototype  and then  manufacture  our
Gotcha!(TM)  device. This agreement is based on NSC paying for units as ordered,
and does not require minimum purchase amounts.

     In December  2002 the Company  entered  into an  agreement  with  FutureCom
Global,  Inc.  (FCG) of Arizona to assist in the marketing  distribution  of its
location tools products.  This is a two-year agreement,  renewable for up to one
additional  year.  The  agreement  calls  for FCG to  market  NSC  Followit(TM),
StarPilot(TM),  and Gotcha!(TM)  products through media and trade shows, as well
as  through  networks  of  sales   representatives  in  a  variety  of  consumer
marketplaces,  including  general  retail.  This  agreement  may be  extended to
include  stocking of NSC products by FCG. FCG  currently  provides some stocking
for NSC's Gotcha!(TM) line of products.  The agreement does not call for minimum
purchase amounts.

PATENTS AND PROPRIETARY RIGHTS

     NSC relies  heavily on its patents and trade  secrets as a defense  against
competitors  introducing  infringing  technologies  that will  compete  with our
memory and wireless technologies.  Although we intend to enforce our patents and
trade secrets  aggressively,  there can be no assurance  that we will be able to
enforce our patents or that we will have the  financial  resources  necessary to
adequately  enforce our patent and trade secret  rights.  This would  materially
adversely  affect NSC's business and operating  results.  We are aware,  because
others  have  obtained  patents  covering  numerous   semiconductor  designs  or
processes, that we operate in a competitive environment in which it would not be
unlikely  for a third  party to claim  that  certain  of our  present  or future
technologies  may infringe the patents or rights of such third  parties.  If any
such infringements  exist or arise in the future, we may be exposed to liability
for damages and may need to obtain licenses  relating to third-party  technology
incorporated  into the Company's  technologies.  NSC's  inability to obtain such
licenses on acceptable terms or the occurrence of related  litigation could have
a material  adverse effect on NSC. NSC has been granted  patents it believes are
fundamental  in covering the basic  architecture  and method of operation of its
memory  and  wireless  technologies,  and  NSC  has  other  patents  and  patent
applications involving its technology pending.

     In 2003 NSC filed for U.S.  trademark  protection for its  Gotcha!(TM)line.
This  application is pending as of the date of this report with the U.S.  Patent
and Trademark Office.

     In addition to protecting patents, NSC protects its proprietary  technology
through a trade secret program that involves  restricting access to confidential
documents and information and obtaining written confidentiality  agreements with
vendors, visitors and technical employees.

     NSC believes its inventions are of fundamental importance to its memory and
wireless technology portfolio and that patents that have been issued, or allowed


                                       24
<PAGE>

but not yet issued,  will provide protection  against  unauthorized use of NSC's
inventions.  There is evidence  that other  companies are seeking to develop and
patent technology similar to NSC's  technologies.  Furthermore,  other companies
may seek to reverse engineer NSC's technologies.

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2003 AND 2002

     We  generated  $63,579  and $2,914 of revenue for the fiscal  years  ending
September  30, 2003 and 2002,  respectively.  Although  we reported  revenues of
$882,715  during the fiscal year ended  September  30, 2001 these  revenues were
derived from our distribution activities. As of the date of this report, we have
ceased such  activities.  Sales for the year ended  September 30, 2003 represent
the  sale  and  delivery  of  product  introductions  from  NSC's  Followit(TM),
DarkStar(TM), and Gotcha!(TM) lines.

     Research and development  expenditures  decreased to $84,301 for the fiscal
year ended September 30, 2003, from $154,548 for the fiscal year ended September
30,  2002.  The decrease in research  and  development  costs in fiscal 2003 was
primarily   attributable  to  the  shift  of  resources  from  capital-intensive
semiconductor-related  development  projects  to more  labor-intensive  location
service technology-related projects.

     Costs and expenses decreased  significantly to $981,098 in fiscal 2003 from
$1,906,035  in fiscal 2002.  Salaries  and benefits  were reduced to $438,244 in
fiscal 2003,  down from $624,069 in 2002. This decrease is attributable to staff
reductions, pay cuts, and the movement of some staff from full time to part time
status.

     Stock  compensation  declined to  $291,658 in fiscal 2003 from  $460,168 in
fiscal  2002.  In fiscal  2003 the  majority of the stock  compensation  expense
relates to the issuance of vested  options to employees  and  consultants  at an
exercise price that was below the then-current  market value. These options were
granted in order to conserve operating cash.

     Other  expenses  also  declined in fiscal 2003 to $149,245 from $667,250 in
fiscal 2002 as a result of the  reduction in  personnel,  reduction in insurance
costs, filing fees, legal expenses, and contract services.

     In  conjunction  with the Company's  annual Form 10-KSB for the year ending
September  30,  2002,  and the  Company's  quarterly  Form 10-QSB for the period
ending  December 31, 2002,  accounts  payable  liabilities  were  presented that
included  approximately  $150,000 to its largest  creditor,  a services firm. In
late March of 2003, the Company came to a definitive  settlement  agreement with
this  creditor  regarding  this  debt.  The  result  of this  agreement  was the
elimination of approximately $150,000 of short-term liability previously owed by
the  Company  to  this  creditor.  The  Company  was  able  to  eliminate  these
liabilities  without  the use of cash or stock.  This  settlement  resulted in a
positive impact to the Company's net income of approximately $150,000.

     In January, 2003, the Company, under the restricted stock retainage program
initiated in September  2002, and described in the Company 10-KSB filing for the
year ending September 30, 2002, and also in the Company Proxy Statement for 2003
filed January 27, 2003,  issued  2,550,000  shares of common stock at an average


                                       25
<PAGE>

price of $0.06 or 90% of the  price on the grant  date of  September  30,  2002.
These stock grants were contingent upon the Company  achieving sales targets for
calendar year 2003,  as outlined in the Company  Proxy  Statement for 2003 filed
January 27, 2003. Should these targets not be met, these shares may be forfeited
back to the Company,  or the Company and the  employees  involved in the program
may elect to establish  new goals for calendar  year 2004,  in order to motivate
the staff to perform and simultaneously  conserve cash resources during the next
calendar year.

     In May  2003  the  Company  entered  into a  six-month  agreement  with New
York-based Stanton, Walker & Company to perform business advisory and consulting
services.  Stanton,  Walker will assist in expanding existing strategies for NSC
business  growth as well as developing new ones,  such as merger and acquisition
planning.  In conjunction with this agreement,  NSC issued 625,000 shares of NSC
common stock to Stanton,  Walker & Company.  The Company has not determined what
services it may procure from Stanton, Walker & Company in calendar year 2004 and
beyond.

     The Company has focused an increasingly  significant amount of its time and
energy on  development  of new sources of revenue  through  the  building of new
distributor and customer  relationships.  This has included increased attendance
at trade  shows,  increased  expenditures  on  direct  mailings  of  promotional
literature, internet advertising and promotion through website listings, on-site
customer product demonstrations, and other marketing related activities intended
to foster customer acquisition. The Company has also spent and plans to continue
to spend  resources  on the  development  of strategic  partnerships  with other
technology firms to assist it in taking its products to market. The Company will
continue  to  research  and  implement  innovative  ways to take its  technology
expertise and products to market,  across its entire  portfolio of semiconductor
and electronics-related devices.

     The Company  entered  into an agreement in June 2003,  to  restructure  its
delinquent  outstanding  debt and back pay to Mr. Lou Ross,  a  Director  of the
Company.  The Company and Mr. Ross  aggregated  the value of all sums  currently
owed by the Company to Mr. Ross.  This included notes executed of  approximately
$75,000,  all salary deferred by Mr. Ross in 2002 of approximately  $8,300,  and
all cash board fees deferred in 2002 by Mr. Ross of approximately  $3,000, for a
total  debt  outstanding  by the  Company  to Mr.  Ross as of June  11,  2003 of
approximately  $86,500.  Mr. Ross agreed to accept  one-half of this amount,  or
$43,250,  in restricted NSC common stock issued at the then-current market price
of $0.15 cents per share, for a total share grant to Mr. Ross of 288,334 shares.
Mr.  Ross also  agreed to  convert  the  remaining  one-half  of the total  debt
outstanding from the Company to him, or $43,250, into a three-year interest free
note,  with no payments  required of the Company until the end of the three-year
period, and which could be paid by the Company at any time before the three-year
period elapses with either cash or its common  restricted stock or a combination
of cash and  stock.  With  this  agreement,  NSC no longer  has any  outstanding
delinquent  notes to Mr. Ross,  and the overall  company  liabilities  have been
reduced by $43,250.

     Mr.  Ross also agreed to take a reduction  in his  Director's  fees for the
period from  February  2003 to the end of the fiscal  year  ending in  September
2003,  and accept 50,000 shares of NSC  restricted  common stock in lieu of cash
for these board  services,  which was paid to him in stock on June 11, 2003.  On
September 30, 2003,  at the point of his  resignation  from the Board,  Mr. Ross


                                       26
<PAGE>

surrendered  all options  contracts  he had  received  from the  Company,  which
included options to purchase 1,000,000 shares of NSC common stock.

     As of September 30, 2003,  the Company has a $20,000  liability for private
placement  deposits.  Subsequent  to  September  30,  2003,  the  liability  was
converted  entirely into equity, in connection with the issuance of shares under
the June 2003 private placement (See Liquidity and Capital Resources).

LIQUIDITY AND CAPITAL RESOURCES

     NSC has not been  profitable  and has  experienced a cash flow deficit from
operations due to its  development  stage,  substantial  on-going  investment in
research and development  efforts.  Consequently,  NSC has been dependent on the
sale of equity to fund cash requirements.

     On March 15,  1998,  the Company  offered  $250,000 of  preferred  stock at
$5,000 per unit.  Each unit consisted of 1,000 shares of  convertible  preferred
stock and 100,000 Class A common stock purchase  warrants.  The preferred  stock
was  non-voting  and each unit was  convertible  into  100,000  shares of common
stock.  The A Warrants are  exercisable at $1 per share and were to expire March
15, 2000.  On October 8, 1998,  the Company  elected to offer an  additional  50
units under the terms of the March 15, 1998 offering.  The offering expired July
31, 1999. In conjunction with this offering, the expiration date of the warrants
was extended until December 31, 2000. All preferred  stock has been converted to
common stock at September 30, 1999.  This  offering  resulted in net proceeds to
the Company of $482,500.

     On August 1, 1999, the Company commenced a $300,000 offering at $10,000 per
unit. Each unit consisted of 30,000 shares of unrestricted common stock that was
to be  transferred to the investor by the spouse of the Chairman of the Company,
40,000  shares of  restricted  common  stock  and  50,000  Class A common  stock
warrants. The Class A warrants are exercisable at $1.50 per share and expired on
December 31, 2001.  The offering was amended  twice and each unit was revised to
consist  of 5,000  shares of  unrestricted  common  stock to be  transferred  to
investors  by the  spouse  of the  Chairman  of the  Company,  25,000  shares of
restricted common stock and 50,000 warrants.  The offering generated $750,000 to
the Company from the sale of 3,765,000 shares of common stock.

     In March 2001, we  established a line of credit with Wells Fargo HSBC Trade
Bank totaling $500,000.  The line of credit was 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 September 30, 2001, there was
$430,000 outstanding under this line of credit. At September 30, 2002 the entire
line of credit had been repaid, and the line of credit had been terminated.

     In May  2001,  we  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 our common stock. A registration statement
filed with the  Securities  and Exchange  Commission  was declared  effective on
October 11, 2001.  This stock purchase  agreement  established an equity line of
credit. Under this arrangement, we at our sole discretion, were to make up to 24
draw  down  requests  over  a two  year  period,  pursuant  to  which  Coriander
Enterprises  was obligated to purchase up to $24 million of our common stock, at
prices  that will vary based upon the market  price of the common  stock.  As of
August 2002,  changes in the market price  and/or  trading  volume of our common


                                       27
<PAGE>

stock have  terminated  our  ability to draw down funds under the equity line of
credit.

     On April 29, 2002 Mr. Lou Ross,  Chairman of the Board, sold 240,000 shares
of common  stock in the  Company.  The proceeds  (net of sales  commissions)  of
$41,125 were loaned to the Company. The loan, which bears 6% interest per annum,
is payable in twelve monthly  installments of $3,649 beginning October 29, 2002.
In July 2002, Mr. Lou Ross, Chairman of the Board, sold 260,000 shares of common
stock in the Company.  The proceeds (net of sales  commissions and approximately
$4,000 withheld by Mr. Ross for taxes) of  approximately  $34,000 were loaned to
the Company.  The loan,  which bears 6% interest  per annum,  is to be repaid in
twelve  installments  of  $3,022  beginning  February  28,  2003.  This loan was
restructured in June of 2003 to a three-year  non-interest bearing loan, with no
payments  due until the end of the loan  period.  The Company has the option any
time during the loan period to pay this Note early.

     During the fiscal  years  ending  September  30, 2003 and 2002,  NSC issued
946,270 and 100,000 shares, respectively,  of NSC common stock to consultants in
lieu of cash  compensation.  During  fiscal 2003,  the Company  granted  428,081
options to NSC consultants to purchase shares of NSC's common stock. The options
granted had exercise prices ranging from $0.03 per share to $0.11 per share. The
exercise prices were generally below market on the date of grant, and vested. We
granted  these options as a means of  compensation  to  consultants  to conserve
operating cash. During fiscal 2003,  substantially all option grants were issued
to employees.

     At  September  30,  2003  and  September  30,  2002,   there  were  412,201
outstanding  warrants to purchase  412,201 shares of common stock at $1.67,  all
held by Coriander Enterprises Limited.

     As of September 30, 2003, the Company's cash and cash  equivalents  totaled
$17,903  and total  current  assets were  $72,729.  NSC has  recently  initiated
product-marketing  efforts after several years of research and  development  and
has not yet reached break-even in terms of both cash flow and profitability. The
Company  has  long-term  debt  of  $43,250  as  of  September  30,  2003.  Total
liabilities at September 30, 2003 were $716,670.

     In November  2002, the Company  commenced a private  offering of restricted
common  stock and  common  stock  purchase  warrants  and  raised  approximately
$470,000 in cash and $30,000 in debt forgiveness  from this effort.  The Company
issued  11,625,000  shares of restricted common stock for the cash collected and
500,000  shares of restricted  common stock for the forgiven  debt,  and granted
4,800,000 warrants to purchase common stock at a strike price of $0.30 per share
and 200,000 warrants at a strike price of $0.50 per share. No underwriters  were
involved in connection with this private  placement.  The sales and issuances of
the securities  issued  pursuant to the foregoing  private  placement are exempt
from  registration  under the  Securities  Act of 1933, as amended,  pursuant to
Section 4(2) thereof, and Rule 506 of Regulation D.

     In June 2003, the Company commenced a private offering of restricted common
stock and common stock purchase warrants.  The Company raised from this offering
in the fiscal year ending  September 30, 2003,  approximately  $200,000 in cash,
and issued  2,500,000  shares of restricted  common stock and granted  2,000,000
warrants to purchase common stock at exercise prices ranging from $0.35 to $0.50
per share.  The Company has continued to raise funds under this private offering


                                       28
<PAGE>

after September 30, 2003. From June 2003 through  December 31, 2003, the Company
had  raised a total of  approximately  $280,000  in cash from this  effort,  and
issued a total of  3,300,000  shares of  restricted  common  stock and granted a
total of 2,400,000  warrants to purchase common stock at exercise prices ranging
from $0.35 to $0.75 per share. No underwriters  were involved in connection with
this  private  placement.  The  sales and  issuances  of the  securities  issued
pursuant to the foregoing private  placement are exempt from registration  under
the  Securities Act of 1933, as amended,  pursuant to Section 4(2) thereof,  and
Rule 506 of Regulation D.

     We have  an  accumulated  deficit  of  approximately  $21.7  million  as of
September  30,  2003  which  includes  approximately  $10  million  of  non-cash
transactions,  in fiscal years 2000 and 2001, for restricted common stock issued
as  payment  for  research,   consulting  and  capital  formation  expenses.   A
substantial  portion of the consulting  expenses  related to the issuance of one
million shares of common stock to Dr. Hashemi, our former Group President,  as a
signing  bonus on  September 1, 2000.  These  shares were later  returned to the
Company. We expect operating losses in the foreseeable future as we continue our
efforts to commercially  exploit our portfolio of patents and develop commercial
products.  Accumulated  cash  used in  operating  services  from  the  Company's
inception to September  30, 2003 totaled  approximately  $6.9  million.  We have
financed our operations primarily through the sale of common stock,  granting of
options, and warrants in the public and private markets.

     The  Company  did not pay cash wages to its  Officers  and  Directors  from
September 2002 through  November 2002. The Officers and Directors  affected have
agreed not to demand  immediate cash payment of these back wages. In December of
2002,  the Company  began to pay a portion of its on-going  wage  obligation  to
current staff, including Officers,  Directors, and some independent contractors,
but has chosen to not yet pay back wages incurred prior to December 2002, due to
limited cash resources.  From time to time officers are directors of the Company
have made loans to the Company to assist with short-term cash  requirements  and
other requirements.

     At  September  30,  2003,  we believed  that our current  working  capital,
together  with the proceeds of our most recent  private  placement and projected
funds generated from sales of our locator products,  would be sufficient to fund
our operations  for the next twelve  months.  This belief assumes the salary and
consulting fee deferral  programs  described  elsewhere in this report remain in
effect and that certain of our employees  would  continue to accept a portion of
their monthly salaries in options or shares of common stock.  However, we may be
required to raise  additional  capital in equity  markets.  Our ability to raise
additional capital in public markets will be primarily dependent upon prevailing
market conditions and the demand for our products and services. No assurance can
be given that we will be able to raise  additional  capital,  when  needed or at
all, or that such capital, if available, will be on acceptable terms. Failure to
raise capital or generate  sufficient  sales to meet our  creditors'  demands as
well as working  capital for ongoing  operations  could result in our failure to
continue  as a going  concern.  In order for the  Company to continue as a going
concern,  management may be required to eliminate new research and  development,
and slow the pace of development of its existing  business  plan.  Further,  the
Company may be required to attempt  renegotiation of its debts or use applicable
organization laws to reorganize its debts.


                                       29
<PAGE>

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

     IN ADDITION TO THE OTHER  INFORMATION  CONTAINED  IN THIS ANNUAL  REPORT ON
FORM 10-KSB, THE FOLLOWING  IMPORTANT FACTORS SHOULD BE CAREFULLY  CONSIDERED IN
EVALUATING  THE COMPANY AND ITS BUSINESS  BECAUSE SUCH FACTORS  CURRENTLY HAVE A
SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND
RESULTS OF OPERATION.

WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE MAY NEVER BE PROFITABLE

     We have  experienced  significant  losses and negative  cash flows from our
research and development endeavors since we began such activities in 1996. As of
September 30, 2003, we had an accumulated deficit of $21,757,900. We had revenue
for the fiscal year ended  September  30, 2003 of $63,579,  and net loss for the
same fiscal year of $952,564.  The future  profitability  of our  business  will
depend  primarily  on our  ability  to  generate  revenues  from the sale of our
products and the licensing of our  technology.  If our revenue grows at a slower
rate than we anticipate or if our expenditures exceed our expectations or cannot
be  adjusted to reflect  slower  revenue  growth,  we may not achieve or sustain
profitability.  Our auditors have issued going concern opinions on our financial
statements for the fiscal years ending September 30, 2002 and 2003.

WE ARE A DEVELOPMENT  STAGE COMPANY WITH A LIMITED OPERATING HISTORY AND WE NEED
ADDITIONAL CAPITAL

     We changed our business  emphasis in 2002 and we don't know if our products
will achieve significant levels of marketing acceptance. Our business is subject
to all of the problems, expenses, delays and risks inherent in the establishment
of a business enterprise including limited capital resources, possible delays in
product  development,  uncertain market  acceptance and the absence of operating
history.  Therefore,  we  aren't  sure that our  business  or  products  will be
successful or that we will be able to achieve or maintain profitable operations.
We may encounter  unforeseen  difficulties  that may deplete our limited capital
resources more rapidly than anticipated.

     We will likely be  required to make  significant  product  development  and
spend  additional  money to maintain and expand our marketing  efforts.  We will
need to seek additional  equity  financing to provide the necessary  capital for
these  efforts.  The  timing and amount of any  capital  requirements  cannot be
predicted at this time. We can't be sure that any financing will be available on
acceptable  terms, if at all. If such financing is not available on satisfactory
terms, we may be unable to continue, develop or expand our business, develop new
products or  penetrate  existing  markets at the rate desired and our ability to
continue in business may be jeopardized.

WE ARE SUBJECT TO NUMEROUS MARKET RISKS THAT COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS

     We have  formulated  our  business  plans and  strategies  based on certain
assumptions  regarding the timely marketability of our products and processes to
potential licensing partners.  These assumptions are based on the best estimates
of NSC's management.  Our assessments regarding potential licensing partners may
be  incorrect.  Any  future  success of NSC may depend  upon  factors  including
changes in the  direction  of  technologies  we are  involved  in,  governmental
regulation,  increased levels of competition within the technology fields we are


                                       30
<PAGE>

attempting to penetrate, licensing agreements offered by competing technologies,
changes  in general  economic  conditions,  fluctuations  in the value of the US
dollar,  increases in operating costs  including  costs of consultants,  lab and
testing facility fees, supplies and equipment.

WE RELY ON A LIMITED NUMBER OF PRODUCTS

     All of our products are based on applications in the electronics  industry.
Although the applications vary from product to product,  a decline in the market
demand for our products as well as the products of other companies utilizing our
products would have a significant adverse impact on NSC.

COMPETITORS HAVE TECHNOLOGY THAT MAY HAVE AN IMPACT ON OUR MARKETING EFFORTS

     The patented  technology used in our business is relatively new but we have
no assurance that advances in competitive technology or other developments would
not have a  significant  impact  on the  industry.  There is no  assurance  that
competitors will not develop better equipment that performs the same function at
a lower  price or more  efficiently.  We are aware of  certain  developments  by
competitors that may have an impact on our business. Our results may vary in the
future due to a number of reasons, including:

     The  development  of competing  technology;
     Costs  of  product  development;
     Results of strategic agreements with partners;
     Technical  difficulties;
     Our ability to attract,  retain and motivate qualified  personnel;
     General economic conditions,  and
     The impact of competitor(s) products and services.

OUR PRODUCTS ARE SUBJECT TO MANUFACTURING RISKS

     If we or any of our strategic partners experience problems with the complex
manufacturing  processes  of our  devices and  products,  we will not be able to
accurately  forecast   manufacturing  yields  and  costs,  which  will  in  turn
negatively impact our ability to operate profitably and the value of our stock.

     The  manufacturing  processes of our devices and products  involve numerous
complex steps. Minor deviations can cause losses from the manufacturing process,
and in some cases, cause production to be suspended.  The complex  manufacturing
process of our products  makes it extremely  difficult  to  accurately  forecast
manufacturing  yields and costs and will likely  become even more complex as the
complexity   of   manufacturing   our   technologies   increases.   Our  forward
product-pricing  model includes  assumptions of improving  manufacturing  yields
and, as a result,  material  variances  between projected and actual yields will
have  a  direct  effect  on  our  gross  margins,  profitability  and  financial
condition.  Our failure to accurately  forecast  manufacturing  yields and costs
could result in decreases in  profitability  and a corresponding  decline in our
stock price.

WE CAN'T PREDICT WHETHER OUR MARKETING EFFORTS WILL BE SUCCESSFUL

     We are  dependent  on our ability to market our  products to  manufacturers
that can use our  technologies  to their benefit.  We must increase the level of
awareness of our products. We will be required to devote substantial  management


                                       31
<PAGE>

and  financial  resources  to our  marketing  efforts and we don't know if these
efforts will be successful.

THE  SEMICONDUCTOR  AND ELECTRONICS  MARKETS  EXPERIENCES  WIDE  FLUCTUATIONS IN
DEMAND

     We may experience  cyclical  fluctuations  in the demand and supply for our
products,  which may cause a decline in our sales or the prices of our  products
and a corresponding decline in our revenues and profitability.

     The electronics industry historically has experienced cyclical fluctuations
with respect to the demand and supply for its products.  These  fluctuations are
caused by:

     Excess production capacity in the industry;
     Maturing product cycles;
     Rapid technological change in the industry; and
     General economic conditions in the industry.

     The occurrence of one or more of these factors may cause periodic  declines
in our sales or the prices of our  products and a  corresponding  decline in our
revenues and profitability.

IMPACT OF THE "PENNY STOCK" RULES ON BUYING OR SELLING OUR COMMON STOCK

     Trading in our common  stock is subject  to the "penny  stock"  rules.  The
Securities and Exchange Commission has adopted regulations that generally define
a penny  stock to be any equity  security  that has a market  price of less than
$5.00 per share.  These rules require that any  broker-dealer who recommends our
securities to persons other than prior customers and accredited investors, must,
prior to the sale,  make a special  written  suitability  determination  for the
purchaser  and  receive  the  purchaser's   written  agreement  to  execute  the
transaction.  In addition,  unless an exception is available,  the broker-dealer
must deliver a  disclosure  schedule  explaining  the penny stock market and the
risks   associated  with  trading  in  the  penny  stock  market  prior  to  any
transaction.  Further,  broker-dealers must disclose commissions payable to both
the broker-dealer and the registered  representative  and current quotations for
the securities they offer. The additional burdens imposed upon broker-dealers by
such  requirements  may discourage  them from  transactions in our common stock,
which could severely limit the market price and liquidity of our securities.

PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS ARE HARD AND COSTLY TO DEFEND

     Our success  depends,  in part, on our ability to obtain patents,  licenses
and other  intellectual  property  rights for our products and  technology.  The
process of seeking patent and trademark  protection is long and expensive and we
can't be sure that any additional  patents will be issued,  that we will be able
to adequately  protect our  technology or that  competition  will not be able to
develop and patent  similar  technology.  We believe the basis on which we filed
our currently pending patent  applications is reasonable;  however,  we can't be
sure that any patent applications filed will result in issued patents or that we
will be able to pursue each particular patent application claim to issuance.


                                       32
<PAGE>

IF WE ARE DELISTED FROM THE OTC BULLETIN  BOARD OR OUR COMMON STOCK IS SUSPENDED
FROM TRADING,  WE MAY HAVE TO SIGNIFICANTLY  CURTAIL OR CEASE OUR OPERATIONS AND
ALTER OUR BUSINESS PLAN

     If we are  unable  to meet  the  requirements  set  forth  by the  NASD for
companies listed on the OTC Bulletin Board or its related trading  services,  we
maybe unable to raise capital. Additionally, if the NASD suspends trading in our
common stock for any reason,  we would not be able to raise sufficient  capital,
and we may be required to significantly curtail or cease our operations.

OUR COMMON STOCK HAS  EXPERIENCED  IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE,  SIGNIFICANT  PRICE AND VOLUME  VOLATILITY,  WHICH MAY SUBSTANTIALLY
INCREASE THE RISK OF LOSS TO OUR STOCKHOLDERS

     We have a limited trading market for our common stock, and our common stock
has experienced price volatility.  In fiscal 2002, our stock price ranged from a
high of $0.44 to a low of $0.07 per share,  and in fiscal  2003 our stock  price
ranged from a high of $0.28 to a low of $0.06.  The inability to sell NSC shares
in a rapidly declining market may  substantially  increase your risk of loss due
to potential  absence of liquidity and the possibility that our common stock may
suffer greater declines.

FAILURE TO PROTECT OUR PROPRIETARY RIGHTS WILL SUBSTANTIALLY  IMPAIR OUR ABILITY
TO GENERATE PROFITS

     The  objective  of  our  business  model  is  the   successful   commercial
exploitation of a portfolio of patented and patent pending  technologies as well
as other unpatented  products.  Failure to protect our proprietary  rights could
impair our ability to generate profits and harm our strategic  relationships and
partnerships.  In the high-tech industry,  intellectual property is an important
asset  that is always  at risk of  infringement.  We may  incur  costs to obtain
patents  and  defend  our  intellectual  property  and rely upon the laws of the
United  States  and  of  foreign   countries  in  which  we  develop,   license,
manufacture,  or sell our products to protect our proprietary  rights.  However,
there can be no assurance that other parties will not  challenge,  invalidate or
circumvent our proprietary rights. Infringement upon our proprietary rights by a
third party could result in uncompensated lost market and revenue  opportunities
for us.

WE DEPEND ON THIRD PARTIES

     Our  success  depends in part on  retaining  and  establishing  third party
relationships in new markets including  international  markets. If we are unable
to establish or maintain adequate third party relationships,  we may not be able
to  expand  our  business.  This in turn  could  seriously  harm  our  business,
financial results and financial condition.

THIRD PARTIES MAY INFRINGE ON OUR PATENTS

     We cannot assure you that third parties will not in the future  infringe on
our intellectual  property or claim  infringement by NSC with respect to current
or  future  intellectual   property.   These  claims  of  infringement  and  the
litigation,  whether  successful  or not, are expensive and if we do not prevail
could seriously harm our business, results of operations or prospects.


                                       33
<PAGE>

ITEM 7. FINANCIAL STATEMENTS

     The  financial  statements  of NSC are included  (with an index listing all
such statements) in a separate financial section at the end of the Annual Report
on Form 10-KSB.

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

     None

ITEM 8A. CONTROLS AND PROCEDURES

     The Company's Chief Executive  Officer and Acting Chief Financial  Officer,
Michael  A.  Grollman,  after  reviewing  and  evaluating  Company's  disclosure
controls and procedures within 90 days prior to the filing of this annaul report
has concluded that  Company's  disclosure  controls and procedures  contained no
significant  deficiencies or material  weakness.  There have been no significant
changes in Company's  internal  controls that could  significantly  affect these
controls  subsequent  to the  date of  their  evaluation,  including  corrective
actions.


                                    PART III

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

     Reference is made to information  contained under the heading  "Election of
Directors" in NSC's  definitive  proxy  statement for its 2003 Annual Meeting of
Shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before January 30, 2004.

     Directors  hold  office  until  the  next  succeeding   annual  meeting  of
shareholders, and until their successors have been elected and qualified.

     The directors, executive officers, significant employees and consultants of
NSC, their respective ages and positions with NSC are as follows:

           NAME               AGE                    POSITION

Lou L. Ross...............     74     Former Director- (Retired from Board Duty
                                      September 30, 2003.)
Michael A. Grollman.......     42     CEO, Chairman of the Board of Directors
Graham L. Clark...........     49     President, Director, Secretary
Gregory Szabo.............     50     Director (Outside)

     DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT ADVISORS

     LOU L.  ROSS  serves  today as an on call  consultant  and  advisor  to the
Company.   Prior  to  September   30,  2003,   he  served  as  Director  and  as
Chairman-Emeritus  of the Company's Board. He had been a Director since 1996 and
assumed  President and CEO duties in March 1998. Mr. Ross resigned as CEO of NSC
in January of 2002,  and also resigned as an employee of NSC in January of 2002,
and became a contract  consultant  for NSC. He resigned as Chairman of the Board


                                       34
<PAGE>

in December  2002.  From 1970 to 1975,  Mr.  Ross served as Chairman  and CEO of
Intel Malaysia,  established  Intel's Manila plant and started Intel's  military
products operation.  From 1976 to 1996, Mr. Ross served in a management capacity
for various  electronics  manufacturing  firms,  including  Labelab and Advanced
Semiconductor  Engineering  (ASE),  where he was a  Founder,  as well as General
Manager and Executive Vice President.

     MICHAEL A. GROLLMAN.  Michael Grollman first became Chief Operation Officer
in October  2000. We appointed  Mr.  Grollman to President in April 2001,  Chief
Executive  Officer in January of 2002,  Chairman of the Board in December  2002,
and Acting Chief Financial Officer in June of 2003. From 1998 to September 2000,
Mr. Grollman served as Regional  Service  Director of MicroAge,  Inc., a company
that provides customer-configured  technology solutions to businesses. He served
as General Manager,  Executive Vice President and Chief  Technology  Officer for
Advanced  Information  Systems  from 1987 to 1998.  Mr.  Grollman  received  his
Bachelor of Science degree in chemistry  from the State  University of New York.
He received his MBA from Arizona State University.

     GRAHAM L. CLARK. Graham Clark joined the Company in early 2001 as leader of
the sales  organization.  He became Vice President of Technology  Applications &
Sales for  National  Scientific  in the spring of 2002,  a Director in August of
2002, and became Corporate  Secretary in January of 2003. Mr. Clark was promoted
to President of the  Corporation in September of 2003.  Before joining  National
Scientific,   Mr.  Clark  was  the  General  Manager  of  the  Billet  Precision
Engineering  Group, a privately held start-up  manufacturing  company  providing
custom engineering and manufacturing solutions to the semiconductor industry and
other  related  industries.  Prior to his  tenure  with  Billet,  he  worked  as
Corporate  General Manager for Amtech Systems,  a publicly traded  semiconductor
equipment manufacturer.  Six years prior, he was a founder and senior partner of
GC Technology,  a private representative  organization for semiconductor capital
equipment.

     GREGORY SZABO joined the  Company's  board on October 1, 2003 as an outside
Director. Mr. Szabo serves on the Board's Audit and Compensation Committees. Mr.
Szabo  currently  serves  as  President  of  Exten  Corp.  and CEO of  MultiCell
Technologies, where he is responsible for public reporting, fund-raising for the
corporation and overall  accountability for its subsidiaries,  including revenue
generation,  intellectual  property  protection and organizational  development.
Prior to joining Exten, Mr. Szabo was president & CEO of Titan Scan Corporation,
a  division  of  Titan   Corporation,   a  $350M  firm  with   subsidiaries   in
sterilization,  defense, software and communications. Mr. Szabo has held several
executive positions with Sunrise Medical Inc., a large global manufacturer,  and
distributor of numerous institutional and retail products. Mr. Szabo earned a BA
in Psychology  from the  University  of Toledo and a MA in  Management  from the
Drucker Graduate School at Claremont University.

BOARD OF DIRECTORS

     The Board of Directors  was made up of three members  during  substantially
all of fiscal 2002. Lou L. Ross has been Director  since February 1998.  Michael
A. Grollman has been a Director since November of 2000. Graham L. Clark has been
a Director  since  August of 2002.  Mr. Ross retired from the board on September
30, 2003. Mr. Szabo joined the board on October 1, 2003. Currently, the Board of
Directors consists of three members,  Michael A. Grollman,  Chairman,  Graham L.
Clark, Secretary, and Gregory Szabo.


                                       35
<PAGE>

DIRECTOR COMPENSATION

     Reference is made to  information  contained  under the heading  "Executive
Compensation" in NSC's definitive proxy statement for its 2003 Annual Meeting of
Shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before January 30, 2004, which information is incorporated herein.

ITEM 10. EXECUTIVE COMPENSATION

     Reference is made to  information  contained  under the heading  "Executive
Compensation" in NSC's definitive proxy statement for its 2003 Annual Meeting of
Shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before January 30, 2004, which information is incorporated herein.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Reference  is made to  information  contained  under  the  heading  "Voting
Securities and Principal  Holders" in NSC's  definitive  proxy statement for its
2003 Annual  Meeting of  Shareholders  to filed with the Securities and Exchange
Commission on or before January 30, 2004.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Reference  is made to  information  contained  under the  heading  "Certain
Transactions" in NSC's definitive proxy statement for its 2003 Annual Meeting of
Shareholders  to be filed with the  Securities  and  Exchange  Commission  on or
before January 30, 2004.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

        (a)     Exhibits

                Exhibit
                Number                      Description
                -------                     -----------

                  31    Certification Pursuant Pursuant to Section 302 of the
                        Sarbanes-Oxley Act

                  32    Certification Pursuant Pursuant to Section 906 of the
                        Sarbanes-Oxley Act

        (b)     Reports on Form 8-K

                The Company filed one Report on Form 8-K on April 8, 2003.




                                       36
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange  Act of 1934,  the  Registrant  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        NATIONAL SCIENTIFIC CORPORATION



Date: January 14, 2004                  By: /s/ Michael A. Grollman
                                            ------------------------------------
                                            Director, Chief Executive Officer,
                                            Acting Chief Financial Officer, and
                                            Chairman

                                        By: /s/ Graham L. Clark
                                            ------------------------------------
                                            Director, President, and Secretary

                                        By: /s/ Gregory Szabo
                                            ------------------------------------
                                            Director


                                       37
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          INDEX TO FINANCIAL STATEMENTS

                                                                            PAGE

Report of Independent Public Accountants..................................  F-2
Balance Sheets............................................................  F-3
Statements of Operations..................................................  F-4
Statements of Shareholders' Equity........................................  F-5
Statements of Cash Flows..................................................  F-11
Notes to Financial Statements.............................................  F-13








                                       F-1

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors
National Scientific Corporation

     We have  audited the  accompanying  balance  sheets of National  Scientific
Corporation (a development stage Company) as of September 30, 2003 and 2002, and
the related  statements of operations,  shareholders'  equity (deficit) and cash
flows for each of the two years in the period ended  September  30, 2003 and for
the period from September 30, 1997 (inception of development stage) to September
30, 2003.  These  financial  statements are the  responsibility  of the National
Scientific Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in  all  material  respects,  the  financial  position  of  National  Scientific
Corporation as of September 30, 2003 and 2002, and the results of its operations
and its cash flows for each of the two years in the period ended  September  30,
2003 and from September 30, 1997  (inception of development  stage) to September
30, 2003 in conformity  with  accounting  principles  generally  accepted in the
United States of America.

     The  accompanying  financial  statements  have been prepared  assuming that
National  Scientific  Corporation will continue as a going concern. As discussed
in Note 2 to the financial statements, National Scientific Corporation is in the
development stage, has not yet generated significant revenues,  and is dependent
upon  raising  capital  from  investors.   Additionally,   National   Scientific
Corporation  has  incurred  aggregate  losses  during the past two years of over
$2,800,000,  and has a total  shareholders'  deficit  of  over  $600,000.  These
matters raise  substantial  doubt about the  Company's  ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 2. The  financial  statements  do not  include any  adjustments  that might
result from the outcome of this uncertainty.

                                           /s/ Hurley & Company

Granada Hills, CA
December 4, 2003, except
for Note 13 which is
January 9, 2004


                                       F-2

<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS
                           SEPTEMBER 30, 2003 AND 2002

                                                        2003           2002
                                                    ------------   ------------
                                     ASSETS

Current Assets:
   Cash and cash equivalents                        $     17,903   $      1,405
   Trade receivables, net of
     reserve of $8,169 at
     September 30, 2003                                   28,200          1,631
   Inventory                                               9,700         14,916
   Other assets                                           16,926            800
                                                    ------------   ------------
          Total current assets                            72,729         18,752

   Property and equipment, net                            32,081         45,007
   Deposits                                                5,031          5,031
                                                    ------------   ------------
                                                    $    109,841   $     68,790
                                                    ============   ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current Liabilities
   Accounts payable                                 $    185,725   $    368,952
   Accrued expenses                                      457,695        396,505
   Deposits                                               20,000             --
   Notes payable                                          10,000         75,079
                                                    ------------   ------------
          Total current liabilities                      673,420        840,536

   Notes payable, net of current portion                  43,250             --
                                                    ------------   ------------
          Total liabilities                              716,670        840,536
                                                    ------------   ------------
    Commitments and contingencies                             --             --
                                                    ------------   ------------

Shareholders' equity (deficit):

   Preferred stock, par value $.10; 4,000,000
     shares authorized, and no shares issued
     or outstanding                                           --             --
   Common stock, par value $.01; 120,000,000
     shares authorized, and shares issued
     70,633,819 and 51,587,062 outstanding
     at September 30, 2003 and 2002,
     respectively                                        706,338        515,871
   Additional paid-in capital                         20,444,733     19,517,719
   Accumulated deficit                               (21,757,900)   (20,805,336)
                                                    ------------   ------------
          Total shareholders' equity (deficit)          (606,829)      (771,746)
                                                    ------------   ------------
                                                    $    109,841   $     68,790
                                                    ============   ============

             SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT AND NOTES
 TO FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-3
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF OPERATIONS
       FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002, AND DEVELOPMENT STAGE

                                                                   Development
                                         2003           2002          Stage
                                     ------------   ------------   ------------

Revenues                             $     63,579   $      2,914   $    949,208
Cost of Sales                              25,848          1,889        897,487
                                     ------------   ------------   ------------
Gross profit                               37,731          1,025         51,721

Costs and expenses
   Salaries and benefits                  438,244        624,069      2,176,796
   Research and development                84,301        154,548      3,713,135
   Stock compensation                     291,658        460,168      3,080,694
   Consulting fees, related party          17,650             --      8,175,973
   Other                                  149,245        667,250      2,407,303
                                     ------------   ------------   ------------
        Total costs and expenses          981,098      1,906,035     19,553,901
                                     ------------   ------------   ------------
Loss from operations                     (943,367)    (1,905,010)   (19,502,180)

Other income (expense)
   Interest and other income                   --            584        178,972
   Gain on settlement                          --         89,403         89,403
   Interest expense                        (9,197)        (1,874)       (34,268)
   Loss on disposal of assets                  --         (2,405)       (30,960)
   Loss on impairment of equipment             --        (64,187)       (64,187)
                                     ------------   ------------   ------------
                                           (9,197)        21,521        138,960
                                     ------------   ------------   ------------
Loss before income taxes                 (952,564)    (1,883,489)   (19,363,220)

Income tax expense                             --             --             --
                                     ------------   ------------   ------------
Net loss                             $   (952,564)  $ (1,883,489)  $(19,363,220)
                                     ============   ============   ============
Net loss per common share,
   basic and diluted                 $      (0.02)  $      (0.04)
                                     ============   ============

Weighted average number of
   shares outstanding                  62,758,349     49,626,954
                                     ============   ============


           SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-4
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

             STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
       FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                           COMMON STOCK           PREFERRED STOCK
                                      ----------------------   ---------------------   ADDITIONAL
                                       NUMBER         PAR       NUMBER        PAR        PAID-IN      ACCUMULATED
                                      OF SHARES      VALUE     OF SHARES     VALUE       CAPITAL        DEFICIT          TOTAL
                                      ----------   ---------   ---------   ---------   ------------   ------------   ------------
<S>                                   <C>          <C>         <C>         <C>         <C>            <C>            <C>
Balance, September 30, 2002           51,587,062     515,871          --   $     --    $ 19,517,719   $(20,805,336)  $    771,746

Stock issued for services @ $0.17        946,270       9,462          --         --         152,913           --          162,375

Exercise of options                      637,153       6,372          --         --          22,686           --           29,058

Stock options granted                         --          --          --         --          60,733           --           60,733

Debt equity swap                         788,334       7,883          --         --          66,232           --           74,115

Private placement @ $0.04 to $0.08    14,125,000     141,250          --         --         528,750           --          670,000

Stock retainage program                2,550,000      25,500          --         --          95,700           --          121,200

Net loss                                      --          --          --         --              --       (952,564)      (952,564)
                                      ----------   ---------   ---------   --------    ------------   ------------    -----------

Balance, September 30, 2003           70,633,819   $ 706,338          --   $     --    $ 20,444,733   $(21,757,900)   $  (606,829)
                                      ==========   =========   =========   ========    ============   ============    ===========
</TABLE>


           SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-5
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

             STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
       FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                           COMMON STOCK           PREFERRED STOCK
                                      ----------------------   ---------------------   ADDITIONAL
                                       NUMBER         PAR       NUMBER        PAR        PAID-IN      ACCUMULATED
                                      OF SHARES      VALUE     OF SHARES     VALUE       CAPITAL        DEFICIT          TOTAL
                                      ----------   ---------   ---------   ---------   ------------   ------------   ------------
<S>                                   <C>          <C>         <C>         <C>         <C>            <C>            <C>
Balance, September 30, 2001           47,367,498   $ 473,675          --   $      --   $ 18,766,775   $(18,921,847)  $    318,603

Stock issued for services @ $0.306       100,000       1,000          --          --         29,600             --         30,600

Issuance of stock under equity
   line of credit @ $0.12 to $0.27     2,122,064      21,221          --          --        393,603             --        414,824

Exercise of warrants                     770,500       7,705          --          --         84,755             --         92,460

Exercise of options                    1,477,000      14,770          --          --        154,762             --        169,532

Loan repayment by officer               (250,000)     (2,500)         --          --        (97,500)            --       (100,000)

Grants of options and
   warrants, net                              --          --          --          --        185,724             --        185,724

Net loss                                      --          --          --          --             --     (1,883,489)    (1,883,489)
                                      ----------   ---------   ---------   ---------   ------------   ------------    -----------

Balance, September 30, 2002           51,587,062   $ 515,871          --   $      --   $ 19,517,719   $(20,805,336)   $  (771,746)
                                      ==========   =========   =========   =========   ============   ============    ===========
</TABLE>



           SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-6
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

             STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
       FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                           COMMON STOCK           PREFERRED STOCK
                                      ----------------------   ---------------------     ADDITIONAL
                                       NUMBER         PAR       NUMBER        PAR         PAID-IN       ACCUMULATED
                                      OF SHARES      VALUE     OF SHARES     VALUE        CAPITAL         DEFICIT          TOTAL
                                      ----------   ---------   ---------   -----------   ------------   ------------   ------------
<S>                                   <C>          <C>         <C>         <C>           <C>            <C>            <C>
Balance, September 30, 2000           47,195,768   $ 471,958          --   $        --   $ 15,086,920   $(12,686,979)  $  2,871,899

Stock issued for services
Stock issued for services @ $1.66        100,000       1,000          --            --        164,600             --        165,600
Stock issued for services @ $1.55         15,000         150          --            --         23,070             --         23,220
Stock issued for services @ $4.32          5,000          50          --            --         21,550             --         21,600
Stock issued for services @ $1.32         75,000         750          --            --         98,475             --         99,225
Stock issued for services @ $0.51         10,000         100          --            --          5,030             --          5,130

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 for stock options            (1,325,000)    (13,250)         --            --     (2,424,750)            --     (2,438,000)

Common stock options exercisable              --          --          --            --        800,567             --        800,567

Net loss                                      --          --          --            --             --     (6,234,868)    (6,234,868)
                                      ----------   ---------   ---------   -----------   ------------   ------------   ------------

Balance, September 30, 2001           47,367,498   $ 473,675          --   $        --   $ 18,766,775   $(18,921,847)  $    318,603
                                      ==========   =========   =========   ===========   ============   ============   ============
</TABLE>



           SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-7
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                           COMMON STOCK           PREFERRED STOCK
                                      ----------------------   ---------------------   ADDITIONAL
                                       NUMBER         PAR       NUMBER        PAR        PAID-IN      ACCUMULATED
                                      OF SHARES      VALUE     OF SHARES     VALUE       CAPITAL        DEFICIT          TOTAL
                                      ----------   ---------   ---------   ---------   ------------   ------------    ------------
<S>                                   <C>          <C>         <C>         <C>         <C>            <C>            <C>
Balance, September 30, 1999           36,544,289   $ 365,443          --   $      --   $  3,678,315    $(4,111,680)   $   (67,922)

Stock issued for services
Price per share ranged
   $0.18 to $0.85                        775,000       7,750          --          --        397,620             --         405,370
   $1.74 to $2.70                        606,797       6,067          --          --      1,071,028             --       1,077,095
   $3.26 to $4.50                        139,000       1,390          --          --        457,884             --         459,274
   $5.12 to 6.92                         236,832       2,369          --          --      1,411,591             --       1,413,960
   $7.43 to $8.80                      1,060,000      10,600          --          --      7,929,921             --       7,940,521

Exercise of warrants
   and options                         3,440,250      34,403          --          --      3,151,997             --       3,186,400

Private placement of common stock
   Shares issued for:
     $0.11                             2,430,000      24,300          --          --        245,700             --         270,000
     $0.25                               360,000       3,600          --          --         86,400             --          90,000
     $0.40                               975,000       9,750          --          --        380,250             --         390,000

Stock converted by director's
   family member                       1,128,600      11,286          --          --        (11,286)            --              --

Common stock to collateralize
   loan -- retired                      (500,000)     (5,000)         --          --             --             --          (5,000)

Deferred stock compensation                   --          --          --          --     (3,712,500)            --      (3,712,500)

Net loss                                      --          --          --          --             --     (8,575,299)     (8,575,299)
                                      ----------   ---------   ---------   ---------   ------------   ------------    ------------
Balance, September 30, 2000           47,195,768   $ 471,958          --   $      --   $ 15,086,920   $(12,686,979)   $  2,871,899
                                      ==========   =========   =========   =========   ============   ============    ============
</TABLE>



           SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-8
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                           COMMON STOCK           PREFERRED STOCK
                                      ----------------------   ---------------------   ADDITIONAL
                                       NUMBER         PAR       NUMBER        PAR        PAID-IN      ACCUMULATED
                                      OF SHARES      VALUE     OF SHARES     VALUE       CAPITAL        DEFICIT          TOTAL
                                      ----------   ---------   ---------   ---------   ------------   ------------   ------------
<S>                                   <C>          <C>         <C>         <C>         <C>            <C>            <C>
Balance, September 30, 1998           25,331,849   $ 253,318      15,000   $   1,500    $ 2,823,491   $ (3,167,225)  $    (88,916)

Stock issued for services
Price per share ranged
   $0.09 to $0.18                      3,020,000      30,200          --          --        528,239             --        558,439
   $0.20 to $0.29                        145,000       1,450          --          --         33,110             --         34,560

Preferred stock offering                      --          --      47,000       4,700        230,300             --        235,000

Exercise of warrants and
options                                  496,000       4,960          --          --         27,490             --         32,450

Private placement of
   common stock                          400,000       4,000          --          --         96,000             --        100,000

Conversion of preferred to
   common stock                        6,200,000      62,000     (62,000)     (6,200)       (55,800)            --             --

Common stock issued to
   collateralize loan                    500,000       5,000          --          --             --             --          5,000

Stock converted by director's
   family member                         451,440       4,515          --          --         (4,515)            --             --

Net loss                                      --          --          --          --             --       (944,455)      (944,455)
                                      ----------   ---------   ---------   ---------   ------------   ------------   ------------

Balance, September 30, 1999           36,544,289   $ 365,443          --   $      --   $  3,678,315   $ (4,111,680)  $   (67,922)
                                      ==========   =========   =========   =========   ============   ============   ============
</TABLE>



           SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                       F-9
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                    COMMON STOCK           PREFERRED STOCK
                               ----------------------   ---------------------   ADDITIONAL                 DEVELOPMENT
                                NUMBER         PAR       NUMBER        PAR       PAID-IN     ACCUMULATED      STAGE
                               OF SHARES      VALUE     OF SHARES     VALUE      CAPITAL       DEFICIT       DEFICIT       TOTAL
                               ----------   ---------   ---------   ---------   ----------   -----------   -----------   ----------
<S>                            <C>          <C>         <C>         <C>         <C>          <C>           <C>           <C>
Balance, October 1, 1997       17,847,292   $ 178,473          --   $      --   $2,160,780   $(2,394,680)  $        --   $  (55,427)

Stock issued for services       3,487,557      34,875          --          --      335,473            --            --      370,348

Private placement of
   preferred stock                     --          --      49,500       4,950      242,550            --            --      247,500

Exercise of warrants
   and options                    547,000       5,470          --          --      100,888            --            --      106,358

Conversion of preferred
   to common stock              3,450,000      34,500     (34,500)     (3,450)     (31,050)           --            --           --

Contributed capital                    --          --          --          --       14,850            --            --       14,850

Net loss                               --          --          --          --           --            --      (772,545)    (772,545)
                               ----------   ---------   ---------   ---------   ----------   -----------    ----------    ---------
Balance, September 30, 1998    25,331,849   $ 253,318      15,000   $   1,500   $2,823,491   $(2,394,680)   $ (772,545)   $ (88,916)
                               ==========   =========   =========   =========   ==========   ===========    ==========    =========
</TABLE>



           SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT AND NOTES TO
 FINANCIAL STATEMENTS, WHICH ARE AND INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      F-10
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
       FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND DEVELOPMENT STAGE
<TABLE>
<CAPTION>
                                                                                                   Development
                                                                      2003            2002            Stage
                                                                  ------------    ------------    ------------
<S>                                                               <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                                       $   (952,564)   $ (1,883,489)   $(19,363,220)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Non cash transactions
        Depreciation                                                    12,926          22,847          65,196
        Loss on disposal of assets                                          --           2,405          30,960
        Impairment loss on equipment                                        --          64,187          64,187
        Stock and options issued for services, net                     344,308         301,495      11,582,712
     Decrease (increase) in inventory                                    5,216           5,084          (9,700)
     (Increase) decrease in deferred offering costs                         --         107,844         (85,171)
     Decrease (increase) in receivables                                (26,569)             --         103,431
     Decrease (increase) in other assets                               (16,126)         13,896         (13,017)
     Increase  (decrease) in accounts payable and
       accrued expenses                                                (69,751)        439,090         673,126
                                                                  ------------    ------------    ------------
            Net cash (used in) operating activities                   (702,560)       (926,641)     (6,951,496)
                                                                  ------------    ------------    ------------
Cash flows from investing activities:
   Acquisition of property and equipment                                    --              --        (153,692)
   Repayment of loans                                                       --              --         200,000
   Proceeds from the sale of furniture and equipment                        --           1,390           6,050
   Loans issued                                                             --              --        (400,000)
                                                                  ------------    ------------    ------------
            Net cash (used in) provided by investing activities             --           1,390        (347,642)
                                                                  ------------    ------------    ------------
Cash flows from financing activities:
   Draws on the line of credit                                              --              --         430,000
   Loan from (to) officer                                                   --          75,079          65,079
   Repayment  of notes payable                                              --              --        (110,000)
   Repayment of line of credit                                              --        (430,000)       (430,000)
   Repayment of capital lease obligations                                   --              --          (1,819)
   Proceeds from the exercise of options                                29,058         169,532         198,590
   Proceeds from the exercise of warrants                                   --          92,460          92,460
   Proceeds from equity line of credit                                      --         414,824         414,824
   Proceeds from the issuance of preferred stock                            --              --         482,500
   Deposits from private placement                                      20,000              --          20,000
   Proceeds from issuance of common stock                              670,000              --       6,151,789
                                                                  ------------    ------------    ------------
            Net cash provided by financing activities                  719,058         321,895       7,313,423
                                                                  ------------    ------------    ------------
Net (decrease) increase in cash and cash equivalents                    16,498        (603,356)         14,285

Cash and cash equivalents, beginning of period                           1,405         604,761           3,618
                                                                  ------------    ------------    ------------
Cash and cash equivalents, end of period                          $     17,903    $      1,405    $     17,903
                                                                  ============    ============    ============
Supplementary Disclosure of Cash Flow Information

Cash paid for interest                                            $      3,000    $      1,874    $     25,474
                                                                  ============    ============    ============
Cash paid for income taxes                                        $         --    $         --    $         50
                                                                  ============    ============    ============
</TABLE>
           SEE ACCOMPANYING INDEPENDENT AUDITOR'S REPORT AND NOTES TO
 FINANCIAL STATEMENTS, WHICH ARE AND INTEGRAL PART OF THE FINANCIAL STATEMENTS

                                      F-11
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
           FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND THE PERIOD
  OCTOBER 1, 1997 (INCEPTION OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2003


SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES

     During 1999, the Company  issued 451,440 shares of restricted  common stock
to a Director's  family member in consideration of the family members'  transfer
of 320,000 shares of  unrestricted  common stock to investors in connection with
the Company's private placement that year.

     During fiscal year 2002,  the Company's  Board  Chairman  repaid a $100,000
loan by returning  250,000 shares of the Company's  common stock valued at $0.40
per share.

     During  fiscal  year  2003,  the  Company  issued  Mr.  Lou  Ross,  288,334
restricted  common stock as part of its program to lower debt without  expending
cash resources,  in exchange for the forgiveness of $43,250 of debt, or one half
of the total debt owed by the company to Mr. Ross of $86,500.  The debt forgiven
included various notes, salary deferred in 2002 and board fees deferred in 2002.
The  shares  were  issued at an  average  market  price per share of $0.15.  The
Company  also  issued Mr.  Ross,  50,000  restricted  common  stock for  reduced
Director's  fees  for  February  2003  through  the end of this  fiscal  year in
September 2003. These shares were issued at an average market price per share of
$0.15.



           SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT AND NOTES TO
  FINANCIAL STATEMENTS, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      F-12
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          The  following  is a summary of the  significant  accounting  policies
     followed by  National  Scientific  Corporation  (the  Company or NSC).  The
     policies  conform  with  accounting  principles  generally  accepted in the
     United States of America,  which require  management to make  estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosure  of  contingent  assets  and  liabilities  at  the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during  the  reporting  period.  Actual  results  could  differ  from those
     estimates.

     a.   OPERATIONS

          The  Company  was  incorporated  in Texas on June 22, 1953 as American
     Mortgage Company. On May 16, 1996, the Company changed its name to National
     Scientific  Corporation  (NSC).  During  1996,  the  Company  acquired  the
     operations of Eden Systems, Inc. (Eden) as a wholly-owned subsidiary.  Eden
     was engaged in water  treatment  and the  retailing  of cleaning  products.
     Eden's operations were sold on September 30, 1997. As such,  management now
     considers  NSC to be in the  development  stage.  From  September  30, 1997
     through  the year ended  September  30,  2001,  the Company has engaged its
     efforts  in the  research  and  development  of  semiconductor  proprietary
     technology and processes and in raising  capital to fund its operations and
     research.  Beginning in calendar  2002, the Company has focused its efforts
     toward the development,  acquisition, enhancement and marketing of location
     device  technologies.  The  Company's  revenue  is  derived  from  sales of
     electronic devices, recognized as the product is delivered.

     b.   CASH EQUIVALENTS

          Cash  equivalents  include money market accounts and other  short-term
     investments with an original maturity of three months or less.

     c.   INVENTORY

          Inventories are stated at the lower of cost or market values.  Cost is
     primarily determined on a FIFO (first-in, first-out) basis.

     d.   PROPERTY AND EQUIPMENT

          Property and equipment are recorded at cost and are being  depreciated
     over estimated useful lives of three to five years using the  straight-line
     method.

     e.   ADVERTISING AND PROMOTION COSTS

          Advertising  and promotion  costs,  which  totaled  $8,105 in 2003 and
     $8,832 in 2002 are expensed as incurred.


                                      F-13
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     f.   STOCK OPTIONS

          The Company has elected to follow Accounting  Principles Board Opinion
     No.  25,   "Accounting   for  Stock  Issued  to   Employees"   and  related
     interpretations in accounting for its employee stock options. Under APB 25,
     no  compensation  expense is recorded when the exercise price of the option
     equals the market price of the  underlying  stock on the date of the grant.
     The Company has adopted the  disclosure  only  provisions  of  Statement of
     Financial  Accounting  Standards  No.  148,  "Accounting  for  Stock  Based
     Compensation."

     g.   INCOME TAXES

          Deferred tax assets and  liabilities are recognized for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying amount of existing assets and liabilities and their respective tax
     bases, including operating loss and tax credit carry-forwards. Deferred tax
     assets and  liabilities  are measured  using enacted tax rates  expected to
     apply to taxable income in the years in which those  temporary  differences
     are expected to be recovered or settled.  The effect in deferred tax assets
     and  liabilities  of a change in tax rates is  recognized  in income in the
     period  that  includes  the  enactment  date.   Valuation   allowances  are
     established  when  necessary  to reduce  deferred  tax assets to the amount
     expected to be realized.

     h.   RESEARCH AND DEVELOPMENT/PATENTS

          Both research and development and the costs  associated with obtaining
     patents and product  development  have been  expensed as  incurred.  Patent
     costs are expensed, since the Company has not yet developed products, which
     have gained market acceptance.

     i.   NET LOSS PER SHARE

          Net loss per share is computed by dividing  the loss  attributable  to
     common  shareholders by the weighted  average number of shares  outstanding
     during the period,  which was 62,758,349 and 49,626,954 for the years ended
     September 30, 2003 and 2002,  respectively.  Stock options  outstanding  of
     3,329,757   and   warrants   outstanding   of  7,412,201   are   considered
     anti-dilutive and were not considered in the calculation.

     j.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

          In April 2002, the Financial  Standards Board (the "FASB") issued SFAS
     No.  145,  "RESCISSION  OF SFAS NO. 4, 44,  AND 64,  AMENDMENT  OF THE FASB
     STATEMENT  NO. 13, AND  TECHNICAL  CORRECTIONS,"  effective  for  financial
     statements issued after May 25, 2002, which effectively amends SFAS No. 13,
     "ACCOUNTING   FOR  LEASES,"  to  eliminate   an   inconsistency   involving
     sale-leaseback  transactions  and also  gives  clarity  to  other  existing


                                      F-14
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     authoritative  pronouncements.  The  adoption  of SFAS  145 did not  have a
     material impact on the Company's financial statements.

          In June 2002,  the FASB  issued SFAS No.  146,  "ACCOUNTING  FOR COSTS
     ASSOCIATED  WITH  EXIT  OR  DISPOSAL  ACTIVITIES,"  effective  for  exit or
     disposal  activities  after December 15, 2002,  which  addresses  financial
     accounting  and  reporting  for  costs  associated  with  exit or  disposal
     activities and nullifies Emerging Issues Task Force (EITF) Issues No. 94-3,
     "LIABILITY  RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER
     COSTS  TO  EXIT  AND  ACTIVITY  (INCLUDING  CERTAIN  COSTS  INCURRED  IN  A
     RESTRUCTURING.)" The adoption of the provisions of this SFAS did not have a
     material impact on the Company's financial statements.

          In October 2002, the FASB issued SFAS No. 147, "ACQUISITION OF CERTAIN
     FINANCIAL INSTITUTIONS - AN AMENDMENT OF FASB STATEMENTS NO. 72 AND 144 AND
     FASB  INTERPRETATION  NO.  9,"  application  for  acquisitions  on or after
     October  1,  2002,  which  generally  removes   acquisitions  of  financial
     institutions  from the scope of both Statement 72 and  Interpretation 9 and
     requires that those  transactions  to be accounted  for in accordance  with
     FASB Statement No. 141, "Business Combinations," and No. 142, "GOODWILL AND
     OTHER  INTANGIBLE  ASSETS," and emends FASB Statement No. 144,  "ACCOUNTING
     FOR THE  IMPAIRMENT  OR DISPOSAL  OF LONG LIVED  ASSETS," to include in its
     scope  certain  long  term   customer-relationship   intangible  assets  of
     financial  institutions.  The  adoption of SFAS 147 did not have a material
     impact on the Company's financial statements.

          In  December  2002,  the FASB issued  SFAS No.  148,  "ACCOUNTING  FOR
     STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB
     STATEMENT NO. 123,"  effective  for fiscal years ending after  December 15,
     2002,  which  provides  alternative  methods of transition  for a voluntary
     change to the fair value based method of accounting for stock-base employee
     compensation.  The adoption of SFAS No. 148 did not have a material  effect
     on the Company's financial statements, as the adoption of this standard did
     not require the Company to change,  and the Company did not change,  to the
     fair value based method of accounting for stock-based compensation.

          In January 2003, the FASB issued FASB  Interpretation  ("FIN") No. 46,
     "CONSOLIDATION  OF VARIABLE  INTEREST  ENTITIES."  FIN No. 46 clarifies the
     application of Accounting Research Bulletin No. 51, "CONSOLIDATED FINANCIAL
     STATEMENTS,"  and applies  immediately  to any variable  interest  entities
     created after January 31, 2003 and to variable  interest  entities in which
     an interest is  obtained  after  January  31,  2003.  The Company  holds no
     interest in variable interest entities.

          In April 2003,  the FASB issued SFAS No. 149,  "AMENDMENT OF STATEMENT
     133 ON DERIVATIVE  INSTRUMENTS AND HEDGING  ACTIVITIES." SFAS 149 clarifies
     the accounting and reporting for derivative instruments,  including certain
     derivative   instruments  imbedded  in  other  contracts  and  for  hedging
     activities under SFAS No. 133,  "ACCOUNTING FOR DERIVATIVE  INSTRUMENTS AND


                                      F-15
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     HEDGING  ACTIVITIES."  In  particular,  SFAS No. 149  clarifies  under what
     circumstances  a  contract  with  an  initial  net  investment   meets  the
     characteristic  of a derivative  as described in SFAS No. 133. SFAS No. 149
     also clarifies when a derivative contains a financing  component.  SFAS No.
     149 is  generally  effective  for  derivative  instruments  entered into or
     modified  after June 30,  2003,  and for hedging  relationships  designated
     after June 30, 2003. The company holds no derivative  instruments  and does
     not engage in hedging activities.

          In May 2003,  the FASB issued SFAS No.  150,  "ACCOUNTING  FOR CERTAIN
     FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY."
     SFAS No. 150 requires certain  financial  instruments that have both equity
     and  liability  characteristics  to be  classified  as a  liability  on the
     balance  sheet.  SFAS No. 150 is  effective  for the first  interim  period
     beginning  after June 15,  2003.  The  adoptions of SFAS 150 did not have a
     material impact on the Company's financial statements.

2.   DEVELOPMENT STAGE OPERATIONS

          Although  the Company  has been in  operation  since 1996,  management
     considers  NSC to be in the  development  stage.  From  September  30, 1997
     through  the year ended  September  30,  2001,  the Company has engaged its
     efforts  in the  research  and  development  of  semiconductor  proprietary
     technology and processes and in raising  capital to fund its operations and
     research.  Beginning  calendar  2002,  the  Company has focused its efforts
     toward the development,  acquisition, enhancement and marketing of location
     device  technologies.  Since its  initiation  of  operations  in 1996,  the
     Company has not  realized  significant  revenue,  except for  approximately
     $882,000  generated  through  the  export of  electronic  equipment,  which
     occurred in fiscal 2001.

          The Company experienced  significant  operating losses during 2003 and
     2002,  of $952,564 and  $1,883,489  respectively,  which raise  substantial
     doubt about the Company's  ability to continue as a going  concern.  Of the
     total net operating losses,  approximately $292,000 and $460,000 related to
     stock issued for services and compensation in 2003 and 2002,  respectively.
     Management  believes  that its current cash position  including  cash funds
     arising from the exercise of outstanding  options, and secured plant assets
     from legal  settlements,  equity  private  placement,  product  sales,  and
     continued  aggressive  expense  management  to be  sufficient  to  continue
     operations for the next twelve months.  We also believe that we may be able
     to reduce outstanding  liabilities through negotiations with our creditors,
     or possibly  negotiate to extend the payment  schedule for these debts.  In
     the event these approaches do not provide us with adequate working capital,
     we may be required to further curtail or reduce our development activities,
     seek alternative funding sources,  or seek protection under  reorganization
     laws.


                                      F-16
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


          The accompanying  financial  statements do not include any adjustments
     relating to the  recoverability  and  classification  of the recorded asset
     amounts or the  amounts and  classification  of  liabilities  that might be
     necessary should the Company be unable to continue in existence.

3.   PROPERTY AND EQUIPMENT

          Property and equipment consists of the following at September 30, 2003
     and 2002:

                                             2003       2002
                                           --------   --------
          Computer equipment               $ 58,806   $ 58,806
          Office furniture                   12,507     12,507
                                           --------   --------
                                             71,313     71,313
          Less: accumulated depreciation     39,232     26,306
                                           --------   --------
                                           $ 32,081   $ 45,007
                                           ========   ========

          During fiscal 2002, the Company  determined  that the value of certain
     computer and other equipment  previously  utilized in their San Jose office
     for  research and  development  was  impaired.  The Company  recognized  an
     impairment loss of approximately $64,000.

4.   EARNINGS PER SHARE

          The following table reconciles  weighted average shares outstanding to
     amounts used to calculate  basic and diluted  earnings per share for fiscal
     years 2003 and 2002.

                                                       2003           2002
                                                   ------------    -----------

     Net (loss)                                    $   (952,564)   $(1,883,489)

     Weighted average shares:
        Average shares outstanding                   62,758,349     49,626,954
        Effect of diluted shares                             --             --
                                                   ------------    -----------
        Average shares outstanding,
          adjusted for dilutive effect               62,758,349     49,626,954
                                                   ------------    -----------

     (Loss) per share - basic                              (.02)          (.04)

     (Loss) per share - diluted                            (.02)          (.04)



                                      F-17
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     Incremental  common shares (not included in denominator of diluted earnings
     per share because of their anti-dilutive nature):

                                                        2003            2002
                                                     ----------      ---------

     Employee options                                 3,329,757      3,582,839
     Warrants                                         7,412,201        412,201
                                                     ----------      ---------

     Potential common equivalents                    10,741,958      3,995,040
                                                     ==========      =========

     If all currently  outstanding  potential common  equivalents are exercised,
     the Company would receive proceeds of approximately $6,100,000.

5.   LEASE COMMITMENTS

          On  September  11,  2001  the  Company  signed  a  thirty-seven  month
     non-cancelable  operating  lease  agreement  for an office  in  Scottsdale,
     Arizona,  which  expires on October 31, 2004.  The lease  requires  monthly
     payments  of $4,785 to $5,031  plus  sales tax and  contains  no renewal or
     purchase options.

          Future minimum lease obligations at September 30, 2003 are as follows:

          Year Ending September 30:

          2004                                   $ 60,250
          2005                                      5,031
                                                 --------
                                                 $ 65,281
                                                 ========

          Rent  expense  for the years  ended  September  30,  2003 and 2002 was
     approximately $64,000 and $106,000 respectively.

6.   INCOME TAXES

     Deferred  income taxes  consist of the following at September 30, 2003  and
     2002:


                                      F-18
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


                                                         2003          2002
                                                      -----------   -----------

     Tax Benefit of net operating loss                $ 5,779,000   $ 5,515,000
        carry-forwards and start up costs
     Valuation allowance                               (5,779,000)   (5,515,000)
                                                      -----------   -----------
                                                      $        --   $        --
                                                      ===========   ===========

     A reconciliation of expected to actual taxes follows:

     Expected federal and state tax recovery at 40%   $  (381,000)  $  (755,000)
     Non-deductible stock compensation                    117,000        20,000
                                                      -----------   -----------
                                                         (264,000)     (735,000)
     Tax benefits not realized - valuation allowance      264,000       735,000
                                                      -----------   -----------
     Realized tax benefit                             $        --   $        --
                                                      ===========   ===========

          The Company has recorded  valuation  allowances to offset the value of
     deferred tax assets,  since it has recorded  losses from  operations  since
     1996 and the  utilization of those assets is uncertain.  During fiscal 2003
     and 2002,  the  valuation  allowance  increased  by $264,000  and  $735,000
     respectively.

          The Company has net operating  loss  carry-forwards  of  approximately
     $14,600,000  at  September  30,  2003,  which may be used to offset  future
     federal taxable income through 2022 and state taxable income through 2008.

7.   RELATED PARTY TRANSACTIONS

          In October 2002, Mr. Lou Ross, the former Chairman of the Board, and a
     Director  until  September 30, 2003, was paid for his services as an active
     member of the board in shares of restricted  common stock, in lieu of cash.
     The former Chairman  received 66,806 restricted common shares at an average
     price on the date of grant of $0.11 per share.

          As  described  in the  Company  10-KSB  filing  for  the  year  ending
     September 30, 2002, and also in the Company Proxy  Statement for 2003 filed
     January 27, 2003,  the  Company's  Board  initiated on September 30, 2003 a
     restricted stock retainage  program ("Stock  Retainage  Program") to retain
     key staff during a period of financial  difficulty.  The Company  allocated
     approximately $150,000 in restricted Common Stock from this Stock Retainage
     Program  pool of shares in fiscal  2002,  to be  granted  to key  employees
     during the year,  subject to the Company  exceeding sales growth objectives
     and expense reduction  objectives in 2003. Failure to meet these objectives
     under the plan would result in the forfeiture by staff of this entire stock


                                      F-19
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     grant by all participants,  unless new objectives are approved by the board
     for calendar year 2004, in which case the stock grant would remain with the
     participants  but be  subject  to  forfeiture  by  participants  until  new
     objectives  have been achieved in 2004. All stock grants under this program
     were  granted in  September  2002 but shares were not finally  issued until
     January of 2003. All of the stock under his program is restricted under SEC
     Section  144,  and  cannot  be  traded  by  the  Stock  Retainage   Program
     participants for at least one year from date of issue.

          The Company CEO,  Michael Grollman was granted 750,000 shares of stock
     from this Stock  Retainage  Program pool of shares,  subject to the Company
     achieving in excess of $200,000 in sales in calendar year 2003, and subject
     to him  accepting a $60,000 per year pay  reduction  for the calendar  year
     2003, reducing his annual payable salary to $120,000 per year for 2003. Mr.
     Grollman  was  granted an  additional  500,000  shares of stock  under this
     program,  subject to sales exceeding $1,000,000 for calendar year 2003. The
     Company's  Vice  President  and Director  Graham Clark was granted  500,000
     shares of stock from the Company's Stock  Retainage  Program pool of shares
     discussed above,  subject to the Company achieving in excess of $200,000 in
     sales in calendar year 2003.  Mr. Clark was granted an  additional  500,000
     shares of stock under this program,  subject to sales exceeding  $1,000,000
     for calendar  year 2003.  The majority of the  remaining  restricted  stock
     allocated under this program was granted to other Company's  staff,  and is
     subject to  substantially  the same risk of forfeiture as the stock granted
     to Grollman and Clark under the Program.

          In January 2003,  Mr. Lou Ross, was paid for his services as an active
     member of the board in shares of restricted  common stock, in lieu of cash.
     The former Chairman  received 54,464 restricted common shares at an average
     market price on the date of grant of $0.14 per share.

          In June 2003,  the  Company  issued Mr. Lou Ross,  288,334  restricted
     common  stock as part of its program to lower debt without  expending  cash
     resources,  in exchange for the forgiveness of $43,250 of debt, or one half
     of the total debt owed by the  company  to Mr.  Ross of  $86,500.  The debt
     forgiven  included  various  disclosed  notes,  salary deferred in 2002 and
     board fees  deferred in 2002.  The shares were issued at an average  market
     price per  share of  $0.15.  The  Company  also  issued  Mr.  Ross,  50,000
     restricted  common  stock for reduced  Director's  fees for  February  2003
     through the end of this fiscal year in  September  2003.  These shares were
     issued at an average market price per share of $0.15.

          The  CEO  and  president  have   employment   contracts  that  include
     termination clauses that fully vest their options and ownership of shares.


                                      F-20
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


8.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

          Fair  value  estimates  are made at a  specific  point in time and are
     based on relevant market  information  and information  about the financial
     instrument;  they are  subjective  in  nature  and  involve  uncertainties,
     matters of judgment and, therefore, cannot be determined with precision.

          These  estimates  do not reflect  any  premium or discount  that could
     result from offering for sale at one time the Company's  entire holdings of
     a particular instrument.  Changes in assumptions could significantly affect
     the estimates.

          Since the fair  value is  estimated  as of  September  30,  2003,  the
     amounts  that  will  actually  be  realized  or paid at  settlement  of the
     instruments could be significantly different.

          The  carrying  amount of cash and cash  equivalents  is  assumed to be
     their fair value  because of the liquidity of these  instruments.  Accounts
     payable and accrued  expenses  approximate  fair value because of the short
     maturity of these instruments.

9.   STOCK OPTIONS

          As of September 30, 2003,  the Company has a stock-based  compensation
     plan wherein officers and employees were granted stock options. The Company
     applies  APB 25 and related  interpretations  in  accounting  for the plan.
     Accordingly,  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 the  grant.  Compensation  expense  of  approximately
     $50,000 and $190,000 was recorded for the fiscal years ending September 30,
     2003 and 2002, respectively.

          Under the  above-mentioned  2000 Stock Option Plan, the purchase price
     must be at least 100% of the fair market  value of NSC's  common  stock (if
     the  option  is an  incentive  stock  option),  or at least 25% of the fair
     market  value of NSC's  common  stock at the time the option is granted (if
     the  option  is a  nonqualified  grant),  or such  higher  price  as may be
     determined by the Board of Directors at the time of grant.  If however,  an
     incentive  stock option is granted to an individual who would,  immediately
     before the grant,  directly  or  indirectly  own more than 10% of the total
     combined voting power of all NSC's classes of stock,  the purchase price of
     the shares of common stock covered by such  incentive  stock option may not
     be less than 110% of the fair  market  value of such  shares on the day the
     incentive  stock option is granted.  As the price of the  Company's  common
     stock is currently  quoted on the OTC Bulletin Board, the fair market value
     of the common stock underlying  options granted under the 2000 Stock Option
     plan shall be the last  closing  sale price of the common  stock on the day
     the options are granted.  If there is no market price for the common stock,
     then NSC's Board of Directors  may,  after  taking all relevant  facts into


                                      F-21
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     consideration,  determine  the fair market  value of the  Company's  common
     stock.

          As required by SFAS 123,  the fair value of each grant is estimated on
     the date of grant using the  Black-Scholes  option  pricing  method for pro
     forma footnote  disclosure with the following  assumptions for all periods;
     dividend  yield of 0%, risk free interest  rate of 5%, and expected  option
     life of 10 years.  Expected volatility was assumed to be 50% as of the date
     of issue.

<TABLE>
<CAPTION>
                                                                      Weighted      Weighted
                                                        Number        Average       Average
                                                          of          Exercise       Fair
                                                        Shares         Price         Value
                                                     ------------------------------------------
<S>                                                   <C>             <C>           <C>
      Options Outstanding, September 30, 2001         1,534,501       $ 1.81        $ 0.15
      Granted                                         3,654,162         1.24          0.24
      Exercised                                      (1,477,000)        0.11          0.11
      Canceled                                         (128,834)        0.71          0.02
                                                     ------------------------------------------
      Options Outstanding, September 30,2002          3,582,839       $ 1.97        $ 0.01
                                                     ------------------------------------------

      Options Outstanding September 30, 2002          3,582,839       $ 1.97        $ 0.01
      Granted                                         1,144,081         0.10          0.10
      Exercised                                        (637,153)        0.05          0.10
      Expired                                          (760,010)        5.45          0.01
                                                     ------------------------------------------
      Options Outstanding, September 30, 2003         3,329,757       $ 0.90        $ 0.06
                                                     ==========================================
</TABLE>

          Had the  Company  fully  adopted  Statement  of  Financial  Accounting
     Standards  ("SFAS") No. 148, the net loss for the years ended September 30,
     2003 and 2002 would have been  $(1,002,924)  and $(2,091,901) and the basic
     and  diluted  earnings  per share  would  have  been  $(0.02)  and  $(0.04)
     respectively.

     WARRANTS

     The warrants outstanding as of September 30, 2003 are as follows:


                                      F-22
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


<TABLE>
<CAPTION>
                                                        Number
                                                          of          Exercise
                                                        Shares         Price          Expires
                                                     ------------------------------------------
<S>                                                   <C>               <C>          <C>
     Outstanding at September 30, 2001                1,500,000         $ .12           1/02
     Excercised                                         770,500
     Expired                                            729,500
     New issues                                         412,201         $1.67          11/04
                                                     ----------
     Outstanding at September 30, 2002                  412,201
     Expired                                                 --
     New issues                                       4,800,000         $ .30          12/04
                                                        200,000         $ .50          12/04
                                                      1,000,000         $ .35           6/06
                                                      1,000,000         $ .50           6/06
                                                     ----------
     Outstanding at September 30, 2003                7,412,201
                                                     ==========
</TABLE>

10.  COMMITMENTS AND CONTINGENCIES

          The  Company  was a  defendant  in a  landlord-tenant  lawsuit  with a
     landlord of leased  property  vacated by the Company in 2001 as part of its
     corporate  consolidation.   The  Company  and  the  landlord  negotiated  a
     settlement in this matter  without  admitting any  wrongdoing.  In order to
     fulfill the terms of this settlement,  NSC must pay a remaining  $10,000 in
     four  installments  by September  2004. The amount due is included in notes
     payable.

          Mr.  Lou Ross  assigned  his  rights to  certain  amounts  that may be
     recoverable  from NetMind as partial payment for loan proceeds  advanced to
     him in 1999 (see  Note 7  above).  The  Company  has  filed a suit  against
     NetMind  to  recover  the  investment,  plus  damages.  In  April  of  2003
     significant portions of this suit were settled by the parties,  while other
     portions remain unsettled. Management is unable to determine the outcome of
     the suit.

          In January  2002,  the Company  initiated  legal  proceedings  against
     Phoenix  Semiconductor,  Inc. (PSI) for breach of contract. The Company has
     taken steps to settle this claim (see Note 12 below).

          The Company was  awarded a judgment of  approximately  $179,000 in May
     2003 against E4World Corporation.  However,  there is no assurance that any
     of this amount will be collected by NSC. Since  collection of this judgment


                                      F-23
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     by NSC is  uncertain,  this  positive  judgment is not  reflected  in NSC's
     current financial  statements.  The Company continues to press its claim to
     secure assets held by E4World in a separate legal matter, although there is
     no assurance  that this claim will be collected by NSC, and thus this claim
     is not shown in the NSC financial statements.

          The Company is from time to time  subject to claims and suits  arising
     in the ordinary  course of operations.  In the opinion of  management,  the
     ultimate  resolution  of such  pending  legal  proceedings  will not have a
     material  adverse effect on the Company's  financial  position,  results of
     operation or liquidity.

11.  EQUITY LINE OF CREDIT

          In March 2001, the Company began  negotiating an equity line of credit
     agreement with a third party  investor.  Under the equity line, the Company
     had the option to issue,  during a two-year term, shares of common stock to
     an investor at prices that were  discounted  from the fair market  value on
     the date of  issuance.  The shares  under this  equity  line of credit were
     registered with the Securities and Exchange  Commission on October 11, 2001
     on Form SB-2. Subsequent to the equity line of credit's effective date, the
     Company  issued  2,122,064  shares of  common  stock to the  investor,  and
     received  net  proceeds of  $414,824.  The  Company's  ability to draw down
     amounts under this line of credit has been materially  adversely  affected,
     substantially  due to the decline in market price for the Company's  stock.
     This line was not used during fiscal 2003, and the Company does not believe
     this line will be used again.

12.  NOTES PAYABLE

     As of September 30, 2003, the notes payable consisted of the following:

     Note payable to shareholder, unsecured, non-interest
        bearing, matures in 2006                                        $43,250

     Note payable, unsecured, non interest bearing,
        payable in quarterly installments of $2,500,
        matures in 2004                                                  10,000
                                                                        -------
            Total notes                                                  53,250
            Current portion                                              10,000
                                                                        -------
                                                                        $43,250
                                                                        =======


                                      F-24
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2003 AND 2002


     The notes mature as follows:

     Year ending September 30, 2004                                     $10,000
                               2005                                          --
                               2006                                      43,250
                                                                        --------
                                                                        $53,250
                                                                        =======

13.  SUBSEQUENT EVENTS

          In January of 2004, the Company entered into a financing  program with
     a U.S. investment fund entity that wants to remain confidential.  The terms
     of this program  include a six-month  Note payable at maturity in July 2004
     for $160,000,  at an effective annual interest rate of 13%. The transaction
     also included 620,000 warrants good for three years to purchase the Company
     restricted  stock,  at  $0.13  during  the  first  and  second  year of the
     warrants, and $0.15 during the third and final year of the warrants.  These
     warrants include anti-dilution  provisions,  as well as registration rights
     in the  event  that the  Company  was to file an  appropriate  registration
     statement  with the SEC during the next three years.  The  principle of the
     Note is optionally  convertible  to the Company's  restricted  stock at any
     time  during  the first six  months of the Note at 90% of the  then-current
     market  value of the  Company's  common  stock.  In the event of failure to
     repay the Note in July 2004, the Note would be extended another six months,
     and the  effective  interest  rate would be  increased to 15%, and a second
     group  of  approximately  620,000  warrants  priced  at 50% of the  average
     trading  price of the  Company's  stock  would be made  effective,  and the
     Company  would  be  required  to  file a  registration  statement  for  the
     securities  underlying  these  warrants  within 90 days.  An officer of the
     Company provided  personal  collateral to support this Note, which would be
     forfeited in the event of non-payment of the Note.


                                      F-25
<PAGE>

                                  EXHIBIT INDEX

Exhibit
Number                             Description
-------                            -----------

  31    Certification Pursuant Pursuant to Section 302 of the Sarbanes-Oxley Act

  32    Certification Pursuant Pursuant to Section 906 of the Sarbanes-Oxley Act