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

                                 --------------
                                   FORM 10-KSB
                                 --------------

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002

                                    000-28745
                              (Commission File No.)

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

                                 --------------
            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].

       Revenues for the fiscal year ended September 30, 2002: $2,914.

       The  aggregate  market  value of voting stock held by  non-affiliates  of
National  Scientific  Corporation's  ("NSC's")  common stock, as of December 20,
2002 was approximately $8,375,845 (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 December 20, 2002 was 52,182,521.

       A portion of the Registrant's Proxy Statement for the 2003 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"),  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.  Since  October 1,  1999,  NSC has added
several key individuals to its management team, who have  significant  expertise
in the electronic  components and semiconductor fields, as well as experience in
leadership as executives of major corporations.

       Until early in calendar 2002, NSC's core business 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 and in location services devices.  We primarily designed
products  that we believe will have a broad  application  and  acceptance in the
commercial marketplace.

       We  currently  hold U.S.  patents on six  devices  and  designs  and have
several  domestic and  international  patent  applications  pending.  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.

       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 continue our focus on
location services devices for the foreseeable  future. Much of our efforts since
February 2002 have been devoted to licensing and developing technologies related
to  location  services.  We made our first sales of these  products  late in the
fiscal  year  ending  September  30,  2002,  although  most of the year has been
devoted to  developing  new  location  products.  We expect to continue  product
development in 2003, and to develop new sales channels and new customers for our
location services products.

       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 since they did not yield the margins
we had  originally  projected.  In the fiscal year ended  September 30, 2002, we
have  focused  on  generating  revenue  through  the  development  and  sale  of
electronic devices for the location services market.

       NSC's net losses  were  $1,883,489  and  $6,234,868  for the years  ended
September  30,  2002 and 2001,  respectively.  See "Part II,  Item 7 - Financial
Statements."


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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 US  Military,  but is now in  common  use in  many
commercially  available products,  including those designed,  manufactured,  and
sold by NSC.

         Our present offering of semiconductor  devices and designs are 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)

         NSC's location products (excluding our "Gotcha" product) 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.

         FOLLOWIT(TM)  TRACKING DEVICE.  Followit 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  Chip (GPS Chip) that allows it to determine  its
current location by examining the current location of GPS satellites  originally
deployed by the US 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 Lobo(TM) below). The 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.  NSC sold only a small
number of these devices over the last 6 months.

         URBAN TRACKER II(TM).   Urban Tracker II is a small  electronic  device
designed for the tracking of people at a distance.  NSC announced this device in
March  of 2002.  The  device  fits in the palm of the  hand,  and is  formed  to
resemble an eyeglasses  case. The unit contains a Global  Positioning  Chip (GPS
Chip) that allows it to determine its current  location by examining the current
location of GPS satellites  originally deployed by the US 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  Lobo(TM)  below).  The unit is
designed  and  manufactured  by NSC,  with  some  components  made 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  from  copying.  This unit is  primarily  intended  for
tracking  people.  NSC has only  developed  prototypes  of this device,  and has
presented  samples  to  various   customers.   NSC  has  not  sold  commercially
significant numbers of this product to customers.

         STARPILOT(TM). StarPilot 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
disk drive that operates on the commercially  available Linux operating  system.
The unit also  contains a Global  Positioning  Chip (GPS Chip) that allows it to
determine  its  current  location  by  examining  the  current  location  of GPS


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satellites  originally  deployed  by the US  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 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.

         SHUTTLEFINDER(TM).  Shuttlefinder is a small electronic device designed
for the tracking of shuttle buses at a distance in a closed campus  environment.
NSC  announced  this device in November of 2002.  The device fits in the palm of
the hand,  but is larger than a Followit  unit by  approximately  40%.  The unit
contains a Global  Positioning  Chip (GPS Chip) that allows it to determine  its
current location by examining the current location of GPS satellites  originally
deployed by the US 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 Lobo(TM)
below) or it may be used with mapping software from other vendors.  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 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.  NSC also offers kiosks that
can be deployed near bus stops in order to display  current bus  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.  This unit is
primarily intended for tracking Shuttle buses. 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,  and to target  advertising  sales on the shuttle
display kiosks as an additional form of revenue from the sale of this product.

         TRACKER IIR(TM).  Tracker IIR is a small electronic device 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  Chip (GPS Chip)
that allows it to  determine  its  current  location  by  examining  the current
location of GPS satellites  originally deployed by the US 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 below).  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 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, 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.  NSC has not sold  commercially  significant  numbers  of this  product to
customers.  NSC intends to market this product through direct sales to specialty
clients.

         GOTCHA(TM).  Gotcha  is a  small  electronic  device  designed  for the
tracking  of  children in indoor and  outdoor  environments at short  distances,
typically  less than 200 feet from the parent or guardian.  NSC  announced  this


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device in November of 2002. The device consists of two parts, one about the size
of a handheld  pager that  attaches to the parent and one the size of a bracelet
that attaches to the child. The unit does NOT contain a Global  Positioning Chip
(GPS  Chip),  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 envisioned to be 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.  This unit is  primarily  intended for parents
trying to keep track of children in hectic environments, such as shopping malls.
NSC has  only  developed  prototypes  of this  device.  NSC has not yet  shipped
commercially  significant  numbers of this product to customers.  NSC intends to
market this product through retail mass-market channels for less than $50.

         URBAN TRACKER IIK(TM).  Urban Tracker IIK is a small electronic  device
designed for the tracking of people at a distance.  NSC announced this device in
October of 2002. The device is an NSC tracking  device (see Followit  above) and
is formed into a child's backpack.  The unit contains a Global  Positioning Chip
(GPS Chip) that allows it to determine  its current  location by  examining  the
current location of GPS satellites  originally  deployed by the US 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 Lobo(TM) below).  The
unit is designed and manufactured by NSC, with some components made 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  from  copying.  This unit is  primarily  intended  for
tracking  children  going  to and  from  places  such as  school.  NSC has  only
developed  prototypes  of this  device,  and has  presented  samples  to various
customers and media outlets.  NSC has not yet shipped  commercially  significant
numbers of this product to customers. NSC intends to market this product through
sales channels that cater to children's safety.

         LOBO  TRACKING   SOFTWARE(TM).   Lobo  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) to make its locator  offerings  more  attractive to customers.
Lobo(TM) is in active use today by most customers using NSC's Followit products.

       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:

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        DEVICE NAME                       USE AND FUNCTION OF DEVICE
--------------------------------------------------------------------------------

Heterojunction Bipolar          Used in the manufacture of digital circuits that
Transistor                      are found in devices  such as  cellular  phones,
                                personal  computers  and  automotive  circuitry.
                                Transistors   provide  electronic  control  over


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--------------------------------------------------------------------------------
        DEVICE NAME                       USE AND FUNCTION OF DEVICE
--------------------------------------------------------------------------------

                                current flow, and are a part of many  electronic
                                circuits. Heterojunction bipolar transistors are
                                used most frequently in power  amplifier,  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     Used  in  digital  computing   devices  such  as
(SRAM) and TMOS(TM) Memory      microcomputers  and  workstations  and   battery
Core                            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 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         Allows the  transmission and  reception of radio
Transceiver                     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). On September 8, 1998, NSC filed
       the Patent Cooperation Treaty  international  patent application for this
       device.

       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


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       device,  as the United  States  Patent and  Trademark  Office issued us a
       patent  on  January  9,  2001   under  US  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.  On October 27, 1998,  the Company filed the Patent
       Cooperation Treaty international patent application. The inductor is 100%
       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.

              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).  On December 15, 1998, the Company filed the Patent
       Cooperation Treaty international patent application for this device.

              U.S.  Patent  6,104,631 was received for this device on August 15,
       2000.

              4. NSC filed its fourth U.S. patent  application on June 18, 1998,
       for  a  Mode  Dielectric   Resonator.   The  Patent   Cooperation  Treaty
       international  application  for this  device  was filed on May 26,  1999.
       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 US Patent  and  Trademark  Office
       issued us U.S. patent 6,169,467 for this device on January 2, 2001.

              5. On July 10,  1998,  the  Company  filed its fifth  U.S.  patent
       application  for a Distributed  Amplifier.  On June 15, 1999,  the Patent
       Cooperation Treaty international application for this device was filed.

              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 for a DRAM  version  of its  tunnel  diode  memory
       technology, as well as for a semiconductor-related  manufacturing process
       improvement device relating to masks. The commercial  importance of these
       inventions and the final disposition of these applications are uncertain.

OTHER STRATEGIC RELATIONSHIPS

       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.  This agreement expires December 31, 2002. VCX has placed
a detailed  description  of many of our  patents on their  website for a fee. We
will be contacted  through VCX if there are parties  interested  in licensing or
purchasing our patents.  Once contacted,  we will seek to negotiate a fair price
for the license or sale of our patents. To date, no product licensing agreements
have resulted from this effort with VCX.

       We executed two  agreements  in June of 2002 with  Followit AB, a Swedish
technology  firm:  (1)  an  international  distribution  agreement  and  (2)  an
intellectual property and patent  cross-licensing  agreement.  The international
distribution  agreement,  dated June 1, 2002,  grants us exclusive  distribution
rights for the Followit locator product in the United States, Canada and Mexico.
The  Followit  locator  product  uses the global  positioning  system  (GPS) and
cellular technology,  with a sophisticated mapping interface to provide tracking


                                       8
<PAGE>

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.

       The  second   agreement   executed  with  Followit  AB  was  a three-year
intellectual  property and patent  agreement,  which was entered into on May 24,
2002.  The agreement  calls for both parties to enjoy the first right of results
regarding  the  licensing  rights of  technology  developed  by the other in the
location services technology areas in which they cooperatively develop products.
Under the  agreement,  neither  party  intends to jointly  own any  intellectual
property that may result from cooperation on the locator products. However, both
parties  have  agreed to a first  right of refusal to any  licensure  of related
intellectual property it develops during the term of the agreement. Either party
may terminate the  agreement  with ninety (90) days written  notice to the other
party.

       In  April  2002,  we  announced  a new  relationship  with  ESEMDE,  Inc.
("ESEMDE"), a wireless virtual network operator.  ESEMDE is obligated to provide
Short Message Services ("SMS") to the Company's customers in North America.  The
Company's locator products utilize SMS message to transfer the GPS location data
via an  internal  cellular  phone to  communicate  the  location  of the locator
device. The Company paid a connection fee to ESEMDE and will be billed a nominal
monthly  access fee per device,  plus a charge for SMS  services  based upon the
volume of  messages  transferred  by ESEMDE  each  month.  The  agreement  has a
three-year  term and may be  terminated  by either  party with a ninety (90) day
written notice.  The Company provides a fixed number (typically several hundred)
of messages with each locator  device sold, the cost of which is included in the
product's sales price. Additional message services for SMS message transfers may
be purchased  through the Company that in turn,  will be billed to the customer.
This  relationship  provides us a data  transport  platform so that our location
devices will be able to roam throughout the United States without  interruption.
It also allows our customers to purchase packets of location  transmissions  and
pay for actual usage, rather than purchasing a monthly service plan like some of
our competitors. We believe this may provide some competitive advantage for some
customer situations.

       In 2000 and 2001, we created strategic  relationships to help develop our
semiconductor-related  products.  One such relationship was with Ramtron, Inc to
explore development of FRAM technology.  As with most of our other semiconductor
efforts, this has been suspended indefinitely due to market conditions.  We also
developed  relationships with NMRC of Ireland, which are now inactive, and Temex
of France, which are also now inactive.

SALES AND MARKETING

       We have researched the products and manufacturing  processes available to
the major  semiconductor  manufacturing  companies.  The results have  generally
confirmed our belief that the increased performance and efficiencies inherent in
our  products  that are  currently in various  stages of design and  development
should  be of  interest  to  many  sectors  of the  semiconductor  manufacturing
industry.  However,  we  believe  that  the  semiconductor  market  is now  very
depressed,  and that  timing is poor for  licensing  our  current  semiconductor
products.  Thus we have redirected resources over the last ten months 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 2002 we entered into
an  agreement  with  ESEMDE  to  provide  us  with  messaging  services  for our
location-based products. In June of 2002 we entered into several agreements with
Followit AB of Sweden to provide NSC with  location-based  products  (see "Other
Strategic  Relationships").  In late 2002,  we entered  into  negotiations  with
Futurecom  Global of  Arizona to assist in the  distribution  of some of our key
location services products.  We also in late 2002 entered into negotiations with
Electroconnect  of  Scotland  regarding  manufacturing  of some of our  location
services products.

       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


                                       9
<PAGE>

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 US, 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 process, 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
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. 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  $39.7  billion  in  2001,  according  to  Semiconductor  Industry
Association  Annual  Worldwide  Market Forecast  2001-2004  (updated June 2001).
According to Cahners In-Stat Group, a leading independent  electronics  industry
research  group,  from a July 2000  report on  wireless  technology,  the market
opportunity for certain high frequency radio and baseband solutions will surpass
$1.5  billion  in  shipments  by the end of 2002 and grow to near $5  billion by
2005.  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.  However,  we believe  substantial  markets  exist for
these 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 the 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.


                                       10
<PAGE>

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

       Vehicle or Asset  Tracking Real time  information as to the location of a
vehicle  or asset,  delivered  by  linking a GPS  receiver  to a device  that is
connected to a cellular network,  allows the location of the vehicle or asset to
be  automatically  transmitted  to a base station via the  Internet  twenty-four
hours per 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 in 2001  exceeded  $771.3M,  and that the market  will  surpass
$2.1B  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
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.


                                       11
<PAGE>

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 market  place
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 on-going association with an 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
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 have been  primarily  private
investigators.  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.  Its customers are primarily  organizations  operating in the
United States and Canada.  NSC has also issued  proposals,  but not  consummated
sales  transactions,  to a  variety  of other  prospective  customers  including
hospitals and airports and the U.S. Military. At the end of the fiscal year 2002
we had only sold a few of our location  products  and had only  realized a small
amount of revenue, but we intend to continue development and marketing efforts.

       NSC has a binding  letter of intent with Siagri  International,  Inc. for
the development of a specific frequency of the Company's Distributed  Amplifier.
It will be used as a component in Siagri's microwave  generator devices.  NSC is
to  receive  royalties  equal  to 5% of  the  amplifier's  contribution  to  the


                                       12
<PAGE>

generator  "gross sale price." To expedite the project,  Siagri  contracted with
NSC's lead technical consultant, Dr. El-Sharawy, to design and build a prototype
amplifier for use in their devices. The prototype was completed in the spring of
2002.  Dr.  Richard  Besserman,  MD, the CEO of Siagri,  has disclosed  Siagri's
activity using the product  developed by the Company is in the  effectiveness of
electromagnetic  treatment in human medicine,  veterinary medicine,  food safety
and  agriculture.  Revenues  have not yet  been  realized  from the  Distributed
Amplifier Product.

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. In addition,
there  can be no  assurance  that  patent  applications  will  result  in issued
patents.

       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;  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 to
third parties,  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 US  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 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  are  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


                                       13
<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
sold several location products. NSC continues conduct research in several areas;
especially in 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, as well
as a number of part time  relationships  with contractors for certain  services.
Three 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  $5,217  per  month.
Additionally,  NSC  leases  1,551  square  feet of  office  space  in San  Jose,
California for its research and development  efforts. The San Jose lease expires
August 31,  2003,  is  non-cancelable  and is at a rental  rate that ranges from
$3,878 to $4,275 per month,  plus increases in operating  expenses.  (See Item 3
below).

       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 a  defendant  in a  lawsuit  with a  landlord  of leased
property  that  was  vacated  by the  Company  in 2001 as part of its  corporate
consolidation.  The landlord has since  subleased  the property for a rate below
that contracted by the Company.  The landlord has initiated legal proceedings to
collect the $19,397  that they allege is the sublease  differential  through the
lease term, plus certain claimed damages. The Company is attempting to negotiate
a settlement  with the landlord,  and does believe this  settlement  will have a
material effect on its current financial presentation

       The Company is also a defendant in a lawsuit filed by Bowne of Phoenix, a
financial printing company. Bowne is attempting to recover approximately $20,000
of fees charged for certain  printing and other charges in  connection  with the
Form SB-2 that was filed in October  2001,  in addition  to the $20,000  already
paid by NSC for these  services.  The  Company  is  attempting  to  negotiate  a
settlement with Bowne of Phoenix.

       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
damages. 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 a  receiving  a cash  payment of
approximately $100,000, expected in the first calendar quarter of 2003, 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.

       On November 13,  2000,  the Company  filed legal action  against a former
director and officer of Company and his spouse. The Company's  complaint alleged
that certain sales and subsequent purchases of the Company's common stock are in
violation of Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C.


                                       14
<PAGE>

Section 78p(b). The Company claimed that both the sale and purchase transactions
were ordered and completed within a six-month restriction period.  Section 16(b)
of the Act requires that any profits realized by an officer and or director from
the purchase and sale within a six month period are subject to disgorgement  and
must be  returned  to the  Company.  The  Company  asked for,  and  received  an
accounting of these  transactions.  The Company and the former director  settled
this case during fiscal 2002.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

       None



                                       15
<PAGE>

                                     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 2002                                              HIGH            LOW
                                                       ---------      ----------
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

FISCAL 2001

Fourth Quarter (through September 30, 2001).........   $   0.810      $   0.215
Third Quarter (through June 30, 2001)...............   $   1.810      $   0.760
Second Quarter (through March 31, 2001).............   $   3.812      $   1.260
First Quarter (through December 31, 2000)...........   $   5.062      $   1.040


       The above prices  presented are bid prices that represent  prices between
broker-dealers  and do  not  include  retail  mark-ups  and  markdowns  for  any
commissions   paid  to  the  dealer.   These  prices  may  not  reflect   actual
transactions.

       The  Company  has not paid any  dividends  during the last two (2) fiscal
years.

       There  were  611  shareholders  of  record  of NSC's  common  stock as of
September 30, 2002.

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.
Recently,  we  discontinued  those  activities  because  they did not  yield the
margins we had  originally  projected.  In the fiscal year ended  September  30,
2002, we have focused on generating  revenue through the development and sale of
electronic devices for the location services market.


                                       16
<PAGE>

       Our revenue from our operations  for the fiscal year ended  September 30,
2001 was $882,715, which was attributable to our distribution business, compared
with revenue of $2,914 for the fiscal year ended  September 30, 2002,  which was
attributable  to our locator device  business.  At September 30, 2002, we had an
accumulated  deficit  of  $20,805,336.   Our  net  losses  were  $1,833,489  and
$6,234,868   for  the  fiscal  years  ended   September  30,  2002,   and  2001,
respectively.

       In October 2001, we entered into an equity line of credit  agreement with
a third  party  investor.  Under the equity  line,  we have the  option,  at our
discretion,  to issue  during a two-year  term shares of our common  stock to an
investor at prices that are discounted from the fair market value on the date of
issuance.  Our ability to draw down  amounts  under this line of credit has been
materially adversely affected due to the declining per share price of our common
stock.  As a result,  the  proceeds  from this equity  line of credit  cannot be
relied upon to fund our ongoing operations.

       In May 2001,  we  entered  into a  distribution  agreement  with  Phoenix
Semiconductor,  Inc.,  which  grants  us the  exclusive  right to  purchase  and
distribute  electronic  devices using  Thyristor(TM)  and related  technologies.
Thyristors  are  electronic  components  that protect  many kinds of  electronic
circuits  from  damage  resulting  from power  surges.  Thyristors  have been in
production  around  the  world  for over 20  years.  However,  to date,  Phoenix
Semiconductor  has  been  unable  to  produce  thyristors  up to our  customer's
specification  in  adequate  quantity,  and it is  doubtful  that we  will  sell
thyristors  manufactured in Phoenix  Semiconductor's Tempe, Arizona plant in the
near future, due in part of a bankruptcy filing by Phoenix  semiconductor in May
of 2002. We are in the process of taking alternative  measures in recovering our
investment  in  the  thyristor  technology  from  Phoenix  Semiconductor,  which
includes the sale of some of the assets currently held by Phoenix  Semiconductor
that  secure a portion of our  investment.  As a result,  we filed suit  against
Phoenix  Semiconductor  in  May of  2002.  In  August  of  2002,  we  reached  a
preliminary  settlement of this suit,  which was entered into court record.  NSC
expects to recover approximately $100,000 net of legal fees from this investment
before March 31, 2003.

       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.  This agreement expires December 31, 2002. VCX has placed
a detailed  description  of many of our  patents on their  website for a fee. We
will be contacted  through VCX if there are parties  interested  in licensing or
purchasing our patents.  Once contacted,  we will seek to negotiate a fair price
for the license or sale of our patents. To date, no product licensing agreements
have  resulted  from this effort with VCX, and NSC may or may not continue  this
relationship into the future.

       The  introduction of our  location-based  products during fiscal 2002 has
been a primary  focus for the Company for the last ten months.  We executed  two
agreements in June of 2002 with Followit AB, a Swedish  technology  firm: (1) an
international distribution agreement and (2) an intellectual property and patent
agreement. The international  distribution agreement, dated June 1, 2002, grants
us exclusive  distribution rights for the Followit locator product in the United
States,  Canada  and  Mexico.  The  Followit  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.

       The  second  agreement   executed  with  Followit  AB  was  a  three-year
intellectual  property and patent  agreement,  which was entered into on May 24,
2002.  The agreement  calls for both parties to enjoy the first right of results
regarding  the  licensing  rights of  technology  developed  by the other in the
location services technology areas in which they cooperatively develop products.
Under the  agreement,  neither  party  intends to jointly  own any  intellectual
property that may result from cooperation on the locator products. However, both
parties  have  agreed to a first  right of refusal to any  licensure  of related
intellectual property it develops during the term of the agreement. Either party
may terminate the  agreement  with ninety (90) days written  notice to the other
party.

       In  April  2002,  we  announced  a new  relationship  with  ESEMDE,  Inc.
("ESEMDE"), a wireless virtual network operator.  ESEMDE is obligated to provide
Short Message Services ("SMS") to the Company's customers in North America.  The
Company's locator products utilize SMS message to transfer the GPS location data


                                       17
<PAGE>

via an  internal  cellular  phone to  communicate  the  location  of the locator
device. The Company paid a connection fee to ESEMDE and will be billed a nominal
monthly  access fee per device,  plus a charge for SMS  services  based upon the
volume of  messages  transferred  by ESEMDE  each  month.  The  agreement  has a
three-year  term and may be  terminated  by either  party with a ninety (90) day
written notice.  The Company provides a fixed number (typically several hundred)
messages  with each locator  device  sold,  the cost of which is included in the
product's sales price. Additional message services for SMS message transfers may
be purchased  through the Company that in turn,  will be billed to the customer.
This  relationship  provides us a data  transport  platform so that our location
devices will be able to roam throughout the United States without  interruption.
It also allows our customers to purchase packets of location  transmissions  and
pay for actual usage, rather than purchasing a monthly service plan like some of
our competitors.

       Shipment and sales of our Followit  product  began in the last quarter of
fiscal 2002.  We are  continuing  to focus on  marketing  and  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 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 one-year agreement,  renewable for up to two
additional years. The agreement calls for FCG to market NSC Followit, StarPilot,
and Gotcha 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. 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  Company  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 affect 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  addition  to  prosecuting   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 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.


                                       18
<PAGE>

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2002 AND 2001

       We  generated  $2,914 and $882,715 of revenue for the fiscal years ending
September  30, 2002 and 2001,  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.  We had no significant revenues in our 2002 fiscal year.
Sales for the year ended  September 30, 2002  represent the sale and delivery of
some of our location based products, principally our Followit products.

       Research  and  development  expenditures  decreased  to $154,548  for the
fiscal year ended  September 30, 2002, from $1,589,005 for the fiscal year ended
September 30, 2001. The decrease in research and development costs in the fiscal
2002 was primarily attributable to the consolidation of research and development
facility in San Jose,  California  which  occurred in 2001, and the cessation of
significant research in the semiconductor sector. The semiconductor industry has
not fared well in the last two years,  and the  Company  has  reacted to suspend
most research and development  expenditures  in the  semiconductor  sector,  and
focus most of its limited  research  and  development  resources on its location
tools products and applications.

       Costs and expenses  decreased  significantly to $1,906,035 in fiscal 2002
from  $6,346,393 in fiscal 2001.  Salaries and benefits were reduced to $624,069
in fiscal 2002, down from $1,040,777 in 2002.  Included in salaries and benefits
expenses are amounts deferred by executives.  Beginning January 1, 2002, members
of management  voluntarily  agreed to reduce their cash salaries by 20%. The 20%
deferred  compensation  has been included in salaries and benefits  expense.  In
addition,  beginning  mid-August  2002,  we no longer had  resources to pay cash
payroll. As a result,  members of management have continued to work without cash
payment  since that time,  and payroll due the  employees  has been  included in
accrued liabilities. At September 30, 2002, we had three full time employees. At
September 30, 2001, we had six full time employees.

       Stock compensation declined to $460,168 in fiscal 2002 from $2,173,592 in
fiscal 2001.  In fiscal 2002,  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. In fiscal 2001, we granted options
to several research  scientists  involved in research and development in our San
Jose  office.  In  addition,  we issued  restricted  common stock as payment for
research,  consulting and capital formation expenses that totaled  approximately
$309,641 in fiscal 2001 in order to conserve cash during the period.

       In July, two members of the Board of Directors, William J. Keilen and Sam
H. Carr resigned from the Board,  as the Company was not capable of  maintaining
insurance for directors  and officers'  liability.  Mr. Carr also resigned as an
officer of the Company as of July 30, 2002.  Effective  August 1, 2002, Mr. Carr
and the Company executed an independent  consulting  agreement  whereby Mr. Carr
was contracted to manage the financial operations of the Company. On November 1,
2002 the contract was amended to eliminate Mr. Carr's  ongoing  responsibilities
to manage financial  operations,  and discontinue our obligation to pay Mr. Carr
for such duties.  The Company has paid Mr. Carr for ongoing new services related
to finance  reporting  he delivered in December  2002,  although  back wages and
contractor  charges from Mr. Carr to the Company remain due to him, as reflected
in the Company's financial statements.

       Consulting fees, related party, were terminated early in fiscal 2001. For
the first two months of fiscal  2001,  all  personnel  were paid as  independent
consultants.  Effective  December 31, 2001 and beyond,  full time employees were
paid as employees and their  salaries and benefits were included as salaries and
benefits for financial reporting purposes.

       Other  expenses also declined in fiscal 2002 to $667,250 from  $1,121,011
in fiscal 2001.  The reduction in expenses is a result of the reduction in costs
relating to the reduction in personnel, the consolidation of the San Jose office
into our Scottsdale facility reducing rent and other related costs, reduction in
legal expenses, and contract services.

       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  reserved  for the asset
impairment and expenses totaling approximately $64,000.



                                       19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

       NSC has not been profitable and has  experienced  negative cash flow from
operations due to its  development  stage,  substantial  on-going  investment in
research  and  development  efforts.  Consequently,  NSC has been  dependent  on
private placements 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
expire on December  31, 2001.  The offering was amended  twice and each unit was
revised  to  consent  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
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.  The
Company is not current on its payments for either of these Notes.

       During the fiscal years ending  September  30, 2002 and 2001,  NSC issued
100,000 and 205,000 shares, respectively,  of NSC common stock to consultants in
lieu of cash  compensation.  During  fiscal 2002,  the Company  granted  788,009
options to NSC consultants to purchase shares of NSC's common stock. The options
granted had exercise  prices ranging from $.05 per share to $.27 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 2001,  substantially all option grants were issued
to employees.

       As of September 30, 2002, the Company's cash and cash equivalents totaled
$1,405  and total  current  assets  were  $18,752.  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 no  long-term  debt as of  September  30,  2002.  However,  current
liabilities at September 30, 2002 totaled $840,536.


                                       20
<PAGE>

       In November 2002, the Company  commenced a private offering of restricted
common stock and common  stock  purchase  warrants.  As of December 18, 2002 the
Company  had  raised  $320,000  and  will  issue  shortly  7,875,000  shares  of
restricted common stock and grant 3,200,000 warrants to purchase common stock at
an exercise  price of $.30 or $.50 per share.  No  underwriters  are 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  $20.8  million as of
September 30, 2002 and expect operating  losses in the foreseeable  future as we
continue  our  efforts to  commercially  exploit  our  portfolio  of patents and
develop commercial  products.  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 portion of these unpaid wages incurred
in the fiscal year  ending  September  30,  2002,  is included in the  Company's
financial  statements.  The Officers and Directors affected have verbally agreed
not to demand  immediate  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.

       At September  30, 2002,  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,  as we may no longer be
able to use our equity  line of credit to raise  capital.  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  creditor's  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.



                                       21
<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, 2002, we had an  accumulated  deficit of  $20,805,336.  We had no
revenues for the fiscal  years ended  September  30, 1999 and 2000.  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.  We had no significant  revenues in
our 2002 fiscal  year.  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, 2001 and 2002.

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
attempting to penetrate, licensing agreements offered by competing technologies,
changes in general economic  conditions,  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


                                       22
<PAGE>

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
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:

       o      Excess production capacity in the industry;

       o      Maturing product cycles;

       o      Rapid technological change in the industry; and

       o      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


                                       23
<PAGE>

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  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.

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, such
as BBX, 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 2001, our stock price ranged
from a high of $5.06 to a low of $0.22 per share,  and in fiscal  2002 our stock
price ranged from a high of $0.44 to a low of $0.07.  The  inability to sell NSC
shares in a rapidly  declining  market may  substantially  increase your risk of
loss due to potential  illiquidity 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


                                       24
<PAGE>

litigation,  whether  successful  or not, are expensive and if we do not prevail
could seriously harm our business, results of operations or prospects.

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



                                       25
<PAGE>

                                    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, 2003.

       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.............   73    Director, Chairman-Emeritus of the Board
       Michael A. Grollman.....   41    CEO, President, Chairman of the Board of
                                        Directors
       Graham L. Clark.........   47    Vice President Technology Applications &
                                        Sales, Director

       DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT ADVISORS

       LOU L. ROSS serves  today as a Director and as  Chairman-Emeritus  of the
Company's Board. He has 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 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 our President in April 2001,
Chief  Executive  Officer  in  January  of 2002,  and  Chairman  of the Board in
December  2002.  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 in November 2001.

       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, and a Director in August of
2002. 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.

       BOARD OF DIRECTORS

       The Board of Directors was made up of five members  during  substantially
all of fiscal 2001. Lou L. Ross has been Director  since February 1998.  Michael
A. Grollman and Sam H. Carr were both  appointed as Directors in November  2000.
Charles  Martin and William  Keilen were also  elected  Directors  at the annual
shareholders'  meeting  held in  February  2002.  During  the spring of 2002 Mr.
Martin  resigned  his position of  Director.  In August  2002,  Mr. Carr and Mr.
Keilen resigned as Directors. At that time, the Board appointed  Graham L. Clark


                                       26

<PAGE>

as a Director.  Currently, the Board of Directors consists of three members, Mr.
Lou L. Ross,  Chairman-Emeritus,  Michael A. Grollman,  Chairman,  and Graham L.
Clark, Director.

       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, 2003, 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, 2003, 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, 2003.

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, 2003.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

       99.1      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
                 PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

--------------
    * Incorporated by reference from the Company's Form 10-SB dated February 14,
2000.


                                       27
<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 1, 2003       By: /s/ L. L. Ross
                                 -----------------------------------------------
                                 L. L. Ross
                                 Director & Chairman-Emeritus Of The Board

                             By: /s/ Michael A. Grollman
                                 -----------------------------------------------
                                 Director, Chief Executive Officer, and Chairman

                             By: /s/ Graham L. Clark
                                 -----------------------------------------------
                                 Director, Vice President of Technology
                                 Applications & Sales



                                       28
<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-10
Notes to Financial Statements.............................................  F-12





                                      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, 2002 and 2001, and
the related  statements of operations,  shareholders'  equity (deficit) and cash
flows for each of the two years in the period ended  September  30, 2002 and for
the period from September 30, 1997 (inception of development stage) to September
30, 2002.  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, 2002 and 2001, and the results of its operations
and its cash flows for each of the two years in the period ended  September  30,
2002 and from September 30, 1997  (inception of development  stage) to September
30, 2002 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
$8,100,000. 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 18, 2002



                                      F-2
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
                                 BALANCE SHEETS
                           September 30, 2002 and 2001
<TABLE>
<CAPTION>
                                                             2002             2001
                                                         ------------    ------------
<S>                                                      <C>             <C>
                      ASSETS

Current Assets:
  Cash and cash equivalents                              $      1,405    $    604,761
  Inventory                                                    14,916          20,000
  Loan to officer                                                  --         100,000
  Other assets                                                  2,431          21,358
                                                         ------------    ------------
     Total current assets                                      18,752         746,119

Property and equipment, net                                    45,007         135,836
Deferred offering costs                                            --         193,015
Deposits                                                        5,031              --
                                                         ------------    ------------
                                                         $     68,790    $  1,074,970
                                                         ============    ============

        LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
  Accounts payable and accrued expenses                  $    765,457    $    326,367
  Line of credit                                                   --         430,000
  Notes payable                                                75,079              --
                                                         ------------    ------------
     Total current liabilities                                840,536         756,367
                                                         ------------    ------------
Total liabilities                                             840,536         756,367
                                                         ------------    ------------
Commitments and contingencies                                      --              --

Shareholders' equity (deficit):
Common stock, par value $.01; 120,000,000
  shares authorized, 51,587,062 and 47,367,498
  shares issued and outstanding at
  September 30, 2002 and 2001, respectively                   515,871         473,675
  Additional paid-in capital                               19,412,922      17,966,208
  Stock options exercisable                                   104,797         800,567
  Accumulated deficit                                     (20,805,336)    (18,921,847)
                                                         ------------    ------------
     Total shareholders' equity (deficit)                    (771,746)        318,603
                                                         ------------    ------------
                                                         $     68,790    $  1,074,970
                                                         ============    ============
</TABLE>
      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, 2002, 2001, and Development Stage
<TABLE>
<CAPTION>
                                                                                Development
                                                    2002            2001           Stage
                                               --------------------------------------------
<S>                                            <C>             <C>             <C>
Revenues                                       $      2,914    $    882,715    $    885,629
Cost of Sales                                         1,889         869,750         871,639
                                               ------------    ------------    ------------
Gross profit                                          1,025          12,965          13,990

Costs and expenses
  Salaries and benefits                             624,069       1,040,777       1,738,552
  Research and development                          154,548       1,589,005       3,628,834
  Stock compensation                                460,168       2,173,592       2,789,036
  Consulting fees, related party                         --         422,008       8,158,323
  Other                                             667,250       1,121,011       2,258,058
                                               ------------    ------------    ------------
  Total costs and expenses                        1,906,035       6,346,393      18,572,803
                                               ------------    ------------    ------------
Loss from operations                             (1,905,010)     (6,333,428)    (18,558,813)

Other income (expense)
  Interest and other income                             584         105,441         178,972
  Gain on settlement                                 89,403              --          89,403
  Interest expense                                   (1,874)         (6,881)        (25,071)
  Loss on disposal of assets                         (2,405)             --         (30,960)
  Loss on impairment of equipment                   (64,187)             --         (64,187)
                                               ------------    ------------    ------------
                                                     21,521          98,560         148,157
                                               ------------    ------------    ------------
Loss before income tax benefit                   (1,883,489)     (6,234,868)    (18,410,656)
Income tax benefit                                       --              --              --
                                               ------------    ------------    ------------
Net loss                                       $ (1,883,489)   $ (6,234,868)   $(18,410,656)
                                               ============    ============    ============

Net loss per common share, basic and diluted   $      (0.04)   $      (0.13)
                                               ============    ============
</TABLE>


      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, 2002, 2001 and Development Stage

<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      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 crdit                       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 payment 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-5
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       For the Years Ended September 30, 2001, 2000 and Development Stage

<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      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 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) (CONTINUED)
       For the Years Ended September 30, 2000, 1999 and Development Stage

<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      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 auditors' 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, 1999, 1998 and Development Stage

<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      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 auditors' 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, 1998, 1997 and Development Stage

<TABLE>
<CAPTION>
                                      COMMON STOCK           PREFERRED STOCK
                                 ----------------------  ---------------------  ADDITIONAL                  DEVELOPMENT
                                  NUMBER OF      PAR      NUMBER OF      PAR     PAID-IN      ACCUMULATED      STAGE
                                   SHARES       VALUE      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 auditors' 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 CASH FLOWS
       For the Years Ended September 30, 2002, 2001 and Development Stage
<TABLE>
<CAPTION>
                                                                                          Development
                                                              2002            2001           Stage
                                                         ------------    ------------    -------------
<S>                                                      <C>             <C>             <C>
Cash flows from operating activities:
  Net loss                                               $ (1,883,489)   $ (6,234,868)   $(18,410,656)
  Adjustments to reconcile net loss to net cash used
  in operating activities:
  Noncash transactions
     Depreciation                                              22,847          19,405          52,271
     Loss on disposal of assets                                 2,405              --          30,960
     Impairment loss on equipment                              64,187              --          64,187
     Stock and options issued for services, net               301,495      (1,322,658)     11,238,404
     Deferred stock compensation                                   --       3,712,500              --
     Decrease (increase) in inventory                           5,084         (20,000)        (14,916)
     (Increase) decrease in deferred offering costs           107,844        (193,015)        (85,171)
     Decrease in receivables                                       --         100,000         130,000
     Decrease in other assets                                  13,896          84,198           3,109
     Increase in accounts payable and accrued expenses        439,090         300,412         742,877
                                                         ------------    ------------    ------------
       Net cash (used in) operating activities               (926,641)     (3,554,026)     (6,248,935)
                                                         ------------    ------------    ------------
Cash flows from investing activities:
  Acquisition of property and equipment                            --        (147,843)       (153,692)
  Repayment of loans                                               --         200,000         200,000
  Proceeds from the sale of furniture and equipment             1,390              --           6,050
  Loans issued                                                     --        (200,000)       (400,000)
                                                         ------------    ------------    ------------
       Net cash (used in) provided by
       investing activities                                     1,390        (147,843)       (347,642)
                                                         ------------    ------------    ------------
Cash flows from financing activities:
  Draws on the line of credit                                      --         430,000         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                       169,532              --         169,532
  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
  Proceeds from issuance of common stock                           --       1,291,730       5,481,788
                                                         ------------    ------------    ------------
       Net cash provided by financing activities              321,895       1,721,730       6,594,364
                                                         ------------    ------------    ------------
Net (decrease) increase in cash and cash equivalents         (603,356)     (1,980,139)         (2,213)
Cash and cash equivalents, beginning of year                  604,761       2,584,900           3,618
                                                         ------------    ------------    ------------
Cash and cash equivalents, end of year                   $      1,405    $    604,761    $      1,405
                                                         ============    ============    ============
Supplementary Disclosure of Cash Flow Information

Cash paid during the year for interest                   $      1,874    $      6,881    $     22,474
                                                         ============    ============    ============
Cash paid during the year for income taxes               $         --    $         50    $         50
                                                         ============    ============    ============
</TABLE>

      See accompanying independent auditors' report and notes to financial
       statements, which are an 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, 2002, 2001 and the Period
  October 1, 1997 (Inception of Development Stage) Through September 30, 2002


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.

      See accompanying independent auditors' report and notes to financial
       statements, which are an integral part of the financial statements



                                      F-11
<PAGE>


                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


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  Co.  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. 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  acquisition,  enhancement  and  marketing  of
location device technologies.

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  consist  of  packaged  Followit  tracking  units  ready  for
shipment.  Inventories  are valued at the lower of their  manufacturing  cost or
market.

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 $8,832 in 2002 and $46,682
in 2001 are expensed as incurred.

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.
123, "Accounting for Stock Based Compensation."


                                      F-12
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


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  carryforwards.  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 49,626,954  and 47,884,820 for the years ended  September
30, 2002 and 2001,  respectively.  Stock  options and  warrants  are  considered
antidilutive and were not considered in the calculation.

j. NEW ACCOUNTING PRONOUNCEMENTS

       The   Financial   Accounting   Standards   Board  has   established   new
pronouncements. The Company does not expect the adoption of these pronouncements
to have a material impact on its financial positions,  results of operations, or
cashflows.  This includes SFAS 144 accounting for impairment and  disposition of
long term assets.

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  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 2002 and
2001, of $1,883,489 and $6,234,868  respectively,  which raise substantial doubt
about the  Company's  ability to continue as a going  concern.  Of the total net
operating losses,  approximately $400,000 and $4,000,000 related to stock issued
for  services  and  compensation  in 2002  and  2001,  respectively.  Management
believes that its current cash position  together with its December 2002 private
placement  will be adequate to fund  operations and research for the next fiscal
year, until the Company can generate more substantial  revenues.  The Company is
also seeking other financing sources that will further enhance its liquidity, as
well as further  expense  reductions.  However,  there can be no assurance  that
these actions will be successful.  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.


                                      F-13
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


3. PROPERTY AND EQUIPMENT

       Property and  equipment  consists of the  following at September 30, 2002
and 2001:

                                                       2002        2001
                                                    ---------   ---------
        Computer equipment....................      $  58,806   $ 145,516
        Office furniture......................         12,507      12,507
                                                    ---------   ---------
                                                       71,313     158,023
        Less: accumulated depreciation........         26,306      22,187
                                                    ---------   ---------
                                                    $  45,007   $ 135,836
                                                    =========   =========


       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. COMMON STOCK WARRANTS EXERCISED

       In December 2001, the Board of Directors extended the term of outstanding
common stock warrants  issued in connection  with a private  placement in fiscal
1999 and 2000,  to purchase an aggregate of 1,320,000  shares from  December 31,
2001 to January 31,  2002,  and reduced  the per share  exercise  price of those
warrants from $1.50 to $0.12. In January 2002,  770,500  warrants were exercised
and the Company collected proceeds of $92,460 in exchange for the issuance of an
aggregate of 770,500 common shares.  On February 1, 2002, the remaining  549,500
warrants expired. At 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.

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.

       On August 17, 2000 the Company  entered into a three-year  non-cancelable
operating lease agreement for the San Jose,  California office, which expires on
August 31, 2003. The lease requires  monthly payments over the term of the lease
that range from  $3,878 to $4,275  plus  increases  in  operating  expenses.  It
contains  no  renewal  or  purchase  options.   In  October  2001,  the  Company
consolidated its San Jose operations into its offices in Scottsdale.

       Future minimum lease obligations at September 30, 2002 are as follows:

       YEAR ENDING SEPTEMBER 30,

       2003.............................................      $ 105,802
       2004.............................................         60,250
       2005.............................................          5,031
                                                              ---------
                                                               $171,083
                                                              =========


       Rent  expense  for the  years  ended  September  30,  2002  and  2001 was
approximately $106,000 and $100,000 respectively.


                                      F-14
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


6. INCOME TAXES

       Deferred  income taxes consist of the following at September 30, 2002 and
2001:

                                                        2002            2001
                                                     -----------    -----------

       Tax Benefit of net operating loss
         carryforwards and start up costs........... $ 5,515,000    $ 4,780,000
       Valuation allowance..........................  (5,515,000)    (4,780,000)
                                                     -----------    -----------
                                                     $        --    $        --
                                                     ===========    ===========

       A reconciliation of expected to actual taxes follows:

       Expected federal and state tax recovery
         at 40%..................................... $  (755,000)   $(2,400,000)
       Non-deductible stock compensation............      20,000      1,480,000
                                                     -----------    -----------
                                                        (735,000)      (920,000)
                                                     -----------    -----------
Tax benefits not realized - valuation allowance.....     735,000        920,000
                                                     -----------    -----------
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 2002 and 2001, the
valuation allowance increased by $735,000 and $920,000 respectively.

       The  Company  has  net  operating  loss  carryforwards  of  approximately
$13,700,000  at September 30, 2002,  which may be used to offset future  federal
taxable income through 2021 and state taxable income through 2007.

7. RELATED PARTY TRANSACTIONS

       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.  Ross,  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.

       During  the  year  ended   September  30,  2001,  the  Company   incurred
professional  and  consulting  fees,  in  connection  with product  research and
development and operations of approximately  $11,804,000,  paid substantially in
common stock, to various officers and key consultants of the Company.

       In 2000,  the  Company  loaned its  then-Chairman  $200,000,  using a 10%
promissory  note from its  then-Chairman  due December 1, 2000. In December 2000
the Board  authorized  the  extension of the loan to officer  until  December 1,
2001. In February  2002,  the Chairman of the Board Mr. Ross repaid  $100,000 of
the loan by returning 250,000 shares of the Company's common stock at the market
price per share of $.40.  In  addition,  the  Chairman  assigned  his  rights to
recover the amounts  recoverable from NetMind,  an electronics  company in which
the Chairman had invested.  The $100,000 balance  remaining after accounting for
the return of the stock was expensed by the Company.

       The CEO has an employment contract that includes  termination clauses and
the granting of stock or options.


                                      F-15
<PAGE>
                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


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, 2002,  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, 2002, 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 $190,000 and $800,000 was recorded
for the fiscal years ending September 30, 2002 and 2001, respectively.

       Under the 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 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 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.

                                      F-16
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


                                                           Weighted    Weighted
                                                Number     Average     Average
                                                  of       Exercise     Fair
                                                Shares      Price       Value
                                             ----------------------------------
Options Outstanding, September 30, 2000....          --     $  --       $  --
   Granted.................................   5,006,168      1.00         .20
   Exercised...............................          --      0.64         .17
   Canceled................................  (3,471,667)     0.64        0.22
                                             ----------------------------------
Options Outstanding, September 30, 2001        1,534,501    $1.81       $0.15
                                             ----------------------------------

Options Outstanding September 30, 2001         1,534,501    $1.81       $0.15
   Granted.................................    3,654,162     1.24        0.24
   Exercised...............................   (1,477,000)    0.115       0.11
   Expired.................................     (128,834)    0.71        0.02
                                             ----------------------------------
Options Outstanding, September 30, 2002....    3,582,839    $1.97       $0.01
                                             ==================================


10. COMMITMENTS AND CONTINGENCIES

       The  Company  is a  defendant  in a  lawsuit  with a  landlord  of leased
property  that was  abandoned  by the  Company in 2001 as part of its  corporate
consolidation.  The landlord has since  subleased  the property for a rate below
that contracted by the Company.  The landlord has initiated legal proceedings to
collect the $19,397 which is the sublease  differential  through the lease term,
plus  certain  claimed  damages.  The  Company  is  attempting  to  negotiate  a
settlement with the landlord.

       The Company is also a defendant in a lawsuit filed by Bowne of Phoenix, a
financial printing company. Bowne is attempting to recover approximately $41,000
of fees charged for certain  printing and other charges in  connection  with the
Company's  Form SB-2 which was filed in October 2001.  The Company is attempting
to negotiate a settlement with Bowne of Phoenix.

       The  Chairman  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.  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).

       On November 13,  2000,  the Company  filed legal action  against a former
director and officer of Company and his spouse. The Company settled this lawsuit
during fiscal 2002.

       The Company  was  committed  in fiscal  2002 to issue  $150,000 of common
stock during fiscal 2003.  The Company's  financial  statements  for fiscal 2002
reflect this liability.

       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.


                                      F-17
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          Notes to Financial Statements
                 For the Years Ended September 30, 2002 and 2001


11. EQUITY LINE OF CREDIT

       On October 11,  2001,  the Company  entered into 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 of October 11, 2002,
the  Company  issued  2,122,064  shares of  common  stock to the  investor,  and
received  total  proceeds of $473,516.  The cost of the  transaction,  including
legal,  accounting,  printing  and other  related  costs  totaled  approximately
$186,000.  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. As a result, approximately $101,000 of the
transaction costs were written off as an operating cost during fiscal 2002.

12. SUBSEQUENT EVENTS

       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 a  receiving  a cash  payment of
approximately $100,000,  expected in the first calendar quarter of 2003 together
with certain other claims remaining on unsecured assets of PSI. The cash payment
is subject to a  contracted  sale of  substantially  all fixed assets of PSI and
formal approval of the bankruptcy court.

       In November 2002, the Company commenced a private placement offering. The
offering  includes shares of restricted  common stock and common stock warrants.
As of December  18,  2002,  the Company had raised  $320,000 and will soon issue
7,875,000  shares of  restricted  common stock and grant  3,200,000  warrants to
purchase  common  stock  at an  exercise  price of $.30 or $.50  per  share.  No
underwriters are 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.



                                      F-18
<PAGE>

                                  EXHIBIT INDEX

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

       99.1      CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
                 PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002