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

                                 --------------
                                  FORM 10-KSB/A
                                 --------------

                                 AMENDMENT NO. 1

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

                  For The Fiscal Year Ended September 30, 2004

                                    000 28745
                              (Commission File No.)
                                 --------------

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

        Texas                                             86-0837077
(State of Incorporation)                    (I.R.S. Employer Identification No.)

  14505 North Hayden Road, Suite 305
            Scottsdale, AZ                                  85260
(Address of Principal Executive Offices)                 (Zip Code)

                                 (480) 948-8324
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:
                        PREFERRED STOCK, $0.10 PAR VALUE

         Securities registered under Section 12(g) of the Exchange 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, 2004: $77,994.

     The  aggregate  market  value of voting  stock  held by  non-affiliates  of
National  Scientific  Corporation's  ("NSC's")  common stock, as of December 27,
2004 was  approximately $ 4,693,101  (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 27, 2004, was 84,350,657.

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

<PAGE>

                                     PART I

FORWARD LOOKING INFORMATION

     This Form 10-KSB contains  certain  forward-looking  statements  within the
meaning of the Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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

     Our business  involves the research,  development,  and sale of devices and
designs commonly used in the electronics industry.  The majority of our products
are electronic  location-determining  devices.  These devices are typically very
small  portable  radios,  intended to help  establish  the physical  location of
people and objects to which these  devices are  attached.  Some of our  location
technologies  use  Global  Positioning  System  (GPS)  technology  to  determine
position.  We also have other products that use non-GPS  technology to establish
and then report position.  We refer to our  location-determining  devices as our
location tracking products, or as location tools.

     Our  primary  focus  for these  location-tracking  products  is the  safety
market,  related in many  cases to the  safety of  children.  Our  products  and
services help our customers  keep better track of their  children.  Our products
are  also  used to keep  track  of  adults,  and as well to help  keep  track of
physical assets,  such as equipment or vehicles.  Our location tracking products
are often used in  conjunction  with software that displays  maps, to show where
people or  things  are  located.  These  mapping  functions  we often  sell as a
service, to assist us in selling our location tracking products.

     We have focused  extensively on developing location tools since early 2002,
and our primary  business  objective is to generate  revenue and profit from the
sale of our location tracking  products and related services.  The sale of these
products  and services  resulted in small  amounts of revenue late in the fiscal
year ended September 30, 2002.

     o    Revenue was $63,579 for the fiscal year ended September 30, 2003;
     o    Revenue for the fiscal year ended September 30, 2004 was $77,994,  all
          derived from the sale of location tracking products and services;
     o    Net losses were  $951,780  for the fiscal year  ending  September  30,
          2004;
     o    Net losses were $952,564 for the fiscal year ended September 30, 2003.


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     We also have  developed  products that are electronic  components,  some of
which are used in radio equipment,  and some of which have other applications in
the electronics field, such as in the memory systems of personal computers.  All
of these electronic component products have been issued U.S. patents. We focused
extensively  on developing  these  products and patenting them from 1996 through
early 2002, with the objective of licensing  these products to other  electronic
companies for their use. This strategy has not generated any revenue to date. In
early 2002,  our focus shifted away from further  development  of our electronic
component products,  but we continue to explore licensing  opportunities for our
component products from time to time, keeping in mind that our primary objective
today is to sell our location tools products.

     We originally  incorporated as a Texas  corporation in 1953. We changed our
name to  National  Scientific  Corporation  in 1996 and we began the  activities
described in this annual report. Our principal  executive offices are located at
14505 North Hayden Road, Suite 305, Scottsdale,  Arizona 85260 and our telephone
number is (480) 948-8324. Our Internet site is www.national-scientific.com.


                                  OUR BUSINESS

LOCATION PRODUCTS

     Most of our customers require tracking of an object,  asset, or person, and
reporting this information back to a central location. Our location products use
different technologies to determine position of the object and report it back to
the user,  usually determined by whether they are trying to track items outdoors
or indoors.  Our customers' choice of the type of technology to use is primarily
based on their application.  Our location tools products therefore fall into two
different  categories  depending  upon  the  type of  application  the  customer
requires. These are Outdoor Location Products and Indoor Location Products.

     Our current location  technology has not been awarded any patents as of the
date of this report, although we have filed for provisional patent protection on
one of these products,  and have been awarded trademark protection on one other.
We use a  combination  of  confidentiality  agreements  and other  trade  secret
management to protect our trade secrets.

OUTDOOR LOCATION PRODUCTS

     OVERVIEW OF THIS TECHNOLOGY

     We have  developed a group of products  with the  capability  to  determine
location  using a technology  called  Global  Positioning  System or GPS.  These
products  report the  location  information  or data back to the user  through a
radio network. The products also contain a small computer to provide the overall
control and data  processing of the device.  In other words,  the product can be
thought  of as  having  three  distinct  pieces or  systems.  These are the data
collection  system, the data control & processing system, and the data transport
system. This design concept is the basis for our outdoor location products.

     DATA COLLECTION SYSTEM

     This system can be thought of as the "eyes and ears" of the product.  It is
comprised of two further systems. One system determines location of the product,
while  the  other  system  records  specific  events  that the  customer  may be
interested in such as a door opening in a delivery  truck.  The location  system
determines the position of the product using a technology  developed by the U.S.
Government  called the Global  Positioning  System,  or GPS,  as it is  commonly


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known. The U.S.  Government for limited  commercial use first made GPS available
in the 1980's. The system consists of approximately 24 satellites that orbit the
earth every 12 hours.  It is a worldwide  navigation  support system that allows
users of GPS receivers to determine their precise geographic locations to within
a few meters.  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.

     GPS works by ranging and triangulating the product's  position from a group
of satellites. Of the 24 GPS satellites in orbit, a minimum of four is needed to
reliably  determine the  product's  three-dimensional  position.  A GPS receiver
measures  distance by  calculating  the amount of time it takes a navigation and
time reference radio signal from the satellite to make a one-way trip to the GPS
receiver.

     One of the main  drawbacks  with GPS is that the GPS  receiver  requires  a
clear line of sight of the satellites.  Therefore GPS receivers generally do not
work indoors. Even when the GPS receiver is outdoors, tall buildings, hills, and
dense foliage such as trees may also block reception.

     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 about 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 better.  This change in policy  significantly  improves
the utility of GPS for many applications.

     GPS receivers  typically  are very  compact;  it is not necessary to have a
large dish  antenna to receive  GPS  signals.  Typical  information  that can be
obtained  from these GPS  signals are  latitude,  longitude,  elevation,  speed,
direction, date and time.

     The second part of this Data Collection System is customer  specific.  Many
customers have additional types of data that they want to know or want collected
relevant to a  location.  An example of this could be,  every time the  delivery
truck door is open, report its position and time the incident happened.  Another
example could be to report every  incident of when the car traveled  faster than
70mph.  This data input  system can  therefore be  customized  to meet the exact
needs of a customer.

     Another kind of data  collection  technology we use in some of our products
is called RFID,  which stands for Radio Frequency  Identification.  RFID devices
are small radios that can be used to track  information about people or objects.
RFID provides a very low cost solution for certain kinds of tracking activities,
especially short-range activities, such as those at distances of less than a few
hundred  feet.  RFID  devices  often  are less  costly to  manufacture  than GPS
devices, although due to their short range, they may not be as versatile as GPS,
which can work at distances of many miles or more.

     DATA CONTROL & PROCESSING SYSTEM

     This system can be thought of as the "brains" of the  product.  A technical
term for this system is an embedded  system,  meaning one that lives deep inside
the overall  product.  An embedded  system is a small  special-purpose  computer
system built into a larger device.  The reason we use an embedded  system in our


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products is to keep cost to us low, so our  products  stay more  competitive  in
price.  Simple embedded  systems can cost us as little as a few dollars each and
use very little  power  compared to the desktop  computers  that many people are
familiar with,  which typically cost much more. On our embedded systems there is
typically no disk drive,  operating system,  keyboard,  or screen.  Our embedded
systems instead communicate with other computers by radio. These other computers
typically  have a  keyboard  and  screens,  and  they are  used to  display  our
information.

     The programs that we run on these systems are custom  designed and built by
our own engineers. These programs are called firmware. The firmware controls how
the data is  collected,  what data should be collected and what events should be
monitored  and  reported,  what should be ignored and how and when and what data
should be sent back to the user. As we mentioned above, the system is relatively
easy to  customize,  and the  firmware is also easy to  customize as it has been
written  in a  modular  fashion  that  allows  changes  to  one  section  to  be
implemented without the need to completely  re-write the program.  This helps us
keep costs down.

     DATA TRANSPORT SYSTEM

     This  system  can  be  thought  of  as  the  "mouth"  of  the  product.  It
communicates  to the outside world where it is and what has happened.  There are
many different  types of technology that can be used to transport this data back
to the user,  generally using some kind of wireless  technology based on radios.
We currently use cellular radios,  satellite radios,  Wi-Fi(R) radios, and other
special purpose radios.

     We use a cellular  radio based on GSM cellular  technology.  GSM, or Global
System  for  Mobile  Communications,   is  a  second-generation  digital  mobile
telephone standard. GSM was initially developed as a pan-European collaboration,
intended to enable mobile roaming between member  countries.  As of 2004,  there
are now one  billion  GSM  customers  in the world in 193  different  countries,
according to a report  published in February  2004 by the GSM  Association.  GSM
technology is experiencing rapid growth in the Americas and elsewhere, according
to the 3G Americas organization. We believe the use of GSM in our products makes
them more attractive to customers on an international basis.

     The cellular radios typically operate in "real time." When an event occurs,
the data is immediately transported back to a user at a remote location.

     While  cellular  coverage and reception is good in urban areas,  it is less
effective in rural areas and is non-existent in most wilderness areas. Sometimes
our products are used in areas where there is poor or no cellular  coverage.  To
overcome this we sometimes use a special radio that communicates with satellites
in orbit around the earth. This form of communication has the advantage that our
products  can be used in very remote  areas  almost  anywhere in the world.  The
major  downside  is that these  radios are large and  expensive  and the airtime
usage costs can be high.  Another  problem  associated  with this  technology is
that, like GPS, these  satellite  radios work best when there is a clear line of
site to the satellites;  as such they may not work well indoors,  or under dense
foliage or in deep valleys.

     The satellite radios typically operate in "real time." When an event occurs
the data is immediately transported back to the user.

     Some of our  customers  do not  want to have  the  expense  of a real  time
cellular or satellite connection,  nor are they interested in having the data in
real time. For this we use either a special purpose radio or a Wi-Fi(R) radio.


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     The Wi-Fi(R)  radio  operates in a very similar  manner to cordless  phones
found in many households.  These phones typically  consist of a base station and
handset.  Our system is very  similar;  it consists of a base  station unit that
receives  data from the mobile unit that would be on the asset or vehicle  being
tracked.  The base station is  typically  attached to a personal  computer  that
takes the raw data from the radio and re-formats it into information that can be
displayed by other  computers on the  Internet.  Wi-Fi(R)  stands for  "Wireless
Fidelity" and is a technology in very common use to connect  personal  computers
to other computer networks, including to the Internet.

     The special  purpose  radios work in a very similar  manner to the Wi-Fi(R)
radio, except that they can sometimes transmit data over longer distances.

     Wi-Fi(R)  radios operate in an unlicensed part of the radio spectrum and as
such do not have any special  government  licensing fees  associated  with them.
Because  they  operate in a license  free  spectrum  the Federal  Communications
Commission (FCC) imposes some restrictions on the use of these radios. One major
restriction  is that the range the radio  signal  can go is limited to about 300
feet.

     Since most of the time our product  will  operate well beyond 300 feet from
the base station, all the data that is collected is stored within the device for
later  transmission  when the product comes back into that range again. When the
vehicle  or asset  comes back into range of the base  station  the mobile  units
automatically  download their information.  We call this mode of operation "near
time."  These  "near  time"  products  do not incur any  special  airtime  usage
charges. As such they can be significantly  cheaper to operate than the cellular
or satellite equivalents.

     Once the data is  transmitted  back to the user they can either display the
information  on our  Lobo(TM)  mapping  software  (see  below) or on some  other
computer application.

OUTDOOR LOCATION TOOLS PRODUCTS

     IBUS(TM).  IBUS(TM) is a small outdoor  location  product designed to track
school  buses,  as well as logging  the  children  riding on the school  bus. We
announced  this product in April of 2003. The unit contains a GPS that allows it
to determine its current  location.  The unit also contains an ID card reader or
thumbprint  scanner. As the child enters the bus they simply swipe their ID card
or scan their  thumbprint  and a record is created of who boarded  the bus,  and
where  they  boarded  the bus.  As the bus  travels  along its route  picking up
passengers, there is a complete manifest created of who is riding on the bus. At
journey's end the children simply swipe their ID cards or scan their thumbprints
as they  disembark  and another log is created.  Should there be a difference in
the logs,  then the driver will be notified  that there could be someone left on
the  bus.  Management  believes  that the near  term  future  of the firm may be
closely linked to market interest in future versions of this product.

     This unit is designed to interface  with software  made by Verify  Systems,
Inc.,  that can  provide  reports  to schools  on the  whereabouts  of buses and
students.  We have  only  produced  small  numbers  of this  product,  and  have
presented   informational  samples  to  various  school  districts,   which  are
evaluating and testing it. We,  together with Verify  Systems,  have run several
pilot projects using IBUSTM with school districts in Massachusetts  and Arizona.
We intend to market this product  directly and through other sales channels.  We
have made very few commercially significant sales of this product as of the date
of this report,  with total  revenues  from this area at  approximately  $10,000
since we introduced the product. However, we believe the sales cycle into school


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districts  can take several  years,  due to budget  cycles,  especially  for new
safety technology, so we are uncertain if these low sales are likely to stay low
or to increase in the future.  We do believe that there will be seasonal factors
which can materially impact the sale of this product, primarily driven by school
budget year cycles, but we are not able to assess the impact of these factors on
future sales at this time,  as our sales have been so limited to date.  Our plan
is to add video recording and biometric  identification to this line in the near
future,  and expand into markets beyond  education,  such as law enforcement and
homeland security.

     STATIONMASTER(TM).  StationMaster(TM)  is an outdoor location product based
on GPS technology.  It is designed to track and report the location of fleets of
vehicles. We announced this product in March of 2003. The product contains a GPS
and  other  sensor  inputs as  required  by the  customer.  The  product  can be
configured  for  either  real  time  data   communication   or  near  time  data
communication again depending upon the customer's requirements. By upgrading the
embedded   processor  to  a  single  board  computer  we  can  run  applications
specifically  designed by our  customers  who  require a mobile  general-purpose
computer that can also perform  tracking and reporting  functions.  We have only
developed prototypes of this product, and have not shipped 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. We have made no sales of this product as of the
date of this report.

     TRACKER  III(TM).  Tracker III(TM) is an outdoor  location product based on
GPS technology.  It is designed to track and report the location of vehicles and
assets.  We announced this product in September of 2003. The unit contains a GPS
to determine  position,  as well as GSM cellular radio to transmit that position
information  back  to a  central  location.  This  location  information  can be
presented  as map  coordinates,  or it can be shown on a map using our  Lobo(TM)
tracking  software  (see  below).  This  product  is  in  the  final  stages  of
development.  Operational  units are expected to be  available in 2005.  We have
made no sales of this product as of the date of this report.

     LOBO  TRACKING   SOFTWARE(TM).   Lobo(TM)  is  an  internet-based   mapping
application that can be used to display the location on a computer screen of our
locator  products in the field.  Lobo(TM) is not sold as a stand-alone  product,
but  instead is a service we offer to  purchasers  of our  cellular-phone  based
locators.  We use Lobo(TM) to make our locator product offerings more attractive
to  customers.  Lobo(TM)  is in  active  use today by most  customers  using our
Followit(TM)  products. We have generated revenue through the sale of service on
our Lobo(TM)  server  service for over two years;  since  Lobo(TM) is part of an
overall  solution  that  includes  Followit(TM),  it is difficult to  accurately
separate the revenue  generated  solely from Lobo(TM)  software from the revenue
generated  from  Followit(TM).  We  estimate  that  Lobo(TM)  has  independently
generated less than $5,000 in revenue over the last two years.

     STARPILOT(TM).  StarPilot(TM)  is an outdoor  location  product  based on a
single board computer and GPS  technology.  We announced this product in June of
2002.  The  product 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 GPS and
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 our Lobo(TM) tracking  software.  This unit is intended for
tracking  vehicles and for running  applications  designed by our  customers who
require a mobile  general-purpose  computer  that can also perform  tracking and
reporting functions. We have only developed prototypes of this product, and have


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not shipped 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.  We have
made no sales of this product as of the date of this report.

     STARPILOT(TM)  SENTINEL.  StarPilot(TM)  Sentinel  is an  outdoor  location
product designed for tracking and reporting the location of field personnel at a
distance.  We announced this product in April of 2003. The product consists of a
vehicle-mounted  satellite/radio  frequency  (RF)  location  and  communications
platform  with a small  personal  RF  transmitter.  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 GPS. This is a concept product
intended  primarily for military use in an area where most of the communications
infrastructure has been destroyed. Occasionally, troops encounter hostile action
close to their  vehicles  but are  unable to return to them to summon  help.  We
developed  this product as an aid to summon help.  All the troops in the vehicle
carry a small radio transmitter,  similar to a key fob used in car alarms.  When
they  experience  difficulties  they simply  press a button on the key fob and a
signal is sent to the communications  module in the vehicle. This communications
module then sends of an  emergency  alert over a satellite  link back to command
along with its  location.  This  location  information  can be  presented as map
coordinates,  or it can be shown on a map using our Lobo(TM)  tracking  software
(see above). We have only developed prototypes of this product.  This product is
targeted  primarily at military  related  uses,  such as  assisting  soldiers or
civilians  in hostile  area such as Iraq to summon help in areas where  cellular
coverage  is  limited.  We have made no sales of this  product as of the date of
this report.

     TRAKJACK(TM).  TrakJack(TM) is an outdoor location product designed for use
in the power sports industry. Examples of power sports equipment are motorcycles
or  snowmobiles.  We  announced  this  product  in  March of 2003  (then  called
TrakForce(TM)) along with our development partner Positus Corporation,  formerly
known as Bike & Cycle  Trak USA,  Inc.  The  product is aimed  primarily  at the
expensive  motorcycle  industry.  It is a custom  designed  unit and will have a
number of unique features, including a crash sensor, which allows the product to
automatically  summon  assistance in the event it detects an accident  through a
call center.  It will also act as a theft recovery device.  The major components
of this  product  are a crash  sensor,  a GPS,  and a  cellular  radio.  We have
provided  Positus  Corporation with a proof of concept product and are currently
working  with  them to  begin  the  next  phase of the  development  cycle.  Our
agreement with Positus allows us to market this product  directly  ourselves and
through Positus. We have generated  approximately $10,000 in cash and $20,000 in
total  revenue  from  this  product  design  as of  the  date  of  this  report.
TrakJack(TM) is a Minnesota trademark of Positus Corporation.

     FOLLOWIT(TM).  Followit(TM) is a small outdoor location product designed to
track vehicles. We announced  availability of this product in March of 2002. The
unit contains a GPS to determine  position,  as well as a GSM cellular  radio to
transmit that position  information  back to a central  location.  This location
information  can be  presented as map  coordinates,  or it can be shown on a map
using our  Lobo(TM)  tracking  software  (see  above).  The unit is designed and
manufactured  for us in Sweden by Followit,  AB. We  currently  have no units in
stock as we have sold our entire inventory of the product, and we currently have
no plans to replenish stock for this unit,  although we will continue to support
our existing  customers  for this unit and have it available on a special  order
basis. Followit(TM) is a trademark of Followit AB of Sweden.

     URBANTRACKER IIK(TM). UrbanTracker IIK(TM) is a derivative of Followit(TM).
We  announced  this  product in October of 2002.  The product is a  Followit(TM)


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product  carefully  integrated into a child's  backpack.  This unit is primarily
used for tracking children.  We have only developed  prototypes of this product,
and have not  shipped  commercial  quantities  as of this time,  other than to a
small number of potential  development  partners.  We have presented  samples to
various interested parties. We have made no sales of this product as of the date
of this report.

INDOOR LOCATION PRODUCTS

     OVERVIEW OF THIS TECHNOLOGY

     Indoor  location  presents many  challenges that are not present in outdoor
location.  This is largely  because GPS systems  work poorly if at all when used
indoors.  While the GPS companies are working hard to overcome this  limitation,
there have not been any major  breakthroughs  as of yet.  Most  indoor  location
technology  uses  proprietary  infrastructure  and  small  radios  called  radio
frequency  identification  tags, or RFID tags,  which are typically  small radio
transmitters that run from battery power.

     Most of our  indoor  positioning  technology  is  based  on  measuring  the
strength or loudness of a radio signal between the transmitter and the receiver.
We do this because the further away a transmitter is from a receiver, the weaker
or quieter the signal is that you will detect.  Many types of radios can measure
this "loudness"  phenomenon and convert it into a useful numerical value. If you
have three or four radio  sources  spread over an area and you can detect  their
value you can then triangulate your position based on that information.  This is
similar  to the  concept  used by GPS,  but since it does not  depend on distant
satellites,  it can be  applied  indoors.  However,  for this  approach  to work
economically,  a large number of transmitters are required throughout the indoor
area. This cost has greatly limited the deployment of indoor location technology
as of the date of this report.

     Today many  organizations  are connecting  their  computers  using Wi-Fi(R)
technology,  rather  than  running  expensive  network  cables.  Wi-Fi(R)  is  a
trademark of Wi-Fi Alliance. We often use WiFi without the hyphen in our product
names to avoid confusion with this trademark. We have developed a means of using
these new  Wi-Fi(R)  networks  to  provide  the  transmitters  needed for indoor
positioning.  We call this "piggy backing" on to the Wi-Fi(R) network, a network
which is composed of many  mounted  receiving  devices  called  Wi-Fi(R)  access
points.

INDOOR LOCATION TOOLS PRODUCTS

     WIFI  TRACKER(TM).  WiFi Tracker(TM) is an indoor tracking product designed
for tracking people and other assets.  We announced this product in May of 2003.
When used in conjunction with Wi-Fi(R) enabled tracking  software,  the tags can
be easily  identified  and  located  within  the  network.  One of our  software
partners  is a Finnish  company,  Ekahau,  Inc.  They have  developed a software
system that takes  information  determined  by our tags and  displays  the tag's
position using Ekahau(TM)  Positioning  Engine(TM) tracking software.  The stage
three  version  of the  prototype,  or  "developer  kit,"  of this  product  was
completed in December of 2003. A newer  version of the  developer  tag,  version
1.2,  was  completed  in August of 2004.  We have  presented  samples to several
customers,  and have  engaged  in  competitive  field  trials  with  prospective
customers,  including NASA, using early versions of this product.  Additionally,
we have been doing  application  design work with iTrack of Ireland for wireless
traffic  management,  though we have no formal  agreements  with this firm. This
product is targeted primarily at commercial users, and uses some RFID technology


                                       9
<PAGE>

in its design.  We have made a very small  number of sales of this product as of
the date of this report.

     GOTCHA!(R).  Gotcha!(R)  is a small  electronic  product  designed to alert
parents or guardians  when their small child  wanders too far away from them. We
announced this product in November of 2002, and began shipments of it during the
summer of 2003 to select distribution organizations. The product consists of two
parts, one about the size of a small pager that attaches to a parent and one the
size of a key fob  that  attaches  to a  child.  When the  pre-set  distance  is
exceeded,  the child  unit makes an  audible  sound to tell the parent  that the
child has  wandered  too far.  It is then up to the parent to locate the wayward
child by  following  the sound of the alert.  The unit is  designed to work well
indoors  or  outdoors,  although  working  through  walls will tend to limit the
unit's range. We believe most of our customers will use this product indoors, in
places  like  shopping  malls.  The  tracker  contains a small radio set used to
transmit  information  between  the parent  and child,  which are a form of RFID
technology.  The units are fully FCC certified and approved for operation in the
U.S. The units are also certified for use in Canada. We plan to have these units
certified  for  use in  other  countries  as and  when  the  business  situation
warrants. We have filed and received a successful trademark claim on Gotcha!(R).
We are currently  marketing this product through various channels for an average
price of  approximately  $50-$90 for a set that includes one parent unit and one
child unit. This product was featured in December of 2003, and again in February
2004, on cable television's Home Shopping Network(TM), and on QVC in April 2004.
We have  manufactured  this unit in quantity and have  inventory  available  for
delivery. We have made commercially significant sales of this product, in excess
of $100,000 as of the date of this report.

LOCATION TOOLS PRODUCTS SALES AND MARKETING

     We believe the products we are developing may be more readily marketable by
licensing   and/or   collaborating   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 May 2003, we entered into a
relationship with Ekahau to co-market  Wi-Fi(R)  positioning  products.  In late
2002, we entered into an agreement with FutureCom Global of Arizona to assist in
the  distribution  of some of our  location  tools.  We have also  entered  into
agreements with Verify Systems regarding  marketing and software support for our
IBUS(TM) systems,  Positus Corporation,  to help market the TrakJack(TM) design,
and KidMapper for distribution of Gotcha!(R) to schools and youth organizations

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


                                       10
<PAGE>

     We hired a part time brand manager for our  Gotcha!(R)  product.  The brand
manager is responsible  for finding and  integrating  distribution  channels for
Gotcha!(R) into  marketplaces  worldwide.  We are currently in discussion with a
number of potential  distribution  partners in Europe,  Canada, South Africa and
Latin America. We have also recently entered non-disclosure  agreements and into
negotiations with new distributors for our Gotcha!(R) products,  one for schools
in the United  States,  one for  distribution  services  in Canada,  and one for
distribution services in Europe.

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

LOCATION TOOLS AND LOCATION SERVICES INDUSTRY

     The market for  Location  Tools with  GPS-enabled  products is projected to
grow during the next few years. The U.S. Department of Commerce reports that the
compound  annual growth rate of the GPS market has been  approximately  22% over
the last six years.  The  Department's  studies  stated that worldwide GPS sales
reached $4B by the end of 1998,  $6.2B by 2000, and exceed $8B by 2002, the last
year for which figures were  available  from them. We believe that the following
are among the key  factors  underlying  the  projected  industry  growth in both
business and consumer markets now and in the near future:

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

     To date,  many  market  leaders  in the  location  services  industry  have
concentrated  primarily  on vehicle or asset  tracking  segments  of the markets
associated with providing information to owners of vehicles or assets. Real time
tracking  information of a vehicle or asset is often  delivered by linking a GPS
receiver to a device that is connected to a cellular network,  allowing location
of the vehicle or asset to be  automatically  transmitted  to a base station via
the  Internet  twenty-four  hours a day.  The user can,  if needed,  immediately
contact an appropriate provider of emergency services. In addition,  this allows
those parties who are  monitoring the location of the vehicle or asset to ensure
that delivery and service fleet  operations are using the most effective  method
of getting to a  location,  or to dispatch  roadside  assistance  and  emergency
services,  such as police or  ambulances.  The primary users  include  owners of
expensive  vehicles.  This  market is a segment of the  overall  GPS  Telematics
services  market.  The GPS Telematics  market  includes all vehicle  mounted GPS
systems that report their  location  remotely,  typically  using  cellular phone
related  devices.  In October  2002 market  consulting  firm Frost and  Sullivan
reported that revenue from this market  segment  exceeded $1B in 2003,  and that
the segment  market may surpass $2.1B by 2008.  Emergency  assistance  mandates,
such as the U.S. Federal  Communications  Commission's  E911 Phase II 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


                                       11
<PAGE>

with relative  accuracy in emergency  situations  may also expand other wireless
location product opportunities.

LOCATION TOOLS CUSTOMERS

     Our customers for location-based products include general consumers as well
as  businesses  that need  accurate  tracking of people or assets.  We have sold
products  to this group  directly  through  our  Internet  Website  and  through
relationships  with  stores  that  specialize  in  tracking  devices and related
security  technologies.  We do not know the  final  destination  of all of these
retail  sales,  but we believe  many have been to private  investigators  or law
enforcement  users in the  U.S.  and  Canada.  We have  also  sold  products  to
developers who are exploring  adapting our hardware to meet custom solutions for
specific  markets,   including  Positus  Corporation  and  Verify  Systems.  See
"Strategic  Relationships  Including Marketing Firms,  Material  Suppliers,  and
Distributors."  We have also sold  location  products to  customers  of the Home
Shopping Network and QVC through  FutureCom  Global,  and implemented  events on
other  direct  marketing  outlets,   including  radio  commercials  and  through
FutureCom Global. We have provided samples and demonstration products to several
dozen major U.S.  retailers,  as well as a few  distribution  firms  outside the
U.S., in Mexico,  Canada, and Europe. Our customers are primarily  organizations
operating in the United States and Canada,  although  samples have been sent for
review to customers in Mexico, Central and South America, Africa, and Europe. We
have also issued proposals, but not consummated sales transactions, to a variety
of other prospective customers including hospitals,  airports, trucking firms, a
resort and entertainment complex, and the U.S. government.

LOCATION TOOLS PRODUCTS - GOVERNMENT REGULATION

     Since our  location-based  products are based on the use, in most cases, of
radio  technology,  we are required to comply with a variety of Federal,  State,
and local  regulations  regarding the use of radio  devices.  The primary set of
regulations  that  concerns our products  are those  promulgated  by the Federal
Communication  Commission,  or FCC, which is tasked with managing the use of the
radio spectrum in the United States.  We have two strategies for compliance with
these regulations. First, we have certain products, such as our Gotcha!(R) child
safety product,  which we have independently tested and certified for compliance
by  the  FCC or  their  approved  third  party  laboratories.  In  the  case  of
Gotcha!(R),  we  achieved  this  certification,  called  a  Grant  of  Equipment
Authorization,  on July 26,  2003,  and we were  issued  FCC  identifier  number
Q79-703 as a result.  This process  typically  takes several  months and creates
testing costs of between $5,000 and $10,000 per device  certification.  In other
cases, we elect to purchase  complete and certified radio systems to incorporate
into our products  that have already  achieved this  certification.  This is the
case with our IBUS(TM) product,  which uses 2.4GHz WiFi radios manufactured by a
supplier of ours that has already achieved this certification. Using this second
approach typically  accelerates time to market over the first approach outlined,
but may add to the cost of manufacturing the product over the long term.

     For markets  outside the United  States,  we may be required to comply with
other government  regulations regarding the use of radios. For example, the "CE"
certification,   formally   called  the  "European   Union  EMC"  program,   has
similarities  in part to the FCC  certification  program in the  United  States.
While we design  our  products  to meet this and other  important  international
regulations,  we  have  not  formally  applied  for  the  "European  Union  EMC"
certification  on any of our  products,  but may choose to do so in the  future,
when we  believe we have more time to devote to  developing  sales  channels  in
those  international  markets. We may also be required to comply with government
regulations  regarding  the export of certain kinds of  technology.  To date, we


                                       12
<PAGE>

have no plans to export  our  technology  to areas  where  such U.S.  government
restrictions might be in force, such as to Cuba.

     An important  additional  aspect of FCC government  regulation that affects
our location  tools  products is the  management  of the cellular  airwaves.  In
particular,  the FCC mandate  entitled  E911-Phase  II puts a burden on cellular
network  operators to provide  position  information  of cellular phone users to
within  approximately  100 feet of  accuracy  before  December  31,  2005.  Some
cellular  network  operators can provide this today. We believe that some of our
products  based on cellular  devices  and GPS can in the future be  manufactured
without the GPS unit, while still being able to accurately  determine  location.
This may allow us to penetrate new markets by lowering the cost and size of some
of our products.

LOCATION TOOLS PRODUCTS - ENVIRONMENTAL REGULATION

     There are few if any special environmental compliance concerns unique to us
that would be different  than those that apply to other design  companies in the
United States in general.  This is  principally  because we use third parties to
manufacture  and distribute our location tools  products,  and in the opinion of
management,  the significant  environmental risks associated with our electronic
products relate to the manufacturing of these units, not the design function.

LOCATION TOOLS PRODUCTS - RESEARCH AND DEVELOPMENT

     Over the last three full fiscal years, we have spent approximately $492,100
directly accounted for as pure research and development of our products overall,
including  semiconductor  products and location tools  products.  In addition to
these direct  expenses,  our small staff spends  considerable  time and indirect
resources  in this  area,  and we would  estimate  that in  excess of 50% of the
available  personnel  resources are involved in research and  development of our
location tools products over the last three years.

     In the last two full fiscal years, we have spent approximately  $337,600 on
research and  development,  which has largely been related to our location tools
products.  We  have  conducted  several  simulations  and/or  developed  working
prototypes  of most of our  products.  We have  successfully  developed and sold
several location products, most prominently our Gotcha!(R) child safety product.
We continue to conduct  research in several  areas,  especially for new location
services products.  Part of that research effort includes additional testing and
product refinement. Our research into new location tools products is expected to
be in  markets  such as child  safety,  school  bus  safety,  military  tracking
markets,  healthcare  asset  tracking,  and also  into  first  responder  safety
markets.

     The following table  summarizes the current  development  status of each of
our current  location tools  products.  The categories  below have the following
meanings:

     o    "Product  Name"  refers to the device we described in the section just
          above;
     o    "Proof of  Concept  Prototype  Built"  means  that we  produced  early
          samples in a laboratory or test facility to demonstrate the concept of
          the product's  viability in a limited fashion.  These early prototypes
          are not useful for  commercial  sale without  additional  research and
          development,  and will  likely not be  available  for testing by third
          parties;
     o    "Pre-Production  Prototype  Tested and Available"  means a form of the
          product  was  created  and tested  that would be  directly  useful for


                                       13
<PAGE>

          commercial sale,  should we decide to manufacture it on a large enough
          scale,  and that interested  third parties may receive samples from us
          that they can  fully  test in their own  environment,  should  they so
          desire;
     o    "Design  Available  for  Licensing  from Us" means that we either hold
          patent rights or other trade secret rights to create this product, and
          that we are able and  willing  to enter  into  agreements  with  other
          parties for them to license from us these rights for their use;
     o    "Production Device Available for Sale" means that either we or another
          third  party  under  license  to use  is  manufacturing  this  product
          currently,  and is  offering it for  general  sale in the  marketplace
          today.

<TABLE>
<CAPTION>
                                                  PRE-PRODUCTION        DESIGN       PRODUCTION
                                  PROOF OF          PROTOTYPE         AVAILABLE        DEVICE
                                   CONCEPT           TESTED         FOR LICENSING    AVAILABLE
      PRODUCT NAME             PROTOTYPE BUILT     & AVAILABLE         FROM US        FOR SALE
--------------------------     ---------------    --------------    -------------    ---------
<S>                            <C>                <C>               <C>              <C>
Gotcha!(R)                         Complete          Complete            Yes            Yes
WiFi Tracker(TM)                   Complete          Complete            Yes            Yes
Followit(TM)                       Complete          Complete           No (1)          Yes
IBUS(TM)                           Complete          Complete            Yes            Yes
Lobo Tracking Software(TM)         Complete          Complete            Yes           No (2)
StationMaster(TM)                  Complete          Complete            Yes            No
Tracker III(TM)(4)                 Complete           No (3)             Yes            No
StarPilot(TM)                      Complete          Complete            Yes            No
StarPilot(TM)Sentinel              Complete             No               No             No
UrbanTracker IIK(TM)               Complete             No               Yes            No
</TABLE>
--------------
(1)  Followit(TM)  is  sold  by us  under  a  non-exclusive  sales  and  license
     agreement  from  Followit  AB.  of  Sweden.  See  "Strategic  Relationships
     Including Marketing Firms, Material Suppliers, and Distributors."
(2)  Lobo(TM)  software is part of an overall tracking  solution,  and we do not
     offer it for sale as a standalone product, only as a licensed product or as
     part of our tracking service solution combined with other products, such as
     Followit(TM) or Tracker III(TM).
(3)  We are in the final  stages of testing a GSM cellular  telephone  module to
     transmit  data to a remote  location.  We  estimate  that this test will be
     completed in February 2005.
(4)  Tracker III(TM) is used as the platform for the design of the  TrakJack(TM)
     product for Positus  Corporation.  TrakJack(TM) is a Minnesota trademark of
     Positus Corporation.

LOCATION TOOLS - PATENTS AND TRADEMARKS

     In the first half of  calendar  year 2004 we filed one  provisional  patent
application  pending  for a  technology  to  assist  in the  location  of  first
responders in indoor environments.  We were granted a United States trademark on
our Gotcha!(R) location tool for child safety applications in May of 2004.

LOCATION TOOLS PRODUCTS AND SERVICES COMPETITION

     The  market  for  communications   and  information   products  related  to
location-based  services  is highly  competitive  and we expect  competition  to


                                       14
<PAGE>

increase.   We  believe  that  the  principal   competitive  factors  that  will
differentiate  the  various  competitors  in this  marketplace  will be  product
features,  quality,  customer service,  brand,  advertising,  price positioning,
time-to-market,   and  availability.   The  market  for  GPS-based  products  is
relatively recent as a direct result of the U.S. Government's removal of the GPS
based  filters  in May 2000 to allow  for more  accurate  tracking.  Many of the
companies  in the  vehicle  tracking  market  have  expensive  systems  that are
permanently  installed  into the vehicle and often  involve a fee-based  monthly
subscription service.  Most of our products are removable,  and some can be used
without incurring any monthly airtime charges. Many GPS device vendors have been
offering products to the marine,  aviation and outdoors  enthusiast  markets for
several years.  We do not generally  compete in those markets.  For the personal
safety locating products markets,  we consider our principal  competitors in the
consumer market to be Wherify,  Digital Angel, Angel Alert, and Child Guard. For
our commercial  vehicle and asset tracking  markets,  our principal  competitors
include  @Road,  Axiom  Navigation,  ALK,  and  Thales  Navigation.   There  are
approximately 100 other smaller companies offering similar products and services
that we presently  offer.  There is  significant  other  competition  from large
competitors in the  GPS/Navigation  market,  including General  Motors-OnStar(R)
system.  We have no current  plans to  directly  compete  with major  automotive
suppliers for in-vehicle  navigation  solutions,  due to the amount of resources
required to successfully compete.

SEMICONDUCTOR PRODUCTS

OVERVIEW

     The  semiconductor  products  market is a secondary focus for us because we
believe that we have a better chance of generating  revenue from the sale of our
location  tools.  This is based on our  assessment  of the current  state of the
semiconductor  market,  the  current  level  of  maturity  of our  semiconductor
products,  the skills of our staff, and our current size and capital  structure.
However,  we believe  that over a long  period of time we may be able to extract
value from the  semiconductor  products we have,  because none of our patents in
this area will expire until at least 2017 if we continue to pay required  patent
maintenance  fees, which we intend to do. As a result, we continue to operate in
this market,  although we commit very few current  resources to it,  relative to
what we commit to the location tools market.

     We intend to  maintain  key  elements  of our  portfolio  of  semiconductor
intellectual  property because we believe there is potential for the products we
might offer to prospective  licensees in the future, as the technology  required
to  manufacture  some of these  designs  is  developed  by  others.  There is no
assurance that the technology required to manufacture some of these designs will
ever be developed, or that when it is developed,  that our patents will still be
enforceable.

     The largest target market for our products is the electronic memory market,
which is the target for our TMOS(R) product. Electronic memory is used widely in
many computer related products,  such as personal  computers.  Our other patents
tend to fall into the "discrete device market," which the Semiconductor Industry
Association (SIA) defines as discrete components including power transistors and
radio frequency  solutions that are found in wireless consumer  products.  These
kinds  of  products  are used  widely  in  radios.  These  technologies  form an
important  part of  communications  systems  worldwide  through  voice  and data
communications  networks,  cordless and cellular wireless  telephony systems and
emerging cable and wireless broadband communications networks.


                                       15
<PAGE>

     Our sales and marketing efforts for  semiconductor  products are limited to
our web presence on our own  internet  site,  our presence in the United  States
Patent and  Trademark  office  database  and website,  web-based  marketing in a
semiconductor   intellectual  property  sales  organization  named  the  Virtual
Component  Exchange,  or VCX, and very limited direct sales efforts from time to
time with  prospective  semiconductor  technology  licensees  at trade shows and
other industry events.

     Our long-term strategy is to develop significant new semiconductor products
that build on our existing  portfolio  of patents in this area,  and to tie this
technology  into our location  tools  products.  We believe this may be possible
because  these  product  families have in common the fact that they both rely on
radios.   Our  location   tools  products  have  radios  built  into  them.  Our
semiconductor  products are components that can be used in radios.  We intend to
utilize unique,  patentable technologies and other proprietary  technologies and
provide these  enhancements to the marketplace  through joint venture  licensing
agreements with  manufacturing  firms. We do not intend to directly  manufacture
any of our own technologies.  When resources are available we intend to continue
research and development efforts,  including simulations and creation of working
prototypes,  where possible.  Our efforts in the location tools product area may
delay this strategy's implementation indefinitely.

     We filed patent  applications  on a number of product  designs between 1997
and 2002 relating to semiconductor  products.  During this time we brought eight
major  research  and  development  projects to the patent or patent  application
stage.  The United  States Patent and  Trademark  Office,  the USPTO awarded our
first U.S.  patent June 15, 1999.  All of our products in this area are based on
paper  designs,  with limited  laboratory  work having been performed on some of
them.  Our primary  semiconductor  and  electronic  device  products and related
patent filings include the following areas:

      PRODUCT NAME                       USE AND FUNCTION OF PRODUCT
------------------------   -----------------------------------------------------

Heterojunction Bipolar     Used in the manufacture of digital circuits  found in
Transistor                 devices such as cellular phones,  personal  computers
                           and   automotive   circuitry.   Transistors   provide
                           electronic  control over current flow, and are a part
                           of many electronic circuits.  Heterojunction  bipolar
                           transistors   are  used  most   frequently  in  power
                           amplifiers,  radio frequency  integrated circuits and
                           other circuits.

Monolithic Inductor        Used  in a wide  range  of  electronic  circuits  for
                           telecommunications  applications. The inductor's most
                           common  application  is  as a  component  of a  radio
                           frequency circuit used to manipulate radio waves into
                           certain other electrical  signals.  The inductor does
                           this,  usually in  conjunction  with a capacitor,  by
                           producing an amplified  current when  stimulated by a
                           specific frequency of radio signal.

Distributed Amplifier      Used in all  electronic  products  that  require some
                           level of power  increase such as  telecommunications,
                           microwave,  internet  communications,  automotive and
                           bio-medical    products   as   well   as    automated
                           manufacturing products.



                                       16
<PAGE>

      PRODUCT NAME                       USE AND FUNCTION OF PRODUCT
------------------------   -----------------------------------------------------

TMOS(R) Memory             Used   in   digital   computing   devices   such   as
                           microcomputers  and  workstations and battery powered
                           devices such as personal data appliances and cellular
                           phones that require a memory function.

Mode Dielectric            Used   in   many  applications  including   microwave
Resonator                  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             Allows the  transmission and reception of radio waves
Wireless Transceiver       and is used in a variety of wireless devices.


SEMICONDUCTOR INDUSTRY, MARKETPLACE, AND COMPETITION

     The  semiconductor  industry  makes a wide variety of electrical  component
products  found in  literally  millions  of  different  devices  in  common  use
throughout  the world.  This includes  everything  from personal  computers,  to
automobiles,  to household  appliances,  cell  phones,  children's  toys,  power
systems,  and  much  more.  The  Semiconductor  Industry  Association,  or  SIA,
publishes  regular reports on the projected size of this industry.  In 2004, SIA
has  estimated the overall size of the  semiconductor  products  marketplace  at
approximately  $200B per year. SIA reports also show a regular trend for average
annual  growth in excess of 10% per year for the overall  industry over the last
twenty  years,  although  there have been periods of much slower  growth or even
decline for significant portions of the semiconductor  marketplace,  such as the
years 2001 and 2002.

     The electronics  products industry is intensely  competitive.  Our wireless
and memory  technologies  experience intense  competition from numerous domestic
and foreign companies in all of our semiconductor products.

     Based on our research and development efforts over the last seven years, we
believe our most promising semiconductor product in the near term is our TMOS(R)
product.  We consider our TMOS(R) memory  technologies  to be  competitive  with
existing memory  technologies in certain  applications.  The companies that make
memory similar to our TMOS(R)  product are both  potential  customers as well as
potential  competitors.  This is because they can choose to license  products we
make, or to develop competitive  technologies  themselves or license competitive
products from others.  As  competitors,  the companies  that make memory devices
similar to ours are much larger firms and are much better  funded.  They include
firms such as Samsung, Alliance Semiconductor Corporation, Cypress Semiconductor
Corporation,  Integrated  Device  Technology,  Inc.,  Motorola,  Inc.,  Hitachi,
ST-Microelectronics,  Toshiba, Fujitsu, and Micron Technology,  Inc. and others.
They have  substantially  greater  research and  development  resources than us.
Because these companies are also potential  licensees for our  technology,  they
could  also  serve as  sources  of  research  and  development  support  for our
semiconductor products. However, we have been trying for the last three years to


                                       17
<PAGE>

interest these kinds of large firms in licensing our semiconductor products, and
to date, we have met with little or no success.

SEMICONDUCTOR PRODUCTS - PATENTS AND TRADEMARKS

     We have applied for U.S.  patents relating to these  technologies,  most of
which have already been issued. These include the following, all of which have a
20-year life following date of filing.

<TABLE>
<CAPTION>
                                                                                     EXPECTED
                                                                                      PATENT
                                                                                    EXPIRATION
      PRODUCT NAME                       SUMMARY OF PATENT INFORMATION                 DATE
----------------------      ----------------------------------------------------    ----------
<S>                         <C>                                                     <C>
Heterojunction Bipolar      On  September 29,  1997,  we  filed  a  U.S.  Patent     Sep. 2017
Transistor                  application for a Heterojunction  Bipolar Transistor
                            (HBT).  U.S.  Patent  5,912,481  was issued for this
                            device on June 15, 1999. We were also  successful in
                            our  Continuation  in  Process  application  on this
                            device,  as the United  States  Patent and Trademark
                            Office  issued us a patent on  January 9, 2001 under
                            U.S.   Patent   6,171,920,   covering   intellectual
                            property  required to manufacture  this  transistor.
                            The  assignment  of this patent to us is recorded at
                            USPTO at reel no: 0111356, frame 0934.

Monolithic Inductor         On  October 31,  1997,   we   filed  a  U.S.  Patent     Oct. 2017
                            application  for a  Monolithic  Inductor.  The  U.S.
                            Patent  Office issued a Notice of Allowance for this
                            application  on  September  7,  1999.   U.S.  Patent
                            6,013,939  was issued for this device on January 11,
                            2000. We were also successful in our Continuation in
                            Process  application  on this device,  as the United
                            States  Patent  and  Trademark  Office  issued  us a
                            patent  on  August  28,   2001  under  U.S.   Patent
                            6,281,778.  The  assignments for these patents to us
                            are recorded  directly on the issued patent from the
                            USPTO.

Distributed Amplifier       On July 10, 1998, we filed a U.S. Patent application     Jul. 2018
                            for a Distributed Amplifier.  The U.S. Patent Office
                            issued a Notice of Allowance on this  application on
                            September  29,  1999.  U.S.  Patent   6,008,694  was
                            received for this device on December  28,  1999.  On
                            May 23, 2001, we a filed a U.S.  Patent  application
                            for  a  Monolithic   Balanced  RF  Power  Amplifier,
                            another   version  of  this  product.   U.S.  Patent
                            6,424,227  was  issued  for this  device on July 23,
                            2002.The  assignments  for these  patents to us have
                            recorded  directly  on the issued  patents  from the
                            USPTO.

TMOS(R) Memory              On  December 17,  1997,   we  filed  a  U.S.  Patent     Dec. 2017
                            application   for  a  High   Performance   N-Channel
                            Metal-Oxide-Semiconductor   (NMOS)   Static   Random
                            Access  Memory  (SRAM).  U.S.  Patent  6,104,631 was
</TABLE>


                                       18
<PAGE>
<TABLE>
<CAPTION>
                                                                                     EXPECTED
                                                                                      PATENT
                                                                                    EXPIRATION
      PRODUCT NAME                       SUMMARY OF PATENT INFORMATION                 DATE
----------------------      ----------------------------------------------------    ----------
<S>                         <C>                                                     <C>
                            received for this device on August 15, 2000. We were
                            also  successful  in  our  Continuation  in  Process
                            application  on this  device,  as the United  States
                            Patent and  Trademark  Office  issued us a patent on
                            October  9, 2001 under U.S.  Patent  6,301,147.  The
                            assignment  of  these  patents  to  us  is  recorded
                            directly on the issued patents from the USPTO.

Mode Dielectric             On June 18, 1998, we filed a U.S. Patent application     Jun. 2018
Resonator                   for a  Mode  Dielectric  Resonator.  The U.S. Patent
                            Office   issued  a  Notice  of  Allowance  for  this
                            application on August 1, 2000.  The U.S.  Patent and
                            Trademark Office issued us U.S. Patent 6,169,467 for
                            this device on January 2, 2001.  The  assignment  of
                            this  patent  to us is  recorded  at  USPTO  at reel
                            number: 011358, frame 0462.

High Frequency Wireless     Patent Pending (Expected issue early 2005).              Pending
Transceiver
</TABLE>

     We have filed patent applications for other  semiconductor-related  patents
since 2000,  including some  improvements to the above existing products as well
as on related  devices.  The commercial  importance of these  inventions and the
final disposition of these applications are uncertain.  At this time, we are not
actively  pursuing  patent  protection  outside  the  United  States  for  these
semiconductor  products.  We also hold the U.S.  trademark to the word  TMOS(R),
awarded to us July 1, 2003, U.S. Trademark registration number 2732825.

SEMICONDUCTOR PRODUCTS - GOVERNMENT REGULATION

     Since our  semiconductor  products  are used,  in most  cases,  as parts of
radios,  our customers are required to comply with a variety of Federal,  State,
and local  regulations  regarding the use of radio  devices.  The primary set of
regulations  that concern our customers'  products are those  promulgated by the
Federal Communication  Commission, or FCC, which is tasked with managing the use
of  the  radio  spectrum  in the  United  States.  However,  since  this  is our
customers'  responsibility and not ours, we do not believe we are subject to any
special level of government  regulation in this line of business other than that
which would be faced by other U.S. Companies in general.

     We may also be required to comply with government regulations regarding the
export of certain kinds of  technology.  To date, we have no plans to export our
technology to areas where such U.S.  government  restrictions might be in force,
such as to Cuba.

SEMICONDUCTOR PRODUCTS - ENVIRONMENTAL REGULATION

     There are numerous environmental  regulations that affect the manufacturing
of  semiconductor  products  in general.  However,  there are few if any special
environmental  compliance  concerns  unique to us that would be  different  from
those that apply to other  companies  in the United  States in general.  This is
principally  because we use third  parties to  manufacture  and  distribute  our


                                       19
<PAGE>

semiconductor  products, as our business model is based on licensing our designs
to others,  who then bear the main  costs of  complying  with the  environmental
rules that directly relate to manufacturing these final goods. Should any single
manufacturer  be subject to special  enforcement  action in this area,  we would
retain  the right to switch to another  manufacturer,  as we  currently  have no
exclusive manufacturing relationships in this area.

SEMICONDUCTOR PRODUCTS - RESEARCH AND DEVELOPMENT

     We have conducted  little  research and  development  of our  semiconductor
products since 2002.  Since fiscal year 2002, we have spent less than $25,000 on
research  and  development  of our  semiconductor  products and $9,400 for legal
services required to protect patents for all of our products.

     The following table  summarizes the current  development  status of each of
our current semiconductor products.

<TABLE>
<CAPTION>
                                                          PRE-PRODUCTION        DESIGN       PRODUCTION
                                          PROOF OF          PROTOTYPE         AVAILABLE        DEVICE
                                           CONCEPT           TESTED         FOR LICENSING    AVAILABLE
      PRODUCT NAME                     PROTOTYPE BUILT     & AVAILABLE         FROM US        FOR SALE
--------------------------             ---------------    --------------    -------------    ---------
<S>                                    <C>                <C>               <C>              <C>
TMOS(R) Memory                             Complete             No               Yes             No
Mode Dielectric Resonator                  Complete          Complete            Yes             No
High Frequency Wireless Transceiver        Complete             No               Yes             No
Distributed Amplifier                      Complete             No               Yes             No
Monolithic Inductor                        Complete             No               Yes             No
Heterojunction Bipolar Transistor             No                No               Yes             No
</TABLE>


STRATEGIC  RELATIONSHIPS  INCLUDING  MARKETING FIRMS,  MATERIAL  SUPPLIERS,  AND
DISTRIBUTORS

     This section  covers  relationships  that may involve both  location  tools
products and semiconductor products, as some of these suppliers and distributors
may be active in both areas. However,  since most of our business activity since
2002 relates to the location  tools  products,  you can assume unless  otherwise
stated below that the primary purpose of these  relationships has to do with the
location tools product line.

     In September of 2004, we signed a contract with KidMapper Inc. of Elmhurst,
IL.  KidMapper is a privately  owned company and  concentrates  on marketing and
distribution  of a full  array of child  safety  products  into  schools,  youth
groups,  and  parent-teacher  associations  (PTAs).  The  material  terms of the
contract include a two year term,  exclusive marketing rights of Gotcha!(R) into
schools  and  PTAs  using  KidMapper's  national  sales   representatives.   The
Gotcha!(R)  configuration  for this  contract is three parent units and 15 child
units.  The contract  specified a minimum of 100 sets that were shipped prior to
the end of our fiscal year.

     In May of 2003,  we  commenced  an informal  strategic  co-development  and
co-marketing program with Ekahau, Inc. of Finland ("Ekahau"). The purpose of the
program  is to  develop  and  co-market  tracking  products  based  on  Wi-Fi(R)
technology,  where we would make tracking hardware that would work cooperatively
with  tracking  software  made  by  Ekahau.  Ekahau  has  developed  a  software
application  called  the  Ekahau  Positioning  Engine(TM)  that  can be  used to
determine  location of Wi-Fi(R) devices in a standard Wi-Fi(R)  network.  We are


                                       20
<PAGE>

developing a hardware  product to interface  with Ekahau's  software that can be
attached  to people or objects  that are moving  within  Wi-Fi(R)  networks,  to
establish  the real time  location of those  people or  objects.  In December of
2003, we completed our first prototype of this Wi-Fi(R)  product,  and displayed
it with Ekahau at the Wi-Fi(R)  Planet  Conference  and  Exposition in San Jose,
California. Additional development of this product occurred during the spring of
2004, resulting in a new generation of products being introduced in August 2004.
We have not  established a contractual  relationship  with Ekahau,  other than a
non-disclosure   agreement.   Ekahau  is  a  small   privately  held  technology
development company with a limited customer base.

     In May 2003,  we entered  into a six-month  agreement  with New  York-based
Stanton,  Walker &  Company  for  business  advisory  and  consulting  services.
Stanton,  Walker  agreed to assist us in expanding our existing  strategies  for
business  growth  as well as  developing  new  strategies,  such as  merger  and
acquisition  planning.  We paid for the  services of Stanton,  Walker  using our
common stock, valued at approximately $100,000 at the time of issue. We have not
yet determined  what additional  services,  if any, we may procure from Stanton,
Walker & Company in calendar year 2004 and beyond.

     In March of 2003,  we  received a blanket  purchase  order for  $250,000 of
IBUS(TM)  technology from Verify Systems of Connecticut,  originally planned for
delivery before June of 2004. Shipments began against this order in May of 2003,
for pilot testing during the summer of 2003.  Testing was continued  through two
pilot  programs.  A third pilot program was conducted in Arizona in November and
December of 2003. The product is still being  demonstrated and developed.  We do
not  expect  the  purchase  order to be  completed.  Verify  Systems  is a small
privately held technology development company with a limited customer base, very
small  operations,  and limited  assets.  In May 2004,  partially in response to
Verify System's failure to timely market our products,  we agreed to license the
marketing  materials and software tools of Verify Systems and assume the primary
sales effort for these products ourselves.  The material terms of this agreement
require that Verify Systems give us an unlimited and  indefinite  license to use
their software products,  in exchange for a cash payment of $6,000 and a royalty
of 5% of sales of their software products over the next two years.

     In March of 2003, we entered into a non-binding Memorandum of Understanding
with Positus  Corporation  ("Positus") doing business as, Bike & Cycle Trak USA,
Inc., of  Minneapolis,  MN, to develop and co-market  tracking  products for the
power sports industry.  We were later issued a $75,000 purchase order by Positus
to develop the prototype version of this product. We began work in the spring of
2003 to develop this  product.  A first proof of concept  product was shipped in
June of 2003,  when the first  payment of $10,000 was received on this order.  A
second  prototype  board was  developed  in the fall of 2003,  and it  currently
continues  in  testing  stage.  Positus  is a small  privately  held  technology
development  company in its startup  phase.  The material terms of the agreement
provide for us to deliver additional prototypes as payment is received.

     In January 2002, we signed an agreement with the Virtual Component Exchange
("VCX") in which we made the majority of our  semiconductor  products  available
for  licensure  through  their  marketing  service.  VCX  is an  Internet  based
organization  focused  on  producing  Internet  tools for  trading  intellectual
property.  We have not seen  substantial  results from this effort with VCX, and
may choose to  discontinue  marketing our  semiconductor  products  through this
channel in the future. Our agreement required that we pay a fee of approximately
$10,000 to have our semiconductor  intellectual property posted on their website
through  December  of  2003,  plus a future  royalty  of 5% or less  should  any
licensing  transaction  result  from  such a  posting.  This  vendor  has  dealt
exclusively  with  our  semiconductor  products,  and  not  our  location  tools


                                       21
<PAGE>

products.  VCX has continued to list our semiconductor  intellectual property on
their Website,  although they have received no additional payments from us since
our first approximately $10,000 payment in 2002.

     In December of 2002,  we entered  into a  manufacturing  relationship  with
Electroconnect Ltd. of Scotland ("Electroconnect") to manufacture our Gotcha!(R)
child  safety  product  for us. The oral  understanding  is based on our issuing
purchase orders and specifications on an order by order basis to Electroconnect,
and Electroconnect fulfilling those orders by shipping Gotcha!(R) units to us in
Scottsdale, typically offering net 30 day terms for payment. Electroconnect is a
small to mid-sized  privately held  manufacturing  company with a broad customer
base.  As  of  the  date  of  this  report,   Electroconnect   has  manufactured
approximately 6,000 units of Gotcha!(R) for us.

     In December of 2002 we entered into a distribution agreement with FutureCom
Global,  Inc.  ("FCG"),  a firm  headquartered  in Scottsdale,  AZ. The two-year
agreement  covers the  non-exclusive  distribution  of products  from us such as
Gotcha!(R),  Followit(TM), and StarPilot(TM). The agreement automatically renews
for the third year unless terminated by one of the parties.  FutureCom Global is
a small privately held  technology  development and  distribution  company.  The
material  terms of the agreement  provide for payment for products  delivered on
net 30 days terms,  although the parties  have the right to enter into  specific
purchase orders where the payment terms may vary. On August 20, 2003, FCG issued
a  purchase  order  for  5,000  units  of  our  Gotcha!(R)   product  valued  at
approximately  $150,000.  We have  delivered  approximately  half of the ordered
units to them as of the date of this report, which they have advertised and sold
on Home Shopping  Network,  QVC, and through other retail  channels.  We are not
certain when or if they will accept the delivery of the remaining  units on this
purchase  order.  This  has  caused  us to  seek  out new  distributors  for our
Gotcha!(R) product, although we continue to work with FCG to sell Gotcha!(R) and
other products as well.

     In December 2002, we entered into a development and co-marketing  agreement
with Geotechnologies,  Inc., a privately held small firm headquartered in Castle
Rock, CO.  Geotechnologies  is a software  development  firm that specializes in
making mapping software that we believe complements our location tools products.
To date our  activities  with them have been jointly  developing  and presenting
solutions that involve our location tools products and their mapping products to
various  private  sector  and  government  prospective  clients.  No sales  have
resulted from these efforts to date.

     In June of 2002,  we entered into an agreement  with Followit AB, a Swedish
technology   firm,  for   international   distribution  of  GPS  products.   The
international   distribution   agreement,   dated  June  1,   2002,   grants  us
non-exclusive  distribution  rights for the Followit(TM)  locator product in the
United States,  Canada and Mexico.  The  Followit(TM)  locator  product uses the
Global  Positioning System (GPS) and cellular  technology,  with a sophisticated
mapping interface to provide tracking  capabilities for a wide variety of assets
or  individuals.  Distributor  prices were defined in the  agreement and payment
terms are letter of credit and net thirty  (30) days from the receipt by us 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. At the current time, we do not anticipate that we will
continue using their  products  other than on a rare special order basis,  as we
have developed our own products such as our Tracker III(TM) product.

     Other  key  suppliers  over the  last  three  years  also  include  Digikey
Corporation  of Minnesota  for  electronic  components,  and Avante  Circuits of


                                       22
<PAGE>

Tempe,  Arizona for circuit boards. We purchase most of our GPS chipsets and GPS
modules from Trimble Corporation of California.  We have spent less than $25,000
with each of these  suppliers over the last three years. We are not dependant on
these particular  suppliers,  as there are alternative sources in the market for
the kinds of component  materials we use in our products.  However, in the event
we needed to change over suppliers,  we may experience some small delays in time
to market for certain products,  or small increases in supply costs due to small
design changes that may be required in our products because of such a change.

PERSONNEL

     As of the date of this report, we have four full time employees,  five part
time employees,  as well as a number of part time relationships with contractors
for certain services. Eight employees work in the Scottsdale,  Arizona corporate
office.  Management  believes employee relations are good. None of our personnel
are covered by collective bargaining agreements.

SUBSEQUENT EVENTS

     In mid  September  2004 we began  the  process  of moving to a new suite of
offices a short  distance  from our old suite.  This  process was  completed  by
mid-October  2004.  Our new  address  is 14505  North  Hayden  Road,  Suite 305,
Scottsdale,  Arizona 85260.  Our phone,  fax, email,  and web addresses have not
changed.  The  primary  motivation  for this  move was to reduce  monthly  lease
expense, as discussed in the sections of this report on real estate property.

     On October 1, 2004,  we changed  our stock  transfer  agent from  Corporate
Stock  Transfer  (CST)  of  Colorado,  to  Computershare  Investor  Services  of
Illinois.   The  new  contact  information  for  our  stock  transfer  agent  is
Computershare Investor Services, 2 North LaSalle Street, Chicago, IL, 60602, and
their telephone number is 312-588-4753.  The principle reason for the change was
to improve  shareholder  services,  particularly  online services,  which in our
opinion are much more developed at Computershare than they are today at CST.

     In October 2004,  David  Mandala also rejoined us as a full time  employee,
after a period when his work was limited to our technical  advisory  board.  Mr.
Mandala is focused on development of some of our embedded systems technology, in
particular, our IBUS(TM) technology.

     On October 8, 2004, we announced a new marketing program for our Gotcha!(R)
child safety monitor.  We plan to market  Gotcha!(R) to organizations  arranging
field trips,  focusing on the product's  ability to monitor  several child units
simultaneously  with only one parent unit.  The company  will target  public and
private schools, school districts,  parent-teacher  associations,  and child and
youth  organizations  nationwide.  We entered into a contract in support of this
effort  with  KidMapper,  Inc.,  a privately  owned  Illinois  corporation.  The
material  terms of that  agreement  call for KidMapper to  aggressively  use its
existing extensive network of sales representatives in the U.S. K-12 marketplace
to sell Gotcha!(R) as an adjunct for field trips. In exchange for these efforts,
NSC will provide a period of exclusivity in the U.S. K-12 territory to KidMapper
for a one-year  period of time,  and extended  payment  terms and  discounts for
products purchased by KidMapper for this market.

     In November  2004,  we  received  radio  frequency  use  approval  from the
government  of Canada for our  Gotcha!(R)product,  known as "CA"  approval,  IC:
5521A-P and IC: 5522A-C for the parent unit and child unit,  respectively.  This
is one of the steps required to sell products like Gotcha!(R)in Canada.


                                       23
<PAGE>

     In November  2004, the Company  presented its WiFi tag technology  combined
with its  software  partner  Ekahau's  technology  at a  symposium  on  location
technology  at  East  Carolina  University.  The  objective  of the  competitive
presentation,  which included  presentations from Bosch,  Nextel,  CISCOR,  Code
Blue,  and others,  was to provide novel  solutions for campus  student  safety.
Trials from this are expected to continue in the early part of 2005.

     In November 2004, we entered into a distributor agreement with Ingram Micro
of Canada.  The material terms of this agreement call for us to pay regular fees
to Ingram Micro based on the number of products we stock with them in Canada, in
exchange  for their  promotion  and  distribution  of our  products  with  their
Canadian  resellers,  which  include  firms such as Radio Shack and  Wal-Mart of
Canada.  Either party with 30 days notice can cancel the  agreement.  We plan to
distribute Gotcha!(R) as well as potentially other products,  including some new
video-related  products  we  may  acquire  as  part  of a  developing  strategic
relationship with Aethra of Italy, a leader in video technology. In November, we
shipped an initial quantity of Gotchas to Ingram Micro in Canada.

     In October  2004, we commenced a new strategic  working  relationship  with
TurboWorx Inc. ("Turbo") regarding joint technology  development and cooperative
marketing.   The  relationship  was  first   memorialized  in  a  Memorandum  of
Understanding  (MOU) in early  November  2004.  The two companies see benefit in
connecting NSC's location sensor  technology to the computing  engines developed
by TurboWorx.  In November 2004, we entered into a Letter of Intent ("LOI") with
Turbo regarding a stock exchange  transaction with Turbo, for an amount of stock
equal to less than 10% of the  outstanding  common stock of each company and the
payment of cash by Turbo to NSC. The LOI  contemplated  a due diligence  process
prior to the share  exchange,  as well as a Securities  Exchange  Agreement (the
"Share Exchange Agreement") to memorialize the proposed exchange. As of the date
of this report,  no Share Exchange  Agreement has been completed.  Completion of
the transaction is subject to completing a mutually  satisfactory Share Exchange
Agreement and completion of due diligence by all parties.  The LOI  contemplates
us  distributing  to our  shareholders  approximately  50% of any Turbo stock we
receive under the proposed Share Exchange Agreement.

     In December 2004, our Chairman  Michael Grollman made a personal loan to us
in the amount of $65,000 to assist NSC with  short-term cash  requirements.  The
loan is evidenced by an unsecured  promissory  note that  provides for repayment
within 90 days or less, at no interest.  The promissory  note also provides that
if repayment  takes longer than 90 days,  then  interest  accrues at a rate of 6
percent  per year until  paid in full.  We intend to pay this Note  sometime  in
January of 2005.

     In  December  2004 we  signed an  agreement  with LDL  Enterprises  in Palm
Springs,  California.  Under this  agreement,  Marcile  Wright,  EDD, CEO of LDL
Enterprises,  is to provide  marketing  services in  California  for various NSC
products,  especially IBUS technology. This is a commission-only agreement, with
a one year term, nonexclusive.

ITEM 2. PROPERTIES

     NSC leases  1,927  square feet of office  space at 14505 North Hayden Road,
Suite 305  Scottsdale,  Arizona  85260.  The lease for the  Scottsdale  facility
expires  October  31,  2006 and is at a rental  rate that  ranges from $2,890 to
$3,051 per month before taxes.

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


                                       24
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

     We are currently a plaintiff in two lawsuits.

     In January 2002, we initiated legal proceedings in Maricopa County Superior
Court  against  Phoenix  Semiconductor,  Inc.  (PSI) for breach of contract.  We
engaged PSI, and advanced approximately $400,000 to PSI, to build thyristors (an
electronic  component)  for us to sell.  When we  engaged  PSI,  we  obtained  a
security  interest in a portion of PSI's equipment  assets.  Before we initiated
legal action, 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 NSC agreed to a settlement of the secured claim against
PSI in the form of a cash payment of approximately $100,000 to NSC together with
certain  other  unsecured  claims  remaining.  The cash  payment is subject to a
contracted sale of substantially  all fixed assets of PSI and formal approval of
the  bankruptcy  court.  The sale has not  occurred;  therefore we are unable to
determine the final outcome of the lawsuit.

     We filed a complaint  in Maricopa  County  Superior  Court in August  2002,
seeking $155,550 plus interest from E4World  Corporation for breach of contract.
We were awarded a judgment of $179,000 in May 2003 against E4World  Corporation.
We are now in the collection phase of this judgment,  and, there is no assurance
that we will collect any of this judgment. Since our collection of this judgment
is  uncertain,  it is not  reflected  in our current  financial  statements.  We
continue  to assert  our claim to secure  assets  held by  E4World in a separate
legal matter.

     Another  lawsuit  was  resolved  early  this  year.   National   Scientific
Corporation  vs.  Netmind  was filed on or around  August 29,  2002 in  Maricopa
County Superior Court,  seeking damages for failure to repay a $200,000 note. We
filed this lawsuit against Netmind, Inc. to recover an investment, plus damages.
Mr. Lou Ross assigned his right to certain sums as partial payment for an amount
we advanced to him in 1999. A final  judgment of dismissal  was entered on March
30, 2004.

     From time to time in the  normal  course  of  business  operations,  we are
involved  in other  legal  proceedings,  none of which  are  expected  to have a
material adverse affect on business operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None.




                                       25
<PAGE>

                                     PART II


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

     Our common  stock is quoted and traded on a limited and  sporadic  basis on
the OTC Bulletin  Board  operated by The NASDAQ  Stock  Market,  Inc.  under the
trading symbol "NSCT." The limited and sporadic trading does not constitute, nor
should it be  considered,  an  established  public trading market for our common
stock.  We have 879  shareholders  of record of our common stock as of September
30, 2004.  The  following  table sets forth the high and low closing sale prices
for our common stock for the periods indicated,  as reported by the OTC Bulletin
Board, NASDAQ Trading and Market Services.

     MARKET FOR COMMON EQUITY                            HIGH        LOW
     -------------------------------------------       --------    --------

     FISCAL 2004

     Fourth Quarter (through September 30, 2004)       $  0.160    $  0.075
     Third Quarter (through June 30, 2004)             $  0.190    $  0.120
     Second Quarter (through March 31, 2004)           $  0.200    $  0.135
     First Quarter (through December 31, 2003)         $  0.205    $  0.130

     FISCAL 2003

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

     FISCAL 2002

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


DIVIDENDS

     As of September 30, 2004, we have never declared or paid any cash dividends
on our common  stock.  Our board of directors  has sole  discretion  to pay cash
dividends or other dividends or other  distributions  with respect to our common
stock  based  on  our  financial  condition,  results  of  operations,   capital
requirements, contractual obligations and other relevant factors.

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 SEC
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,  before the sale, make a
special  written  suitability  determination  for the  purchaser and receive the
purchaser's written agreement to execute the transaction. In addition, unless an
exception is available,  the  broker-dealer  must deliver a disclosure  schedule
explaining the penny stock market and the risks  associated  with trading in the
penny  stock  market  prior to any  transaction.  Further,  broker-dealers  must
disclose  commissions  payable  to both  the  broker-dealer  and the  registered


                                       26
<PAGE>

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.

DESCRIPTION OF SECURITIES

COMMON STOCK

     As of December  27,  2004,  we are  authorized  to issue up to  120,000,000
shares of common  stock,  par value $0.01 per share.  As of December  27,  2004,
there  were  84,350,657  shares  of  common  stock   outstanding.   We  had  877
shareholders  of record of common stock as of December 27, 2004.  Each holder of
common  stock is  entitled to one vote for each share held on all  matters.  Our
articles of  incorporation  and bylaws do not provide for  cumulative  voting in
elections of directors or any other matters brought before shareholder meetings.

     The holders of our common stock are entitled to receive such dividends,  if
any,  as may be  declared  by our  board of  directors  from time to time out of
legally  available  funds. The dividend rights of our common stock are junior to
any preferential  dividend rights of any outstanding  shares of preferred stock.
The holders of our common stock also are entitled to receive  distributions upon
our  liquidation,  dissolution  or  winding up of our  assets  that are  legally
available for distribution,  after payment of all debt and other liabilities and
distribution  in full of  preferential  amounts,  if any, to be  distributed  to
holders of our preferred stock.

     The  holders  of  our  common  stock  are  not   entitled  to   preemptive,
subscription,  redemption  or conversion  rights.  The rights,  preferences  and
privileges  of holders of our common  stock are subject to, and may be adversely
affected by, the rights of any series of preferred  stock that we may  designate
and issue in the future.

PREFERRED STOCK

     Our board of directors is  authorized by our articles of  incorporation  to
issue up to 4,000,000 shares of one or more series of preferred stock, par value
$0.10 per share.  No shares of such  preferred  stock have been  authorized  for
issuance by our board of  directors,  and we have no present  plans to issue any
such shares.  In the event that the board of directors  issues  shares of serial
preferred  stock,  it may exercise its discretion in  establishing  the terms of
such preferred stock.

     Our board of directors  may  determine  the voting  rights,  if any, of the
series of preferred stock being issued, including the right to:

     o    vote  separately  or as a single  class with the common  stock  and/or
          other series of preferred stock;
     o    have more or less voting  power per share than that  possessed  by the
          common stock or other series of preferred stock; and
     o    vote on specified  matters  presented to the shareholders or on all of
          such  matters  or  upon  the  occurrence  of any  specified  event  or
          condition.

     If our  company  liquidates,  dissolves  or winds up,  the  holders  of our
preferred stock may be entitled to receive preferential cash distributions fixed
by our board of directors  when creating the particular  preferred  stock series
before the  holders  of our  common  stock are  entitled  to  receive  anything.


                                       27
<PAGE>

Preferred  stock  authorized  by our board of directors  could be  redeemable or
convertible into shares of any other class or series of our stock.

     The issuance of preferred  stock by our board of directors  could adversely
affect  the  rights of  holders of the  common  stock by,  among  other  things,
establishing  preferential  dividends,  liquidation rights or voting powers. See
"Risk Factors" above.

STOCK OPTION PLAN

     Our board of directors adopted the 2000 Stock Option Plan effective January
1, 2001.  Our  stockholders  formally  approved  the 2000 Stock  Option  Plan on
February 14, 2001.

SUMMARY OF 2000 PLAN

     The  following is a summary of certain  provisions of the 2000 Stock Option
Plan:

     ADMINISTRATION

     Either our board of  directors  or a  committee  appointed  by our board of
directors may administer the 2000 Stock Option Plan.

     ELIGIBILITY

     NONQUALIFIED  OPTIONS.  Nonqualified  options  may be  granted  only to our
officers,  directors,   including  our  non-employee  directors,  employees  and
advisors  who,  in the  judgment  of the  committee,  are  responsible  for  our
management  or  our  success  and  who,  at the  time  of  the  granting  of the
nonqualified options, are our officers, directors, employees or advisors.

     INCENTIVE  OPTIONS.  Incentive  stock  options  may be granted  only to our
employees  who, in the judgment of the committee or our board of directors,  are
responsible  for our  management  or our  success  and  who,  at the time of the
granting of the incentive  stock option,  are also our  employees.  No incentive
stock option may be granted  under the 2000 Stock Option Plan to any  individual
who would, immediately before the grant of such incentive stock option, directly
or  indirectly,  own more than 10% of the  total  combined  voting  power of all
classes of our capital stock unless:  such incentive  stock option is granted at
an option price not less than 110% of the fair market value of the shares on the
date the  incentive  stock option is granted;  and such  incentive  stock option
expires on a date not later than five  years from the date the  incentive  stock
option is granted.

     OPTION PRICE

     The purchase  price as  represented  by our common stock  offered under the
2000 Stock  Option  Plan must be at least 100% of the fair  market  value of our
common stock (if the option is an incentive  stock  option),  or at least 25% of
the fair market  value of our common stock at the time the option is granted (if
the option is a nonqualified  option),  or such higher  purchase price as may be
determined by the committee or our board of directors at the time of grant.  If,
however,  we grant  an  incentive  stock  option  to an  individual  who  would,
immediately  before the grant,  directly or indirectly  own more than 10% of the
total combined  voting power of all of our classes of stock,  the purchase price
of the shares of our 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 our common stock is currently


                                       28
<PAGE>

quoted on the OTC  Bulletin  Board,  the fair market  value of our common  stock
underlying  options  granted  under the 2000 Stock  Option Plan will be the last
closing sale price of our common  stock on the day the options are  granted.  If
there is no market price for our common  stock,  then our board of directors and
the committee may, after taking all relevant facts into consideration, determine
the fair market value of our common stock.

     EXERCISE OF OPTIONS

     An option  holder  under the 2000 Stock Option Plan may exercise his or her
option in whole or in part as provided  under the terms of the grant,  but in no
event shall an option be exercisable  after the expiration of ten years from the
grant date. An option holder may not exercise any option after the option holder
ceases to be one of our employees except in the case of disability or death. Our
committee  may,  however,  extend the right of exercise up to three months after
the date of  termination  of the  option  holder's  employment  with  us.  If we
terminate an option holder's  employment by reason of disability,  the committee
or our board of directors may extend the exercise period for a specified period,
generally one year,  following the date of  termination  of the option  holder's
employment.  If an option  holder dies while in our employ and the option holder
has not fully  exercised  his or her  options,  the options may be  exercised in
whole or in part at any time within one year after the option  holder's death by
the executors or  administrators  of the option holder's estate or by any person
or persons who acquired the option directly from the option holder by bequest or
inheritance.

     In the event of the death of an employee or consultant while in our employ,
the  committee  or our  board of  directors  is  authorized  to  accelerate  the
exercisability of all outstanding options under the 2000 Stock Option Plan.

     Under the 2000 Stock  Option  Plan,  we may grant one or more options to an
individual,  as long as the aggregate fair market value of the shares covered by
incentive options  exercisable for the first time during any calendar year shall
not exceed $100,000.

     ACCELERATION AND EXERCISE UPON CHANGE OF CONTROL

     All option holders' unvested options  automatically will become exercisable
in the event of a change of control of our  company as defined in the 2000 Stock
Option Plan.

     PAYMENT FOR OPTION SHARES

     An option  holder may  exercise  his or her options by  delivering  written
notice to us at our  principal  office  setting  forth the number of shares with
respect to which the option is to be exercised,  together with cash or certified
check  payable to us for an amount equal to the option price of such shares.  We
may not issue any shares  underlying an option grant until full payment has been
made  of all  amounts  due.  We  will  deliver  a  certificate  or  certificates
representing the number of shares purchased as soon as practicable after payment
is received.  Our board of directors or the  committee  may, in its  discretion,
permit the holder of an option to pay all or a portion of the exercise  price by
a simultaneous  sale of our common stock to be issued upon exercise of an option
pursuant to a brokerage or similar arrangement.

     TERMINATION OF THE 2000 STOCK OPTION PLAN

     The 2000 Stock Option Plan will  terminate on December 1, 2010,  unless our
board of directors terminates the 2000 Stock Option Plan prior to its expiration


                                       29
<PAGE>

date.  Any option  outstanding  under the 2000 Stock  Option Plan at the time of
termination shall remain in effect until the option is exercised or expires.

     AMENDMENT OF THE 2000 STOCK OPTION PLAN

     Our board of  directors  may at any time  modify  or amend  the 2000  Stock
Option Plan without  obtaining the approval of our shareholders as it shall deem
advisable to comply with Section 422 of the Internal  Revenue Code or Rule 16b-3
of the Securities and Exchange Act of 1934, as amended, or in any other respect.

     TRANSFERABILITY OF OPTIONS

     An option holder may not assign any option under the 2000 Stock Option Plan
other than by will or the laws of descent  and  distribution  or if our board of
directors or the committee agrees otherwise.

     ISSUANCE AND RESERVATION OF SHARES

     As of September 30, 2004,  we have issued  options to purchase an aggregate
of 3,709,257  shares of our common stock.  We have reserved the right to issue a
total of 7,000,000  shares of our common stock for issuance under the 2000 Stock
Option Plan, although our Board currently plans to limit issuances of options to
4,000,000 for the immediate future.

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

OVERVIEW

     Our  business  focuses on the  research,  development  and sale of location
tools  used to track or  monitor  people or objects  such as  vehicles  or other
mobile  equipment.  We  also  own  devices  and  designs  that  are  used in the
semiconductor and electronics industries.

     From 1996 to 2002, we engaged  primarily in developing  devices and designs
that are used in the semiconductor and electronics industries.  This resulted in
a number of U.S. patents, but did not produce any significant amount of revenue.
Additionally,  during the period from 2000 to 2001 we engaged in the business of
distributing electronic and other semiconductor-related products to customers in
Asia  and  the  United  States  in  order  to  generate  revenue.  In  2001,  we
discontinued those activities because they did not produce the profit margins we
had originally expected.

     In 2002, we began to focus on  applications  of  electronic  devices in the
location  tools  market.  We also began to decrease  our focus on  semiconductor
designs and  devices,  due  primarily  to  difficult  market  conditions  in the
semiconductor  industry. We plan to continue our focus on location tools for the
foreseeable future.

     Our first  shipment and sale of our location  tools began with the sale and
shipment of our Followit(TM) product in August 2002.

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

     In December 2002, we entered into an agreement with FutureCom Global,  Inc.
(FCG) of Arizona to assist us in the marketing and  distribution of our location


                                       30
<PAGE>

tools.  The term of the agreement is two years and it is renewable for up to one
additional  year.  The  agreement   allows  FCG  to  market  our   Followit(TM),
StarPilot(TM), and Gotcha!(R) products through media and trade shows, as well as
through networks of sales representatives in a variety of consumer marketplaces,
including  general retail.  The agreement may be expanded to include stocking of
our products by FCG. FCG currently  provides  some  stocking for our  Gotcha!(R)
line of products. The agreement does not require minimum purchase amounts.

     Our sales  during the two fiscal  years ending  September  30,  2004,  have
consisted  largely  of sales of our  Gotcha!(R)  child  safety  product  through
FutureCom Global, and to a lesser extent of our GPS related products,  including
IBUS(TM) to Verify  Systems  and early  prototype  versions of the  TrakJack(TM)
product to Positus Corp.  During this period,  we have  generally seen a gradual
increase in the total sales on a quarter-to-quarter  basis, although we can make
no assurance that this trend will continue into any future periods.

PATENTS AND PROPRIETARY RIGHTS

     We  currently  hold U.S.  patents on eight  devices  and  designs  and have
several domestic patent applications pending. 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,  electronics  and  location
industries.  Our business plan  contemplates  that we will  generate  revenue by
entering  into  strategic  joint  venture  licensing  agreements,  manufacturing
agreements,  development  agreements,  distribution and marketing agreements and
other  arrangements with firms and/or entities that will either  incorporate our
technologies  into  their  product  offerings  or sell  them  directly  to their
customers.

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2004 AND 2003

     We  generated  $77,994 and $63,579 of revenue for the fiscal  years  ending
September 30, 2004 and 2003,  respectively.  Sales for the year ended  September
30, 2004  represent  the sale and delivery of product  introductions  from NSC's
Gotcha!(R), WiFi Tracker(TM), and Followit(TM) lines.

     Gross  profit  decreased  to $22,397 in fiscal 2004 from  $37,731 in fiscal
2003.

     Costs and expenses  decreased  to $952,635 in fiscal 2004 from  $981,098 in
fiscal 2003.

     Salaries and benefits,  of administration and marketing personnel decreased
to $393,308 in fiscal 2004, from $438,244 in 2003.

     Research and development  expenditures increased to $253,257 for the fiscal
year ended  September 30, 2004,  from $84,301 for the previous fiscal year as we
continued to engineer and develop new location tools.

     Stock  compensation  decreased  to $45,421 in fiscal 2004 from  $291,658 in
fiscal  2003.  The most  significant  factor  in the  decrease  is a result of a
reduction in Director's  compensation.  In fiscal 2003 the majority of the stock
compensation  expense related 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.


                                       31
<PAGE>

     Other expenses increased in fiscal 2004 to $260,649 from $149,245 in fiscal
2003 as a result of increases in insurance  costs,  marketing  expenses,  filing
fees,  and legal  expenses.  The 2003  total was  reduced by a one time event of
approximately $150,000 after we came to a definitive settlement agreement with a
service  firm  resulting  in  the  elimination  of  approximately   $150,000  of
short-term liability previously owed by the company.

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

     In January,  2003 we initiated a restricted stock retainage program or plan
("Stock  Retainage  Program")  to retain key staff  during a period of financial
difficulty in calendar year 2002. Our board allocated  approximately $150,000 in
restricted common stock from this Stock Retainage Program as a pool of shares of
our restricted  common stock, to be granted to key employees at the direction of
the board for the year and the  next,  subject  to NSC  exceeding  sales  growth
objectives  and  expense  control  objectives  in 2003.  Failure  to meet  these
objectives under the plan would result in serious risk of forfeiture by staff of
some or all of these stock grants by all  participants.  All goals set were team
goals.  The plan has been used as a tool to achieve  salary  deferral  and other
salary  concessions  from the staff in order to retain key employees during this
period of fiscal hardship.  The plan's sales goals were not met in calendar year
2003,  although  the plan was  nonetheless  largely  successful  in assisting to
retain key staff,  even during this  period of  deferred or reduced  salary.  In
January of 2004,  our board  extended this program into 2004,  and set new sales
growth  objectives  for the year at a level 50% higher than the previous  year's
program,  giving  plan  participants  an  additional  year to fully  earn  these
previously  outstanding restricted stock grants. No new shares were added to the
plan,  although plan  participants  were able to convert some long-term back pay
into  restricted  stock at that time,  if  desired.  All of the stock under this
program is restricted  under SEC Section 144. As of September 30, 2004,  none of
these grants have been fully earned, and they remain subject to substantial risk
of forfeiture.

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


                                       32
<PAGE>

     Mr.  Ross also agreed to take a reduction  in his  Director's  fees for the
period from  February  2003 to the end of the fiscal  year  ending in  September
2003,  and accept 50,000 shares of NSC  restricted  common stock in lieu of cash
for these board  services,  which was paid to him in stock on June 11, 2003.  On
September 30, 2003,  at the point of his  resignation  from the Board,  Mr. Ross
surrendered  all options  contracts he had  received  from NSC,  which  included
options to purchase 1,000,000 shares of NSC common stock.

     We expect to continue to increase  our focus on sales and  marketing of our
Location   Tools(TM)  products  for  the  foreseeable   future.   This  includes
significantly  increased  attendance at trade shows and other product  marketing
events during the most recent quarters,  as well as recent additional investment
in product promotion  through new outreach programs with the trade press,  using
new outside public relations resources.  Partly as a result of these efforts and
others, revenues have begun to be generated from operations. It is thus possible
that we may emerge from its  development  stage  status at  sometime  during the
coming year.

LIQUIDITY AND CAPITAL RESOURCES

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

     As of September 30, 2004, NSC's cash and cash equivalents  totaled $160,214
and  total   current   assets  were   $267,650.   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. NSC
has long-term  debt of $43,250 as of September 30, 2004.  Total  liabilities  at
September 30, 2004 were $532,421.

     We have  an  accumulated  deficit  of  approximately  $22.7  million  as of
September  30,  2004  which  includes  approximately  $10  million  of  non-cash
transactions,  in fiscal years 2000 and 2001, for restricted common stock issued
as  payment  for  research,   consulting  and  capital  formation  expenses.   A
substantial  portion of the consulting  expenses  related to the issuance of one
million shares of common stock to Dr. Hashemi, our former Group President,  as a
signing bonus on September 1, 2000.  These shares were later  returned to us. We
expect operating losses in the foreseeable  future as we continue our efforts to
commercially  exploit our portfolio of patents and develop commercial  products.
Accumulated  cash used in operating  services  from the  Company's  inception to
September 30, 2004 totaled approximately $7.8 million.

     Cash used in  operations  was  approximately  $880,334  for the year  ended
September  30, 2004  compared  with  approximately  $702,560  for the year ended
September 30, 2003. The increase in cash used in operations  resulted from fewer
salary  deferrals,   the  addition  of  several  new  permanent   employees  and
contractors  to support  our  efforts in the area of sales,  marketing,  product
engineering and development and to market our products.

     We have financed our operations primarily through the sale of common stock,
granting  of  options,  and  warrants  and through  some debt  financing.  Those
activities since 2001 are summarized below.

     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


                                       33
<PAGE>

$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.  This loan was
restructured in June of 2003 to a three-year  non-interest bearing loan, with no
payments  due until the end of the loan  period.  The Company has the option any
time during the loan period to pay this Note early.

     During the fiscal  years  ending  September  30, 2004 and 2003,  NSC issued
160,084 and 946,270 shares, respectively,  of NSC common stock to consultants in
lieu of cash  compensation.  During  fiscal 2004,  the Company  granted  790,000
options to NSC  consultants  and  employees  to purchase  shares of NSC's common
stock.  The options  granted had exercise prices ranging from $0.09 per share to
$0.16 per share.  The exercise prices were generally below market on the date of
grant,  and  vested.  We granted  these  options as a means of  compensation  to
consultants to conserve  operating cash.  During fiscal 2003,  substantially all
option grants were issued to employees.

     At  September  30,  2004  there were  18,249,197  outstanding  warrants  to
purchase  18,249,197  shares of common  stock,  at prices  ranging from $0.10 to
$0.75,  with expiry dates from December 2004 to April 2011. There were 7,412,201
outstanding  warrants at September 30, 2003,  412,201 of those  warrants held by
Coriander Enterprises Limited expired during fiscal year 2004.

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

     In June 2003, the Company commenced a private offering of restricted common
stock and common stock purchase warrants.  The Company raised from this offering


                                       34
<PAGE>

in the fiscal year ending  September 30, 2003,  approximately  $200,000 in cash,
and issued  2,500,000  shares of restricted  common stock and granted  2,000,000
warrants to purchase  common  stock at exercise  prices  ranging  from $0.35 and
$0.50 per share.  The Company has  continued  to raise funds under this  private
offering after September 30, 2003. From June 2003 through December 31, 2003, the
Company had raised a total of  approximately  $280,000 in cash from this effort,
and issued a total of 3,300,000 shares of restricted  common stock and granted a
total of 2,400,000  warrants to purchase common stock at exercise prices ranging
from $0.35 to $0.75 per share. No underwriters  were involved in connection with
this  private  placement.  The  sales and  issuances  of the  securities  issued
pursuant to the foregoing private  placement are exempt from registration  under
the  Securities Act of 1933, as amended,  pursuant to Section 4(2) thereof,  and
Rule 506 of Regulation D.

     In  January  of 2004,  we  entered  into a  financing  program  with a U.S.
investment  fund. The terms of this program  include a six-month Note payable at
maturity in July 2004 for $160,000, at an effective annual interest rate of 13%.
The transaction  also included 640,000 warrants good for three years to purchase
the Company's restricted stock, at $0.13 during the first and second year of the
warrant's  lifetime,  and $0.15 during the third and final year of the warrant's
lifetime.   These  warrants  include  anti-dilution   provisions,   as  well  as
registration  rights  in the  event  that we file  an  appropriate  registration
statement  with the SEC during  the next three  years.  This  $160,000  Note was
repaid in full in May of 2004.

     During March 2004 we secured  short-term  loans in the aggregate  principal
amount of $36,000.  The  interest  rate on the loan was less than 10% plus minor
processing fees. The notes were repaid in full in April 2004.

     On March 15, 2004,  NSC commenced a private  offering of restricted  common
stock  units  through a placement  agent.  The offer  consisted  of one share of
common  stock and a warrant  to  purchase  three  quarters  of a share of common
stock.  On June 14, 2004, we completed  this private  placement  with  aggregate
gross proceeds of  approximately  $1.1 million and issued  10,334,266  shares of
restricted common stock and warrants to purchase  7,750,700 shares of our common
stock at an exercise price of $0.11 per share.  The warrants have a term of five
years, and include certain registration rights. After deducting  commissions and
other  expenses  relating to the private  placement,  we received  aggregate net
proceeds of  approximately  $972,864.  Additional  disbursements  by the Company
related to the private  placement  further reduced the net proceeds to $935,044,
the majority of which was spent by September  30, 2004.  We invested part of the
proceeds  of the private  placement  to finance the  continued  development  and
marketing of WiFi and RFID related Location Tools(TM) products.  We used part of
the  proceeds   for  expanded   marketing   and  sales   efforts,   for  further
commercialization  of our other Location  Tools(TM)  product line, and for other
corporate purposes.  The Units were sold to accredited  investors pursuant to an
exemption from the registration  requirements of the Securities Act of 1933 (the
"Act") and applicable state exemptions from  registration.  On June 24, 2004, we
filed a  Registration  Statement on Form SB-2 with the  Securities  and Exchange
Commission  in connection to register the shares.  The  Securities  and Exchange
Commission declared the Registration Statement effective on July 7, 2004.

     We believe  that our  current  cash  position  as of  September  30,  2004,
including  cash funds  arising from the  exercise of  outstanding  options,  and
secured plant assets from legal  settlements,  from equity  placement  sales and
other capital raising efforts,  product sales, and continued  aggressive expense
management to be sufficient to continue  operations  for the next twelve months.
We also believe that we may be able to reduce  outstanding  liabilities  through


                                       35
<PAGE>

negotiations  with our  creditors,  or possibly  negotiate to extend the payment
schedule for these debts.  In the event these  approaches do not provide us with
adequate  working  capital,  we may be required to further curtail or reduce our
development  activities,  seek alternative  funding sources,  or seek protection
under reorganization laws.

         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  NSC  AND  ITS  BUSINESS  BECAUSE  SUCH  FACTORS   CURRENTLY  HAVE  A
SIGNIFICANT IMPACT ON NSC'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS
OF OPERATION.

AN INVESTMENT IN OUR COMMON STOCK IS VERY RISKY.  YOU MAY LOSE THE ENTIRE AMOUNT
OF YOUR INVESTMENT.

     Before  you invest in shares of our  common  stock,  you should be aware of
various risks,  including those described below.  You should carefully  consider
these risk factors,  together with all of the other information included in this
annual  report,  before you decide  whether to purchase the shares of our common
stock. The risks set out below are not the only risks we face.

     If any of the following risks occur, our business,  financial condition and
results of operation could be materially and adversely affected. In such a case,
the trading  price of our common  stock could  decline,  and you may lose all or
part of your investment.

     Keep these risk factors in mind when you read "forward-looking"  statements
elsewhere  in this  annual  report.  These  are  statements  that  relate to our
expectations  for  future  events  and  time  periods.   Generally,  the  words,
"anticipate,"    "expect,"   "intend"   and   similar    expressions    identify
forward-looking   statements.   Forward-looking  statements  involve  risks  and
uncertainties,  and future events and circumstances  could differ  significantly
from those anticipated in the forward-looking statements.

RISKS RELATING TO OUR BUSINESS

WE HAVE EXPERIENCED SIGNIFICANT LOSSES AND WE MAY NEVER BE PROFITABLE.

     We have generated nominal revenue and significant  losses and negative cash
flows  from  our  research  and  development  endeavors  since  we  began  these
activities in 1996. As of September 30, 2004, we had an  accumulated  deficit of
$22,709,680.  We had  revenue for the fiscal  year ended  September  30, 2004 of
$77,994  and a net  loss  for the  same  fiscal  year of  $951,780.  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, 2004 and 2003.

OUR FUTURE  SUCCESS IS HIGHLY  DEPENDENT ON THE  CONTINUED  AVAILABILITY  OF KEY
EMPLOYEES AND CONSULTANTS INCLUDING MICHAEL GROLLMAN AND GRAHAM CLARK.

     Our success  depends  substantially  on the  continued  services of our two
executive officers,  Michael Grollman and Graham Clark. The loss of the services


                                       36
<PAGE>

of any of our executive  officers or key employees could harm our business.  Mr.
Grollman and Mr. Clark have entered into employment and  non-compete  agreements
with us, but the loss of their services would have a material  adverse effect on
our business.  In addition to Mr.  Grollman and Mr. Clark, we employ or contract
with other  engineers  and  scientists  who may be also critical to our success,
especially  Dr.  El-Badawy  El-Sharawy,   who  developed  the  majority  of  our
semiconductor  patented products.  Both Mr. Clark and Dr. El-Sharawy are foreign
nationals,  and there is a risk that the Immigration and Naturalization  Service
(INS) may at any time withdraw their permission to work in the United States for
us.  Although our  scientists  and engineers  have entered into  confidentiality
agreements with us, most have not entered into  non-compete  agreements with us.
The loss of one or more of our  research  personnel  could  prevent or delay the
ongoing  development  of our products and services,  which would  materially and
adversely affect our business.

WE HAVE A  LIMITED  OPERATING  HISTORY  ON WHICH TO  EVALUATE  OUR  BUSINESS  OR
PROSPECTS.

     We are a development stage company with limited revenue. Our business focus
changed in 2002 from semiconductor  product licensing to development of location
tools  and we have  only a limited  operating  history  on which you can base an
evaluation of our business and prospects,  with only  approximately  $141,573 in
net  revenue  generated  from this line of  business  for the  two-years  ending
September 30, 2004.  Accordingly,  our business  prospects must be considered in
light  of  the  risks,  uncertainties,   expenses  and  difficulties  frequently
encountered  by  companies in their early  stages of  development,  particularly
companies  in new and rapidly  evolving  markets,  such as the  electronics  and
wireless location tools services markets.

WE WILL REQUIRE ADDITIONAL FINANCING IN ORDER TO COMPLETE THE DEVELOPMENT OF OUR
PRODUCTS AND  SERVICES  AND  OTHERWISE  DEVELOP OUR  BUSINESS  OPERATIONS.  SUCH
FINANCING MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.

     We changed our business emphasis in 2002 and we do not know if our products
will  achieve  significant  levels  of  market  acceptance.   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
expenditures  and spend  additional  money to maintain and expand our  marketing
efforts.  Although we recently  completed a private offering that should provide
us with  sufficient  capital  for the next  twelve  months,  we may need to seek
additional  equity  financing  in the  future if our  products  do not  generate
revenue or if our expenses are greater than  expected.  The timing and amount of
any capital  requirements  cannot be predicted  at this time.  We cannot 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.  If  adequate  financing  is not  available,  we may be required to
terminate or significantly  curtail our operations,  or enter into  arrangements
with  collaborative  partners or others that may require us to relinquish rights
to certain of our technologies, or potential markets that we would not otherwise
relinquish. This could have a negative impact on the value of your shares.

WE RELY HEAVILY ON INTERNATIONAL THIRD PARTIES TO MANUFACTURE OUR PRODUCTS.

     We  currently  lack  the  facilities  to  manufacture  our  products  on  a
commercial  scale.  If  any of our  customers  require  our  location  tools  in


                                       37
<PAGE>

commercial  quantities  in the near  term,  we will  have to rely on one or more
third-party  contractors,  some of which are outside  the United  States such as
Electroconnect,  Ltd., to manufacture  the products to satisfy the needs of such
customers.  Reliance  on one or  more  international  third-party  manufacturers
exposes us to the risk that delivery schedules cannot be met, and that we cannot
fulfill  orders for some of our  products  in a timely way at the right price in
U.S. dollars. An example of a product we make outside the U.S. is our Gotcha!(R)
child safety product, which Electroconnect,  Ltd makes for us in Scotland.  This
risk includes the concern that:

     o    Third-party  manufacturers might be unable to manufacture our products
          in the volume and of the quality required to meet customers' needs;
     o    Our  existing  and future  contract  manufacturers  may not perform as
          agreed or may not remain in the  contract  manufacturing  business for
          the time required to supply our customers;
     o    If   any   third-party   manufacturer   makes   improvements   in  the
          manufacturing process for our products, we may not own, or may have to
          share, the intellectual property rights to the innovation.

     Each of these  conditions  could  delay  the  shipments  to our  customers,
approvals required by regulatory authorities,  and the commercialization of some
of our customers' products. These risks could also result in higher costs to the
customer or could deprive us of potential product revenues.

WE WILL NEED TO SIGNIFICANTLY INCREASE OUR SALES AND SUPPORT OPERATIONS.

     We will need to create and substantially grow our direct and indirect sales
operations,  both  domestically  and  internationally,  in order to  create  and
increase market  awareness and sales of our products and services.  For example,
our IBUS(TM)  products will require us to gain  significant  new sales skills in
the education market.  Our WiFi Tracker(TM)  product will require us to gain new
skills in the  healthcare  market.  The sale of our products  and services  will
require  the  engagement  of  sophisticated  and  highly   knowledgeable   sales
personnel.  Similarly,  the anticipated  complexity of our products and services
and the  difficulty  of  customizing  them will require us to hire  research and
development personnel and customer service and support personnel, highly trained
in  hardware  and  software  engineering.  Competition  between us and others to
retain  qualified sales personnel,  engineers,  and scientists is intense due to
the limited number of available qualified candidates for such positions. Because
of our limited resources, many of our competitors are in a financial position to
offer potential  employees greater  compensation and benefits than those that we
may be able offer them.

RISKS RELATING TO OUR INDUSTRY

WE MAY BE HELD LIABLE FOR HARM CAUSED BY PRODUCTS THAT OUR CUSTOMERS USE.

     Often  times,  our  products are used to enhance the safety and security of
individuals  and  organizations  because they provide real time  information  on
location. For example, our Gotcha!(R) is used to help keep track of children and
keep them safe in public  places.  Should  these  products  fail to  perform  as
intended,  or should these  products  directly or indirectly  cause  injuries or
illness to people,  we may be required to incur  substantial  costs in defending
against  claims and may be required to pay damages  arising from these  actions.
Although we have  liability  insurance  and will try to limit our  liability for
improper use of our products,  such protections may not be sufficient to protect
us from the cost of such claims.  Damages awarded in a product  liability action
could be substantial and if damages exceed our insurance coverage, our financial
condition would be negatively affected.


                                       38
<PAGE>

SINCE  MANY  OF OUR  PROSPECTIVE  BUSINESS  PARTNERS  AND  SUPPLIERS  ARE  SMALL
ELECTRONICS  AND  SOFTWARE  COMPANIES,  WE ARE AND  WILL BE  SUBJECT  TO  RISKS,
UNCERTAINTIES AND TRENDS THAT AFFECT THESE SMALL COMPANIES IN THESE INDUSTRIES.

     For the  foreseeable  future,  we will derive a substantial  portion of our
revenue  from  selling our products in  combination  with  software and hardware
products  developed  by other  companies in areas  complementary  to our line of
business.  These are sometimes other small technology companies. As a result, we
will be subject  to risks and  uncertainties  that  affect  the  electronic  and
software   industries  and  possible   reduction  and  delays  in  research  and
development expenditures by companies in these industries.  For example, our GPS
products  produce  coordinates  that  are  usually  displayed  on a  map  to  be
meaningful.  As a result,  we have developed  partnerships with mapping software
companies  to help us display  this data in ways  useful to our  customers.  For
special mapping  services such as this, we often deal with small  privately-held
technology  firms,  such as  Geotechnologies,  Inc.  for  military  and  related
applications,  or Verify  Systems for school bus  tracking  software and mapping
applications.  Although we take certain steps to locate secondary  suppliers and
partners in each market  where we depend on such small  suppliers,  we are often
dependant on these firms to supply us and our  customers  with key products in a
timely way.  High costs and delays in product  delivery  by us to our  customers
could be  experienced as a result of supplier  changeover if these  suppliers do
not perform as we expect them to perform. Additionally, smaller firms that issue
us  purchase  orders  for our  products  to include  in  offerings  to their own
customers,  such as Verify  Systems for our IBUS(TM)  product,  may not have the
financial  resources to meet the terms of their  purchase  orders should they be
unsuccessful  in  generating  their own sales to their  own  customer  base in a
timely way.  These factors could  negatively  affect our delivery  schedules and
potentially our financial results.

THE  SEMICONDUCTOR AND ELECTRONICS  MARKETS  EXPERIENCE WIDER DEMAND AND PRICING
FLUCTUATIONS THAN MOST OTHER INDUSTRIES.

     We may experience  extreme  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.  For
example,  our  TMOS(R)  memory  products  fall into a class of  computer  memory
products  that often see annual price  swings of over 50% or more in  particular
lines of products, according to the reports issued by the Semiconductor Industry
Association  over the last 10  years.  We  believe,  based on  reports  from the
Semiconductor  Industry  Association  and on the rate at which  technologies  in
these markets become popular, and then rapidly obsolete, that year-to-year price
swings in the  semiconductor  industry  can be more  extreme  than in many other
industries.  Should we be  successful in licensing  our  semiconductor  patented
designs at all, these kinds of extreme price swings could delay by several years
the development of revenue from these patented semiconductor products.

RISKS RELATING TO OUR TECHNOLOGY

SOME OF OUR WIRELESS TECHNOLOGY IS SUBJECT TO SUBSTANTIAL GOVERNMENT REGULATION.

     The  wireless   electronics   industry  faces  significant   regulation  by
governmental  entities in the United States and other countries.  The nature and
the extent to which these regulations apply to our customers will vary depending
on the nature of any of our customer's  products.  Most of the wireless products
developed by us will require regulatory approval by governmental  agencies prior
to sale. In particular,  radios we include in our products will require  testing


                                       39
<PAGE>

and other approval procedures by the Federal  Communications  Commission ("FCC")
and by foreign  regulatory  authorities.  Some of this work has been  completed,
such as FCC approval of our Gotcha!(R)  child safety product.  In some cases, we
purchase pre-approved  assemblies for use in our products that have existing FCC
approval  for their  radios,  such as with our  IBUS(TM)  products.  Other  work
remains to be done for other  products  with the FCC before the  products can be
sold to  consumers,  such as with  the  next  version  of our  WiFi  Tracker(TM)
product. The process of obtaining these approvals and the subsequent  compliance
with appropriate  federal and foreign statutes and regulations can be costly and
time  consuming,  and can  cause  significant  delays in the sale of some of our
products.

WE MAY NOT BE ABLE TO LICENSE OR  MAINTAIN  ACCESS TO THE  TECHNOLOGIES  THAT WE
NEED TO CONDUCT OUR BUSINESS, SUCH AS GPS.

     In addition to the  technologies  that we develop,  we will rely heavily on
technologies that we license from other companies or institutions. We may not be
able to license  technologies  that we need in the future or we may be unable to
license such technologies on a commercially reasonable basis. In particular,  we
depend on wireless  technologies  such as GPS that have been  developed  and are
owned by others.  If we are unable to license  the  technologies  we need in the
future,  or to license or otherwise  acquire such  technologies  on commercially
reasonable  terms, we may experience  increased costs (and,  therefore,  reduced
profits)  or be unable  to  engage in  certain  activities  that  require  those
technologies.  In the case of GPS, we are  dependant on the U.S.  Department  of
Defense to operate a large network of GPS satellites safely and at a low cost to
consumers into the future,  without degrading the signal accuracy.  Prior to the
year 2000, the Department of Defense  degraded GPS accuracy for civilian uses on
a  regular  basis,  and has  reserved  the  right to do so again in the  future,
without warning.  Such an action by the Department of Defense could make our GPS
based  products  less  accurate,  and thus  potentially  less  desirable  to our
customers, and have a negative effect on our sales.

OUR SUCCESS  WILL DEPEND ON OUR ABILITY TO PROTECT OUR  PROPRIETARY  TECHNOLOGY,
ESPECIALLY OUR LOCATION TOOLS PRODUCT DESIGNS.

     Our rights to a substantial  portion of our components  products technology
are as the assignee of several United States patents and patent applications. We
also protect our  intellectual  property,  especially  for our  location  tools,
through the use of confidentiality  agreements and other trade secret management
practices. We also hold U.S. trademarks,  such as TMOS(R) and Gotcha!(R). In the
case  of  most  of  our  patented  electronic  component  products,  we  have  a
contractual obligation to pay royalties to Dr. El-Badawy El-Sharawy in the event
that these  products  generate any  royalties to us, in order to maintain  these
rights of assignment.  Our success will depend largely on our ability to protect
and exploit our intellectual  property,  to obtain additional  patents for other
technologies and products,  to defend patents once obtained,  and maintain trade
secrets  over  time.  Failure  to  do  so  may  introduce  domestic  or  foreign
competition  that could  significantly  reduce our ability to generate  sales at
acceptable margins.

RISKS RELATED TO OUR SECURITIES

OUR STOCK PRICE HAS BEEN  VOLATILE  AND WE EXPECT IT TO REMAIN  VOLATILE,  WHICH
COULD  LIMIT  INVESTORS'  ABILITY  TO SELL  STOCK AT A PROFIT AT THE TIME OF THE
INVESTORS' CHOOSING.

     We have a limited trading market for our common stock, and our common stock
has experienced price volatility in that market. In fiscal 2003, our stock price


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<PAGE>

ranged  from a high of $0.225 to a low of $0.065 per share,  and in fiscal  2004
our stock  price  ranged  from a high of $0.205 to a low of  $0.075.  This price
volatility may substantially increase your risk of loss.

     The volatile price of our stock makes it difficult for investors to predict
the value of their investment,  to sell shares at a profit at any given time, or
to plan  purchases  and sales in  advance.  A variety of factors  may affect the
market price of our common stock. These include, but are not limited to:

     o    announcements of technological  innovations or new commercial products
          by our competitors or us;
     o    developments concerning proprietary rights, including patents;
     o    regulatory developments in the United States and foreign countries;
     o    economic or other crises and other external factors;
     o    period-to-period  fluctuations  in our revenues  and other  results of
          operations;
     o    changes in financial estimates by securities analysts; and
     o    sales of our common stock.

     We will not be able to control many of these  factors,  and we believe that
period-to-period  comparisons of our financial  results will not  necessarily be
indicative of our future performance.

     In addition,  the stock market in general,  and the market for  electronics
companies in particular,  has experienced  extreme price and volume fluctuations
that may have been unrelated or disproportionate to the operating performance of
individual companies. These broad market and industry factors may seriously harm
the market price of our common stock,  regardless of our operating  performance,
and may have a negative impact on your ability to sell shares of our stock.

OUR  ARTICLES  OF  INCORPORATION  ALLOW  US  TO  SELL  PREFERRED  STOCK  WITHOUT
SHAREHOLDER APPROVAL.

     Our Board of Directors has the authority to issue up to 4,000,000 shares of
preferred stock and to determine the price, rights, preferences,  privileges and
restrictions,  including  voting rights,  of those shares without any additional
vote or action by our  shareholders.  The  rights of the  holders  of the common
stock will be subject to, and could be  materially  adversely  affected  by, the
rights of the holders of any  preferred  stock that may be issued in the future.
For example we could issue preferred stock that has superior rights to dividends
or is convertible  into shares of common stock.  This might adversely affect the
market price of the common stock.

TRADING OF OUR COMMON STOCK IS LIMITED.

     Trading of our common stock is conducted  on the  National  Association  of
Securities  Dealers'  Over-the-Counter  Bulletin Board, or "OTC Bulletin Board."
This adversely  affects the liquidity of our common stock,  not only in terms of
the  number of shares  that can be bought  and sold at a given  price,  but also
through delays in the timing of transactions and reduction in security analysts'
and the media's  coverage of us. This may result in lower  prices for our common
stock than might  otherwise be obtained and could also result in a larger spread
between the bid and ask prices for our common stock.

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.


                                       41
<PAGE>

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

     None

ITEM 8A. CONTROLS AND PROCEDURES

     Our management has responsibility for establishing and maintaining adequate
internal  control  over  financial  reporting  for  us.  Our  management  uses a
framework for  establishing  these internal  controls.  This framework  includes
review of accounting  detailed records on at least a quarterly basis by multiple
senior officers of National Scientific, at least one of whom operates outside of
the corporate  finance and accounting  area, and one of whom operates within the
area of corporate finance and accounting. This review process includes review of
significant  accounting  records and source  documents,  such as general journal
entry   records,   accounts   payable   records,   and  monthly  bank  statement
reconciliations. Documentary records are kept of this review process.

     The Company  carried out an evaluation,  under the supervision and with the
participation of the Company's management, including its Chief Executive Officer
and Acting Chief Financial Officer and its President,  of the effectiveness,  as
of September 30, 2004,  of the design and operation of the Company's  disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that
evaluation,  the Chief Executive  Officer and Acting Chief Financial Officer and
its President  concluded that the Company's  disclosure  controls and procedures
are effective.

     There have been no  changes  in the our  internal  control  over  financial
reporting  during  the year  ended  September  30,  2004  that  have  materially
affected,  or are reasonably likely to materially affect, the Company's internal
control over financial reporting.

     The  controls and  procedures  for our  disclosure  as well as our internal
controls  over  financial  reporting  are  processes  designed  by, or under the
supervision of, the principal executive and principal  financial  officers,  and
effected by the board of directors,  management and other personnel,  to provide
reasonable  assurance  regarding the reliability of financial  reporting and the
preparation  of financial  statements for external  purposes in accordance  with
generally accepted accounting  principles.  We believe that a control system, no
matter how well designed and operated,  cannot provide  absolute  assurance that
the  objectives of the control system are met, and no evaluation of controls can
provide  absolute  assurance that all control issues and instances of fraud,  if
any, within a company have been detected.  However,  our Chief Executive Officer
and Acting Chief  Financial  Officer and its President  have  concluded that the
Company's  disclosure  controls and  procedures  and its  internal  controls and
procedures are effective at providing that reasonable level of assurance.

     Our management  believes that upon significant  future growth in the number
of accounting transactions we process,  perhaps within the next year, additional
review and enhancement of internal controls will be required.  Our management is
planning to assign  additional staff resources to assist with support for growth
in the internal controls area when the increase in transaction velocity dictates
this as a prudent  step in order to  maintain  our  effective  level of internal
controls.


                                       42
<PAGE>

     Our external auditors,  Hurley and Company,  have not issued an attestation
report  on  management's  assessment  of the  Company's  internal  control  over
financial  reporting,  as it is not yet required since the Company has less than
$75 million in "public float."


ITEM 8B. OTHER INFORMATION

     Not Applicable.



                                       43
<PAGE>

                                    PART III


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

     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
National Scientific, their respective ages and positions with us are as follows:

            NAME                AGE                     POSITION
     -------------------       -----     ---------------------------------------
     Michael A. Grollman         43      CEO, Chairman of the Board of Directors
     Graham L. Clark             49      President, Director, Secretary
     Gregory Szabo               51      Director (Outside)


DIRECTORS AND EXECUTIVE OFFICERS

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

     GRAHAM L. CLARK.  Graham Clark joined National  Scientific in early 2001 as
general  manager  of  the  sales  organization.  He  became  Vice  President  of
Technology Applications & Sales for National Scientific in the spring of 2002, a
Director in August of 2002, and became  Corporate  Secretary in January of 2003.
Mr. Clark was named  President of National  Scientific in September of 2003. For
the two years immediately before joining National Scientific,  Mr. Clark was the
General  Manager of the Billet  Precision  Engineering  Group,  a privately held
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,  Inc. a
semiconductor  equipment  manufacturer.  Six years  prior,  he was a founder and
senior  partner of GC  Technology,  a private  representative  organization  for
semiconductor  capital equipment.  Mr. Clark has a Bachelor of Science degree in
mechanical engineering from Paisley University in Scotland.

     GREGORY SZABO joined National  Scientific's  board on October 1, 2003 as an
outside  Director.  Mr.  Szabo  serves on the  Board's  Audit  and  Compensation
Committees.   Mr.  Szabo  served  in  various   executive   positions  at  Exten
Corporation,   including   President  of  Exten  Corp.   and  CEO  of  MultiCell
Technologies,  Inc.  from  approximately  May 2000 to April  2004,  where he was
responsible for public  reporting,  fund-raising for the corporation and overall
accountability for its subsidiaries,  including revenue generation, intellectual
property  protection  and  organizational  development.  Mr.  Szabo  was  also a
director at Exten, a publicly traded company (OTC: MUCL.OB).  Immediately before
joining  Exten,  Mr. Szabo was for a number of years  President and CEO of Titan
Scan  Corporation,  a  division  of  Titan  Corporation,  with  subsidiaries  in


                                       44
<PAGE>

sterilization,  defense, software and communications. Mr. Szabo has held several
executive positions with Sunrise Medical Inc., a manufacturer and distributor of
numerous  institutional and retail products. Mr. Szabo earned a BA in Psychology
from the University of Toledo and a MA in Management  from the Drucker  Graduate
School at Claremont University.

SIGNIFICANT ADVISORS AND KEY EMPLOYEES

     EL-BADAWY   EL-SHARAWY,   PH.D.  Dr.  El-Sharawy  is  a  Senior  Scientific
Consultant  to us,  starting  with  us in  1996.  Dr.  El-Sharawy  is  currently
Assistant  Professor of Electrical  Engineering  at Arizona  State  University's
Telecommunications  Research Center,  Department of Electrical Engineering,  and
has been there for over ten years.  His expertise  includes,  but is not limited
to, microwave circuits, anistropic devices and applied electromagnetics. He is a
senior  member  of IEEE  and is a  recipient  of the 1980  Egyptian  Engineering
Syndicate Medal of Honor.

     DAVID  MANDALA.  Mr.  Mandala is our Chief Systems  Architect.  Mr. Mandala
serves  as  lead  developer  for  several  GPS  tracking  product  lines  and is
responsible  for research & development,  architecture,  prototype  creation and
client product presentations. Most recently prior to joining NSC Mr. Mandala led
a group of OLAP developers at Texas  Instruments.  Mr. Mandala previously worked
for NSC during 2002 and 2003.  Prior to working for NSC he  developed an on-line
lab  infrastructure  for  embedded  computer  hardware  and server  systems  for
DevelopOnline  Corporation;  he  developed a number of database  and  courseware
packages  for  Linuxcare,  Inc.,  and has also  made  significant  technological
contributions to Ciba-Geigy, Dragon Medical Interactive Communications, and Sony
Corporation. Mr. Mandala received his formal electronics education while serving
in the United States Navy.

     OSCAR QUADROS,  CHARTERED  ACCOUNTANT.  Mr. Quadros is our controller,  and
works for us on a part-time  basis. He joined us in late 2002. He is a Fellow of
the  Institute  of  Chartered  Accountants  in  Ireland,  and is a  graduate  of
University  College  Dublin,  Ireland,  with a Bachelor  of  Commerce,  major in
Accounting and Economics.  From August 1998 to June 2002, he was  CFO/Controller
at A3T  Incorporated  & Axxis 3T Inc. of  Scottsdale,  Arizona.  His 40 years of
experience in international  accounting and finance include senior auditor roles
at Alexander  MacLennan  Trundell & Co.,  Public  Accountants;  Atkinson & Boyd,
Public  Accountants;  and as an audit  manager  at  Coopers  &  Lybrand,  Public
Accountants.  He has also worked as a Director of Accounting  at Canadelle  Inc.
(Subsidiary   of  Sara  Lee   Corporation),   Canada,   and  as  Vice  President
Finance/Controller at Jeno Neuman & Sons of Montreal, Canada.

     SUSAN L. REGAN,  ESQ.  Ms. Regan has been  part-time  legal  counsel for us
since 2002. Ms. Regan holds a Bachelor of Science degree from Heidelberg College
in Ohio,  a  Master's  Degree  in  Planning  and  Resource  Management  from the
University of Alaska,  and a Juris Doctorate from the Thomas M. Cooley School of
Law in Michigan.  She is admitted to practice law in both  Washington  State and
the State of Arizona.  She was in part-time private practice for the three years
prior to joining us. Previously she was employed with Standard Insurance Company
group legal department as an in house counsel.

     KAREN A. FUHRE. Ms. Fuhre is responsible for investor relations for us, and
is  involved  as well in  product  marketing.  She  joined  us in  2001.  She is
responsible for investor  communications,  certain matters  surrounding parts of
SEC compliance,  and strategic  planning.  Ms. Fuhre is also responsible for our
web site,  collateral  materials,  and media  relations.  Before joining us, Ms.
Fuhre spent  approximately  five years with FINOVA, a publicly traded commercial


                                       45
<PAGE>

lender,  where  she  worked  with  the  company's  financial  and  informational
communications areas. Ms. Fuhre earned a Bachelor of Science Degree in Marketing
from Northwest  Missouri State  University and a Paralegal  Certificate in Civil
Litigation from the University of San Diego.

     ERIC HIMMER.  Mr.  Himmer is a full-time  senior  wireless  design  systems
engineer  for us.  Mr.  Himmer has more than 25 years of  systems  and  software
engineering  and  programming  experience.  He is responsible for developing and
designing tracking and other firmware and software used in many of the Company's
wireless location products such as WiFi Tracker(TM)and IBUS(TM).  Before joining
NSC, Mr. Himmer was an embedded systems software  engineer for  GlobespanVirata,
Inc.  (formerly  Intersil)  where he designed and developed IEEE 802.11 wireless
networking  firmware and software  systems in conjunction  with hardware product
development.  Prior to that,  Mr.  Himmer  served  as a systems  programmer  and
systems engineer for Datapoint Corporation for a number of years. Mr. Himmer has
a B.S. in Systems Engineering from the University of Arizona.

     PAUL C. DAVIDSON.  Mr. Davidson is a part-time embedded systems development
engineer for us. He has more than 20 years of software,  hardware,  and embedded
systems development experience. Mr. Davidson is responsible for implementing new
features  within our location tools  products.  Prior to joining us Mr. Davidson
developed software,  firmware,  embedded systems, and device drivers for several
firms  including  C.S. & E. where he was  Senior  R&D  Software  Engineer & Team
leader  and  Hypercom  Corporation  where  he was  OS/R&D  Team  leader/Software
Engineer. His career experience also includes serving as V.P. of Engineering for
Advanced Video Technology, and Engineering Test Manager for Cal Omega Inc.

BOARD OF DIRECTORS

     Our business is managed under the direction of the Board of Directors.  The
Board meets on a regularly  scheduled basis to review  significant  developments
affecting  us and to act on  matters  requiring  Board  approval.  It also holds
special  meetings  when  an  important  matter  requires  Board  action  between
scheduled  meetings.  The Board met eight (8) times  during  fiscal  2004.  Each
serving director attended 100% of the meetings held in 2004 by the Board and the
committees  of the Board on which such director  served.  The Board of Directors
was made up of three members during substantially all of fiscal 2004. Michael A.
Grollman has been a director since November of 2000.  Graham L. Clark has been a
director  since  August of 2002.  Former  director Mr. Lou Ross retired from the
board on September  30, 2003 for  personal  reasons,  citing no  conflicts  with
management  or board  policy.  Mr.  Szabo  joined  the board on October 1, 2003.
Currently,  our  Board of  Directors  consists  of  three  members,  Michael  A.
Grollman,  Chairman,  Graham L. Clark, Secretary, and Gregory Szabo. These Board
members were re-elected by shareholder vote in March 2004.

AUDIT COMMITTEE

     Our Board's audit  committee was  established  in December  2000. The audit
committee  met three (3) times  during  calendar  year 2004.  Mr.  Greg Szabo is
chairman of our audit committee as an outside director and financial expert, and
is currently  its sole member.  The audit  committee  has reviewed our financial
statements for the fiscal year ended  September 30, 2004, as audited by Hurley &
Company,  National  Scientific's  independent  auditors.  Hurley &  Company  has
discussed these financial statements with management and the audit committee.

     AUDITOR

     Our independent auditor is Hurley & Company, based in California. This firm
is licensed to practice  public  accounting by the State of  California,  and is


                                       46
<PAGE>

also registered with the Public Company  Accounting  Oversight Board. The senior
audit partner Mr. Michael Hurley is also licensed to practice public  accounting
in  Arizona.  Our  shareholders  in each of the last  three  fiscal  years  have
ratified the use of this firm.

     Hurley  &  Company  billed  us  approximately  $18,100  for  the  following
professional  services:  audit of the annual financial statements for the fiscal
year ended  September 30, 2004, and review of the interim  financial  statements
included in quarterly  reports on Form 10-QSB for the  quarterly  periods  ended
December 31, 2003, March 31, 2004 and June 30, 2004.

     During the last two fiscal years we have had no changes in or disagreements
with our auditors on accounting or financial disclosure.

     ALL OTHER FEES

     Hurley & Company billed us,  approximately $1,500 for other services during
the fiscal year ended  September 30, 2004 for audit services in connection  with
the filing of a  registration  statement  on Form SB-2 with the  Securities  and
Exchange Commission.

     REVIEW OF AUDITED FINANCIAL STATEMENTS & REPORT OF THE AUDIT COMMITTEE

     The audit  committee  has  reviewed  and  discussed  the audited  financial
statements  with  management.   The  audit  committee  has  discussed  with  the
independent  auditors the matters  required to be discussed by SAS 61. The audit
committee  has  received  the  written  disclosures  and  the  letter  from  the
independent  accountants required by Independence Standards Board Standard No. 1
(Independence  Standards  Board Standard No. 1,  Independence  Discussions  with
Audit  Committees)  and  has  discussed  with  the  independent  accountant  the
independent   accountant's   independence.   Based  on  the   review  and  these
discussions,  the audit committee recommended to the board of directors that the
audited financial  statements be included in the company's Annual Report on Form
10-KSB for the last fiscal year for filing with the Commission.

     FINANCIAL  INFORMATION  SYSTEMS  DESIGN AND  IMPLEMENTATION  FEES AND OTHER
     SERVICES

     We did not  engage  Hurley & Company to provide  services  to us  regarding
financial  information systems design and implementation  during the fiscal year
ended  September  30, 2004.  The Board of Directors has  considered  whether the
provision  of  non-audit  services  is  compatible  with  maintaining  Hurley  &
Company's independence,  and has decided not to secure such services from Hurley
& Company at this time in that area.

COMPENSATION COMMITTEE AND BOARD COMPENSATION

     Our board's  Compensation  Committee  was  established  in March 2003.  The
Compensation  Committee met once during  calendar year 2003, and has met once so
far in calendar  year 2004.  Mr.  Greg Szabo  currently  heads our  Compensation
Committee  as an  outside  director,  and is  currently  its  sole  member.  The
Compensation  Committee approved the executive  compensation plan for the fiscal
years ending September 30, 2003 and 2004, respectively.

     Our board as a whole  approves  board  member  compensation.  This plan was
approved by the Board originally in 2000, and was amended in the summer of 2003.
Currently,  employees of National Scientific who also serve on the board receive
no additional  compensation for board service. All newly appointed  non-employee
directors  appointed  after the end of fiscal year 2002 will be provided  with a


                                       47
<PAGE>

one-time grant of 20,000 shares of National  Scientific  restricted common stock
upon original appointment to the board. This stock will be subject to forfeiture
back to us should the Director for any reason not serve a full term on the board
at least up to the next annual meeting of shareholders.

     Additionally,  non-employee  directors  will also be paid  $1,250 per board
meeting,  which includes telephonic board meetings as well as face-to-face board
meetings. The $1,250 fee will be in the form of $250 cash and $1,000 of National
Scientific  restricted common stock. The restricted common stock will be at risk
of forfeiture if the director does not serve his complete term. The fee will not
be paid for telephone  conversations  involving Board members or others where no
formal  board  meeting  has been  declared,  or for normal  committee  meetings.
Non-employee directors will also be paid retrospectively a quarterly retainer of
10,000  options (as defined in the 2000 NSC Stock Option Plan) to purchase  free
trading National  Scientific common stock at the end of each fiscal quarter they
have served.  The options will be immediately vested at point of grant, and will
be issued at an exercise price equal to the average closing price for our common
stock for that quarter.  Non-employee  directors who serve on a board committee,
such as the audit or compensation committees,  will also be paid retrospectively
a  quarterly  additional  retainer  of 10,000  options,  as  defined in the 2000
National  Scientific  Stock Option Plan, to purchase free trading  common stock.
The options will be immediately  vested at point of grant, and will be issued at
an exercise price equal to the average  closing price for National  Scientific's
common  stock for that  quarter.  Non-employee  directors  who serve on multiple
committees  will be paid this bonus  only once for  general  committee  service,
however, as it is not paid for each committee of service. All directors are paid
any reasonable out of pocket expenses required to attend board meetings, such as
travel, if any.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
our directors and executive  officers,  as well as persons  beneficially  owning
more than 10% of the our  outstanding  Common Stock,  to file certain reports of
ownership with the  Commission  within  specified  time periods.  Such officers,
directors,  and shareholders are also required by Commission's  rules to furnish
the Company with copies of all Section 16(a) forms they file.

     Based solely on our review of such forms, all requirements  received by it,
or written  representations  from  certain  reporting  persons,  we believe that
between  October 1, 2002 and  September  30,  2004,  all  Section  16(a)  filing
requirements  applicable to its officers,  directors and 10%  shareholders  were
met.

CODE OF ETHICS

     Our board adopted on July 28, 2004, a code of ethical  conduct that applies
to our principal executive officers and principal financial officer. Its purpose
is to promote  honest and ethical  conduct,  including  the ethical  handling of
actual or apparent  conflicts  of interest  between  personal  and  professional
relationships,  full, fair, accurate,  timely, and understandable  disclosure in
reports and documents  that a small  business  issuer files with, or submits to,
the  Commission  and in other public  communications  made by the small business
issuer, compliance with applicable governmental laws, rules and regulations; the
prompt internal  reporting of violations of the code to an appropriate person or
persons  identified in the code; and accountability for adherence to the code. A
copy of this code has been filed with the Securities and Exchange Commission. An
additional copy can be found on our website at WWW.NATIONAL-SCIENTIFIC.COM or by
writing to the Company and requesting one.


                                       48
<PAGE>

ITEM 10. EXECUTIVE COMPENSATION

     The following  table sets forth certain  information  regarding  annual and
long-term compensation for services rendered to us during the fiscal years ended
September 30, 2004,  2003, and 2002 to the Chief  Executive  Officer of National
Scientific, and other named executive officers who served us in fiscal year 2004
and whose total  salary and  non-cash  compensation  exceeded  $100,000  for the
applicable  fiscal  periods.  The table below includes salary earned and paid in
the fiscal year ended September 30, 2004.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                           LONG-TERM COMPENSATION
                                                                    ----------------------------------
                                       ANNUAL COMPENSATION                   AWARDS            PAYOUTS
                                 -------------------------------    -----------------------    -------
                                                        OTHER       RESTRICTED   SECURITIES
                                                       ANNUAL         STOCK      UNDERLYING     LTIP        ALL OTHER
   NAME AND PRINCIPAL    FISCAL  SALARY    BONUS    COMPENSATION     AWARD(S)     OPTIONS/     PAYOUT     COMPENSATION
        POSITION          YEAR   ($)(1)     ($)          ($)          ($)(2)      SARS (#)       ($)         ($)(3)
-----------------------  ------  -------   -----    ------------    ----------   ----------    -------    ------------
<S>                      <C>     <C>       <C>      <C>             <C>          <C>           <C>        <C>
Michael A. Grollman       2004    94,200      --              --            --           --         --          70,800
CEO, Chairman (4)         2003    64,640      --              --            --           --         --          70,360
                          2002   138,000      --              --        78,750           --         --          43,500

Graham L. Clark           2004   101,100      --              --            --           --         --          41,400
President, Director (5)   2003    69,639      --              --            --           --         --          50,360
                          2002    75,385      --              --        63,000           --         --          15,624

Lou L. Ross               2004        --      --              --            --           --         --              --
Former CEO &              2003        --      --              --        17,650           --         --              --
Chairman (retired) (6)    2002    86,000      --          12,700         4,500           --         --              --

Sam H. Carr               2004        --      --              --            --           --         --              --
Former CFO (7)            2003        --      --          32,362            --           --         --              --
                          2002   160,275      --          34,166            --           --         --              --

Gregory Szabo             2004        --      --              --            --           --         --           2,250
Director (8)
</TABLE>
-------------------
(1)  Unpaid wages in this table are subject to  Agreements  with listed  persons
     that allow for  interest  of  approximately  prime rate plus 2% accruing on
     those  unpaid  wages until paid.  These  accruals for interest are shown as
     approximate through fiscal year-end September 2004.
(2)  Stock grants  included in this column are for common stock valued at 90% of
     the closing sales price for such shares on the date of grant. Closing sales
     price at fiscal year end September 2004 was approximately $0.075 per share,
     and closing sales price at fiscal year end September 2003 was approximately
     $0.16 per share.
(3)  Includes  unpaid  salary  forgone at the  election  of  executive  officers
     Grollman  and Clark  pursuant to a  registrant  program  under which stock,
     stock-based  or other forms of non-cash  compensation  may be received by a
     named  executive  in lieu of a portion of annual  compensation  earned in a
     covered fiscal year.


                                       49
<PAGE>

(4)  Salaries  of  $70,800,  $70,360  and  $43,500  were not  paid in cash,  but
     deferred  to  a  future  period  for  fiscal  years  2004,  2003  and  2002
     respectively.  Subsequent to September  30, 2002,  Mr.  Grollman  exchanged
     $10,000 of this  deferred  salary for a B Unit in our November 2002 Private
     Placement  Offering  for  125,000  shares of  restricted  stock and 100,000
     common stock purchase  warrants  exercisable at a price of $0.50 per share,
     thus  reducing   2002  unpaid  wages  for  that  year  to  $33,500.   Other
     Compensation for 2002 also includes $78,750 for common stock grants subject
     to risk of  forfeiture  if  calendar  2004  sales do not meet or exceed key
     targets,  and in exchange  for salary  reduction  in calendar  year 2003 of
     $60,000 (See Note 2 above and  Employment  Agreements  below).  In December
     2003 Mr. Grollman agreed to convert approximately  $150,000 of his back pay
     and accrued vacation pay to our restricted common stock, at a rate equal to
     the then currently  available  private  placement  share price of $0.10 per
     share. Mr. Grollman received this stock in January of 2004. Also subsequent
     to fiscal 2004 year-end,  Mr.  Grollman  deferred $6,000 of his October and
     $5,000 of his November monthly salary of $15,000 to a future period. During
     fiscal 2004 and up to November 2004, Mr.  Grollman's share of contributions
     to the Company's  health  insurance  program of  approximately  $8,544 were
     deducted from the balance of wages owing, leaving as of the end of November
     2004,  unpaid  wages  of  approximately  $55,090  accrued  vacation  pay of
     approximately   $15,816  and  accrued   interest  on  deferred   salary  of
     approximately $8,998 for a combined total of approximately $79,904.
(5)  Salaries  of  $41,400,  $50,360  and  $15,624  were not  paid in cash,  but
     deferred  to  a  future  period  for  fiscal  years  2004,  2003  and  2002
     respectively. Subsequent to September 30, 2002, Mr. Clark exchanged $10,000
     of deferred  salary for a B Unit in our  November  2002  Private  Placement
     Offering for 125,000  shares of restricted  stock and 100,000  common stock
     purchase  warrants  exercisable  at a  price  of  $0.50  per  share.  Other
     compensation  for 2002 also includes  $63,000 for  restricted  common stock
     grants  subject to risk of  forfeiture  if 2004 sales do not meet or exceed
     key  targets  (See  Note 2 above and  Employment  Agreements  below).  Also
     subsequent to September 30, 2004 year-end, Mr. Clark deferred $3,500 of his
     October  and $2,500 of his  monthly  salary of $12,500 to a future  period.
     During  fiscal  2004  and  up  to  November  2004,  Mr.  Clark's  share  of
     contributions to the Company's  health  insurance  program of approximately
     $9,967 were deducted from the balance of wages owing, leaving as of the end
     of November 2004, unpaid wages of approximately  $87,574,  accrued vacation
     pay of  approximately  $22,263 and accrued  interest on deferred  salary of
     approximately $8,047 for a combined total of approximately $117,884.
(6)  Other  Compensation  for 2003 and 2002 includes common stock grants paid as
     board service fees. Mr. Ross resigned as an employee in January of 2002 and
     as a director in September 2003.
(7)  Other  Compensation  for  2003  includes  $32,362  of  contractor  fees for
     services  rendered in the six months to March 2003, of which  approximately
     $17,083  remains  unpaid.  For 2002  salary of $30,173  was not paid out in
     cash, but deferred to a future period,  and remains  unpaid,  including all
     accrued  vacation  through July 2002, plus an estimated  $1,500 in interest
     through September 30, 2002. Other Compensation for 2002 includes $34,166 of
     contractor  fees for services  rendered in August and September of 2002, of
     which $21,337  remains  unpaid.  Subsequent to year ending  September 2002,
     $10,000 of other deferred  contractor fees was exchanged by Mr. Carr for an
     A Unit in the  Company's  November  2002  Private  Placement  Offering  for
     250,000  shares of  restricted  stock and  100,000  Common  Stock  purchase
     warrants  exercisable at a price of $.30 per share.  Other  Compensation in
     2001 for Mr.  Carr  includes  the value of options  granted at an  exercise
     price  below the market  value of the stock on the date of grant.  Mr. Carr
     resigned  in July  2002 as an  employee  and a  director.  (See  Employment
     Agreements below).
(8)  Other Compensation for 2004 includes $2,250 for board fees.


                                       50
<PAGE>

LONG TERM INCENTIVE PLANS - AWARDS IN THE LAST FISCAL YEAR

     The table below  describes all Long Term Incentive Plans under which awards
were given to the named executive  officers  during the last fiscal year.  These
awards fall under our employee stock retainage program.

             LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
             ------------------------------------------------------

<TABLE>
<CAPTION>
                                                             ESTIMATED FUTURE PAYOUTS UNDER NON-
                                           PERFORMANCE OR         STOCK PRICED-BASED PLANS
                                            OTHER PERIOD     -----------------------------------
                              NUMBER OF        UNTIL
                               SHARES      MATURATION OR     THRESHOLD    TARGET        MAXIMUM
          NAME                 (#)(1)          PAYOUT        ($ OR #)     ($ OR #)      ($ OR #)
-----------------------       ---------    --------------    ---------    --------      --------
<S>                           <C>          <C>               <C>          <C>           <C>
Michael A. Grollman (2)       1,250,000    Dec 2004
Graham L. Clark (3)           1,000,000    Dec 2004
</TABLE>
--------------
(1)  All grants in this table are based on our fiscal year 2002 stock  retainage
     program.  Our board  implemented this program in September 2002, and shares
     were  granted  at that  time.  Actual  issuance  of  shares  for the  named
     executive  participants  took place in January of 2003. Our board allocated
     approximately  $150,000 in common stock from this Stock  Retainage  Program
     pool of shares, to be granted to key employees during the year,  subject to
     National Scientific exceeding sales growth objectives and expense reduction
     objectives, and subject to the employees remaining with us through the next
     15 months,  or  longer,  if the  awards  were not  earned  after 15 months.
     Failure  to  meet  these  objectives  under  the  plan  can  result  in the
     forfeiture by staff of some or all of the stock grants by all participants.
     These goals were the same for all plan  participants,  which included other
     non-executives,  as well the named executives.  These goals were not met in
     calendar  year 2003.  In January of 2004,  our board  extended this program
     into 2004, and set new sales growth  objectives for the year at a level 50%
     higher  than the  previous  year's  program,  giving plan  participants  an
     additional year to fully earn this stock grant.
(2)  Mr.  Grollman was granted 750,000 shares of stock from this Stock Retainage
     Program pool of shares,  subject to National Scientific achieving in excess
     of $400,000 in sales in calendar  year 2004.  Mr.  Grollman  was granted an
     additional  500,000  shares of stock under this  program,  subject to sales
     exceeding $1,500,000 for calendar year 2004.
(3)  Mr.  Clark was  granted  500,000  shares of stock from our Stock  Retainage
     Program  pool of shares  discussed  above,  subject to National  Scientific
     achieving in excess of $400,000 in sales in calendar  year 2004.  Mr. Clark
     was  granted an  additional  500,000  shares of stock  under this  program,
     subject to sales exceeding $1,500,000 for calendar year 2004.

OPTION/SAR GRANTS AND EXERCISES OF OPTIONS/SAR GRANTS DURING LAST FISCAL YEAR

     No individual grants of stock options (whether or not in tandem with SARs),
or freestanding  SARs (including  options and SARs that  subsequently  have been
transferred) were made during the fiscal year ending Septembers 30, 2004, to any
of the named executive  officers,  nor did any of the named  executive  officers
exercise any options or SAR grants during that period.


                                       51
<PAGE>

EMPLOYEE STOCK RETAINAGE PLAN

     In September  2002,  by unanimous  vote,  our board  initiated a restricted
stock retainage program or plan ("Stock Retainage  Program") to retain key staff
during a period  of  financial  difficulty  in  calendar  year  2002.  The board
allocated  approximately  $150,000 in  restricted  common  stock from this Stock
Retainage  Program as a pool of shares of our  restricted  common  stock,  to be
granted  to key  employees  at the  direction  of the board for the year and the
next,  subject to National  Scientific  exceeding  sales growth  objectives  and
expense control  objectives in 2003.  Failure to meet these objectives under the
plan would result in serious risk of forfeiture by staff of some or all of these
stock grants by all  participants.  All goals set were team goals.  The plan has
been used as a tool to achieve salary deferral and other salary concessions from
the  staff  during  this  period  of fiscal  hardship,  in order to  retain  key
employees  during this  period.  The plan's sales goals were not met in calendar
year 2003,  although the plan was nonetheless largely successful in assisting to
retain key staff,  even during this  period of  deferred or reduced  salary.  In
January of 2004,  our board  extended this program into 2004,  and set new sales
growth  objectives  for the year at a level 50% higher than the previous  year's
program,  giving  plan  participants  an  additional  year to fully  earn  these
previously  outstanding  restricted stock grants. The board may extend this plan
into calendar year 2005 at its  direction.  No new shares were added to the plan
in 2004, although plan participants were able to convert some long-term back pay
into restricted  stock at that time, if desired.  As of the date of this report,
the plan  currently  covers  officers  Michael  Grollman and Graham  Clark,  and
employees who are not officers  including Oscar Quadros,  Karen Fuhre,  and Paul
Davidson.  The plan has not been submitted to our shareholder's for approval.  A
sample agreement for the plan is included as an exhibit to this report.

EMPLOYMENT AGREEMENTS

     We engaged Mr.  Grollman as an independent  contractor from October 7, 2000
until  November  30, 2000.  He was paid  $15,000  monthly for his services as an
independent  contractor.  Effective  December 1, 2000,  Mr.  Grollman  became an
employee of National  Scientific under a one-year contract to serve as our Chief
Operating Officer.  Mr. Grollman was named President in April 2001. The contract
automatically  renews for additional  one-year terms unless either party chooses
to terminate,  and it remains in force through at least  calendar year 2004. Mr.
Grollman's  contract  calls for an annual  gross  salary  of  $180,000,  payable
semi-monthly.  Also in  accordance  with the  contract,  on December 1, 2000, we
granted  Mr.  Grollman  100,000  shares  of  common  stock;  subject  to risk of
forfeiture  should Mr.  Grollman not fulfill his employment  agreement.  Also on
December 1, 2000, we granted Mr.  Grollman  500,000  vested  options to purchase
common stock at the closing sales price of the common stock on December 1, 2000.
Additional option grants are included in Mr. Grollman's  employment contract for
each whole dollar amount  increase in the market value of our Common Stock.  The
whole dollar amount  increase is measured over a moving  two-week  average.  For
each whole dollar amount  attained  between $1 and $15 inclusive,  Mr.  Grollman
will  receive  75,000  options at the whole  dollar  amount  option  price.  Mr.
Grollman is also entitled to additional  options at various but declining levels
for  increases  in stock  value up to $50 per  Common  Share.  In the event of a
change  in  control  or  sale  of  substantially  all  the  assets  of  National
Scientific,  the employment  agreement between Mr. Grollman and us automatically
terminates,  and Mr.  Grollman is to receive one hundred fifty percent (150%) of
the then current year's annual salary.

     In January  of 2002 Mr.  Grollman  agreed to defer 20% of his salary  until
such a time as cash was more available,  reducing his  immediately  payable cash
salary to $12,000 per month. For September,  October,  and November of 2002, Mr.

                                       52
<PAGE>

Grollman deferred 100% of his payable salary,  reducing his immediately  payable
cash salary to $0 per month.  Mr.  Grollman  agreed from  January  2003  through
December 2003 to reduce his total  payable  salary for the 2003 year to $120,000
per year.  In addition to this  reduction,  during the year ended  September 30,
2003 Mr. Grollman  deferred  $70,360 of his salary and was paid $64,640 in cash.
For the three months ending December 31, 2003, Mr. Grollman  deferred $19,900 in
salary and was paid  $10,100 in cash.  For the fiscal year ended  September  30,
2004 salary of $70,800 was not paid in cash,  but  deferred to a future  period.
Also  subsequent to fiscal 2004 year-end,  Mr.  Grollman  deferred $6,000 of his
October and $5,000 of his November monthly salary of $15,000 to a future period.
For  calendar  year  2004,  Mr.  Grollman  agreed to defer up to  $30,000 of his
contracted pay as needed.

     In September 2002, our board initiated a restricted stock retainage program
("Stock  Retainage  Program")  to retain key staff  during a period of financial
difficulty in calendar year 2002. The board allocated  approximately $150,000 in
common stock from this Stock Retainage  Program pool of shares, to be granted to
key employees during the year,  subject to National  Scientific  exceeding sales
growth  objectives  and expense  reduction  objectives in 2003.  Failure to meet
these  objectives under the plan would result in the forfeiture by staff of this
entire  stock  grant by all  participants.  These goals were not met in calendar
year 2003. In January of 2004,  our Board  extended this program into 2004,  and
set new sales  growth  objectives  for the year at a level 50%  higher  than the
previous  year's program,  giving plan  participants an additional year to fully
earn this stock grant. On August 19, 2003, a participant of the plan left us and
his grant of 800,000 shares were forfeited at the average market price per share
of $0.15.  On September  30, 2003 the 800,000  shares of common stock  resulting
from the  forfeiture  was  allocated to the plan. We issued this stock under the
terms of the plan to several employees in 2004 who are not officers or directors
of National Scientific.

     Mr.  Grollman was granted 750,000 shares of stock from this Stock Retainage
Program pool of shares,  subject to National  Scientific  achieving in excess of
$400,000 in sales in calendar year 2004. Mr.  Grollman was granted an additional
500,000  shares  of  stock  under  this  program,  subject  to  sales  exceeding
$1,500,000 for calendar year 2004.

     In December 2003 Mr. Grollman agreed to convert  approximately  $150,000 of
his back pay and accrued vacation pay to our restricted  common stock, at a rate
equal to the then currently available private placement share price of $0.10 per
share. Mr. Grollman received this stock in January of 2004.

     Our board of directors is also considering granting  approximately  500,000
additional  options  to  Mr.  Grollman  in  calendar  year  2004  based  on  the
achievement of calendar year 2004 business  objectives,  including such areas as
product development and customer base development. The plan has been approved by
the board of directors,  subject to  availability  of sufficient  options in the
plan. These options have not been issued.

     Mr. Clark was hired in December 2000 as manager of the sales  organization.
His salary was $120,000  per year base  salary,  plus  commission  on sales.  He
became Vice  President of  Technology  Applications  & Sales for us in September
2001,  and a director and a corporate  officer in August of 2002.  In January of
2003,  Mr. Clark  entered into a one-year  employment  agreement  with  National
Scientific to serve as Vice  President of Technology  Applications  & Sales.  In
June of 2003 Mr. Clark was named President of National Scientific.  The contract
automatically  renews for additional  one-year terms unless either party chooses
to  terminate.  Mr.  Clark's  contract  provides  for an annual  gross salary of
$150,000,  payable  monthly.  In the  event of a change  in  control  or sale of
substantially  all our assets,  the employment  agreement  between Mr. Clark and


                                       53
<PAGE>

National Scientific automatically terminates,  and Mr. Clark is to receive fifty
percent (50%) of the then current year's annual salary.

     For  September,  October,  and November of 2002, Mr. Clark deferred 100% of
his payable  salary,  reducing  his  immediately  payable  cash salary to $0 per
month.  During the year ended  September 30, 2003 Mr. Clark deferred  $50,360 of
his salary and was paid  $69,640 in cash.  During the year ended  September  30,
2004 Mr.  Clark  deferred  $41,400 of his salary and was paid  $101,100 in cash.
Also  subsequent  to fiscal 2004  year-end,  Mr.  Clark  deferred  $3,500 of his
October and $2,500 of his monthly salary of $12,500 to a future period.

     Mr.  Clark was  granted  500,000  shares of stock from our Stock  Retainage
Program pool of shares discussed above, subject to National Scientific achieving
in excess of $400,000 in sales in calendar  year 2004.  Mr. Clark was granted an
additional  500,000  shares  of  stock  under  this  program,  subject  to sales
exceeding $1,500,000 for calendar year 2004.

     Our board of directors is also considering granting  approximately  500,000
additional  options to Mr. Clark in calendar year 2004 based on the  achievement
of  calendar  year 2004  business  objectives,  including  such areas as product
development  and customer  base  development.  The plan has been approved by the
board of directors,  subject to availability of sufficient  options in the plan.
These options have not been issued.

     Throughout  fiscal 2000, Mr. Ross was engaged as an independent  contractor
for  National  Scientific.  As such,  Mr. Ross was paid a monthly fee of $9,500,
subject to cash  availability.  Effective  December 1, 2001,  Mr. Ross became an
employee of National  Scientific.  Throughout  fiscal 2001 and  continuing  into
2003, Mr. Ross served without a written contract and was paid $9,500 monthly. In
addition,  in connection with an equity  transaction  involving Mr. Ross and his
spouse in September  1999, the Board of Directors  granted Mr. Ross the right to
receive 4% of our gross revenues.  In partial  consideration for the forgiveness
of this right to 4% of our future revenues,  National Scientific agreed to issue
500,000  restricted  shares of our common stock to Mr. Ross.  The 500,000 shares
are subject to the terms of a Restricted Stock Award  Agreement,  which required
that the  shares  issued be  released  only when the  market  price of the stock
exceeds $2.50 per share.

     Subsequent to fiscal year end 2001,  National  Scientific  granted Mr. Ross
options to purchase an aggregate of 750,000 shares of common stock.  The options
consist of ten separate  groups of 75,000  shares each,  whose  exercise  prices
range from $1 to $10 per share,  which vest when the  previous  five day average
market price exceeds even dollar levels  beginning with $1 per share through $10
per share.  On September 30, 2003,  these options were forfeited and returned to
us.

     In  February  of  2002,  Mr.  Ross  resigned  as an  employee  of  National
Scientific,  and became a  part-time  contractor,  paid at a rate of $10,000 per
month,  of which  20% would be  deferred  until a future  date.  The term of the
agreement was two years and it required that Mr. Ross provide  approximately  80
hours per month management-consulting services to us and serve as a director. In
July 2002  National  Scientific  and Mr. Ross  amended the contract to eliminate
mandatory monthly minimum cash payments and minimum hours per month for on-going
consulting  duties  other than his  responsibilities  as a director.  Under this
revised contract,  Mr. Ross was paid a director's fee of $2,500 per month in our
restricted  common stock. In February 2003 this contract was again revised,  and
from  February 2003 to September 30, 2003 Mr. Ross agreed to take a reduction in
his director's fees and accept 50,000 shares of common stock in lieu of cash for
board services for the entire six-month period.  Mr. Ross retired from the board


                                       54
<PAGE>

on September 30, 2003. His major contract  duties as a consultant  with us ended
in February  2004,  although some  confidentiality  provisions of this agreement
continue into 2005.

     Mr. Carr served us as an independent contractor from October 15, 2000 until
November  30,  2000.  He was paid $13,750  monthly for his  services.  Effective
December 1, 2000, Mr. Carr became employed under a one year contract to serve as
our Chief Financial Officer. The contract  automatically  renewed for additional
one-year  terms unless either party elected to  terminate.  Mr. Carr's  contract
provided for an annual gross salary of $180,000,  payable semi-monthly.  Also in
accordance  with the contract,  on December 1, 2000, we granted Mr. Carr 100,000
vested  options to purchase  common stock at a price equal to 25% of the closing
price per share on  December 1, 2000.  Also on December 1, 2000,  we granted Mr.
Carr 500,000 vested options to purchase  common stock at the closing sales price
of the shares on December 1, 2000. Additional option grants were included in Mr.
Carr's  employment  contract for each whole dollar amount increase in the market
value of our Common Shares.  The whole dollar amount increase is measured over a
moving two-week  average.  For each whole dollar amount attained  between $1 and
$15 inclusive,  Mr. Carr would receive 75,000 options at the whole dollar amount
option price.  Mr. Carr was also  entitled to additional  options at various but
declining levels for increases in stock value up to $50 per common share.

     From  January of 2002 through  July of 2002,  Mr. Carr  deferred 20% of his
salary,  subject to future cash  availability,  reducing his monthly salary cash
payments to $12,000 per month.

     In July of 2002,  Mr. Carr  resigned  as CFO and also as an employee  and a
company  director,  and became a full-time  non-employee  contractor  for us. He
signed a  one-year  contract,  the terms of which were  similar to his  previous
company  employment  contracts,  although  all  employee-related  benefits  were
eliminated,  and his hourly  rate of pay was  changed to  approximately  $97 per
hour, or approximately  $17,000 per month. In November 2002, National Scientific
and Mr. Carr amended this contract to eliminate mandatory monthly payments.  Mr.
Carr was retained on this basis during the month of December 2002 to assist with
preparation  of our  annual  report  and  other  matters,  for which he was paid
approximately  $12,000 in cash. In January 2003 Mr. Carr and National Scientific
agreed to secure his services as a financial  consultant for a minimum  retainer
of ten hours per month at a rate of $120 per hour. This retainer agreement ended
on April 1, 2003.

     In January 2003, we, under our Restricted Stock Retainage Plan initiated in
September 2002,  issued  2,550,000 shares of common stock at an average price of
$0.06 or 90% of the price on the grant date of September 30, 2002.  These grants
were provided originally to Michael Grollman,  Graham Clark, David Mandala,  and
Karen Fuhre.  Mr.  Mandala  left the firm in mid-2003,  and his shares under the
plan were  reallocated  to Oscar Quadros and Paul  Davidson.  These stock grants
were  contingent upon National  Scientific  achieving sales targets for calendar
year 2003. Should these targets not be met, these shares would be forfeited,  or
we and the employees  involved in the program would elect to establish new goals
for  calendar  year  2004,  in order  to  motivate  the  staff  to  perform  and
simultaneously  conserve cash resources during the next calendar year, using the
same stock grants, as yet unearned, as long term incentive.

     During the fiscal  years  ending  September  30,  2004 and 2003,  we issued
160,084 and 946,270 shares, respectively, of our common stock to our consultants
in lieu of cash compensation.  During fiscal 2004, we granted 790,000 options to
our  consultants  and  employees  to purchase  shares of our common  stock.  The
options  granted had exercise  prices  ranging from $0.09 per share to $0.16 per
share. The exercise prices were generally below market on the date of grant, and


                                       55
<PAGE>

vested.  We granted these options as a means of  compensation  to consultants to
conserve  operating cash.  During fiscal 2003,  substantially  all option grants
were issued to employees.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The table below sets forth  certain  information,  as of November 30, 2004,
concerning the beneficial  ownership by (i) all current directors,  (ii) each of
our named executive officers, (iii) each person known to us to be the beneficial
owner of more than five percent (5%) of our outstanding  common stock,  and (iv)
all of our directors and executive  officers as a group.  To our knowledge,  all
persons listed in the table have sole voting and  investment  power with respect
to their  shares,  except to the extent  that  their  respective  spouses  share
authority under applicable law.

                                                 NUMBER OF
                                               COMMON SHARES         PERCENT OF
                                               BENEFICIALLY         OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER (1)         OWNED (2)             SHARES
----------------------------------------       -------------        -----------
Michael A. Grollman                                4,066,000 (3)        4.8%
Graham L. Clark                                    1,451,667 (4)        1.7%
Gregory Szabo                                        157,240 (5)        0.2%

All executive officers and directors as
  a group (3 persons)                              5,674,907            6.7%

-------------
(1)  The  business  address  for all  directors  and  officers  is c/o  National
     Scientific  Corporation,  14505 North Hayden Road,  Suite 305,  Scottsdale,
     Arizona 85260-6951.
(2)  A person is deemed to be the  beneficial  owner of  securities  that can be
     acquired  within 60 days from the date set forth above through the exercise
     of any option, warrant or right. Shares of Common Stock subject to options,
     warrants or rights that are currently  exercisable or exercisable within 60
     days are deemed  outstanding  for  computing  the  percentage of the person
     holding such options,  warrants or rights,  but are not deemed  outstanding
     for  computing  the  percentage  of  any  other  person.  The  amounts  and
     percentages are based upon the  approximately  84,350,657  shares of Common
     Stock outstanding as December 27, 2004.
(3)  Includes  1,050,000 shares underlying  currently  exercisable stock options
     and warrants,  and 2,750,000  shares of restricted  Common Stock subject to
     substantial risk of forfeiture.
(4)  Includes 326,667 shares underlying currently  exercisable stock options and
     warrants  and  1,000,000  shares of  restricted  Common  Stock  subject  to
     substantial risk of forfeiture.
(5)  Includes 80,000 shares underlying  currently  exercisable stock options and
     warrants  and  77,240  shares  of   restricted   Common  Stock  subject  to
     substantial risk of forfeiture.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                       56
<PAGE>

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

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

     On September 30, 2002 we started a restricted  Stock  Retainage  Program to
retain  key  staff  during a period of  financial  difficulty  with  significant
periods of cash wage deferrals. We allocated approximately 3,350,000 shares with
a current  market value of $150,000  from this Stock  Retainage  Program pool of
shares in fiscal 2002, to be granted to key personnel.  Grants from this pool of
shares have been made to Michael  Grollman,  Graham  Clark,  Karen Fuhre,  Oscar
Quadros, and Paul Davidson.  As of the date of this report, none of these grants
have  been  fully  earned,  and  they  remain  subject  to  substantial  risk of
forfeiture.

WHERE YOU CAN FIND MORE INFORMATION

     We file reports and other information with the U.S. Securities and Exchange
Commission.  You may read and copy any document that we file at the SEC's public
reference  facilities  at 450 Fifth Street  N.W.,  Room 1024,  Washington,  D.C.
20549.  Please call the SEC at  1-800-732-0330  for more  information  about its
public reference  facilities.  Our SEC filings are also available to you free of
charge at the SEC's web site at www.sec.gov.

     Copies of publicly available  documents that we have filed with the SEC can
also be  inspected  and copied at the  offices of the  National  Association  of
Securities Dealers, Inc., 1735 K. Street, N.W., Washington, D.C. 20006.

     You should only rely upon the  information  included in or  incorporated by
reference into this annual report and the exhibits to the annual report. We have
not authorized  anyone to provide you with additional or different  information.
You  should not assume  that the  information  included  in or  incorporated  by
reference into this annual report is accurate as of any date later than the date
on the front of the annual report.

     We have not authorized any person to provide you with information different
from that  contained or  incorporated  by reference in this annual  report.  The
information  contained in this annual  report is accurate only as of the date of
this report, regardless of the time of delivery of this annual report.

                                       57
<PAGE>

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

EXHIBIT
NUMBER                                 DESCRIPTION
-------    ---------------------------------------------------------------------

  3.1      Articles of Incorporation(1)
  3.2      Bylaws(2)
 10.1      Employment Agreement between National Scientific Corporation and
           Michael A. Grollman dated January 2001(4)
 10.2      Employment Agreement between National Scientific Corporation and
           Graham L. Clark dated January 2003(6)
 10.3      NSC Consulting Agreement dated August 2001, and Amendments dated
           August 2002 and July 2003, with Dr. El-Badawy El-Sharawy(6)
 10.4      Amended and Restated 2000 Stock Option Plan(3)
 10.5      Form of 2004 Stock Retainage Plan Agreement(6)
 10.6      Agreement Regarding Management Consulting Services with Stanton
           Walker of New York dated May 2003(6)
 10.7      Agreement Regarding Distribution and Marketing of Gotcha!(R) Child
           Safety Product and other products dated December 2002 with
           FutureCom Global, Inc. (6)
 10.8      Purchase Order from Verify Systems, Inc, dated March 2003 for
           IBUS(TM) School Child Tracking Systems(5)
 10.9      Letter of Understanding and Agreement dated April 2004 Regarding
           Sales and Distribution of Verify School safety products, and an
           Unlimited Software License with Anthony Grosso and CIS Services,
           LLC(6)
 10.10     Letter of Intent from Positus, Inc. dba Bike & Cycle Trak, dated
           February 2003 for Design of Power Sports Tracking System(6)
 10.11     Purchase Order from Positus, Inc. dba Bike & Cycle Trak, for Design
           of Power Sports Tracking System dated March 2003(6)
 14        Code of Ethics(7)
 31        Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
 32        Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

--------------
(1)  Incorporated by reference to the Registrant's  Form 10-SB filed on or about
     January 3, 2000.
(2)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended March 31, 2001 and filed on or about May 15, 2001.
(3)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended December 31, 2000 and filed on or about February 14, 2001.
(4)  Incorporated  by  reference  to the  Registrant's  Form 10-KSB for the year
     ended September 30, 2000 and filed on or about December 19, 2000.
(5)  Incorporated by reference to the  Registrant's  Form S-8 filed on or around
     June 3, 2003.
(6)  Incorporated by reference to the  Registrant's  Form SB2 filed on or around
     June 24, 2004.
(7)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended June 30, 2004 and filed on or about August 16, 2004.

(b)  Reports on Form 8-K

The  Company  filed one  Report on Form 8-K on April 15,  2004  relating  to the
initial closing of a private placement of its common stock units.


                                       58
<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: March 18, 2005       By: /s/ Michael A. Grollman
                               -------------------------------------------------
                               Director, Chief Executive Officer, Acting Chief
                               Financial Officer, and Chairman


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


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



                                       59
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          AUDITED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND DEVELOPMENT STAGE

                                      INDEX

                                                                            PAGE

Report of Independent Registered Public Accounting Firm                     F-2

Balance Sheets (September 30, 2004 and 2003)                                F-3

Statements of Operations (Years Ended September 30, 2004, 2003
and Development Stage)                                                      F-4

Statements of  Shareholders' Equity (Seven Years Ended
September 30, 2004, and Development Stage)                                  F-5

Statements of Cash Flows (Years Ended September 30, 2004, 2003
and Development Stage)                                                      F-12

Notes to Financial Statements (Years Ended September 30, 2004, 2003
and Development Stage)                                                      F-13




                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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, 2004 and 2003, and
the related statements of operations,  changes in shareholders' equity (deficit)
and cash flows for each of the two years in the period ended  September 30, 2004
and from September 30, 1997  (inception of  development  stage) to September 30,
2004. These financial  statements are the responsibility of 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 of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits 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, 2004 and 2003, and the results of its operations
and its cash flows for each of the two years in the period ended  September  30,
2004 and from September 30, 1997  (inception of development  stage) to September
30, 2004 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
$1,900,000 and has a total shareholders' deficit of over $200,000. 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
October 20, 2004



                                      F-2
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS
                           SEPTEMBER 30, 2004 AND 2003

                                                       2004            2003
                                                   ------------    ------------
                                      ASSETS

Current Assets:
   Cash and cash equivalents                       $    160,214    $     17,903
   Trade receivables, net                                25,797          28,200
   Inventory                                             66,150           9,700
   Other assets                                          15,489          16,926
                                                   ------------    ------------
           Total current assets                         267,650          72,729

Property and equipment, net                              21,021          32,081
Deposits                                                  5,031           5,031
                                                   ------------    ------------
                                                   $    293,702    $    109,841
                                                   ============    ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
   Accounts payable                                $    148,187    $    185,725
   Accrued expenses                                     340,984         457,695
   Deposits                                                  --          20,000
   Notes payable, current                                    --          10,000
                                                   ------------    ------------
           Total current liabilities                    489,171         673,420

Notes payable, net of current portion                    43,250          43,250
                                                   ------------    ------------
           Total liabilities                            532,421         716,670

Commitments and contingencies                                --              --
                                                   ------------    ------------
Shareholders' equity (deficit):
   Preferred stock, par value $0.10;
     4,000,000 shares authorized, and
     no shares issued and outstanding                        --              --
   Common stock, par value $0.01;
     120,000,000 shares authorized, and
     shares issued and outstanding 84,330,669
     and 70,633,819 at September 30, 2004 and
     2003, respectively                                 843,307         706,338
   Additional paid-in capital                        21,627,654      20,444,733
   Accumulated deficit                              (22,709,680)    (21,757,900)
                                                   ------------    ------------
           Total shareholders' equity (deficit)        (238,719)       (606,829)
                                                   ------------    ------------
                                                   $    293,702    $    109,841
                                                   ============    ============


           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, 2004, 2003, AND DEVELOPMENT STAGE
<TABLE>
<CAPTION>
                                                                                 DEVELOPMENT
                                                    2004             2003           STAGE
                                                ------------    ------------    ------------
<S>                                             <C>             <C>             <C>
Revenues                                        $     77,994    $     63,579    $  1,027,202

Cost of Sales                                         55,597          25,848         953,084
                                                ------------    ------------    ------------
Gross profit                                          22,397          37,731          74,118

Costs and expenses
   Salaries and benefits                             393,308         438,244       2,570,104
   Research and development                          253,257          84,301       3,966,392
   Stock compensation                                 45,421         291,658       3,126,115
   Consulting fees, related party                         --          17,650       8,175,973
   Other                                             260,649         149,245       2,667,952
                                                ------------    ------------    ------------
           Total costs and expenses                  952,635         981,098      20,506,536
                                                ------------    ------------    ------------
Loss from operations                                (930,238)       (943,367)    (20,432,418)

Other income (expense)
   Interest and other income                              --              --         178,972
   Gain on settlement                                     --              --          89,403
   Interest expense                                  (21,542)         (9,197)        (55,810)
   Loss on disposal of assets                             --              --         (30,960)
   Loss on impairment of equipment                        --              --         (64,187)
                                                ------------    ------------    ------------
                                                     (21,542)         (9,197)        117,418
                                                ------------    ------------    ------------
Loss before income taxes                            (951,780)       (952,564)    (20,315,000)
Income tax expense                                        --              --              --
                                                ------------    ------------    ------------

Net loss                                        $   (951,780)   $   (952,564)   $(20,315,000)
                                                ============    ============    ============
Net loss per common share, basic and diluted    $      (0.01)   $      (0.02)
                                                ============    ============    ============
Weighted average number of shares outstanding     78,212,528      62,758,349
                                                ============    ============    ============
</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, 2004, 2003 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                      COMMON STOCK        PREFERRED STOCK
                                 ----------------------   ---------------
                                   NUMBER                 NUMBER             ADDITIONAL
                                     OF          PAR        OF       PAR      PAID-IN      ACCUMULATED
                                   SHARES       VALUE     SHARES    VALUE     CAPITAL        DEFICIT         TOTAL
                                 ----------   ---------   ------    -----   ------------   ------------    ---------
<S>                              <C>          <C>         <C>       <C>     <C>            <C>             <C>
Balance, September 30, 2003      70,633,819   $ 706,338       --    $  --   $ 20,444,733   $(21,757,900)   $(606,829)

Exercise of options                 107,500       1,075       --       --          8,600             --        9,675

Stock Issued for services
  Price per share ranged
    $0.140                           47,646         476       --       --          5,527             --        6,003
    $0.155                           33,000         330       --       --          4,274             --        4,604
    $0.150                           55,186         552       --       --          7,726             --        8,278
    $0.160                           24,252         243       --       --          3,249             --        3,492

Common stock options granted,
  net                                    --          --       --       --         23,094             --       23,094

Debt to equity swap               1,500,000      15,000       --       --        135,000             --      150,000

Private placement of
  common stock
  Shares issued for:
    $0.100                        1,100,000      11,000       --       --         99,000             --      110,000
    $0.110                       10,334,266     103,343       --       --        831,701             --      935,044

Stock retainage program             500,000       5,000       --       --         64,750             --       69,750

Stock returned to treasury           (5,000)        (50)      --       --             --             --          (50)

Net loss                                 --          --       --       --             --       (951,780)    (951,780)
                                 ----------   ---------   ------    -----   ------------   ------------    ---------
Balance, September 30, 2004      84,330,669   $ 843,307       --    $  --   $ 21,627,654   $(22,709,680)   $(238,719)
                                 ==========   =========   ======    =====   ============   ============    =========
</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, 2003, 2002 AND DEVELOPMENT STAGE

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

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

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

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

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

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

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

Net loss                                 --          --       --       --             --       (952,564)    (952,564)
                                 ----------   ---------   ------    -----   ------------   ------------    ---------
Balance, September 30, 2003      70,633,819   $ 706,338       --    $  --   $ 20,444,733   $(21,757,900)   $(606,829)
                                 ==========   =========   ======    =====   ============   ============    =========
</TABLE>


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


                                      F-6
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

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

<TABLE>
<CAPTION>
                                      COMMON STOCK        PREFERRED STOCK
                                 ----------------------   ---------------
                                   NUMBER                 NUMBER             ADDITIONAL
                                     OF          PAR        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 credit
  @ $0.12 to $0.27                2,122,064      21,221       --       --        393,603             --        414,824

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

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

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

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

Net loss                                 --          --       --       --             --     (1,883,489)    (1,883,489)
                                 ----------   ---------   ------    -----   ------------   ------------    -----------
Balance, September 30, 2002      51,587,062   $ 515,871       --    $  --   $ 19,517,719   $(20,805,336)   $  (771,746)
                                 ==========   =========   ======    =====   ============   ============    ===========
</TABLE>

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


                                      F-7
<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
                                 ----------------------   ---------------
                                   NUMBER                 NUMBER             ADDITIONAL
                                     OF          PAR        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         100,000       1,000       --       --        164,600             --        165,600
    @ $1.66
  Stock issued for services          15,000         150       --       --         23,070             --         23,220
    @ $1.55
  Stock issued for services           5,000          50       --       --         21,550             --         21,600
    @ $4.32
  Stock issued for services          75,000         750       --       --         98,475             --         99,225
    @ $1.32
  Stock issued for services          10,000         100       --       --          5,030             --          5,130
    @ $0.51

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-8
<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
                                 -----------------------   ---------------
                                   NUMBER                  NUMBER             ADDITIONAL
                                     OF          PAR         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-9
<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
                                 ----------------------   ----------------
                                   NUMBER                 NUMBER             ADDITIONAL
                                     OF          PAR        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-10
<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
                                 ----------------------   ----------------
                                   NUMBER                 NUMBER              ADDITIONAL
                                     OF          PAR        OF       PAR       PAID-IN      ACCUMULATED    DEVELOPMENT
                                   SHARES       VALUE     SHARES    VALUE      CAPITAL        DEFICIT          STAGE       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-11
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
       FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                                                                                  DEVELOPMENT
                                                                     2004            2003            STAGE
                                                                 ------------    ------------    ------------
<S>                                                              <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                                      $   (951,780)   $   (952,564)   $(20,315,000)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Non cash transactions
       Depreciation                                                    13,134          12,926          78,330
       Loss on disposal of assets                                          --              --          30,960
       Impairment loss on equipment                                        --              --          64,187
       Stock and options issued for services, net                      45,421         344,308      11,628,133
     Decrease (increase) in inventory                                 (56,450)          5,216         (66,150)
     (Increase) decrease in deferred offering costs                        --              --         (85,171)
     Decrease (increase) in receivables                                 2,403         (26,569)        105,834
     Decrease (increase) in other assets                                1,437         (16,126)        (11,580)
     Increase (decrease) in accounts payable and accrued
       expenses                                                        65,501         (69,751)        738,627
                                                                 ------------    ------------    ------------
           Net cash (used in) operating activities                   (880,334)       (702,560)     (7,831,830)
                                                                 ------------    ------------    ------------
Cash flows from investing activities:
   Acquisition of property and equipment                               (2,074)             --        (155,766)
   Repayment of loans                                                      --              --         200,000
   Proceeds from the sale of furniture and equipment                       --              --           6,050
   Loans issued                                                            --              --        (400,000)
                                                                 ------------    ------------    ------------
           Net cash (used in) provided by investing activities         (2,074)             --        (349,716)
                                                                 ------------    ------------    ------------
Cash flows from financing activities:
   Draws on the line of credit                                             --              --         430,000
   Loan from (to) officer                                                  --              --          65,079
   Repayment of notes payable                                         (10,000)             --        (120,000)
   Repayment of line of credit                                             --              --        (430,000)
   Repayment of capital lease obligations                                  --              --          (1,819)
   Proceeds from the exercise of options                                9,675          29,058         208,265
   Proceeds from the exercise of warrants                                  --              --          92,460
   Proceeds from equity line of credit                                     --              --         414,824
   Proceeds from the issuance of preferred stock                           --              --         482,500
   Deposits from private placement                                    (20,000)         20,000              --
   Proceeds from issuance of common stock                           1,045,044         670,000       7,196,833
                                                                 ------------    ------------    ------------
           Net cash provided by financing activities                1,024,719         719,058       8,338,142
                                                                 ------------    ------------    ------------
Net (decrease) increase in cash and cash equivalents                  142,311          16,498         156,596
Cash and cash equivalents, beginning of period                         17,903           1,405           3,618
                                                                 ------------    ------------    ------------
Cash and cash equivalents, end of period                         $    160,214    $     17,903    $    160,214
                                                                 ============    ============    ============
Supplementary Disclosure of Cash Flow Information
Cash paid for interest                                           $     10,493    $      3,000    $     35,967
                                                                 ============    ============    ============
Cash paid for income taxes                                       $         --    $         --    $         50
                                                                 ============    ============    ============
</TABLE>


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


                                      F-12
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                      STATEMENTS OF CASH FLOWS (CONTINUED)
   FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND THE PERIOD OCTOBER 1, 1997
           (INCEPTION OF DEVELOPMENT STAGE) THROUGH SEPTEMBER 30, 2004


SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES

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

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

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

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



                                      F-13
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     a.   OPERATIONS

     The Company was incorporated in Texas on June 22, 1953 as American Mortgage
Company.  On May 16, 1996, the Company  changed its name to National  Scientific
Corporation.  During 1996, the Company  acquired the operations of Eden Systems,
Inc.  (Eden) as a wholly owned  subsidiary.  Eden was engaged in water treatment
and the retailing of cleaning  products.  Eden's operations were sold on October
1, 1997. As such, management now considers us as being in the development stage.
From September 30, 1997 through the year ended  September 30, 2001, we aimed our
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,  we  focused  our  efforts  on  the  development,
acquisition,  enhancement  and marketing of location  device  technologies.  Our
revenue is derived from sales of electronic  devices,  recognized as the product
is delivered.

     b.   CASH EQUIVALENTS

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

     c.   INVENTORY

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

     d.   PROPERTY AND EQUIPMENT

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

     e.   ADVERTISING AND PROMOTION COSTS

     Advertising and promotion  costs,  which totaled $53,239 in 2004 and $8,185
in 2003 are expensed as incurred.


                                      F-14
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


     f.   STOCK BASED COMPENSATION

     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,  "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related  interpretations  as
permitted by SFAS 123 "Accounting for  Stock-Based  Compensation"  as amended in
accounting for its employee stock options. Under APB 25, compensation expense is
measured as the  excess,  if any, of the quoted  market  price of the  Company's
stock at the date of grant over the exercise price.

     The following  table  illustrates the effect on net loss and loss per share
if the Company  applied  the fair value  recognition  provisions  of SFAS 123 to
stock-based compensation:

                                           2004           2003
                                       -----------    -----------

        Net loss as reported           $  (951,790)   $  (952,564)

        Deduct: total stock based
           compensation expense as
           determined under the fair
           value method                     31,500         50,360
                                       -----------    -----------

        Pro forma net loss             $  (983,290)   $(1,002,924)
                                       -----------    -----------

        Loss per share as reported            (.01)          (.02)

        Loss per share, pro forma             (.01)          (.02)


     As  required  by SFAS 123,  as  amended,  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.

     g.   INCOME TAXES

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


                                      F-15
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


     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 78,212,528  and 62,758,349 for the years ended  September 30,
2004 and 2003, respectively. Stock options outstanding of 3,709,257 and warrants
outstanding of 18,249,197 are considered  anti-dilutive  and were not considered
in the calculation.

     j.   RECENTLY ISSUED 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
cash flows.  This includes SFAS 144 accounting for impairment and disposition of
long term assets.

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

     In April 2003, the FASB issued SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON
DERIVATIVE   INSTRUMENTS  AND  HEDGING   ACTIVITIES."  SFAS  149  clarifies  the
accounting  and  reporting  for  derivative   instruments,   including   certain
derivative  instruments  embedded in other contracts and for hedging  activities
under  SFAS  No.  133,  "ACCOUNTING  FOR  DERIVATIVE   INSTRUMENTS  AND  HEDGING
ACTIVITIES." In particular,  SFAS No. 149 clarifies  under what  circumstances a
contract with an initial net investment meets the characteristic of a derivative
as  described  in SFAS No. 133.  SFAS No. 149 also  clarifies  when a derivative
contains  a  financing  component.  SFAS  No.  149 is  generally  effective  for
derivative  instruments  entered into or modified  after June 30, 2003,  and for
hedging  relationships  designated  after June 30,  2003.  The company  holds no
derivative instruments and does not engage in hedging activities.

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


                                      F-16
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


     In  December  2003,  the  FASB  issued a  revised  Interpretation  No.  46,
"CONSOLIDATION OF VARIABLE INTEREST ENTITIES." The interpretation  clarifies the
application  of Accounting  Research  Bulletin No. 51,  "CONSOLIDATED  FINANCIAL
STATEMENTS," to certain types of variable  interest  entities.  The Company does
not  expect  the  adoption  of this  interpretation  to have any  impact  on its
financial statements.

2.   DEVELOPMENT STAGE OPERATIONS

     Although the Company has been in operation since 1996, management considers
NSC to be in the  development  stage.  From  September 30, 1997 through the year
ended  September 30, 2001,  the Company  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 focused its efforts toward the development, acquisition, enhancement and
marketing of location device technologies. Since its initiation of operations in
1996, the Company has not realized significant revenue, except for approximately
$882,000  generated  through  the export of  electronic  equipment,  an isolated
event, which occurred in fiscal 2001.

     The Company experienced  significant operating losses during 2004 and 2003,
of $951,708 and $952,564  respectively,  which raise substantial doubt about the
Company's  ability to continue as a going  concern.  Of the total net  operating
losses,  approximately  $45,000 and  $292,000  are  related to stock  issued for
services and compensation in 2004 and 2003,  respectively.  Management  believes
that its current cash position including cash funds arising from the exercise of
outstanding  options,  and secured plant assets from legal  settlements,  equity
private placement, product sales, and continued aggressive expense management to
be sufficient to continue operations for the next twelve months. We also believe
that we may be able to reduce outstanding  liabilities through negotiations with
our creditors,  or possibly  negotiate to extend the payment  schedule for these
debts.  In the event these  approaches do not provide us with  adequate  working
capital,  we may be  required  to  further  curtail  or reduce  our  development
activities,   seek  alternative   funding  sources,  or  seek  protection  under
reorganization laws.

     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-17
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


3.   TRADE RECEIVABLES

     Trade receivables are net of reserves:


                                              2004          2003
                                           ----------    ----------

        Trade receivables                  $   35,797    $   36,359
        Less: reserves                         10,000         8,159
                                           ----------    ----------
                                           $   25,797    $   28,200
                                           ==========    ==========

4.   PROPERTY AND EQUIPMENT

     Property and equipment  consists of the following at September 30, 2004 and
2003:

                                              2004          2003
                                           ----------    ----------

        Computer equipment                 $   60,880    $   58,806
        Office furniture                       12,507        12,507
                                           ----------    ----------
                                               73,387        71,313
        Less: accumulated depreciation         52,366        39,232
                                           ----------    ----------
                                           $   21,021    $   32,081
                                           ==========    ==========

     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.


                                      F-18
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


5.   EARNINGS PER SHARE

     The following  table  reconciles  weighted  average  shares  outstanding to
amounts used to calculate basic and diluted  earnings per share for fiscal years
2004 and 2003.

                                              2004            2003
                                          ------------    ------------

        Net (loss)                        $   (951,780)   $   (952,564)
        Weighted average shares:
        Average shares outstanding          78,212,528      62,758,349
        Effect of diluted shares                    --              --
                                          ------------    ------------
        Average Shares outstanding,
          adjusted for dilutive effect      78,212,528      62,758,349
                                          ------------    ------------
        (Loss) per share - basic          $      (0.01)   $      (0.02)
                                          ============    ============
        (Loss) per share - diluted        $      (0.01)   $      (0.02)
                                          ============    ============

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

                                              2004            2003
                                          ------------    ------------

        Employee options                     3,709,257       3,329,757
        Warrants                            18,249,197       7,412,201
                                          ------------    ------------
        Potential common equivalents        21,958,454      10,741,958
                                          ============    ============

     If all currently  outstanding  potential common  equivalents are exercised,
the Company would receive proceeds of approximately $7,000,000.

6.   LEASE COMMITMENTS

     On August 27, 2004 the Company  signed a  twenty-six  month  non-cancelable
operating lease agreement for an office in Scottsdale, Arizona, which expires on
October 31, 2006.  The lease does not require any monthly  payments in the first
two months.  Thereafter, the lease requires monthly payments of $2,890 to $3,051
plus sales tax and contains no renewal or purchase options.


                                      F-19
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


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

        Year ending September 30,                        Amount
        -------------------------                    -------------

        2005                                         $      31,796
        2006                                                36,452
        2007                                                 3,051
                                                     -------------
                                                     $      71,299
                                                     =============

     Rent  expense  for  the  years  ended  September  30,  2004  and  2003  was
approximately $60,000 and $64,000, respectively.

7.   INCOME TAXES

     Deferred  income taxes  consist of the  following at September 30, 2004 and
2003:

                                                      2004            2003
                                                  ------------    ------------

        Tax Benefit of net operating loss
          carry-forwards and start up costs       $  5,941,000    $  5,779,000
        Valuation allowance                         (5,941,000)     (5,779,000)
                                                  ------------    ------------
                                                  $         --    $         --
                                                  ============    ============

         A reconciliation of expected to actual taxes follows:

                                                      2004            2003
                                                  ------------    ------------

        Expected federal and state tax recovery
          at 40%                                  $   (380,000)   $   (381,000)
        Non-deductible stock compensation               18,000         117,000
                                                  ------------    ------------
                                                      (362,000)       (264,000)
        Tax benefits not realized - valuation
          allowance                                    362,000         264,000
                                                  ------------    ------------
        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 2004 and 2003, the
valuation allowance increased by $362,000 and $264,000, respectively.


                                      F-20
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


     The  Company  has  net  operating  loss   carry-forwards  of  approximately
$15,600,000  at September 30, 2004,  which may be used to offset future  federal
taxable income through 2023 and state taxable income through 2009.

8.   RELATED PARTY TRANSACTIONS

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

     As described in the Company's  10-KSB filing for the year ending  September
30, 2003, and also in the Company's  Proxy  Statement for 2004 filed January 30,
2004,  the Company's  Board  initiated on September 30, 2002 a restricted  stock
retainage  program  ("Stock  Retainage  Program")  to retain key staff  during a
period of financial difficulty.  The Company allocated approximately $150,000 in
restricted  Common  Stock from this Stock  Retainage  Program  pool of shares in
fiscal  2002,  to be granted to key  employees  during the year,  subject to the
Company exceeding sales growth  objectives and expense  reduction  objectives in
2003.  Failure  to meet  these  objectives  under the plan  would  result in the
forfeiture by staff of this entire stock grant by all  participants,  unless new
objectives  are approved by the board for calendar  year 2004, in which case the
stock grant would remain with the  participants  but be subject to forfeiture by
participants  until new objectives  have been achieved in 2004. All stock grants
under this program  were  granted in September  2002 but shares were not finally
issued until January of 2003.  All of the stock under this program is restricted
under SEC  Section  144,  and  cannot be traded by the Stock  Retainage  Program
participants for at least one year from date of issue.

     The Company CEO,  Michael Grollman was granted 750,000 shares of stock from
this Stock Retainage Program pool of shares, subject to the Company achieving in
excess of $200,000 in sales in calendar year 2003,  and subject to him accepting
a $60,000 per year pay reduction for the calendar year 2003, reducing his annual
payable  salary to  $120,000  per year for 2003.  Mr.  Grollman  was  granted an
additional  500,000  shares  of  stock  under  this  program,  subject  to sales
exceeding  $1,000,000  for  calendar  year 2003.  The  Company's  President  and
Director  Graham Clark was granted  500,000  shares of stock from the  Company's
Stock Retainage  Program pool of shares discussed above,  subject to the Company
achieving  in excess of $200,000 in sales in calendar  year 2003.  Mr. Clark was
granted an additional  500,000  shares of stock under this  program,  subject to
sales  exceeding  $1,000,000 for calendar year 2003. The plan's sales goals were
not met in  calendar  year  2003,  although  the  plan was  nonetheless  largely
successful in assisting to retain key staff, even during this period of deferred
or reduced  salary.  In January 2004, our board extended this program into 2004,
and set new sales growth  objectives for the year at a level 50% higher than the
previous  year's program,  giving plan  participants an additional year to fully
earn these previously  outstanding  restricted stock grants.  No new shares were
added to the plan,  although  plan  participants  were able to convert some long
term back pay into  restricted  stock at that time The majority of the remaining
restricted  stock  allocated  under this  program was  granted to other  Company


                                      F-21
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


staff, and is subject to substantially  the same risk of forfeiture as the stock
granted to Grollman and Clark under the Program.

     In January  2003,  Mr.  Lou Ross,  was paid for his  services  as an active
member of the board in shares of restricted  common stock,  in lieu of cash. The
former Chairman  received 54,464  restricted  common shares at an average market
price on the date of grant of $0.14 per share.  In June 2003, the Company issued
Mr. Lou Ross,  288,334 shares of restricted  common stock as part of its program
to lower debt without expending cash resources,  in exchange for the forgiveness
of $43,250 of debt, or one-half of the total debt of $86,500 owed by the Company
to Mr. Ross. The debt forgiven included various disclosed notes, salary deferred
in 2002 and board fees  deferred  in 2002.  The shares were issued at an average
market price per share of $0.15.  The Company also issued Mr. Ross 50,000 shares
of restricted common stock for reduced Director's fees for February 2003 through
the end of this fiscal year in  September  2003.  These shares were issued at an
average market price per share of $0.15.

     The CEO and the President have employment  contracts  previously filed with
the SEC that  include  termination  clauses  that fully vest their  ownership of
shares.

9.   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, 2004,  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.


                                      F-22
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


10.  STOCK OPTIONS AND WARRANTS

     STOCK OPTIONS

     As of September 30, 2004, 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.

     Under the  above-mentioned  2000 Stock Option Plan, the purchase price must
be at least 100% of the fair market  value of our common stock (if the option is
an  incentive  stock  option),  or at least 25% of the fair market  value of our
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 our 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 our Board of
Directors may, after taking all relevant facts into consideration, determine the
fair market value of the Company's common stock.

                                                        WEIGHTED   WEIGHTED
                                             NUMBER     AVERAGE    AVERAGE
                                               OF       EXERCISE    FAIR
                                             SHARES      PRICE      VALUE
                                           ---------    --------   --------
Options Outstanding, September 30, 2002    3,582,839    $   1.97   $   0.01
   Granted                                 1,144,081        0.10       0.10
   Exercised                                (637,153)       0.05       0.10
   Canceled                                 (760,010)       5.45       0.01
                                           ---------
Options Outstanding, September 30, 2003    3,329,757    $   0.90   $   0.06
                                           ---------

Options Outstanding September 30, 2003     3,329,757    $   0.90   $   0.06
   Granted                                   790,000        0.13       0.04
   Exercised                                (107,500)       0.09       0.09
   Expired                                  (303,000)       0.13       0.09
                                           ---------
Options Outstanding, September 30, 2004    3,709,257    $   0.82   $   0.02
                                           =========


                                      F-23
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


     WARRANTS

     The warrants outstanding as of September 30, 2004 are as follows:

                                        NUMBER OF   EXERCISE
                                         SHARES      PRICE     EXPIRES
                                       ----------   --------   -------
Outstanding at September 30, 2002         412,201   $   1.67     5/04
   New issues                           4,800,000       0.30    12/04
                                          200,000       0.50    12/04
                                        1,000,000       0.35     6/06
                                        1,000,000       0.50     6/06
                                       ----------
Outstanding at September 30, 2003       7,412,201
   Expired                               (412,201)
   New issues                             275,000       0.50     6/06
                                          275,000       0.75     6/06
                                          640,000       0.13     1/07
                                          500,000       0.10     3/11
                                        4,414,739       0.11     4/09
                                        3,335,961       0.11     4/09
                                        1,808,497       0.10     4/11
                                       ----------
Outstanding at September 30, 2004      18,249,197
                                       ==========


11.  COMMITMENTS AND CONTINGENCIES

     The Company was a defendant in a landlord-tenant lawsuit with a landlord of
leased  property  vacated  by the  Company  in 2001  as  part  of its  corporate
consolidation.  The Company and the landlord  negotiated  a  settlement  in this
matter without  admitting any wrongdoing.  In order to fulfill the terms of this
settlement,  NSC was to pay $10,000 in four  installments by September 2004. The
amount due is included in notes payable on September 30, 2003.  This $10,000 was
repaid in full during fiscal year 2004 in accordance with the settlement terms.

     Mr. Lou Ross assigned his rights to certain amounts that may be recoverable
from NetMIND as partial  payment for loan proceeds  advanced to him in 1999 (see
Note 8 above).  The  Company  has filed a suit  against  NetMIND to recover  the
investment,  plus  damages.  In April of 2003 the  parties  settled  significant
portions of this suit,  while other  portions  remain  unsettled.  Management is
unable to determine the outcome of the suit.

     In January 2002, the Company  initiated legal  proceedings  against Phoenix
Semiconductor,  Inc.  (PSI) for breach of  contract.  The  Company was awarded a
judgment of  approximately  $179,000 in May 2003  against  E4World  Corporation.
However,  there is no assurance that NSC will collect any of this amount.  Since
collection of this judgment by NSC is uncertain,  this positive  judgment is not
reflected in NSC's current financial statements.  The Company continues to press
its claim to secure assets held by E4World in a separate legal matter,  although

                                      F-24
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


there is no assurance  that NSC will collect this claim,  and thus this claim is
not shown in the NSC  financial  statements.  The  Company  is from time to time
subject to claims and suits arising in the ordinary course of operations. In the
opinion of management, the ultimate resolution of such pending legal proceedings
will not have a material  adverse  effect on the Company's  financial  position,
results of operation or liquidity.

12.  NOTES PAYABLE AND LONG TERM DEBT

     As of September 30, 2004, all long-term debt consisted of the notes payable
following:

                                             2004            2003
                                         ------------    ------------

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

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

        Current portion                            --          10,000
                                         ------------    ------------
                                         $     43,250    $     43,250
                                         ============    ============

     The notes mature as follows:

        Year ending September 30,
        -------------------------

        2004                             $         --    $     10,000
        2005                                       --              --
        2006                                   43,250          43,250
                                         ------------    ------------
                                         $     43,250    $     53,250
                                         ============    ============


                                      F-25
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)

                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


13.  SUBSEQUENT EVENTS

     In October  2004, we commenced a new strategic  working  relationship  with
TurboWorx Inc. ("Turbo") regarding joint technology  development and cooperative
marketing.   The  relationship  was  first   memorialized  in  a  Memorandum  of
Understanding  (MOU) in early  November  2004.  The two companies see benefit in
connecting NSC's location sensor  technology to the computing  engines developed
by TurboWorx.  In November 2004, we entered into a Letter of Intent ("LOI") with
Turbo regarding a stock exchange  transaction with Turbo, for an amount of stock
equal to less than 10% of the  outstanding  common stock of each company and the
payment of cash by Turbo to NSC. The LOI  contemplated  a due diligence  process
prior to the share  exchange,  as well as a Securities  Exchange  Agreement (the
"Share Exchange Agreement") to memorialize the proposed exchange. As of the date
of this report,  no Share Exchange  Agreement has been completed.  Completion of
the transaction is subject to completing a mutually  satisfactory Share Exchange
Agreement and completion of due diligence by all parties.  The LOI  contemplates
us  distributing  to our  shareholders  approximately  50% of any Turbo stock we
receive under the proposed Share Exchange Agreement.


                                      F-26
<PAGE>

                                 EXHIBIT INDEX

EXHIBIT
NUMBER                                 DESCRIPTION
-------    ---------------------------------------------------------------------

  3.1      Articles of Incorporation(1)
  3.2      Bylaws(2)
 10.1      Employment Agreement between National Scientific Corporation and
           Michael A. Grollman dated January 2001(4)
 10.2      Employment Agreement between National Scientific Corporation and
           Graham L. Clark dated January 2003(6)
 10.3      NSC Consulting Agreement dated August 2001, and Amendments dated
           August 2002 and July 2003, with Dr. El-Badawy El-Sharawy(6)
 10.4      Amended and Restated 2000 Stock Option Plan(3)
 10.5      Form of 2004 Stock Retainage Plan Agreement(6)
 10.6      Agreement Regarding Management Consulting Services with Stanton
           Walker of New York dated May 2003(6)
 10.7      Agreement Regarding Distribution and Marketing of Gotcha!(R) Child
           Safety Product and other products dated December 2002 with
           FutureCom Global, Inc. (6)
 10.8      Purchase Order from Verify Systems, Inc, dated March 2003 for
           IBUS(TM) School Child Tracking Systems(5)
 10.9      Letter of Understanding and Agreement dated April 2004 Regarding
           Sales and Distribution of Verify School safety products, and an
           Unlimited Software License with Anthony Grosso and CIS Services,
           LLC(6)
 10.10     Letter of Intent from Positus, Inc. dba Bike & Cycle Trak, dated
           February 2003 for Design of Power Sports Tracking System(6)
 10.11     Purchase Order from Positus, Inc. dba Bike & Cycle Trak, for Design
           of Power Sports Tracking System dated March 2003(6)
 14        Code of Ethics(7)
 31        Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
 32        Certification Pursuant to Section 906 of the Sarbanes-Oxley Act

---------------------
(1)  Incorporated by reference to the Registrant's  Form 10-SB filed on or about
     January 3, 2000.
(2)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended March 31, 2001 and filed on or about May 15, 2001.
(3)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended December 31, 2000 and filed on or about February 14, 2001.
(4)  Incorporated  by  reference  to the  Registrant's  Form 10-KSB for the year
     ended September 30, 2000 and filed on or about December 19, 2000.
(5)  Incorporated by reference to the  Registrant's  Form S-8 filed on or around
     June 3, 2003.
(6)  Incorporated by reference to the  Registrant's  Form SB2 filed on or around
     June 24, 2004.
(7)  Incorporated by reference to the  Registrant's  Form 10-QSB for the quarter
     ended June 30, 2004 and filed on or about August 16, 2004.


                                       60