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

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

                 ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                  For The Fiscal Year Ended September 30, 2001

                                    000-28745
                              (Commission File No.)

                                 ---------------

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

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

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

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

             Securities Registered Under Section 12(b) of the Act:
                        PREFERRED STOCK, $0.10 PAR VALUE

             Securities Registered Under Section 12(g) of the Act:
                          COMMON STOCK, $0.01 PAR VALUE

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

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

     Revenues for the fiscal year ended September 30, 2001: $882,715

     The aggregate market value of voting stock held by non-affiliates of
National Scientific Corporation's ("NSC's") common stock, as of December 19,
2001, was approximately $11,598,736 (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 19, 2001 was 48,328,067.

     A portion of the Registrant's Proxy Statement for the 2001 Annual Meeting
of Shareholders is incorporated into Part III as set forth therein.

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

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

     National Scientific Corporation's ("NSC" or the "Company") core business
focuses on the research and development of devices and designs that are intended
to enhance the performance of various products commonly used in the
semiconductor and electronics industries. We primarily design products that we
believe will have a broad application and acceptance in the commercial
marketplace.

     We currently hold U.S. patents on six devices and designs and have several
domestic and international patent applications pending. We plan to continue to
develop our existing patented technologies as well as develop new
performance-enhancing devices and designs for use in the semiconductor and
electronics industries. Our business plan contemplates that we will generate
revenue by entering into strategic joint venture licensing agreements,
manufacturing agreements, development agreements and other arrangements with
manufacturing firms and/or entities that will incorporate our technologies into
their products.

     We believe our decentralized business model will enable us to add other
operating divisions as we grow from our purely research and development roots
into a research, development and production organization.

     To generate revenue to fund our core business and implement our business
plan, we have in the past engaged in the import/export business of distributing
electronic and other semiconductor-related products to customers in Asia and the
United States. Recently, we elected to discontinue such activities since they
did not yield the margins we had originally projected.

     We generated no revenues from our operations for the fiscal year ended
September 30, 2000 and a total of $882,715 for the fiscal year ended September
30, 2001, which were attributable to our import/export distribution business. At
September 30, 2001, we had an accumulated deficit of $18,921,847. NSC's net
losses were $6,234,868 and $8,575,299 for the fiscal years ended September 30,
2001 and 2000, respectively. See "Part II, Item 7-Financial Statements."

     We incorporated in Texas in 1953. Prior to 1996, our business primarily
involved maintaining mortgage portfolios. In 1996 we abandoned this line of
business. Our principal executive offices are located at 14455 North Hayden
Road, Suite 202, Scottsdale, Arizona 85260. Our telephone number is (480)
948-8324.

PRODUCTS

     Our present offering of devices and designs are based on principles and
applications in the electronics and semiconductor industries. The majority of
these devices and designs are based on semiconductor technology. Semiconductors


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<PAGE>

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

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

     STATIC RANDOM ACCESS MEMORY AND TMOS(TM) MEMORY CORE. TMOS(TM) memory cells
are designed to help digital devices that require a memory function accurately
store and retrieve information at high speeds. This type of memory is intended
and designed for use in electronic devices, such as computers and workstations,
and battery-powered devices, such as cellular phones and handheld computers
These cells comprise part of a larger information storage device called STATIC
RANDOM ACCESS MEMORY. One of the patent claims for our memory cell device is
that it may use less power than other devices that perform the same or similar
functions, and thus can potentially extend the battery life of certain battery
powered devices. We are in the process of conducting research to prove the
commercial and technical viability of this patent claim.

     In May 2001, we engaged National Microelectronics Research Center in Cork,
Ireland ("NRMC") to manufacture prototypes of the TMOS(TM) memory cell. Under
this agreement, NMRC also has agreed to assist us in the simulation, design
revision, manufacturing and testing of TMOS(TM) memory components in
consideration for a series of cash payments not expected to exceed $100,000 in
calendar year 2001. In June 2001, our engineers provided NMRC with
computer-generated designs, and NMRC's activities under this agreement soon
thereafter commenced. Before our arrangement with NMRC, we conducted
approximately six months of similar development activities at Stanford
University. These activities at Stanford were not successful since the products
produced were partially contaminated and could not be effectively tested.

     We reviewed preliminary test results of a portion of the TMOS(TM) memory
cells during the fall of 2001. The results of these preliminary tests were not
conclusive, but did demonstrate some of the performance characteristics required
for the device to function correctly. Additional development activities during
the next twelve months will include taking commercially reasonable steps to
enter into appropriate licensing arrangements with NMRC and other entities,
further testing at NMRC, as well as specific application development and testing
of different formats of our designs. If our testing and development activities
produce positive results, we intend to license our designs to third parties for
manufacture.

     TDRAM(TM) MEMORY CORE (A DYNAMIC RANDOM ACCESS MEMORY SUBSTITUTE). DRAM
memory is primarily used in computer applications. It accounts for a significant
portion of the memory that is found in computers today. Because of its
relatively simple architecture it can be manufactured cheaply. A negative
attribute is that is uses relatively high levels of energy performing its memory
process. National Scientifics' TDRAM(TM) memory cell design adds a small
component into the circuit that is intended to hold the charge reducing the
power consumption of the memory. This design should allow manufactures to build
a memory chip that may not requiring constant re-charging. Applying TDRAM in a
battery powered device should allow the battery to last longer than the existing
DRAM memory device. This product will be developed in parallel with the TMOS(TM)
cell, as the central technology required to make the TMOS(TM) device function is
the same as the central technology required to enable the TDRAM(TM) device to
function.

     MODE DIELECTRIC RESONATORS. Mode dielectric resonators allow devices such
as cell phones, radar detectors and speed guns, automatic door openers and


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satellites to enhance information transmitted via radio waves from external
sources by converting these radio waves into electronic data. The major patent
claim for this device is that it may use less space than other similar devices
that perform the same or similar functions, and thus can potentially reduce the
actual physical size of certain handheld radio devices. We are in the process of
conducting research to prove the commercial and technical viability of this
patent claim and other patent claims of our resonator device.

     In June 2001, NSC entered into a development licensing agreement for a
dielectric resonator with TEMEX, a subsidiary of TEKELEC Group, a French
corporation. Under the licensing agreement, we granted TEMEX a limited
manufacturing license to our intellectual property relating to our dielectric
resonator for a nominal fee. In consideration for this license, TEMEX has agreed
to produce prototype samples and supply these samples to certain interested
potential customers. These potential customers were selected as a result of
their ability to use our dielectric resonator in their applications and because
they may provide valuable feedback regarding the technical performance of this
device in their specific customer application. We intend to optimize our product
offering based on this feedback.

     Due to the nature of our license agreement, TEMEX's ability to use our data
and information is limited. Rights to any inventions created during the term of
the agreement will be the property of the inventor. The licensing agreement has
a term of six months and may be renewed by the mutual agreement of the parties.
The agreement may be terminated at any time by mutual consent of the parties. If
this test marketing and manufacturing phase proves successful we intend to enter
into a new licensing arrangement with TEMEX, which will provide for the payment
of fees based on sales volume.

     HIGH FREQUENCY WIRELESS TRANSCEIVERS. Like resonators, high frequency
transceivers convert information transmitted via radio waves into electronic
data and also convert electrical signals into radio waves that can be
transmitted to other devices. Transceivers are used in a variety of radio
devices such as wireless computer networks. Our design goal for this product is
to make it more efficient in its use of power than similar devices, and thus
potentially improve the battery life of some of these handheld radio devices. We
have filed patents on only a portion of our design to date, so that patent
claims do not currently exist to cover the function of this entire device. We
have not conducted sufficient research and testing to determine whether or not
we can meet this design goal in a commercially reasonable manner. Research on
this device is currently suspended, pending further review of the market and
business case for the design.

     In March 2000, we entered into a memorandum of understanding with a leading
Taiwanese foundry, United Microelectronics Corporation. United Microelectronics
has agreed to provide manufacturing capacity, utilizing its patented process
technology, for production of some of our designs for radio devices and is
currently producing the first batch of samples of our designs for the receiver
portion of our high frequency transceiver. We believe that we still have to
perform substantial work to complete the final version of our transceiver device
and commence the sale of this technology. Our receiver could be produced as a
stand-alone product. While no binding agreement has been negotiated to date, we
believe a strategic alliance with United Microelectronics, if available, will
aid in the advancement of our production of wireless products as well as enhance
our existing development and production relationships. We plan to perform
additional research and testing during the next twelve months including taking
commercially reasonable steps to enter into acceptable licensing arrangements.
We intend to either license this device to others to manufacture or sell the
patent rights outright.

     DISTRIBUTED AMPLIFIERS. Distributed amplifiers increase the power of
electrical signals. Amplifiers help products used in telecommunications,
automotive systems, and biomedical products to increase their electrical power.
Our major patent claim for this device is that our amplifier may be more
efficient than other devices that perform the same or similar functions, and
thus may have some competitive advantage over the other distributed power
amplifiers on the market. We are in the process of conducting research to prove
the commercial and technical viability of this patent claim and other patent
claims relating to our amplifier device.

     Although we intend to approach appropriate third party contractors to
develop an amplifier device, we believe that it is unlikely this product will be
completed and ready for production before the end of fiscal 2002. We plan to
perform additional research, including the building of new test devices at a
greater number of commercially significant frequencies, in order to improve our
chances of executing a license agreement with a third party for this product. We
intend to license this design to others to manufacture or sell the patent rights
outright.


                                       4
<PAGE>

     MONOLITHIC INDUCTORS. Monolithic inductors help process information
transmitted by radio waves into a form that is understandable to the end users
of electronic devices such as pagers. Inductors are used in a wide range of
electronic circuits for telecommunications applications. For example, inductors
help process the data transmitted via radio waves to produce the phone number or
the message that appears on a pager screen. Our patent claims for our inductor
device include its ability to capture radio waves more efficiently than other
devices that perform the same function. By capturing radio waves more
efficiently, our inductors may have a competitive advantage over other
monolithic inductors and allow devices incorporating our technology to operate
more efficiently. We are in the process of conducting research to prove the
commercial and technical viability of these patent claims and other patent
claims of our inductor device.

     Although we intend to approach appropriate third party contractors to
develop this product, we believe that it is unlikely this product will be
completed and ready for production within the next six months. We plan to
perform additional research during the next twelve months to include running of
a large number of samples of the device at several foundries, which can allow
benchmarking of the design against other competitive inductor designs. We intend
to either license this design to others to manufacture or sell the patent rights
outright.

     HETEROJUNCTION BIPOLAR TRANSISTORS. Transistors are the basic building
blocks of all virtually all integrated circuits. They are in almost every
product that is electronic. They are in computer memory, children's toys,
cellular telephones, land line telephones, satellites, domestic appliances and
automotive circuitry to name but a few. We have a patent on a type of transistor
called a Heterojunction Bipolar Transistors (HBT's). These transistors, if
produced, could be used in applications where a `normal' transistor would not
operate effectively, such as satellite communications or certain military
applications. The patent claims for our HBT patent include the claim that it may
be able to operate at higher speeds than other devices that perform a comparable
function. We are in process of planning research to prove the commercial and
technical viability of this patent claim and other patent claims of our
transistor. The research on the transistor, however, is difficult, complex and
expensive and may require several months or even years to perform in a
commercially reasonable manner.

     Although we intend to approach appropriate third party contractors to
develop this product, we believe that it is unlikely this product will be
completed and ready for production before the end of fiscal 2002. We plan to
perform additional research during the next twelve months including primary
material science experiments to demonstrate manufacturing feasibility. We intend
to license this design to others to manufacture or else sell the patent rights
outright.

DEVELOPMENT OF THIRD PARTIES' TECHNOLOGY

     In March 2001, we entered into a one-year Teaming Agreement with Ramtron
International Corporation (Ramtron). Under the Teaming Agreement we have agreed
to assist Ramtron in taking their technology into a Malaysian foundry. A foundry
is a manufacturing plant that makes electronic components that are used in many
consumer electronics and other devices. We believe that our management team's
experience with the electronics industry, particularly in the Far East, may be
useful in pursuing the manufacture of Ramtron's patented FRAM memory devices.
FRAM is an acronym for ferroelectric random access memory. Under the Teaming
Agreement, we have agreed to act as the prime contractor in submitting work
proposals to the foundry.

     In October 2001, we entered into a memorandum of understanding with a
Malaysian foundry to provide engineering and test sample manufacturing
capability that will verify the viability of manufacturing FRAM at the proposed
specifications. The engineering evaluation is expected to be complete by the
spring or summer of 2002. With successful results from this engineering
evaluation, production could follow as soon as three to six months after the
evaluation is complete. We have approached several large Japanese technology
firms who have expressed interest in making investments in this project. We have
also entered into discussion with Malaysian government officials, who also are
currently considering support for this project.

     The current Teaming Agreement with Ramtron provides us with design, device
and process engineering support to enable us to properly coordinate the
manufacturing and marketing of this technology. Ramtron will grant us revenue
and licensing rights to manufacture its patented memory devices in this foundry,
and will assist in developing enhancements to these products. Under the Teaming
Agreement each party retains the rights to any inventions produced during the
duration of the agreement.


                                       5
<PAGE>

     The success or failure of the FRAM project is dependent on several key
factors. The FRAM technology is complex and difficult to manufacture. We may be
unable to build the products to the desired specifications. The financing for
this project is not yet complete and may be costly. We may not be successful in
securing adequate funds to pursue the effort. Additionally, this is a complex
business model, and we may not be able to produce from it at the level of our
current projections due to market conditions and other market variables.
Finally, competitive new technologies may emerge which reduce or eliminate the
need for FRAM products.

     In May 2001, we entered into a distribution agreement with Phoenix
Semiconductor, Inc., which grants us the exclusive right to purchase and
distribute electronic devices using Thyristor(TM) and related technologies.
Thyristors are electronic components that protect many kinds of electronic
circuits from damage resulting from power surges. Thyristors have been in
production around the world for over 20 years. Under the terms of our agreement
with Phoenix Semiconductor, there are no restrictions on our distribution of
these products. Under the agreement, we agreed to pay Phoenix Semiconductor a
license fee based on a percentage of revenue that we earn on the sales of the
licensed products. In conjunction with the contracting for the manufacture of
thyristors, we received a purchase order for 14 million thyristors to be
delivered over the next twelve months. Gross Sales from this purchase order were
estimated to be approximately $1 million. However, to date, Phoenix
Semiconductor has been unable to produce thyristors up to our customer's
specification in adequate quantity, and it is doubtful that we will sell
thyristors manufactured in Phoenix Semiconductor's Tempe, Arizona plant in the
near future. We are in the process of taking alternative measures in recovering
our investment in the thyristor technology from Phoenix Semiconductor. We
continue to believe that the thyristor market is attractive. Through our
relationships at Phoenix Semiconductor, we are currently exploring the
possibility of transferring the ability to manufacture thyristors into an Asian
manufacturing facility, with the intent to improve the quality and quantity of
production of these products.

SUPPLIERS AND MANUFACTURERS

     We do not enter into agreements directly with suppliers of raw materials.
Rather, as described above, our business involves entering into agreements with
third parties who will utilize our technology to manufacture products. Those
third parties may have agreements with suppliers of raw materials, although our
agreements with them typically do not require them to assure a source of
necessary raw materials.

OTHER STRATEGIC RELATIONSHIPS

     We have entered into informal and non-binding arrangements with parties
that have international ties in the semiconductor and electronics industries,
which we believe will assist us in the future manufacturing and marketing of any
technologies we bring to market.

     On June 21, 2001, we entered into a non-binding memorandum of understanding
with AIC Semiconductor Sdn. Bhd., a Malaysian corporation. The memorandum
contemplates the negotiation and execution of a definitive agreement regarding a
licensing and technology transfer arrangement in which we would license yet to
be determined technologies to AIC to manufacture in Malaysia. Both AIC and
National Scientific would be responsible for marketing and sales of the
Malaysian manufactured products. As of the date of this prospectus, the parties
have not entered into a definitive agreement and no activities other than
planning relating to the memorandum have commenced.

DISTRIBUTION OF ELECTRONIC AND SEMICONDUCTOR PRODUCTS

     We recently entered into the business of distributing electronic and other
semiconductor related products to customers in Asia and the United States. We
generated gross revenue of approximately $882,000 during the fiscal year ended
September 30, 2001, from our distribution business. We planned to use the
revenue generated from our distribution business to help fund our core business
of researching, developing and licensing our patented technologies. However, due
to the low margins on these exports, we have decided to terminate future exports
of this nature.

     In January 2001, we entered into an import/export agreement with E4world
Corp., an entity in which one of our former directors, Dr. Richard Kim, was also


                                       6
<PAGE>

Chairman of the Board of Directors. In October 2001, Dr. Kim resigned from the
NSC board of directors. The term of the agreement with E4world is twelve months,
expiring in January, 2002. E4world's main business involves the import of
Korean-manufactured personal computer/electronic components to U.S.
distributors. Consequently, E4world has developed strong relationships with
several Korean manufacturers and U.S. distributors. Under the terms of our
agreement with E4world, E4world has an obligation to introduce us to Korean
manufacturers and U.S. distributors of personal computer/electronic components.
E4world also has committed to provide us with purchase orders from U.S.
buyers/distributors for the purchase of an aggregate of $10 million worth of
Korean-manufactured personal computer/electronic components over the course of
the twelve-month term of the agreement. E4world negotiates and secures
non-cancelable purchase orders from U.S. distributors on our behalf. We, in
turn, take these purchase orders to the Korean manufacturers and purchase the
products directly from such manufacturers and then resell these products to the
U.S. distributors in accordance with the terms of the non-cancelable purchase
orders. We obtain all of the gross revenues from the sale of these products to
the U.S. distributors and then we pay E4world a commission on all sales made to
U.S. distributors pursuant to the non-cancelable purchase orders. Our profit
stems from the mark-up of Korean-manufactured goods we sell to the U.S.
distributors. In consideration for E4world's commitment to provide us with $10
million worth of import/export business, we have advanced $100,000 to E4world as
prepayment of future commissions, which is evidenced by a note bearing interest
at the rate of 12% per annum on the amount advanced but not yet earned as
commissions. As of November 2001, we have obtained one million dollars worth of
import/export business from E4world. We do not anticipate that E4World will meet
its obligation to provide us with $10 million of import/export business by the
end of the term of the agreement. Consequently, we are pursuing collection of
all amounts due under the $100,000 note, including any and all accrued
interest, for breach of contract and unearned commissions.

INTELLECTUAL PROPERTY

     We seek to protect our intellectual property by filing domestic and
international patent applications for our devices and designs. Generally, a
patent is a grant to the patent holder of a right to prevent others from making,
using and selling the combination of elements or steps covered by the patent.

     We have been granted six patents by the United States Patent and Trademark
Office on our devices and designs set forth in the chart below. We also have
filed United States patent applications for four additional devices and designs.
Patents issued by the United States Patent and Trademark Office have a term of
20 years from the date of filing. We plan to file additional patent applications
for enhancements to our existing devices and designs as well as additional
devices and designs that we develop.

     We also have filed international patent applications pursuant to the Patent
Cooperation Treaty. We have filed international patent applications
corresponding to each of our U.S. patents. Filing a patent application pursuant
to the Patent Cooperation Treaty will enable us to apply for patent protection
in over 100 countries that have ratified the Patent Cooperation Treaty.
Generally, an international patent application filed pursuant to the Patent
Cooperation Treaty takes approximately one year to be examined. We anticipate
that most of our international patent applications will be examined by the end
of 2003. We intend to file additional Patent Cooperation Treaty patent
applications that may be examined after that date. International patent
applications filed under the Patent Cooperation Treaty and subsequently issued
by either Japan or the European Community will have up to a maximum of a 20 year
term from the date of filing of the corresponding U.S. patent application.

     The following table summarizes all of our U.S. and international patents
and patent applications for our devices and designs:
<TABLE>
<CAPTION>
====================================================================================================================
                 TITLE                         PATENT NO.                 TERM EXPIRES               COUNTRY
====================================================================================================================
<S>                                            <C>               <C>                          <C>
Heterojunction Bipolar                         5,912,481              September 29, 2017         United States
Transistor                                     6,171,920
                                               ---------------------------------------------------------------------
                                               98945940.9               Patent Pending              European
                                                                                                   Community
                                               ---------------------------------------------------------------------
                                               2000-514337              Patent Pending               Japan
====================================================================================================================
Monolithic Inductor with                       6,013,939               October 31, 2017          United States
Magnetic Flux Lines Guided                     ---------------------------------------------------------------------
Away From Substrate                            98954007.5               Patent Pending              European
                                                                                                   Community
                                               ---------------------------------------------------------------------
                                               2000-519468              Patent Pending               Japan
====================================================================================================================
</TABLE>


                                       7
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
                 TITLE                         PATENT NO.                 TERM EXPIRES               COUNTRY
====================================================================================================================
<S>                                            <C>               <C>                          <C>
Distributed Amplifier and Method               6,008,694                 July 10, 2018           United States
                                               ---------------------------------------------------------------------
                                               99926671.9               Patent Pending              European
                                                                                                   Community
====================================================================================================================
Dielectric Resonator                           6,169,407                 June 18, 2018           United States
                                               ---------------------------------------------------------------------
                                               99925897.3               Patent Pending              European
                                                                                                   Community
                                               ---------------------------------------------------------------------
                                               2000-555315              Patent Pending               Japan
====================================================================================================================
Static Memory Cell                             6,104,631               December 17, 2014         United States
                                                                  (Additional patent pending
                                                                 on enhancements, on which we
                                                                  have been granted a Notice
                                                                   of Allowance in May 2001
                                                                    with all claims intact)
                                               ---------------------------------------------------------------------
                                               98963176.7               Patent Pending              European
                                                                                                   Community
                                               ---------------------------------------------------------------------
                                               2000-539480              Patent pending               Japan
====================================================================================================================
High Frequency Wireless                        09/833,438               Patent pending           United States
Receiver
====================================================================================================================
Electronic Semiconductor                       09/520,081               Patent pending           United States
Circuit Which Includes a                        (Patent                                       (Patent Cooperation
Tunnel Diode                                  Cooperation                                           Treaty)
                                           Treaty/US01/06753)
====================================================================================================================
Monolithic Balanced                            09/864,097               Patent pending           United States
Radio Frequency
Power Amplifier
====================================================================================================================
Semiconductor Memory Cell                    Not available              Patent pending           United States
with Leakage Current
Compensation Using a Tunnel
Diode
====================================================================================================================
</TABLE>

     We cannot assure you that any of our pending patent applications will
result in issued patents. If any of our patent applications are rejected, we may
not be able to enter into licensing or other strategic relationships to leverage
the applicable technology. In addition, although none of our intellectual
property rights have been invalidated or declared unenforceable, we cannot
assure you that such rights will be upheld in the future. We also may not be
able to license certain technology, necessary to the conduct of our business,
from third parties on commercially reasonable terms. Our inability to obtain
such licensing rights could have a material adverse effect on our ability to
generate licensing revenue and leverage our technologies.

     Our business model contemplates that we will successfully develop
prototypes of our inventions and designs and, thereafter, establish partnerships
and strategic relationships with third parties to commercialize such inventions
and designs. Our business model further contemplates that we will generate
revenue from the licensing of our inventions and designs through these
partnerships and strategic relationships, and that we will achieve profitability
by gaining market acceptance of our inventions and designs with both the users
of our products and those third parties to whom we license these products. We
may also elect to sell some of our designs in product form directly to
customers. If we are unable to successfully establish such partnerships and
strategic relationships and achieve broad market acceptance of our technology,
we may be unable to generate revenue from our business or operate profitably and
the value of your investment could be significantly reduced.

SALES AND MARKETING

     We have performed research into the major semiconductor manufacturing
companies regarding their products and the manufacturing processes available to
them. The results have confirmed our belief that the increased performance and
efficiencies inherent in our products that are currently in various stages of
design and development are of interest in virtually all sectors of the
semiconductor manufacturing industry.


                                       8
<PAGE>

     The existing markets where enhanced products and processes have
applicability are already multi-billion dollar markets. We believe our products
are responsive to these ongoing changes in the semiconductor industry and, if
successfully developed and marketed, our products will help NSC achieve
profitability and increase shareholder value.

     We believe the products we are developing may become marketable quicker by
licensing and/or partnering with on-going companies with complementary
technologies. We have undertaken an aggressive search for candidates and are in
the process of conducting investigations, technology evaluations and preliminary
negotiations with potential licensees/partners. No definitive agreements have
been reached with any potential licensee or partner. In December 2000, we hired
a full time Director of Sales and Marketing to facilitate its search for
potential licensees/partners. This individual is an experienced marketing
manager as well as an applications engineer who is familiar with both our
existing technologies and potential licensing customers.

     We believe that maintaining a close relationship with customers and
providing customers with ongoing technical support is essential to customer
satisfaction in the RF wireless and semiconductor communications industry. Our
staff interacts with customers during all 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's role will be to maintain regular contact with the
customer to determine its product needs and concerns. Members of senior
management also are involved in managing relationships with significant
customers. We believe that maintaining close contact with customers improves
their level of satisfaction and enables us to anticipate their future product
needs.

     As is typical of other new technologies in the semiconductor industry, our
technologies can require lengthy "design-in" cycles for customer applications
and extensive application engineering support. We support potential customers'
design-in activities and consider such support an important element of our sales
and marketing efforts.

     We are marketing our technologies worldwide through our internal sales
resources 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.

INDUSTRY

     Based on our review of publicly available data relating to the products and
manufacturing processes of the major semiconductor manufacturing companies, we
believe that the increased performance and efficiencies inherent in our devices,
designs and process, if successfully developed, will be of interest to many key
sectors of the semiconductor industry. The largest target market for our
products is the electronic memory market, where worldwide sales of electronic
memory devices (which could incorporate our products) are expected to be
approximately $39.7 billion in 2001, according to Semiconductor Industry
Association Annual Worldwide Market Forecast 2001-2004 (updated June 2001). The
same study reports that the Thyristor market in 2001 is expected to be $805
million globally. The same study also reports that the memory sector occupied by
FRAM, the non-volatile sector, is expected to be $13.4 billion in 2001, which
would be roughly 33% of the overall memory market. FRAM A 1999 study by the BCC
Consulting Group of Connecticut projected that FRAM sales by 2003 would be 3% of
this NVM market or $400 million But the study also indicated that the aggregate
FRAM market growth rate from 1998-2003 was 24.5% annually, which was 5 times
higher than the market share growth rate for Flash, the current non-volatile
market leader. According to Carners In-Stat Group, a leading independent
electronics industry research group, from a July 2000 report on wireless
technology, the market opportunity for certain high frequency radio and baseband
solutions will surpass $1.5 billion in shipments by the end of 2002 and grow to
near $5 billion by 2005. The market size for our other devices and designs is
more difficult to quantify, due to the numerous diverse applications and
products that incorporate such devices and designs. However, we believe
substantial markets exist for these devices and designs in light of the fact
that the Semiconductor Industry Association estimates the size of the global
electronics market size to be approximately $220 billion in 2001.

BUSINESS STRATEGY

     Our strategy is to develop significant enhancements for existing
semiconductor, integrated circuit and other electronic component products,
processes and markets. We intend to utilize unique, patentable technologies and


                                       9
<PAGE>

provide these enhancements to the market place through joint venture licensing
agreements with leading manufacturing firms. We do not intend to manufacture any
of our own technologies. We intend to continue research and development efforts,
including simulations and creation of working prototypes, where possible.
Research and development will be accomplished through our on-going association
with an independent lab, and test facilities at a major Arizona university, as
well as at other contracted facilities as needed.

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

     We intend to grow through internal research and development, but also
through strategic investments, alliances and acquisitions. Although we invest
significant resources in research and development activities, the complexity and
rapidity of technological changes make it impractical for us to pursue
development of all technological solutions independently. Accordingly, we
conduct ongoing analyses as a basis of investment, alliance and acquisition
prospects that would complement our existing product offerings, augment our
market coverage or enhance our technological capabilities.

     Based on our review of publicly available data relating to the products and
manufacturing processes of the major semiconductor manufacturing companies, we
believe that the increased performance and efficiencies inherent in our devices,
designs and process, if successfully developed, will be of interest to many key
sectors of the semiconductor industry. The largest target market for our
products is the electronic memory market, where worldwide sales are expected to
be around $39.7 billion in 2001, according to Semiconductor Industry Association
Annual Worldwide Market Forecast 2001-2004 (updated June 2001). The same study
reports that the Thyristor market in 2001 is expected to be $805 million
globally. The same study also reports that the memory sector occupied by FRAM,
the non-volatile sector, is expected to be $13.4 billion in 2001, which would be
roughly 33% of the overall memory market. According to Carners In-Stat Group, a
leading independent electronics industry research group, from a July 2000 report
on wireless technology, the market opportunity for certain high frequency radio
and baseband solutions will surpass $1.5 billion in shipments by the end of 2002
and grow to near $5 billion by 2005. The market size for our other devices and
designs is more difficult to quantify, due to the numerous diverse applications
and products that incorporate such devices and designs. However, we believe
substantial markets exist for these devices and designs in light of the fact
that the Semiconductor Industry Association estimates the size of the global
electronics market size to be approximately $220 billion in 2001.

PATENTS AND PROPRIETARY RIGHTS

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

     In addition to prosecuting patents, we protect our proprietary technology
through a trade secret program that involves restricting access to confidential
documents and information and obtaining written confidentiality agreements with
vendors, visitors and technical employees.

     We believe our inventions are of fundamental importance to our memory and
wireless technology portfolio and that patents that have been issued, or allowed
but not yet issued, will provide protection against unauthorized use of our
inventions. There is evidence that other companies are seeking to develop and
patent technology similar to our technologies. Furthermore, other companies may
seek to reverse engineer our technologies.


                                       10
<PAGE>

     As of the date of this report, we have one individual under contract, Dr.
El Sharway, engaged in research and development.

COMPETITION

     Our competitors are well established and have significantly greater
resources. Although we believe that our products and processes are proprietary
and protected by patents and/or patents pending, there is no assurance that we
can compete successfully in the semiconductor and electronics markets.

RESEARCH AND DEVELOPMENT

     We have conducted several simulations and/or developed working prototypes
of our products and processes that have yielded results that we believe
distinguish our products from those currently in the marketplace. There is no
assurance that the test results will prove successful in the actual marketplace
or that we will be able to develop additional new products or processes.

GOVERNMENT REGULATION

     Our business is not currently subject to material special government
regulation. It is possible, however, that businesses that license technology
from us may be subject to government regulation, either because of the general
nature of their businesses or because of the specific manner in which they
intend to use the licensed technology. In addition, we may be subject to
government regulation from time to time regarding import and export matters,
both in the United States and abroad.

PERSONNEL

     As of the date of this report, NSC has six full time employees. Six
employees work in the Scottsdale, Arizona corporate office. We believe employee
relations are good. None of our personnel are covered by collective bargaining
agreements.

ITEM 2. PROPERTIES

     We lease 2,945 square feet of office space in Scottsdale, Arizona for our
corporate office. The lease for the Scottsdale facility expires October 31, 2004
and is at a rental rate of $4,785 to $5,031 per month. Additionally, we lease
1,551 square feet of office space in San Jose, California for our research and
development efforts. The San Jose lease expires August 31, 2003, is
non-cancelable and is at a rental rate that ranges from $3,878 to $4,275 per
month, plus increases in operating expenses. Because of our recent office
consolidation in Scottsdale, Arizona, we are seeking to sub-lease our San Jose
office space.

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

ITEM 3. LEGAL PROCEEDINGS

     On November 13, 2000, we filed legal action against a former director and
officer of Company and his spouse. Our complaint alleged that certain sales and
subsequent purchases of our common stock were in violation of ss. 16(b) of the
Securities and Exchange Act of 1934, 15 U.S.C. ss. 78p(b). In October 2001, we
settled this legal action.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

     None


                                       11
<PAGE>

                                     PART II

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

     The principal United States market for our common stock, with the ticker
symbol of NSCT, is the OTC Bulletin Board. The high and low bid prices for NSC
common stock as reported from October 1, 1999 through September 30, 2001 by
fiscal quarter were as follows:

FISCAL 2001                                           HIGH          LOW
                                                   ----------    ----------
Fourth Quarter (through September 30, 2001)        $      .90    $      .22
Third Quarter (through June 30, 2001)              $     1.81    $     0.76
Second Quarter (through March 31, 2001)            $     3.81    $     1.26
First Quarter (through December 31, 2000)          $     5.06    $     1.04

FISCAL 2000

Fourth Quarter (through September 30, 2000)        $     8.25    $     9.69
Third Quarter (through June 30, 2000)              $     9.78    $     3.63
Second Quarter (through March 31, 2000)            $    18.25    $     1.50
First Quarter (through December 31, 1999)          $     2.91    $     0.19


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

     We have not paid any dividends during the last two fiscal years.

     There were 484 shareholders of record of NSC's common stock as of September
30, 2001.

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

OVERVIEW

     Since May 1996, we have been engaged in research and development activities
in the electrical components and telecommunications industry that have resulted
in the issuance of six U.S. Patents. We also have several patents pending. Our
current activities include:

     o    Research, including product testing;

     o    Product development of electrical devices and components;

     o    Development of markets and distribution channels;

     o    Negotiation of strategic alliances;

     o    Patent applications;

     o    Raising capital; and

     o    Development of corporate infrastructure.

     Development of additional technologies and the associated design
development and manufacturing processes will require us to make significant
additional investments in research and development. We believe continued
investment in both technologies and processes is critical to our success and to
the commercial realization of such technologies. Our current research and
development activities are focused on expanding our existing technology by
developing new electrical applications, materials and processes, design concepts
and architectures.

     We intend to continue our research and development activities for the
foreseeable future. During the next twelve months, we expect to file additional
patent applications for certain of our designs and devices and perform active


                                       12
<PAGE>

testing on most or all our existing devices and designs. See the disclosure
under the captions " Business - Products" and "Product Development" for a
complete discussion of the development status of each of our products.

     Since we have not generated significant revenue from our operations to
date, our ability to file additional patent applications for our devices and
designs and conduct our research, product development, marketing and production
activities over the next 12 months will be primarily dependent upon our ability
to fund such activities from draw downs under our $24 million equity line of
credit. Further, the extent and level of such activities will also be dependent
upon the amount of funds we are able to draw down under the equity line of
credit. If market conditions enable us to draw down only minor amounts of
capital under the equity line, we may be required to focus our research,
development, marketing and production activities on a single product or a select
a number of products in an effort to bring such products to commercial
viability. Similarly, if market conditions enable us to draw down material
amounts of capital under the equity line, our activities will be broader in
scope and will be aimed at bringing each of the products discussed in this
report to the point of commercial viability, unless determinations are made to
subsequently abandon efforts with respect to a particular product. As of the
date of this prospectus, we have not made any determination with regard to which
products we would focus our efforts on should we determine such prioritizations
are necessary. We do not anticipate drawing down, or having access to, the full
$24 million equity line, and in fact, we believe that an aggregate draw down of
$2 million dollars would be sufficient to bring most of our products in
development to market.

     To date, our product research efforts have consisted primarily of research
and patent filings. Research includes engineering time spent in electronics
laboratories, testing and refining new ideas using computers. The research has
resulted in the issuance of multiple patents as more particularly described
earlier in this report. Over the past year, although we continue our research
efforts, we have placed a greater emphasis on developing our ideas into
commercially profitable products. We do not anticipate hiring additional
personnel until such time as our products are ready to be mass produced,
marketed or licensed. In the event we are unable to access meaningful amounts of
funds under our equity line, we may be required to review the size of our
research and development staff and make appropriate staffing adjustments.

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2001 AND 2000

     Revenues increased to $882,715 for the fiscal year ended September 30,
2001, from no revenue in the fiscal year ended September 30, 2000. These
revenues were primarily attributable to our purchase and export of consumer
electronics components. We have ceased these activities due to insufficient
margins.

     Research and development expenditures increased to $1,589,005 for the
fiscal year ended September 30, 2001, from $1,433,751 for the fiscal year ended
September 30, 2000. The increase in research and development costs in the fiscal
2001 was primarily attributable to costs incurred in our San Jose research
facility, which was closed in August, 2001.

     Costs and expenses decreased to approximately $6.3 million in the fiscal
year ended September 30, 2001, from approximately $8.6 million for the prior
fiscal period. We issued restricted common stock as payment for research,
consulting and capital formation expenses that totaled approximately $314,000 in
fiscal 2001 and approximately $9.9 million in fiscal 2000, in order to conserve
cash during both fiscal periods. The stock issued for research was valued at
approximately $2.2 million and was issued primarily to a scientist who developed
most of our patents and subsequently assigned them to us. Capital formation
costs of approximately $1.3 million were paid primarily to two consultants in
the form of common stock for services rendered in connection with our 1999
private placement. Common stock valued at approximately $4.0 million was issued
to certain independent contractors in exchange for consulting services provided
to us. A substantial portion of these consulting expenses relate 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. Other services from the
contractors included accounting and tax services, web page and logo design, as
well as other services needed for building and maintaining our corporate
infrastructure. Cash expenditures for costs and expenses increased to $3.6
million in fiscal 2001 from $1.0 million in fiscal 2000.

     Interest expense was $6,900 and $5,200 in fiscal 2001 and 2000,
respectively. Interest expense for the fiscal year ended September 30, 2001,
consisted of interest paid on our line of credit with Wells Fargo. Interest


                                       13
<PAGE>

expense for the fiscal year ended September 30, 2000 reflects interest paid on a
note payable in the amount of $110,000. We paid the note payable in full in
March 2000.

LIQUIDITY AND CAPITAL RESOURCES

     We have not been profitable and have experienced negative cash flow from
operations due to its development stage, substantial on-going investment in
research and development efforts and expenditures to build the appropriate
infrastructure to support growth. Consequently, we have been dependent on
private placements of equity to fund cash requirements.

     As of September 30, 2001, our cash and cash equivalents totaled $604,761
and total current assets were $1,074,970. We have recently initiated product
marketing efforts after several years of research and development and have not
yet reached break-even in terms of both cash flow and profitability. We have no
long or short-term debt, other than accounts payable and current accrued
liabilities as of September 30, 2001.

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

     In March 2001, we established a line of credit with Wells Fargo HSBC Trade
Bank totaling $500,000. The line of credit is collateralized with deposits at
Wells Fargo Bank. Borrowings under the line of credit bear interest at the prime
rate of Wells Fargo Bank, National Association. At September 30, 2001, there was
$430,000 outstanding under this line of credit. This line of credit was
terminated in October 2001.

     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. This stock purchase
agreement establishes an equity line of credit. Under this arrangement, we at
our sole discretion, may make up to 24 draw down requests over a two year
period, pursuant to which Coriander Enterprises is 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, but will be below the market price of the common
stock at the time of issuance. Changes in the market price and/or trading volume
of our common stock may limit our ability to draw down all $24 million under the
equity line of credit. For more complete information on the equity line of
credit, refer to our Form SB-2, which became effective October 11, 2001.

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

     During the fiscal years ended September 30, 2001 and 2000, we issued
205,000and 2,817,629 shares, respectively, of NSC common stock to consultants in
lieu of cash compensation. Also, during fiscal 2001 and 2000, we granted
1,534,501and 256,000 options, respectively, to employees and consultants to
purchase shares of our common stock. The options granted before the initiation
of the 2000 Stock Option Plan in December 2000, were for shares of common stock
restricted under Rule 144. The options were issued with an exercise price set at
less than fair market value of the shares at the date of grant. During fiscal
year ended September 30, 2000, an additional 256,000 options were granted at an
exercise price of $.10 per share. During the year ended September 30, 2000 all
348,000 outstanding options were exercised. There were no outstanding options at
September 30, 2000. The options granted during fiscal 2001 were issued under the
2000 Stock Option Plan, primarily to employees.


                                       14
<PAGE>

ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS

     IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-KSB, THE FOLLOWING IMPORTANT FACTORS SHOULD BE CAREFULLY CONSIDERED IN
EVALUATING THE COMPANY AND ITS BUSINESS BECAUSE SUCH FACTORS CURRENTLY HAVE A
SIGNIFICANT IMPACT ON THE COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. WE HAVE A HISTORY OF LOSSES AND WE MAY NEVER ACHIEVE OR
SUSTAIN PROFITABILITY.

     We have experienced significant losses and negative cash flows from our
research and development endeavors since we began such activities in 1996. As of
September 30, 2001, we had an accumulated deficit of $18,921,847. We had no
revenues for the fiscal years ended September 30, 1999 and 2000. Although we
reported revenues of $882,715 during the fiscal year ended September 30, 2001,
respectively, these revenues were derived from our import and export activities.
As of the date of this report we have ceased such activities. The future
profitability of our core business will depend primarily on our ability to
generate revenues from the sale of our products and the licensing of our
technology. We may find it necessary to accelerate expenditures relating to the
sale or licensing of our products. 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.

IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL FROM OTHER FINANCINGS, WE MAY HAVE
TO SIGNIFICANTLY CURTAIL THE SCOPE OF OUR OPERATIONS AND ALTER OUR BUSINESS
MODEL.

     We must achieve profitability for our business model to succeed. Prior to
accomplishing this goal, we may need to raise additional funds, from equity or
debt sources. Our cash requirements are substantial, and, despite the fact that
we have raised approximately $4.4 million in recent private placement
transactions, amounts available under the equity line of credit may still not be
sufficient to meet our cash needs in the future. In addition, business and
economic conditions may make it unfeasible or undesirable to draw down under the
common stock purchase agreement at every opportunity, and draw downs are
available only once every 22 trading days. If additional financing is not
available when required or is not available on acceptable terms, we may be
unable to continue our operations at current levels. In addition, any failure to
raise additional funds in the future may result in our inability to successfully
promote or market our products, develop or enhance our existing technologies,
take advantage of business opportunities or respond to competitive pressures,
any of which could cause us to significantly curtail the scope of our operations
and alter our business model.

IF THE PRICE OR THE TRADING VOLUME OF OUR COMMON STOCK DOES NOT REACH CERTAIN
LEVELS, WE WILL BE UNABLE TO DRAW DOWN ALL OR SUBSTANTIALLY ALL OF THE $24
MILLION UNDER THE EQUITY LINE, WHICH MAY FORCE US TO SIGNIFICANTLY CURTAIL THE
SCOPE OF OUR OPERATIONS AND ALTER OUR BUSINESS PLAN.

     The maximum draw down amount every 22 trading days under our equity line
facility is the lesser of $1,000,000 or 6% of the weighted average price of our
stock for the 60 day period prior to the draw down multiplied by the total
trading volume for that 60 day period. If our stock price and trading volume
fall below certain levels, then we will not be able to draw down all $24 million
pursuant to the proposed equity line facility with Coriander Enterprises. For
example, during the 60-day period ended June 30, 2001, our weighted average
stock price was $1.19 per share and our total daily trading volume was 6,403,600
shares. Based on such stock price and trading volume levels, the maximum draw
down amount available to us during such period would have been $390,554. At that
rate, we would be drawing a total of approximately $9,373,296 in the two-year
draw down period. Another example based upon the 60-day period ended September
30, 2001, giving us a weighted average stock price of $.41 per share and a total
trading volume of 6,774,300, would produce a maximum draw down of $141,555 for
that period. At this rate, we would be drawing a total of approximately
$3,397,326 in the two-year draw down period. Accordingly, our stock price and
the trading volume of our stock will have to increase substantially in the
future in order for us to have access to the full $24 million under the equity
line. If we are unable to draw down the full $24 million, we may have to curtail
the scope of our operations as contemplated by our business plan.

IF WE ARE DELISTED FROM THE OTC BULLETIN BOARD OR OUR COMMON STOCK IS SUSPENDED
FROM TRADING, WE WILL NOT BE ABLE TO DRAW DOWN ON THE EQUITY LINE OF CREDIT,
WHICH MAY CAUSE US TO SIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS AND ALTER
OUR BUSINESS PLAN.


                                       15
<PAGE>

     If we are unable to meet the requirements set forth by the NASD for
companies listed on the OTC Bulletin Board, we would be unable to draw down on
the equity line of credit, as provided for in the common stock purchase
agreement. Additionally, if the NASD suspends trading in our common stock for
any reason, we would not be able to draw down on the equity line of credit
during the term of the suspension. If we are unable to draw down on the equity
line of credit, we may be required to significantly curtail or cease our
operations.

IF WE FAIL TO MEET CERTAIN REQUIREMENTS AND CONDITIONS SET FORTH IN THE COMMON
STOCK PURCHASE AGREEMENT, WE WILL NOT BE ABLE TO DRAW DOWN ON THE EQUITY LINE OF
CREDIT, WHICH MAY CAUSE US TO SIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS.

     The common stock purchase agreement requires:

     o    that we do not merge or consolidate with another company during the
          effective term of the common stock purchase agreement;

     o    that no law or statute may prohibit the transactions contemplated by
          common stock purchase agreement; and

     o    that we do not experience a material adverse effect, as defined in the
          common stock purchase agreement.

     If we fail to maintain the foregoing conditions, we would be unable to draw
down on the equity line of credit, which may cause us to significantly curtail
or cease our operations.

OUR COMMON STOCK PURCHASE AGREEMENT LIMITS THE NUMBER OF SHARES OF COMMON STOCK
CORIANDER ENTERPRISES IS REQUIRED TO HOLD AT ANY ONE TIME TO 9.9%, WHICH MAY
FURTHER LIMIT OUR ABILITY TO DRAW DOWN AMOUNTS THAT WE REQUEST AND WHICH MAY
CAUSE US TO SIGNIFICANTLY CURTAIL THE SCOPE OF OUR OPERATIONS AND ALTER OUR
BUSINESS PLAN.

     The common stock purchase agreement provides that we may not sell shares of
our common stock pursuant to our draw down rights under such agreement if such
sale would cause Coriander Enterprises to beneficially own more than 9.9% of our
issued and outstanding common stock on any given date. Accordingly, we may have
to significantly curtail the scope of our operations and alter our business plan
if, at the time of one or more draw downs, this 9.9% restriction results in our
inability to draw down some or all of the amounts requested in any draw down
notice.

IF WE OR ANY OF OUR STRATEGIC PARTNERS EXPERIENCE PROBLEMS WITH THE COMPLEX
MANUFACTURING PROCESSES OF OUR DEVICES AND PRODUCTS, WE WILL NOT BE ABLE TO
ACCURATELY FORECAST MANUFACTURING YIELDS AND COSTS, WHICH WILL IN TURN
NEGATIVELY IMPACT OUR ABILITY TO OPERATE PROFITABLY AND THE VALUE OF OUR STOCK.

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

WE MAY EXPERIENCE CYCLICAL FLUCTUATIONS IN THE DEMAND AND SUPPLY FOR OUR
SEMICONDUCTOR PRODUCTS, WHICH MAY CAUSE A DECLINE IN OUR SALES OR THE PRICES OF
OUR PRODUCTS AND A CORRESPONDING DECLINE IN OUR REVENUES AND PROFITABILITY.

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

     o    Excess production capacity in the industry;


                                       16
<PAGE>

     o    Maturing product cycles;

     o    Rapid technological change in the industry; and

     o    General economic conditions in the industry.

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

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

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

OUR COMMON STOCK HAS EXPERIENCED IN THE PAST, AND IS EXPECTED TO EXPERIENCE IN
THE FUTURE, SIGNIFICANT PRICE AND VOLUME VOLATILITY, WHICH SUBSTANTIALLY
INCREASES THE RISK OF LOSS TO OUR STOCKHOLDERS AND MAY NEGATIVELY IMPACT AN
INVESTOR'S ABILITY TO SELL OUR COMMON STOCK.

     Because of the limited trading market for our common stock, and because of
the possible price volatility, you may not be able to sell your shares of common
stock when you desire to do so. In fiscal 2000, our stock price ranged from a
high of $19.125 to a low of $0.205 per share, and in fiscal 2001 our stock price
ranged form a high of $5.06 to a low of $0.21. The inability to sell your shares
in a rapidly declining market may substantially increase your risk of loss due
to potential illiquidity and the possibility that our common stock may suffer
greater declines.

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

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

ITEM 7. FINANCIAL STATEMENTS

     Our financial statements are included (with an index listing all such
statements) in a separate financial section immediately following the signature
page of this Annual Report on Form 10-KSB.

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

     None


                                       17
<PAGE>

                                    PART III

     PURSUANT TO PARAGRAPH (E)(3) OF THE GENERAL INSTRUCTIONS TO FORM 10-KSB,
PORTIONS OF THE INFORMATION REQUIRED BY PART III OF FORM 10-KSB ARE INCORPORATED
BY REFERENCE FROM THE COMPANY'S PROXY STATEMENT TO BE FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IN CONNECTION WITH THE COMPANY'S 2002 ANNUAL MEETING OF
SHAREHOLDERS (THE "PROXY STATEMENT").

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

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

NAME                       AGE   POSITION
----                       ---   --------
Lou L. Ross                72    CEO, Chairman of the Board
Michael A. Grollman        40    President, COO, Director
Sam H. Carr                45    Senior Vice President, CFO, Director, Secretary
Dr. El-Badawy El-Sharawy   43    Chief Technical Consultant
Charles E. Martin          42    Director


     DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT ADVISORS

     LOU L. ROSS has served as Chairman of the Board of Directors since 1996 and
assumed President & CEO duties in March 1998. From 1970 to 1975, Mr. Ross served
as Chairman & CEO of Intel Malaysia, established Intel's Manila plant and
started Intel's military products operation. From 1976 to 1996, Mr. Ross served
in a technical consulting capacity for various electronics manufacturing firms,
including Labelab and Advanced Semiconductor Engineering.

     MICHAEL A. GROLLMAN became Chief Operation Officer of NSC in October 2000
and was elected to its Board in November 2000. Mr. Grollman was promoted as
President in April 2001. Prior to joining NSC, Mr. Grollman was Regional Service
Director of MicroAge, Inc. in Phoenix, Arizona beginning in 1998. He served as
General Manager, Executive Vice President and Chief Technology Officer for
Advanced Information Systems from 1987 to 1998.

     SAM H. CARR, C.P.A., joined NSC as its Chief Financial Officer in October
2000 and was elected to its Board in November 2000. From 1997 to 2000, he served
as Senior Vice President of Finance and Chief Financial Officer for
e-dentist.com, formerly known as the Pentegra Dental Group, Inc. Prior to that,
Mr. Carr was Chief Financial Officer and Chief Development Officer for a
consolidator of podiatry practices.

     EL-BADAWY EL-SHARAWY, PH.D. has been with NSC since its inception in 1996
as its Chief Technical Advisor. He has been an Assistant Professor of Electrical
Engineering since 1989 at a major Arizona university. His expertise includes
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.

     CHARLES E. MARTIN was appointed Director of NSC in December 2000. Since
November 1999 he has been the President of Kinetic Thinking, a technology
consulting firm. He served as the Chief Technology Officer for MicroAge from
July 1997 until November 1999. Mr. Martin was employed by Solutions Consulting
from July 1996 until July 1997. From February 1995 until July 1996 he worked as
a consultant with Ernst & Young.

     DIRECTOR COMPENSATION

     The other information required by this Item is incorporated by reference to
the Company's Proxy Statement.

ITEM 10. EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.


                                       18
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference to the
Company's Proxy Statement.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

     (a)(1) The financial statements listed in the index set forth in Item 7 of
this Form 10-KSB are filed as part of this report.

     (a)(2) Exhibits. See the Exhibit Index located immediately following the
Company's financial statements, which follow the signature page of this report.

     (b) Reports on Form 8-K. There were no Reports on Form 8-K filed during the
fiscal quarter ended September 30, 2001.


                                       19
<PAGE>

                                   SIGNATURES

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

                               NATIONAL SCIENTIFIC CORPORATION

Date:  December 19, 2001       By: /s/ L. L. Ross
                                   -------------------------------------------
                                   L. L. Ross
                                   Chairman Of The Board And
                                   Chief Executive Officer


                                POWER OF ATTORNEY

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael A. Grollman and Sam H. Carr, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-KSB
Annual Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

                               By: /s/ L. L. Ross
                                   ---------------------------------------------
                                   L. L. Ross
                                   Chairman Of The Board of Directors

                               By: /s/ Michael A. Grollman
                                   ---------------------------------------------
                                   Michael A. Grollman
                                   President, COO and Director

                               By: /s/ Sam H. Carr
                                   ---------------------------------------------
                                   Sam H. Carr
                                   Senior V.P., CFO, Secretary and Director

                               By: /s/ Charles E. Martin
                                   ---------------------------------------------
                                   Charles E. Martin
                                   Director


                                       20
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Report of Independent Public Accountants..................................   F-2
Balance Sheets............................................................   F-3
Statements of Operations..................................................   F-4
Statements of Shareholders' Equity (Deficit)..............................   F-5
Statements of Cash Flows..................................................   F-8
Notes to Financial Statements.............................................   F-9




                                      F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Board of Directors
National Scientific Corporation

     We have audited the accompanying balance sheets of National Scientific
Corporation (a development stage Company) as of September 30, 2001 and 2000, and
the related statements of operations, shareholders' equity (deficit), and cash
flows for each of the two years in the period ended September 30, 2001 and from
September 30, 1997 (inception of development stage) through September 30, 2001.
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 generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from 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 present fairly, in all material
respects, the financial position of National Scientific Corporation as of
September 30, 2001 and 2000 and the results of its operations and its cash flows
for each of the two years in the period ended September 30, 2001 and from
September 30, 1997 (inception of development stage) through September 30, 2001
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 is in the development
stage, has not yet generated significant revenues and is dependent upon raising
capital from investors. Additionally, National Scientific has incurred aggregate
losses during the past two years of over $14,800,000. These matters raise
substantial doubt about its 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
November 29, 2001


                                      F-2
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
                                 BALANCE SHEETS
                           September 30, 2001 and 2000
<TABLE>
<CAPTION>
                                                               2001            2000
                                                           ------------    ------------
                         ASSETS
<S>                                                        <C>             <C>
Current Assets:
   Cash and cash equivalents                               $    604,761    $  2,584,900
   Inventory                                                     20,000              --
   Loan to officer                                              100,000         200,000
   Other assets                                                  21,358         105,556
                                                           ------------    ------------
       Total current assets                                     746,119       2,890,456

Property and equipment, net                                     135,836           7,397
Deferred offering costs                                         193,015              --
                                                           ------------    ------------
                                                           $  1,074,970    $  2,897,853
                                                           ============    ============

           LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
   Accounts payable and accrued expenses                   $    326,367    $     25,954
   Line of credit                                               430,000              --
                                                           ------------    ------------
       Total current liabilities                                756,367          25,954
                                                           ------------    ------------
Shareholders' equity (deficit):
   Common stock, par value $.01; 120,000,000 shares
     authorized, and 47,367,498 and 47,195,768 shares
     issued and outstanding at September 30, 2001 and
     2000, respectively                                         473,675         471,958
   Additional paid-in capital                                17,966,208      18,799,420
   Stock options exercisable                                    800,567              --
   Less deferred stock compensation                                  --      (3,712,500)
   Accumulated deficit                                      (18,921,847)    (12,686,979)
                                                           ------------    ------------
          Total shareholders' equity                            318,603       2,871,899
                                                           ------------    ------------
                                                           $  1,074,970    $  2,897,853
                                                           ============    ============
</TABLE>

                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      F-3
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
       For the Years Ended September 30, 2001, 2000, and Development Stage
<TABLE>
<CAPTION>
                                                                                DEVELOPMENT
                                                    2001           2000            STAGE
                                               ------------    ------------    ------------
<S>                                            <C>             <C>             <C>
Revenues                                       $    882,715    $         --    $    882,715
Cost of Sales                                       869,750              --         869,750
                                               ------------    ------------    ------------
Gross profit                                         12,965              --          12,965

Costs and expenses
   Consulting fees, related party                   422,008       6,960,170       8,158,323
   Salaries and benefits                          1,040,777              --       1,114,483
   Research and development                       1,589,005       1,433,751       3,474,286
   Stock compensation                             2,173,592          50,320       2,328,868
   Other                                          1,121,011         197,536       1,590,808
                                               ------------    ------------    ------------
Total costs and expenses                          6,346,393       8,641,777      16,666,768
                                               ------------    ------------    ------------
Loss from operations                             (6,333,428)     (8,641,777)    (16,653,803)
                                               ------------    ------------    ------------
Other income (expense)
   Interest and other income                        105,441          71,667         178,388
   Interest expense                                  (6,881)         (5,189)        (23,197)
   Loss on disposal of assets                            --              --         (28,555)
                                               ------------    ------------    ------------
                                                     98,560          66,478         126,636
                                               ------------    ------------    ------------
Net loss                                       $(6,234,868))   $ (8,575,299)    (16,527,167)
                                               ============    ============    ============

Net loss per common share, basic and diluted   $      (0.13)   $      (0.20)
                                               ============    ============
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      F-4
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
                  STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
       For the Years Ended September 30, 2001, 2000 and Development Stage
<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      SHARES       VALUE       CAPITAL       DEFICIT         TOTAL
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
<S>                                  <C>          <C>         <C>         <C>         <C>           <C>            <C>
Balance, September 30, 2000.......   47,195,768   $ 471,958          --   $      --   $15,086,920   $(12,686,979)  $ 2,871,899
Stock issued for services:
Stock issued for services at $1.66      100,000       1,000          --          --       164,600           --         165,600
Stock issued for services at $1.55       15,000         150          --          --        23,070           --          23,220
Stock issued for services at $4.32        5,000          50          --          --        21,550           --          21,600
Stock issued for services at $1.32       75,000         750          --          --        98,475           --          99,225
Stock issued for services at $0.51       10,000         100          --          --         5,030           --           5,130

Exercise of warrants and options..    1,291,730      12,917          --          --     1,278,813           --       1,291,730
Amortization of stock
  compensation....................           --          --          --          --     3,712,500           --       3,712,500

Exchange for stock options........   (1,325,000)    (13,250)         --          --    (2,424,750)          --      (2,438,000)
Common stock options
   exercisable....................           --          --          --          --       800,567           --         800,567
Net loss..........................           --          --          --          --            --     (6,234,868)   (6,234,868)
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
Balance, September 30, 2001.......   47,367,498   $ 473,675          --   $      --   $18,766,775   $(18,921,847)  $   318,603
                                     ==========   =========   =========   =========   ===========   ============   ===========
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS

                                      F-5
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
                  STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
       For the Years Ended September 30, 2000, 1999 and Development Stage

<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      SHARES       VALUE       CAPITAL       DEFICIT         TOTAL
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
<S>                                  <C>          <C>         <C>         <C>         <C>           <C>            <C>
Balance, September 30, 1999........  36,544,289   $ 365,443          --   $      --   $ 3,678,315   $ (4,111,680)  $   (67,922)
Stock issued for services..........
Price per share ranged:
  $0.18 to $0.85...................     775,000       7,750          --          --       397,620             --       405,370
  $1.74 to $2.70...................     606,797       6,067          --          --     1,071,028             --     1,077,095
  $3.26 to $4.50...................     139,000       1,390          --          --       457,884             --       459,274
  $5.12 to $6.92...................     236,832       2,369          --          --     1,411,591             --     1,413,960
  $7.43 to $8.80...................   1,060,000      10,600          --          --     7,929,921             --     7,940,521
Exercise of warrants and options...   3,440,250      34,403          --          --     3,151,997             --     3,186,400
Private placement of common stock:
   Shares issued for:
     $0.11.........................   2,430,000      24,300          --          --       245,700             --       270,000
     $0.25.........................     360,000       3,600          --          --        86,400             --        90,000
     $0.40.........................     975,000       9,750          --          --       380,250             --       390,000
Stock converted by director's
   family member...................   1,128,600      11,286          --          --       (11,286)            --            --
Common stock to collateralize
   loan-retired....................    (500,000)     (5,000)         --          --            --             --        (5,000)
Deferred stock compensation........          --          --          --          --    (3,712,500)            --    (3,712,500)
Net loss...........................          --          --          --          --            --     (8,575,299)   (8,575,299)
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
Balance, September 30, 2000........  47,195,768   $ 471,958          --   $      --   $15,086,920   $(12,686,979)  $ 2,871,899
                                     ==========   =========   =========   =========   ===========   ============   ===========
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      F-6
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
            STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       For the Years Ended September 30, 1999, 1998 and Development Stage
<TABLE>
<CAPTION>
                                          COMMON STOCK           PREFERRED STOCK
                                     ----------------------   ---------------------    ADDITIONAL
                                      NUMBER OF      PAR      NUMBER OF      PAR        PAID-IN      ACCUMULATED
                                       SHARES       VALUE      SHARES       VALUE       CAPITAL       DEFICIT         TOTAL
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
<S>                                  <C>          <C>         <C>         <C>         <C>           <C>            <C>
Balance, September 30, 1998........  25,331,849   $ 253,318      15,000   $   1,500   $ 2,823,491   $ (3,167,225)  $   (88,916)
Stock issued for services:
  Price per share ranged
    $0.09 to $0.18.................   3,020,000      30,200          --          --       528,239             --       558,439
    $0.20 to $0.29.................     145,000       1,450          --          --        33,110             --        34,560
Preferred stock offering...........          --          --      47,000       4,700       230,300             --       235,000
Exercise of warrants and
   options.........................     496,000       4,960          --          --        27,490             --        32,450
Private placement of
   common stock....................     400,000       4,000          --          --        96,000             --       100,000
Conversion of preferred
   to common stock.................   6,200,000      62,000     (62,000)     (6,200)      (55,800)            --            --
Common stock issued to
   collateralize loan..............     500,000       5,000          --          --            --             --         5,000
Stock converted by director's
   family member...................     451,440       4,515          --          --        (4,515)            --            --
Net loss...........................          --          --          --          --            --       (944,455)     (944,455)
                                     ----------   ---------   ---------   ---------   -----------   ------------   -----------
Balance, September 30, 1999........  36,544,289   $ 365,443          --   $      --   $ 3,678,315   $ (4,111,680)  $   (67,922)
                                     ==========   =========   =========   =========   ===========   ============   ===========
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      F-7
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A Development Stage Company)
            STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       For the Years Ended September 30, 1998, 1997 and Development Stage
<TABLE>
<CAPTION>
                                         COMMON STOCK          PREFERRED STOCK
                                     ---------------------  --------------------  ADDITIONAL
                                      NUMBER OF     PAR     NUMBER OF     PAR      PAID-IN    ACCUMULATED   DEVELOPMENT
                                       SHARES      VALUE     SHARES      VALUE     CAPITAL      DEFICIT    STAGE DEFICIT     TOTAL
                                     ----------  ---------  ---------  ---------  ----------  -----------  -------------   ---------
<S>                                  <C>         <C>        <C>        <C>        <C>         <C>          <C>             <C>
Balance, October 1, 1997...........  17,847,292  $ 178,473         --  $      --  $2,160,780  $(2,394,680) $          --   $(55,427)
Stock issued for services..........   3,487,557     34,875         --         --     335,473           --             --    370,348
Private placement of
   preferred stock.................          --         --     49,500      4,950     242,550           --             --    247,500
Exercise of warrants and
   options.........................     547,000      5,470         --         --     100,888           --             --    106,358
Conversion of preferred
   to common stock.................   3,450,000     34,500    (34,500)    (3,450)    (31,050)          --             --         --
Contributed capital................          --         --         --         --      14,850           --             --     14,850
Net loss...........................          --         --         --         --          --           --       (772,545)  (772,545)
                                     ----------   --------  ---------  ---------  ----------  -----------   ------------   ---------
Balance, September 30, 1998........  25,331,849   $253,318     15,000  $   1,500  $2,823,491  $(2,394,680)  $   (772,545)  $(88,916)
                                     ==========   ========  =========  =========  ==========  ===========   ============   =========
</TABLE>


                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS


                                      F-8
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
       For the Years Ended September 30, 2001, 2000 and Development Stage
<TABLE>
<CAPTION>
                                                                                             DEVELOPMENT
                                                                 2001           2000            STAGE
                                                            ------------    ------------    ------------
<S>                                                         <C>             <C>             <C>
Cash flows from operating activities:
   Net loss .............................................   $ (6,234,868)   $ (8,575,299)   $(16,527,167)
   Adjustments to reconcile net loss to net cash used in
     operating activities:
     Noncash transactions:
     Depreciation .......................................         19,405           1,792          29,424
     Loss on disposal of assets .........................             --              --          28,555
     Stock issued for services ..........................     (1,322,658)      7,583,720      10,936,909
     Deferred stock compensation ........................      3,712,500              --              --
     Advances to affiliate ..............................             --              --              --
     Increase in inventory ..............................        (20,000)             --         (20,000)
     Deferred offering costs ............................       (193,015)             --        (193,015)
     Decrease in receivables ............................        100,000              --         130,000
     (Increase) decrease in other assets ................         84,198        (105,556)        (10,787)
     Increase in accounts payable and accrued expenses           300,412           6,037         303,787
     Decrease in accrued interest .......................             --          (8,530)             --
                                                            ------------    ------------    ------------
       Net cash used in operating activities ............     (3,554,026)     (1,097,836)     (5,322,294)
                                                            ------------    ------------    ------------
Cash flows from investing activities:
   Acquisition of property and equipment ................       (147,843)         (5,849)       (153,692)
   Repayment of loans ...................................        200,000              --         200,000
   Proceeds from the sale of furniture and equipment ....             --              --           4,660
   Loans issued .........................................       (200,000)       (200,000)       (400,000)
                                                            ------------    ------------    ------------
       Net cash used in investing activities ............       (147,843)       (205,849)       (349,032)
                                                            ------------    ------------    ------------
Cash flows from financing activities:
   Draws on the line of credit ..........................        430,000              --         430,000
   Loan to officer ......................................             --              --         (10,000)
   Repayment of notes payable ...........................             --        (110,000)       (110,000)
   Repayment of capital lease obligations ...............             --              --          (1,819)
   Proceeds from the issuance of preferred stock ........             --              --         482,500
   Proceeds from issuance of common stock ...............      1,291,730       3,936,400       5,481,788
                                                            ------------    ------------    ------------
       Net cash provided by financing activities ........      1,721,730       3,826,400       6,272,469
                                                            ------------    ------------    ------------
Net (decrease) increase in cash and cash equivalents ....     (1,980,139)      2,522,715         601,143
Cash and cash equivalents, beginning of year ............      2,584,900          62,185           3,618
                                                            ------------    ------------    ------------
Cash and cash equivalents, end of year ..................   $    604,761    $  2,584,900    $    604,761
                                                            ============    ============    ============
Supplementary Disclosure of Cash Flow Information:
Cash paid during the year for interest ..................   $      6,881    $     13,719    $     20,600
                                                            ============    ============    ============
Cash paid during the year for income taxes ..............   $         50    $         --    $         50
                                                            ============    ============    ============
</TABLE>

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.


                                      F-9
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

     a.   OPERATIONS

          The  Company  was  incorporated  in Texas on June 22, 1953 as American
     Mortgage  Co. On May 16,  1996,  the  Company  changed its name to National
     Scientific  Corporation  (NSC).  During  1996,  the  Company  acquired  the
     operations of Eden Systems,  Inc. as a  wholly-owned  subsidiary.  Eden was
     engaged in water treatment and the retailing of cleaning  products.  Eden's
     operations  were  sold on  September  30,  1997.  As such,  management  now
     considers NSC to be in the development stage. Since September 30, 1997, the
     Company  has  engaged  its  efforts  in the  research  and  development  of
     semiconductor  proprietary  technology and processes and in raising capital
     to fund its operations and research.

     b.   CASH EQUIVALENTS

          Cash equivalents include money market accounts and other short-term
     investments with an original maturity of three months or less. At September
     30, 2001, the Company had cash of approximately $604,761 which exceeded
     federally insured limits.

     c.   INVENTORY

          Inventory consists of processed silicon wafers not yet completed or
     ready for shipment. Inventory is valued at the lower of its manufacturing
     cost or market. Cost is determined on a 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 $46,682 in 2001 and
     $17,512 in 2000 are expensed as incurred.

     f.   STOCK OPTIONS

          The Company has elected to follow Accounting Principles Board Opinion
     No. 25, "Accounting for Stock Issued to Employees" and related
     interpretations in accounting for its employee stock options. Under APB 25,
     no compensation expense is recorded when the exercise price of the option
     equals or is higher than the market price of the underlying stock on the
     date of the grant. The Company has adopted the disclosure only provisions
     of Statement of Financial Accounting Standards No. 123, "Accounting for
     Stock Based Compensation".

     g.   INCOME TAXES

          Income taxes are accounted for in accordance with Statement of
     Financial Accounting Standards No. 109, "Accounting For Income Taxes".
     Deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amount of existing assets and liabilities and their respective tax
     bases, including operating loss and tax credit carryforwards. Deferred tax


                                      F-10
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


     assets and liabilities are measured using enacted tax rates expected to
     apply to taxable income in the years in which those temporary differences
     are expected to be recovered or settled. The effect in deferred tax assets
     and liabilities of a change in tax rates is recognized in income in the
     period that includes the enactment date. Valuation allowances are
     established when necessary to reduce deferred tax assets to the amount
     expected to be realized.

     h.   RESEARCH AND DEVELOPMENT/PATENTS

          Both research and development and the costs associated with obtaining
     patents have been expensed as incurred. Patent costs are expensed, since
     the Company has not yet developed products, which have gained market
     acceptance. Research and development expenditures increased to $1,589,005
     for the fiscal year ended September 30, 2001, from $1,433,751 for the
     fiscal year ended September 30, 2000. The increase in research and
     development costs in the fiscal 2001 was primarily attributable to costs
     incurred in the San Jose research facility, which was closed in August,
     2001.

     i.   NET LOSS PER SHARE

          Net loss per basic and diluted share is computed by dividing the loss
     attributable to common shareholders by the weighted average number of
     shares outstanding during the period, which was assumed to be 47,884,820
     and 43,707,159 for the years ended September 30, 2001 and 2000,
     respectively. Stock options and warrants are considered antidilutive and
     were not considered in the calculation.

     j.   ACCUMULATED DEFICIT

          The Company's accumulated deficit includes $2,394,680 of losses
     sustained through September 30, 1997 when the Company was not in the
     development stage.

     k.   RECENT ACCOUNTING PRONOUNCEMENTS

          The Financial Accounting Standards Board has established the following
     new pronouncements; we do not expect the adoption of these statements to
     have a material impact on our financial position, results of operations or
     cash flows: SFAS No. 133, "Accounting for Derivative Instruments and
     Hedging Activities (effective for years beginning after June 15, 2000),"
     SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
     Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
     Enterprise - an amendment of SFAS No. 65 (effective for fiscal quarters
     beginning after December 15, 1998)," SFAS No. 135, "Rescission of SFAS No.
     75 and Technical Corrections (effective for fiscal years ending after
     December 15, 1999)," SFAS No. 137, "Accounting for Derivative Instruments
     and Hedging Activities - Deferral of the Effective date of SFAS No. 133 -
     an amendment of SFAS No. 133 (effective June 1999)," SFAS No. 138,
     "Accounting for Certain Derivative Instruments and Certain Hedging
     Activities - an amendment of SFAS No. 133 (effective for fiscal years
     beginning after June 15, 2000)," SFAS No. 139, "Rescission of SFAS No. 53
     and amendments to SFAS No. 63, 89, and 121 (effective for fiscal years
     beginning after December 15, 2000)," SFAS No. 140, "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities - a replacement of SFAS No. 125 (effective for certain
     disclosures for fiscal years beginning after December 15, 2000)," SFAS No.
     141, "Business Combinations," which eliminates the pooling-of-interests
     method for business combinations initiated after June 30, 2001, SFAS No.
     142, "Goodwill and Other Intangible Assets" (effective for fiscal years
     beginning after March 15, 2001), which enhances disclosure for those assets
     subsequent to their acquisition, SFAS No. 143, "Accounting for Asset
     Retirement Obligations," which is effective for financial statements issued
     for fiscal years beginning after June 15, 2002, and SFAS No. 144,
     "Accounting for the Impairment or Disposal of Long-Lived Assets" (effective
     for financial statements issued for fiscal years beginning after December
     15, 2001, and interim periods within those fiscal years), which supersedes
     SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
     Long-Lived Assets to be disposed of" and provides guidance for estimating
     the recoverability of the carrying amount of these assets through a
     probability-weighted cash flow approach.

2.   DEVELOPMENT STAGE OPERATIONS

          While in the development stage, the Company experienced significant
     operating losses during 2001 and 2000, of approximately $6.2 million and
     $8.6 million respectively, which raise substantial doubt about the
     Company's ability to continue as a going concern. Of the total net
     operating losses, approximately $300,000 and $7.6 million related to stock
     issued for services in 2001 and 2000, respectively.


                                      F-11
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


          During the year ended September 30, 2000, the Company raised
     approximately $3,900,000 from sale of its common stock; and subsequent to
     September 30, 2000, the Company raised an additional $1,291,730 from the
     exercise of common stock warrants. Management believes that its current
     cash position together with the proceeds from the sale of stock registered
     on Form SB-2 with the Securities and Exchange Commission (see Note 12) will
     be adequate to fund operations and research for the next fiscal year, until
     the Company can generate significant revenues. The Company is also seeking
     other financing sources that will further enhance its liquidity. However,
     there can be no assurance that these actions will be successful. The
     accompanying financial statements do not include any adjustments relating
     to the recoverability and classification of the recorded asset amounts or
     the amounts and classification of liabilities that might be necessary
     should the Company be unable to continue in existence.

3.   PROPERTY AND EQUIPMENT

          Property and equipment consists of the following at September 30, 2001
     and 2000:

                                                          2001      2000
                                                        --------  -------
     Computer equipment.............................    $145,517  $ 8,907
     Office furniture...............................      12,507    3,623
                                                        --------  -------
                                                         158,024   12,530
     Less: accumulated depreciation.................      22,188    5,133
                                                        --------  -------
                                                        $135,836  $ 7,397
                                                        ========  =======

4.   PRIVATE PLACEMENT OF COMMON AND PREFERRED STOCK

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

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

          In consideration of the transfer by the spouse of the Chairman of the
     Company of an aggregate of 840,000 shares of unrestricted common stock
     owned by her in connection with the foregoing offering, the Company, at her
     direction, issued to its Chairman 1,580,040 shares of restricted common
     stock and agreed that the Chairman would receive 4% of all future corporate
     gross revenues generated from the sale of the Company's products. In
     connection with the foregoing transaction, the Company's financial
     statements reflect cash collections of $750,000 and $100,000 for fiscal
     2000 and 1999, respectively. Restricted common stock issued in connection
     with the foregoing transaction totaled 4,893,600 shares for fiscal 2000 and
     85,144 shares for fiscal 1999.

          In conjunction with the August 1, 1999 offering, the Company agreed to
     issue one share of common stock to two key consultants for each dollar
     raised, provided the offering generated a minimum of $150,000. The maximum
     number of shares to be issued was 300,000 to each consultant. A liability
     of $15,000 was accrued for issuance of the stock at September 30, 1999.
     Since the offering was successful, 600,000 shares of restricted common


                                      F-12
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


     stock were issued that were valued at $1,062,720. The Company also issued
     300,000 shares to a key consultant during the year ended September 30, 2000
     in conjunction with attaining goals related to the Company's stock.

          During the year ended September 30, 2000, 2,972,250 warrants to
     purchase common stock were exercised at an exercise price of $1.00 per
     share each and 120,000 warrants to purchase common stock were exercised at
     an exercise price of $1.50 per share each generating a total of $3,152,250.

5.   LEASE COMMITMENTS

          On September 11, 2001 the Company signed a thirty-seven month
     non-cancelable operating lease agreement for an office in Scottsdale,
     Arizona which expires on October 31, 2004. The lease requires monthly
     payments of $4,785 to $5,031 over the term of the lease (plus sales taxes)
     and contains no renewal or purchase options. On August 17, 2000 the Company
     entered into a three-year non-cancelable operating lease for the San Jose,
     California office, which expires on August 31, 2003. The lease requires
     monthly payments which range from $3,878 to $4,275 over the term of the
     lease, plus increases in operating expenses. It contains no renewal or
     purchase options.

          Future minimum lease obligations at September 30, 2001 are as follows:

          YEAR ENDING SEPTEMBER 30,
          2002............................................       101,698
          2003............................................       105,802
          2004............................................        60,250
          2005............................................         5,031
                                                                --------
                                                                $272,781
                                                                ========

          Rent expense for the years ended September 30, 2001 and 2000 was
     approximately $99,973 and $32,840 respectively.

6.   INCOME TAXES

          Deferred income taxes consist of the following at September 30, 2001
     and 2000:

                                                       2001            2000
                                                   -----------      -----------
     Tax Benefit of net operating loss carry
       forwards and start up costs...............  $ 4,780,000      $ 3,860,000
     Valuation allowance.........................   (4,780,000)      (3,860,000)
                                                   -----------      -----------
                                                   $        --      $        --
                                                   ===========      ===========

          A reconciliation of expected to actual taxes follows:

     Expected federal and state tax recovery
       at 40%....................................  $(2,400,000)     $(3,430,000)
     Non-deductible stock compensation...........    1,480,000               --
                                                   -----------      -----------
                                                      (920,000)      (3,430,000)
                                                   -----------      -----------
     Tax benefits not realized-valuation
       allowance.................................      920,000        3,430,000
                                                   -----------      -----------
     Financial statement recovery of income
       taxes.....................................  $        --      $        --
                                                   ===========      ===========

          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 losses is uncertain. During fiscal 2001
     and 2000, the valuation allowance increased by $920,000 and $3,430,000
     respectively.

          The Company has net operating loss carryforwards of approximately
     $11,950,000 at September 30, 2001, which may be used to offset future
     federal taxable income through 2020 and state taxable income through 2006.


                                      F-13
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


          Due to changes in ownership during 1996, the Company expects that the
     availability of losses generated prior to that time will not be
     significant. Valuation allowances would be recorded to offset any value
     assigned, since the Company is in the development stage and has recorded
     losses from operations for several years.

7.   RELATED PARTY TRANSACTIONS

          The Company incurred professional and consulting fees, in connection
     with product research and development and operations of approximately
     $400,000 and $7.0 million to various officers and key consultants of the
     Company during the years ended September 30, 2001 and 2000, respectively.

          The above fees have been restated as of August 13, 2001 to reflect a
     10% discount from the market price of the common stock to allow for the
     lack of liquidity and market uncertainty of issued restricted shares in
     lieu of cash.

          For the two years ended September 30, 2000 and the two months ended
     November 30, 2000, the Company purchased services from officers and
     consultants under independent contractor agreements. The Company did not
     have any employees during this period, and as a result, reported no
     salaries and benefits expense. Compensation to officers and consultants has
     been recorded as "Consulting fees, related party" or "Research and
     development" according to the nature of the expense.

          On September 1, 2000, Dr. Majid Hashemi became President of the
     Company, and as partial compensation for his independent contractor
     agreement to serve as President and Chief Technical Officer, he was issued
     1,000,000 shares of common stock, (restricted by Section 144), valued at
     $7,425,000. As a result of this transaction, stock compensation expense in
     the amount of $3,712,500 was recorded in the year ended September 30, 2000.
     The balance of $3,712,500 at September 30, 2000 was being deferred and
     amortized over the three-year term of Dr. Hashemi's employment contract.

          In the first quarter of fiscal year 2001, Dr. Majid Hashemi and the
     Company executed an employment agreement under which Dr. Hashemi is to
     serve as the Division President of the California Division. As part of his
     employment agreement, he received 2,766,667 common stock options in
     exchange for 1,325,000 previously issued shares of common stock. This
     employment agreement represented a modification of his September 1, 2000
     consulting agreement. The stock options, as valued under the Black-Scholes
     model, had a fair value of $3,478,000, whereas the returned stock had a
     fair value of $2,672,500 on the date of the exchange, resulting in a net
     charge to operations of $805,500. Additionally, $3,712,500 in deferred
     stock compensation, arising from the initial consulting agreement and being
     amortized over a three-year service period, was expensed in full. In the
     fourth quarter of fiscal 2001, the Company rescinded the employment
     agreement, which included the stock option grant. As a result, the Company
     reversed the charge to compensation expense representing the original grant
     of vested options by $3,478,000. The net compensation expense associated
     with these transactions recognized in the financial statements during the
     fiscal year ended September 30, 2001 was $1,040,000, the difference between
     the amortization of the deferred stock compensation and the market value of
     the returned stock. Dr. Hashemi is no longer employed by the Company.

          Loan to officer consisted of a $200,000, 10% promissory note from the
     Company's chairman originally due December 1, 2000. In December, 2000 the
     Board authorized the extension of the loan to officer until December 1,
     2001. As of September 30, 2001, the Company had recorded interest income of
     $20,000 and accrued interest receivable of $29,275 in connection with the
     loan. In December 2001, the Board authorized Mr. Ross to return 250,000
     shares if common stock in NSC, together with all rights to pursue recovery
     from the investment Mr. Ross made in a local manufacturer of firewall
     hardware, in exchange for the note and accrued interest. The stock to be
     returned had a market value of $100,000 at September 30, 2001. As a result,
     compensation expense of $129,275 has been recorded for the year ended
     September 30, 2001 for the difference between the note including accrued
     interest and the value of common stock at September 30, 2001 to be retuned.

          Substantially all officers have employment contracts, many of which
     include termination clauses and the granting of stock or options.


                                      F-14
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


8.   SUBSIDIARY

          In May, 2001, the Company formed a wholly owned California corporation
     named Wireless Touch Design, Inc. This subsidiary, which holds no assets,
     has been and remains dormant.

9.   DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

          Statement of Financial Accounting Standards No. 107, "Disclosures
     about Fair Value of Financial Instruments" requires that the Company
     disclose estimated fair values for its financial instruments. The following
     summary presents a description of the methodologies and assumptions used to
     determine such amounts.

          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, 2001, 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. The recorded balance of the loan receivable
     is assumed to be the fair value, since the rate specified in the note
     approximates current market rates.

10.  STOCK OPTION PLAN

          The Company from time to time issues stock options for the purchase of
     restricted stock to directors, officers, employees and consultants. The
     Company's board of directors adopted the 2000 Stock Option Plan effective
     January 1, 2001. The Company's stockholders formally approved the 2000
     Stock Option Plan on February 14, 2001.

          The purchase price or exercise price as represented by the common
     stock offered under the 2000 Stock Option Plan must be at least 100% of the
     fair market value of the common stock (if the option is an incentive stock
     option), or at least 25% of the fair market value of the 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 the
     board of directors at the time of grant. If, however, the Company grants 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 the classes of stock, the purchase price of the
     shares of the 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 common stock is
     currently quoted on the OTC Bulletin Board, the fair market value of our
     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 and the committee may, after taking all relevant
     facts into consideration, determine the fair market value of the common
     stock.

          The Company adopted Statement of Financial Accounting Standards No.
     123 (SFAS 123), "Accounting for Stock-Based Compensation," which permits
     entities to recognize as expense over the vesting period the fair value of
     all stock-based awards on the date of grant. Under the terms of the
     Company's stock options granted to certain directors, officers and
     consultants, the Board of Directors, at its sole discretion, will determine
     when certain options granted shall be fully vested and exercisable. At
     September 30, 2001, 1,460,001 outstanding stock options were vested, and
     fully exercisable, and 74,500 were not vested.

          In accordance with SFAS 123, which was effective as of January 1,
     1996, the fair value of option grants is estimated on the date of grant
     using the Black-Scholes option-pricing model for pro-forma footnote
     purposes with the following assumptions used for grants in all years;


                                      F-15
<PAGE>

                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000


     dividend yield of 0%, risk-free interest rate of 6%, and expected option
     life of 2.5 years. Expected volatility was assumed to be 50% in both 2001
     and 2000.

                                                             WEIGHTED  WEIGHTED
                                                    NUMBER   AVERAGE   AVERAGE
                                                      OF     EXERCISE   FAIR
                                                    SHARES    PRICE     VALUE
                                                 ----------  --------  --------
     Options Outstanding, September 30, 1999...      92,000  $    .09  $   0.17
        Granted ...............................     256,000       .10      0.19
        Exercised .............................    (348,000)      .10      0.17
        Canceled ..............................          --        --        --
                                                 ----------
     Options Outstanding, September 30, 2000...          --        --        --
                                                 ----------
        Granted ...............................   5,006,168      1.00      0.20
        Canceled ..............................  (3,471,667)     0.64      0.22
                                                 ----------
     Options Outstanding, September 30, 2001...   1,534,501  $   1.81  $   0.15
                                                 ==========

11.  SUBSEQUENT EVENTS

          On October 11, 2001, a registration statement filed with the SEC on
     form SB-2 became effective which allows NSC to periodically sell shares of
     its common stock to a private investor, Coriander Enterprises, Limited,
     (Coriander) a British Virgin Islands corporation. The Company entered into
     a common stock purchase agreement on May 14, 2001, with Coriander, for the
     future issuance and purchase of shares of common stock. The common stock
     purchase agreement established an equity line of credit.

          In general, the equity line of credit operates as follows: the
     investor, Coriander, has committed to provide the Company with up to $24
     million as requested over a 24 month period, in return for common stock
     issued to Coriander. Once every 22 trading days the Company may request a
     draw. The amount drawn at each request must be at least $50,000. The
     maximum amount we can actually draw for each request is also limited to the
     lesser of $1,000,000 and 6% of the weighted average price of the Company's
     common stock for the 60 days prior to the date of the request multiplied by
     the total trading volume of the Company's common stock for such 60 day
     period. The Company may request a maximum of 24 draws during the 24-month
     period. The Company is under no obligation to issue any shares to Coriander
     Enterprises or to request a draw down during any period. The aggregate
     total of all draw downs under the equity facility cannot exceed $24
     million.

          Deferred offering costs at September 30, 2001 represent the costs of
     obtaining this line of credit and will be amortized over the life of the
     equity line of credit.


                                      F-16
<PAGE>

                                  EXHIBIT INDEX

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

  2.1     Common Stock Purchase Agreement(5)
  2.2     Form of Warrant(5)
  2.3     Escrow Agreement(5)
  2.4     Registration Rights Agreement(5)
  3.1     Articles of Incorporation(1)
  3.2     Bylaws(1)
 10.1     Employment Agreement between National Scientific Corporation and Sam
          H. Carr(4)
 10.2     Employment Agreement between National Scientific Corporation and
          Michael A. Grollman(4)
 10.3     Amended and Restated 2000 Stock Option Plan(3)
 10.4     Master Purchase and Licensing Contract, dated January 12, 2001,
          between National Scientific Corporation and Sungil Computech(3)
 10.5     Master Purchase and Licensing Contract, dated January 12, 2001,
          between National Scientific Corporation and Maroo Electrotech Co.
          Ltd.(3)
 10.6     Master Purchase and Licensing Agreement, dated January 12, 2001,
          between National Scientific Corporation and Ozaki Korea Co., Ltd.(3)
 10.7     Employment Agreement, dated December 1, 2000, between National
          Scientific Corporation and Majid Hashemi(2)
 10.8     Letter Agreement, dated January 4, 2001, between E4World Corp. and
          National Scientific Corporation(2)
 10.9     Exclusive Distributorship Agreement dated May 8, 2001, between
          National Scientific Corporation and Phoenix Semiconductor, Inc.(5)
 10.10    Lease Agreement between National Scientific and Borelli Investment
          Company, dated August 17, 2000(5)
 10.11    Lease & Service Agreement between National Scientific and Targun
          Properties, Inc., dated October 1, 2000(5)
 10.12    Credit Agreement between National Scientific and Wells Fargo HSBC
          Trade Bank, N.A., dated March 29, 2001.(5)
 10.13    Memorandum of Understanding between National Scientific and AIC
          Semiconductor Sdn. Bhd., dated June 21, 2001.(5)
 10.14    Teaming Agreement between National Scientific and Ramtron
          International Corporation, dated March 2, 2001.(5)
 10.15    Memorandum of Understanding between National Scientific and UMC Group
          (USA), dated March 28, 2000.(5)
 10.16    Developmental Licensing Agreement between National Scientific and
          TEMEX, dated June 26, 2001.(5)
 10.17    Single Principal Payment Note in the sum of $200,000, made by Lou L.
          Ross in favor of National Scientific Corporation, dated December 1,
          1999.(5)
 10.18    Agreement between National Scientific and Microelectronics Research
          Center, dated May 5, 2001.(5)
 21       List of Subsidiaries
 23       Consent of Hurley & Company
 24       Power of Attorney (included on signature page)

---------
(1)  Incorporated by reference to the Registrant's Form 10-SB filed on or about
     January 3, 2000.

<PAGE>

(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 SB-2 (File No.
     333-62430).