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

                                 FORM 10-KSB/A

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

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000

                                    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.)

  4455 EAST CAMELBACK ROAD, SUITE E160
              PHOENIX, AZ                                          85018
(Address of Principal Executive Offices)                         (Zip Code)

                                 (602) 954-1492
                 (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, 2000: -0-

       The aggregate market value of voting stock held by non-affiliates of
National Scientific Corporation's ("NSC's") common stock, as of December 18,
2000 was approximately $73,100,000 (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 18, 2000 was 47,778,218.

       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]

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                                     PART I

FORWARD LOOKING INFORMATION

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

LIMITED OPERATING HISTORY; NEED FOR ADDITIONAL CAPITAL

       There is limited historical financial information about NSC upon which to
base an evaluation of our performance or to make a decision regarding an
investment in shares of our common stock. We commenced marketing efforts in
August 1999, but we don't know if our products and processes will achieve
significant levels of marketing acceptance. Our business is subject to all of
the problems, expenses, delays and risks inherent in the establishment of a new
business enterprise including limited capital resources, possible delays in
product development, uncertain market acceptance and the absence of operating
history. Therefore, we aren't sure that our business or products/processes will
be successful or that we will be able to achieve or maintain profitable
operations. We may encounter unforeseen difficulties that may deplete our
capital resources more rapidly than anticipated.

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

MARKET RISKS OF A NEW BUSINESS

       We have formulated our business plans and strategies based on certain
assumptions regarding the timely marketability of our products and processes to
potential licensing partners. These assumptions are based on the best estimates
of NSC's management. Our assessments regarding potential licensing partners may
be incorrect. Any future success of NSC may depend upon factors including
changes in the direction of technologies we are involved in, governmental
regulation, increased levels of competition within the technology fields we are
attempting to penetrate, licensing agreements offered by competing technologies,
changes in general economic conditions, increases in operating costs including
costs of consultants, lab and testing facility fees, supplies and equipment.

RELIANCE ON LIMITED NUMBER OF PRODUCTS

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

DEPENDENCE ON MARKETING EFFORTS

       We are dependent on our ability to market our products to manufacturers
that can use our technologies to their benefit. We must increase the level of
awareness of our products to firms that spend considerably more money than


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we do on their own on-going research and development. We will be required to
devote substantial management and financial resources to our marketing efforts
and we don't know if these efforts will be successful.

DEPENDENCE ON KEY EMPLOYEES

       We believe that our success will depend to a significant extent upon the
efforts and abilities of a small group of executive, technical and marketing
personnel and in particular on Lou Ross, Chairman and CEO and Drs. El-Sharawy
and Hashemi. The loss of the services of one or more of these key personnel
could have a material adverse effect on our business, financial condition and
results of operations. In addition, our future success will depend on our
ability to continue to attract and retain qualified technical and management
personnel.

PATENTS, LICENSES AND INTELLECTUAL PROPERTY CLAIMS

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

       There are no known pending claims or lawsuits against NSC regarding
possible infringement claims. Although we do not believe that we have infringed
on any patented technology, any successful infringement claim would materially
adversely affect our business, financial condition and results of operations. In
the future, litigation may be necessary to enforce patents issued to us, to
protect trade secrets or know-how owned by us or to defend us against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others.

       Any litigation could result in substantial cost and diversion of effort
by us, which could have a material adverse effect on our financial condition and
operating results. Adverse determinations in any litigation could result in
NSC's loss of proprietary rights, subject us to significant liabilities to third
parties, require us to seek licenses from third parties or prevent us from
marketing our products, any of which could have a material adverse effect on our
financial condition and results of operations. We do not know if a license under
a third party's intellectual property rights will be available to us on
reasonable terms, if at all.

THIN MARKET, POSSIBLE VOLATILITY OF STOCK PRICE

       NSC's common stock has been traded on the OTC Electronic Bulletin Board
since December 1996 under the symbol "NSCT". We believe that factors such as
announcements of developments related to our business, fluctuations in our
quarterly or annual operating results, failure to meet securities analysts'
expectations, general conditions in the marketplace and the worldwide economy,
announcements of technological innovations or enhancements by us or our
competitors, developments in patents or other intellectual property rights and
developments in our relationships with clients and suppliers could cause the
price of our common stock to fluctuate, perhaps substantially. In recent years,
the stock market has experienced extreme price fluctuations, which have often
been unrelated to the operating performance of affected companies. These
fluctuations could adversely affect the market price of NSC's common stock.

ITEM 1.       DESCRIPTION OF BUSINESS

OVERVIEW

       National Scientific Corporation, a Texas corporation ("NSC" or the
"Company"), was originally formed in 1953 as American Mortgage Company, Inc. In
1993, NSC became a subsidiary of A.F.M.S., Inc. In 1994, U.S. Network Funding,
Inc. acquired A.F.M.S., Inc., including a controlling interest in American
Mortgage Company, Inc. In 1995, U.S. Network Funding, Inc. divested itself of
A.F.M.S., Inc. and made a dividend distribution of its common shares of American
Mortgage Company, Inc. to its shareholders.



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       On May 16, 1996, the Company changed its name to National Scientific
Corporation and began its operations. Since October 1, 1999, NSC has added
several key individuals to its management team, who have significant expertise
in the electronic components and semiconductor fields, as well as experience in
leadership as executives of major corporations.

       NSC acquired the operations of Eden Systems as a wholly owned subsidiary
in 1996. Eden was engaged in the water reclamation business and the sale of
environmentally sensitive cleaning products. Eden's operations were sold on
September 30, 1997.

       NSC's current business involves development of several products for use
in the electronics industry. The Company intends to provide enhanced products
and processes to the semiconductor, integrated circuit and telecommunications
industries through joint ventures, developmental agreements, licensing and other
mutually beneficial arrangements.

       NSC's net losses were $8,575,299 and $944,455 for the years ended
September 30, 2000 and 1999, respectively. See "Part II, Item 7-Financial
Statements."

PRODUCTS

       NSC believes its products and processes will directly affect many aspects
of quality standards in the electronics manufacturing industry. This will be
accomplished by application of the company's proprietary component designs,
which the Company hopes to market successfully to electronics manufacturers. NSC
believes the components that it is developing and plans to market will simplify
the manufacturing process through standardization of the size and shape of
passive components and through application of NSC's high speed, high efficiency
transistors.

       NSC believes that the manufacturing process for virtually all consumer,
industry and governmental electronic products will become much less complicated
than it is now. There will be fewer "rejects" and the products will be more
compact, faster and be able to perform many more functions than is possible
using current technology and processes. The results will be cheaper products,
that do more, are more reliable, are produced faster with fewer steps and
smaller standardized components.

       During the past several years, the Company has brought five research and
development projects to the patent or patent application stage. NSC's first
patent was awarded June 15, 1999. The initial five projects for NSC are:

                     1.     On September 29, 1997, NSC filed a U.S. patent
              application for a Hetrojunction Bipolar Transistor (HBT). On
              September 8, 1998, NSC filed the Patent Cooperation Treaty
              international patent application for this device.

                     Bipolar transistors are used in the manufacture of digital
              circuits such as cellular phones, personal computers and
              automotive circuitry. The demand for faster and more efficient
              signal processing has been a driving force behind the enormous
              prosperity of the world electronics market in the last decade.
              This design of the HBT will be used to create faster devices with
              superior performance in high-speed digital circuits, high
              frequency microwave circuits and linear applications.

                     U.S. Patent 5,912,481 was issued for this device on June
              15, 1999.

                     2.     NSC filed a U.S. patent application on October 31,
              1997, for a Monolithic Inductor. On October 27, 1998, the Company
              filed the Patent Cooperation Treaty international patent
              application. The inductor is 100% compatible with current
              integrated circuit manufacturing technology and requires no
              additional steps to be included in the manufacturing process.

                     Inductors and/or coils are used in the broadest range of
              electronic circuits for telecommunications applications. Since the
              device can be easily included within an integrated circuit, it
              offers manufacturers dramatic cost reductions through simplified
              design, assembly and testing. In addition, the new device will
              allow for significantly increased miniaturization, a critical
              factor for electronics manufacturer circuit technology.



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                     The U.S. Patent Office issued a Notice of Allowance for
              this application on September 7, 1999. U.S. Patent 6,013,939 was
              issued for this device on January 11, 2000.

                     3.     On December 17, 1997, a U.S. patent application was
              filed for a High Performance N-Channel Metal-Oxide-Semiconductor
              (NMOS) Static Random Access Memory (SRAM). On December 15, 1998,
              the Company filed the Patent Cooperation Treaty international
              patent application for this device.

                     SRAM and DRAM (dynamic random access memory) memories are
              key and integral components of digital computing devices such as
              microcomputers, workstations, etc., which depend on an
              ever-increasing amount of memory to improve performance. Any
              improvement in chip size amounts to a considerable reduction in
              cost.

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

                     4.     NSC filed its fourth U.S. patent application on June
              18, 1998, for a Mode Dielectric Resonator. The Patent Cooperation
              Treaty international application for this device was filed on May
              26, 1999. Resonators are used in many applications, including
              microwave oscillators, narrowband microwave filters, radar
              detectors, speed guns, automatic door openers, cellular and
              portable phones and global positioning satellites.

                     The U.S. Patent Office issued a Notice of Allowance for
              this application on August 1, 2000.

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

                     Amplifiers are used in all electronic products that require
              some level of power increase such as telecommunication and
              microwave products, internet communications, automotive products,
              biomedical products and in virtually all automated manufacturing
              functions.

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

SALES AND MARKETING

       NSC has performed extensive research into the major semiconductor
manufacturing companies regarding their products and the manufacturing processes
available to them. The results of this research have confirmed the belief of
Company management and consultants that the increased performance and
efficiencies inherent in the Company's products that are currently in various
stages of design and development are of interest in virtually all sectors of the
semiconductor manufacturing industry.

       The existing markets where enhanced products and processes have
applicability are already multi-billion dollar markets. A revolution in the
semiconductor industry is an on-going process to create devices that do more,
are faster and cost less. Management believes its products will aid this
revolution and create profits for NSC and increase value for its shareholders.

       Management believes the products being developed by the Company may
become marketable quicker by licensing and/or partnering with on-going companies
with complementary technologies. Management has undertaken an aggressive search
for candidates and is 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,
except Siagri International, Inc. In December 2000, NSC hired a full time
Director of Sales and Marketing. This individual is an experienced marketing
manager as well as an applications engineer who is familiar with both the
Company's existing technologies and potential licensing customers.

       The Company believes that maintaining a close relationship with customers
and providing customers with ongoing technical support is essential to customer
satisfaction in the wireless communications industry. NSC's marketing
application 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


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assists in the resolution of technical problems. NSC will assign to NSC's
largest customers, a contract account manager who maintains 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. NSC believes 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,
the Company's technologies can require lengthy "design-in" cycles for customer
applications and extensive application engineering support. NSC supports its
potential customers' design-in activities and considers such support an
important element of its sales and marketing efforts.

       NSC is marketing its technologies worldwide through using internal sales
resources and other means. The Company recently hired a full time Director of
Sales and Marketing at its headquarters in Phoenix, and uses a number of
contract-based marketing resources throughout the U.S. to assist in executing
this process. Additionally, senior management at NSC devotes substantial time
and effort to developing customer relationships and contracts.

INDUSTRY

       NSC's management and consulting team is committed to research and monitor
the specific needs of the electronic products industry. The need for increased
speed in manufacturing and delivery is paramount in maintaining a profit margin
for the electronic product providers. NSC is committed to providing the
intellect, experience, drive, determination and the technical innovations
required to address the needs of the semiconductor, integrated circuit and
telecommunication sectors within the electronics products industry.

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

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

       NSC's prospective licensees may market technologies that compete with the
Company's wireless and memory products. To the extent that any of the Company's
technologies achieve market acceptance, there can be no assurance that NSC's
competitors will not be able to develop and offer competitive technologies or
implement pricing strategies for memory and wireless technologies that could
adversely affect the Company's business and operating results. The Company's
ability to compete successfully depends on its ability to develop low-cost
volume production of its technologies permitting its technologies to be sold at
a price that is both competitive and profitable to the Company and on its
ability to design technologies which successfully address customer requirements.
NSC's ability to compete successfully also depends on factors beyond its
control, including the rate at which customers incorporate the Company's
technologies into their own technologies, the success of such customers in
selling their technologies, the success of the Company's protection of its
intellectual property, the success of competitors' technologies and general
market and economic conditions. Many companies are researching and developing
semiconductor memory technologies and product configurations that could reduce
or eliminate any future


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competitive advantages of the Company's technologies. There can be no assurance
that NSC's memory and wireless technologies will not be supplanted in the future
by competing technology or that the Company will have the technical capability
or financial resources to be competitive in the semiconductor industry with
respect to the design, development or manufacture of either memory or wireless
technologies.

BUSINESS STRATEGY

       NSC's strategy is to develop significant enhancements for existing
semiconductor, integrated circuit and other electronic component products,
processes and markets. NSC intends to utilize unique, patentable technologies
and provide these enhancements to the market place through joint venture
licensing agreements with leading manufacturing firms. The Company does not
intend to manufacture any of its own technologies. NSC intends to continue
research and development efforts, including simulations and creation of working
prototypes, where possible. Research and development will be accomplished
through the Company's on-going association with an independent lab, and test
facilities at a major Arizona University, as well as NSC's research lab located
in Northern California.

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

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

       The Company intends to grow through internal research and development,
but also through strategic investments, alliances and acquisitions. Although the
company invests significant resources in research and development activities,
the complexity and rapidity of technological changes make it impractical for the
Company to pursue development of all technological solutions independently.
Accordingly, NSC conducts ongoing analyses as a basis of investment, alliance
and acquisition prospects that would complement NSC's existing product
offerings, augment the Company's market coverage or enhance NSC's technological
capabilities.

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

       The Company's strategy is to develop significant enhancements for
existing semiconductor, integrated circuit and other electronic component
products, processes and markets. The Company intends to utilize unique, patented
technologies and provide these enhancements to the market place through joint
venture licensing agreements with leading manufacturing firms.

CUSTOMERS

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

       To expedite the project, Siagri contracted with NSC's lead technical
consultant, Dr. El-Sharawy, to design and build a prototype amplifier for use in
their devices. The prototype was completed in the Spring of 2000.



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       Dr. Richard Besserman, MD, the CEO of Siagri, has disclosed Siagri's
activity using the product developed by the Company is in the effectiveness of
electromagnetic treatment in human medicine, veterinary medicine, food safety
and agriculture. Siagri will conduct experiments at two major universities to
determine the effects of controlled microwave energy on disease causing bacteria
and viruses.

       Revenues have not yet been realized from existing products and processes.

PATENTS

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

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

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

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

COMPETITION

       NSC's competitors are well established and have significantly greater
resources. Although NSC believes that its products and processes are proprietary
and protected by patents and/or patents pending, there is no assurance that NSC
can compete successfully in the semiconductor and electronics markets. See
"FACTORS AFFECTING OPERATING RESULTS -- PATENTS, LICENSES AND INTELLECTUAL
PROPERTY CLAIMS."

RESEARCH AND DEVELOPMENT

       NSC has conducted several simulations and/or developed working prototypes
of its products and processes that have yielded results that the Company
believes separate NSC's products from those currently in the marketplace. There
is no assurance that the test results will prove successful in the actual
marketplace or that NSC will be able to develop additional new products or
processes.

       As of the date of this report, NSC has three full-time personnel and one
part-time consultant engaged in research and development. In conjunction with
the opening of a research and development facility in San Jose, California in
September 2000 NSC engaged Majid Hashemi Ph.D. and on November 2, 2000 added Ali
Mireshghi, Ph.D. NSC also uses the services of independent lab and test
facilities at a major Northern California university under the direction of
NSC's part-time technical consultant. Expenditures for research and development
for the years ending September 30, 2000 and 1999 totaled $1,433,751 and $130,463
respectively.



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PERSONNEL

       As of the date of this report, NSC has eight full time employees. Six
employees work in the Phoenix, Arizona corporate office and two reside and work
in San Jose, California. Management believes employee relations are good. None
of NSC's personnel are covered by collective bargaining agreements.

ITEM 2.       PROPERTIES

       NSC leases 1,038 square feet of office space in Phoenix, Arizona for its
corporate offices. The lease for the Phoenix facility expires September 30, 2001
and is at a rental rate of $4,320 per month. Additionally, NSC leases 1,551
square feet of office space in San Jose, California for its research and
development efforts. The San Jose lease expires August 31, 2003, is
non-cancelable and is at a rental rate that ranges from $3,878 to $4,275 per
month, plus increases in operating expenses.

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

ITEM 3.       LEGAL PROCEEDINGS

       On November 13, 2000, the Company filed legal action against a former
director and officer of Company and his spouse. The Company's complaint alleges
that certain sales and subsequent purchases of the Company's common stock are in
violation of Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C.
Section 78p(b). The Company claims that both the sale and purchase transactions
were ordered and completed within a six-month restriction period. Section
Section 16(b) of the Act requires that any profits realized by an officer and or
director from the purchase and sale within a six month period are subject to
disgorgement and must be returned to the Company. The Company has asked for an
accounting of these transactions and disgorgement of any profits made on the
sales and purchases of the Company's common stock within the restricted time
period.

ITEM 4.       SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

       None





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                                     PART II

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

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

<TABLE>
<CAPTION>
                                                             HIGH          LOW
                                                            -------      -------
<S>                                                         <C>          <C>
FISCAL 2000
Fourth Quarter (through September 30, 2000) .........       $  8.25      $ 4.969
Third Quarter (through June 30, 2000) ...............       $ 9.781      $ 3.625
Second Quarter (through March 31, 2000) .............       $ 18.25      $  1.50
First Quarter (through December 31, 1999) ...........       $ 2.906      $  0.19

FISCAL 1999
Fourth Quarter (through September 30, 1999) .........       $  0.31      $ 0.170
Third Quarter (through June 30, 1999) ...............       $ 0.296      $ 0.130
Second Quarter (through March 31, 1999) .............       $  0.38      $  0.10
First Quarter (through December 31, 1998) ...........       $  0.36      $  0.11
</TABLE>


       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.

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

       There were 418 shareholders of record of NSC's common stock as of
September 30, 2000.

       During the period October 1, 1999 through September 30, 2000, NSC (1)
issued 3,092,250 shares of common stock for $3,150,250 upon the exercise of
warrants for common stock, (2) issued 348,000 shares of common stock upon the
exercise of stock options and (3) sold 3,750,000 shares of common stock for a
total consideration of $750,000 to accredited investors as defined by Rule
501(a) of Regulation D. The shares were sold in reliance upon the exemption
provided by Section 4(2) and 4(6) of the Securities Act of 1933 and Rule 506 of
Regulation D.

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

OVERVIEW

       Since May 1996, NSC has been engaged in extensive research and
development activities that have resulted in the issuance of four (4) U.S.
Patents, one (1) Notices of Allowance. NSC's current activities include:

       -    Product development;

       -    Development of markets and distribution channels;

       -    Negotiation of strategic alliances;

       -    Patent applications;

       -    Raising capital;

       -    Development of corporate infrastructure; and

       For a complete understanding of these activities, this Management's
Discussion and Analysis should be read in conjunction with Part I, Item
1-Description of Business and Part II, Item 7-Financial Statements to this Form
10-KSB.

       Development of additional wireless and memory technologies and the
associated design development and manufacturing processes will require NSC to
make significant additional investments in research and development. Continued
investment in both technologies and processes is critical to the Company's
success and in the case of NSC's memory technology, to the ultimate commercial
realization of such technologies as its tunnel diode memory


                                       10
<PAGE>   11
technology. The Company's current research and development activities are
focused on expanding the Company's existing technology by developing new
low-density and high-density applications, materials and processes, design
concepts and architectures.

PATENTS AND PROPRIETARY RIGHTS

       NSC relies heavily on its patents and trade secrets as a defense against
competitors introducing infringing technologies that will compete with the
Company's memory and wireless technologies. Although the Company intends to
enforce its 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 the Company 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 NSC's business and operating results.
The Company is aware, because others have obtained patents covering numerous
semiconductor designs or processes, that the Company operates in a competitive
environment in which it would not be unlikely for a third party to claim that
certain of the Company's present or future technologies may infringe the patents
or rights of such third parties. If any such infringements exist or arise in the
future, the Company may be exposed to liability for damages and may need to
obtain licenses relating to third-party technology incorporated into the
Company's technologies. NSC's inability to obtain such licenses on acceptable
terms or the occurrence of related litigation could have a material adverse
affect on the Company. The Company has been granted patents it believes are
fundamental in covering the basic architecture and method of operation of its
memory and wireless technologies, and the Company has other patents and patent
applications involving its technology pending.

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

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

       As of the date of this report, NSC has three full-time personnel and one
part-time consultant engaged in research and development.

RESULTS OF OPERATIONS

YEARS ENDED SEPTEMBER 30, 2000 AND 1999

       We generated no revenue for the fiscal years ending September 30, 2000
and 1999.

       Research and development expenditures increased to $1,433,751 for the
fiscal year ended September 30, 2000, from $130,463 for the fiscal year ended
September 30, 1999. The increase in research and development costs in the fiscal
2000 was primarily attributable to the engagement of additional research and
development personnel for our facility in San Jose, California.

       Costs and expenses increased to $8,641,777 in the fiscal year ended
September 30, 2000, from $937,197 for the prior fiscal period. We issued
restricted common stock as payment for research, consulting and capital
formation expenses that totaled approximately $7.5 million in fiscal 2000 and
approximately $550,000 in fiscal 1999, in order to conserve cash during both
fiscal periods. The stock issued for research was valued at approximately $2.2
million and was granted primarily to a leading scientist who developed most of
our patents and subsequently assigned them the Company. Capital formation costs
of approximately $1.3 million was paid primarily to two consultants in the form
of common stock for services rendered in connection with the 1999 private
placement. Common stock valued at approximately $4.0 million was issued to
certain independent contractors in exchange for consulting services provided to
the Company. 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 $1.0
million in fiscal 2000 and from $349,000 in fiscal 1999.



                                       11
<PAGE>   12
       The interest expense of approximately $5,200 in fiscal 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

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

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

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

       During the fiscal years ending September 30, 2000 and 1999, NSC issued
2,817,629 and 3,165,000 shares, respectively, of NSC common stock to consultants
in lieu of cash compensation. Also, during fiscal 2000 and 1999, the Company
granted 256,000 and 270,000 options, respectively, to NSC consultants to
purchase shares of NSC's common stock. Because the shares of common stock
available for issuance upon exercise under these options were 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. As of September 30, 1999, a
total of 604,000 options had been granted at exercise prices ranging from $.02
to $.10 per share. Also at September 30, 1999, 512,000 options had been
exercised, leaving 92,000 options outstanding with an average exercise price of
$.09 per share. 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.

       As of September 30, 2000, the Company's cash and cash equivalents totaled
$2,584,900 and total current assets were $2,890,456. NSC has 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.
NSC at its current operating rate, believes it will have sufficient cash
reserves to operate through September 30, 2001. The Company has no long or
short-term debt as of September 30, 2000.

ITEM 7.       FINANCIAL STATEMENTS

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

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

       None



                                       12
<PAGE>   13
                                    PART III

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

       Reference is made to information contained under the heading "Election of
Directors" in NSC's definitive proxy statement for its 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before December 31, 2000.

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

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

<TABLE>
<CAPTION>
NAME                          AGE     POSITION
----                          ---     --------
<S>                           <C>     <C>
Lou L. Ross..............     71      CEO, Chairman of the Board
Dr. Majid Hashemi........     39      President, Chief Technology Officer
Michael A. Grollman......     39      Executive Vice President, Chief Operating Officer
Sam H. Carr..............     44      Senior Vice President, Chief Financial Officer
Dr. Ali Mireshghi........     44      Director of Research
Dr. Richard C. Kim.......     42      Director
Wendy S. Burton..........     38      Director of Corporate Communications
Dr. El-Badawy El-Sharawy.     42      Chief Technical Consultant
Charles E. Martin........     41      Director
</TABLE>

       Directors, Executive Officers and Significant Advisors

       Lou L. Ross has served as Chairman of the Board and Director since 1996
and assumed President & CEO duties in March 1998. Mr. Ross served as Chairman &
CEO of Intel Malaysia from 1970 to 1975. From 1976 to 1996, Mr. Ross served in a
technical consulting capacity for various electronics manufacturing firms,
including Labelab and Advanced Semiconductor Engineering.

       Majid M. Hashemi, Ph.D. joined NSC as President in September 2000. Prior
to joining NSC, he was the principal design engineer for National Semiconductor
located in Silicon Valley beginning in 1995. Prior to that, he was with Motorola
from 1993 to 1995.

       Michael A. Grollman. became Chief Operation Officer of NSC in October
2000. 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. He served as Senior Vice President of Finance and Chief Financial Officer
for e-dentist.com, formerly known as the Pentegra Dental Group, Inc. beginning
in 1997. Prior to that, Mr. Carr was Chief Financial Officer and Chief
Development Officer for a consolidator of podiatry practices.

       Ali Mireshghi, Ph.D. was hired as Director of Research for NSC in
November 2000, joining the NSC staff in the San Jose, California facility. He
served as professor for Sharif University of Technology in Tehran from 1994 to
November 2000.

       Richard C. Kim, Ph.D. was appointed Director of NSC in October 2000,
subject to shareholder approval. He was the founder and former President of
OHost Corporation beginning in 1999. Dr. Kim is currently a Director and Chief
Executive Officer of KoreaStation Corporation, the parent company of OHost
Corporation.

       Wendy S. Burton. joined NSC in May 1998 as Director of Corporate
Communications. From 1992 to 1998, Ms. Burton was in the investors relations
field with various companies with duties ranging from initial public offerings,
private placements and seed capital ventures.



                                       13
<PAGE>   14
       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,
but is not limited to: microwave circuits, anistropic devices and applied
electromagnetics. He is a senior member of IEEE and is a recipient of the 1980
Egyptian Engineering Syndicate Medal of Honor.

       Charles E. Martin was appointed Director of NSC in December 2000, subject
to shareholder approval. 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.

       Board of Directors

       The Board of Directors was made up of three members until February 1998,
at which time Marc Messina and Michelle Neild resigned. Lou L. Ross has been
Director and Chairman of the Board of NSC since February 1998. Dr. Richard C.
Kim was appointed Director in October 2000. Michael A. Grollman and Sam H. Carr
were both appointed to the Directors in November 2000.

       Director Compensation

       Reference is made to information contained under the heading "Executive
Compensation" in NSC's definitive proxy statement for its 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before December 31, 2000, which information is incorporated herein.

ITEM 10.      EXECUTIVE COMPENSATION

       Reference is made to information contained under the heading "Executive
Compensation" in NSC's definitive proxy statement for its 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before December 31, 2000, which information is incorporated herein.

ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       Reference is made to information contained under the heading "Voting
Securities and Principal Holders" in NSC's definitive proxy statement for its
2001 Annual Meeting of Shareholders to filed with the Securities and Exchange
Commission on or before December 31, 2000.

ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       Reference is made to information contained under the heading "Certain
Transactions" in NSC's definitive proxy statement for its 2001 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission on or
before December 31, 2000.



                                       14
<PAGE>   15
ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER      DESCRIPTION
    ------      -----------
<S>             <C>
      3.1       Articles of Incorporation*
      3.2       Form of Bylaws*
     10.1       Employment Agreement dated December 1, 2000 between Sam H. Carr
                and the Company
     10.2       Employment Agreement dated December 1, 2000 between Michael
                Grollman and the Company
     10.3       2000 Stock Option Plan
     10.4       Warrant Agreement as part of Private Offering dated August 1,
                1999*
     10.5       Warrant Agreement as part of Private Offering dated March 15,
                1998*
     10.6       Lease Agreement between Targun Properties, Inc. and the
                Registrant dated August 21, 1998*
     10.6(i)    First Lease Addendum between Targun Properties, Inc. and the
                Registrant dated July 27, 1999*
     10.6(ii)   Second Lease Addendum between Targun Properties, Inc. and the
                Registrant dated September 15, 1999*
     10.7       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the HETROJUNCTION BIPOLAR
                TRANSISTOR HAVING WIDE BANDGAP, LOW INTERDIFFUSION BASE-EMITTER
                JUNCTION*
     10.8       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the VERTICAL HETROJUNCTION
                BIPOLAR TRANSISTOR*
     10.9       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the MONOLITHIC INDUCTOR WITH
                MAGNETIC FLUX LINES GUIDED AWAY FROM SUBSTRATE*
     10.10      Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the MONOLITHIC INDUCTOR WITH
                MAGNETIC FLUX LINES GUIDED AWAY FROM SUBSTRATE Continuation in
                Part*
     10.11      Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the STATIC MEMORY CELL WITH
                LOAD CIRCUIT USING A TUNNEL DIODE*
     10.12      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the TE MODE DIELECTRIC RESONATOR*
     10.13      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the DISTRIBUTED AMPLIFIER AND METHOD THEREFOR*
     10.14      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the DISTRIBUTED AMPLIFIER Continuation in Part*
      22        List of Subsidiaries - NSC has no subsidiaries
      27        Financial Data Schedule
</TABLE>


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



                                       15
<PAGE>   16
                                   SIGNATURES

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

                                            NATIONAL SCIENTIFIC CORPORATION


Date:    December 19, 2000               By: /s/ L. L. Ross
                                            ------------------------------------
                                             L. L. Ross
                                             Chairman Of The Board And
                                             Chief Executive Officer


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


                                         By: /s/ Michael A. Grollman
                                            ------------------------------------
                                             Michael A. Grollman
                                             Executive V.P., COO and Director


                                         By: /s/ Richard C. Kim
                                            ------------------------------------
                                             Richard C. Kim
                                             Director


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



                                       16
<PAGE>   17
                         NATIONAL SCIENTIFIC CORPORATION


                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Public Accountants.................................    F-2
Balance Sheets...........................................................    F-3
Statements of Operations.................................................    F-4
Statements of Shareholders' Equity.......................................    F-5
Statements of Cash Flows.................................................    F-8
Notes to Financial Statements............................................    F-9
</TABLE>








                                      F-1
<PAGE>   18
                    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, 2000 and 1999 and
the related statements of operations, shareholders' equity (deficit) and cash
flows for each of the two years in the period ended September 30, 2000 and from
September 30, 1997 (inception of development stage) through September 30, 2000.
These financial statements are the responsibility of the National Scientific'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, such financial statements present fairly, in all material
respects, the financial position of National Scientific Corporation at September
30, 2000 and 1999 and the results of its operations and its cash flows for each
of the two years in the period ended September 30, 2000 and from September 30,
1997 (inception of development stage) through September 30, 2000 in conformity
with accounting principles generally accepted in the United States of America.

       The accompanying financial statements have been prepared assuming that
National Scientific 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 $9,500,000. 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
December 1, 2000
Except Note 8, which is dated August 13, 2001.




                                      F-2
<PAGE>   19
                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                                 BALANCE SHEETS
                           SEPTEMBER 30, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                                      2000             1999
                                                                                  ------------      -----------
<S>                                                                               <C>               <C>
                                    ASSETS
Current Assets:
   Cash and cash equivalents ................................................     $  2,584,900      $    62,185
   Loan to officer ..........................................................          200,000               --
   Other assets .............................................................          105,556               --
                                                                                  ------------      -----------
       Total current assets .................................................        2,890,456           62,185

Property and equipment, net .................................................            7,397            3,340
                                                                                  ------------      -----------
                                                                                  $  2,897,853      $    65,525
                                                                                  ============      ===========

                LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
   Accounts payable and accrued expenses ....................................     $     25,954      $    19,917
   Accrued interest .........................................................               --            8,530
                                                                                  ------------      -----------
       Total current liabilities ............................................           25,954           28,447
                                                                                  ------------      -----------

Long term note payable ......................................................               --          110,000

Commitments, contingencies and subsequent events (see notes) ................

Shareholders' equity (deficit):
   Common stock, par value $.01; 80,000,000 shares authorized, 47,195,768 and
     36,544,289 shares issued and outstanding at September 30, 2000 and 1999,
     respectively ...........................................................     $    471,958      $   365,443
   Additional paid-in capital ...............................................       18,799,420        3,678,315
   Less deferred stock compensation .........................................       (3,712,500)              --

   Accumulated deficit ......................................................      (12,686,979)      (4,111,680)
                                                                                  ------------      -----------
                                                                                     2,871,899          (67,922)
   Receivable for return of stock ...........................................               --           (5,000)
                                                                                  ------------      -----------
       Total shareholders' equity ...........................................        2,871,899          (72,922)
                                                                                  ------------      -----------
                                                                                  $  2,897,853      $    65,525
                                                                                  ============      ===========
</TABLE>

                 See accompanying notes to financial statements



                                      F-3
<PAGE>   20
                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF OPERATIONS
       FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999, AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                                                                   DEVELOPMENT
                                                     2000             1999            STAGE
                                                 -----------      -----------      ------------
<S>                                              <C>              <C>              <C>
Revenues ...................................              --               --                --
Costs and expenses
   Consulting fees, related party ..........     $ 6,960,170      $   700,420      $  7,736,315
   Salaries and benefits ...................              --               --            73,706
   Research and development ................       1,433,751          130,463         1,885,281
   Stock compensation ......................          50,320           40,916           155,276
   Other ...................................         197,536           65,398           469,797
                                                 -----------      -----------      ------------
Total costs and expenses ...................       8,641,777          937,197        10,320,375
                                                 -----------      -----------      ------------
Net loss from operations ...................      (8,641,777)        (937,197)      (10,320,375)
                                                 -----------      -----------      ------------
Other income (expense)
   Interest and other income ...............          71,667            1,280            72,947
   Interest expense ........................          (5,189)          (8,538)          (16,316)
   Loss on disposal of assets ..............              --               --           (28,555)
                                                 -----------      -----------      ------------
                                                      66,478           (7,258)           28,076
                                                 -----------      -----------      ------------
Net loss before income taxes benefit .......      (8,575,299)        (944,455)      (10,292,299)
Provision for income taxes (benefit) .......              --               --                --
                                                 -----------      -----------      ------------
Net loss ...................................     $(8,575,299)     $  (944,455)     $(10,292,299)
                                                 ===========      ===========      ============

Net loss per common share, basic and diluted     $     (0.20)     $     (0.03)
                                                 ===========      ===========
</TABLE>

                 See accompanying notes to financial statements




                                      F-4
<PAGE>   21
                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
             STATEMENTS OF CHANGES IN 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 ...
$ 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)
                                         ----------    --------      ----      -----   -----------    ------------    -----------
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-5
<PAGE>   22
                        NATIONAL SCIENTIFIC CORPORATION
                         (A DEVELOPMENT STAGE COMPANY)
       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND DEVELOPMENT STAGE


<TABLE>
<CAPTION>
                                    COMMON STOCK             PREFERRED STOCK
                                ----------------------    --------------------      ADDITIONAL
                                 NUMBER OF      PAR       NUMBER OF      PAR         PAID-IN      ACCUMULATED
                                  SHARES       VALUE       SHARES       VALUE        CAPITAL        DEFICIT         TOTAL
                                ----------    --------    ---------    -------     ----------     -----------     ---------
<S>                             <C>           <C>         <C>          <C>         <C>            <C>             <C>
Balance, September 30, 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-6
<PAGE>   23
                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
       STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
       FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND DEVELOPMENT STAGE


<TABLE>
<CAPTION>
                                  COMMON STOCK          PREFERRED STOCK
                              ---------------------   -------------------    ADDITIONAL
                              NUMBER OF      PAR      NUMBER OF     PAR        PAID-IN      ACCUMULATED
                                SHARES      VALUE       SHARES     VALUE       CAPITAL        DEFICIT        TOTAL
                              ----------   --------   ---------   -------    -----------    -----------    ---------
<S>                           <C>          <C>        <C>         <C>        <C>            <C>            <C>
Balance, September 30, 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    $(3,167,225)   $ (88,916)
                              ----------   --------     ------    -------    -----------    -----------    ---------
</TABLE>

                 See accompanying notes to financial statements




                                      F-7
<PAGE>   24
                         NATIONAL SCIENTIFIC CORPORATION
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
       FOR THE YEARS ENDED SEPTEMBER 30, 2000, 1999 AND DEVELOPMENT STAGE

<TABLE>
<CAPTION>
                                                                                             DEVELOPMENT
                                                               2000             1999            STAGE
                                                           ------------     ------------     ------------
<S>                                                        <C>              <C>              <C>
Cash flows from operating activities:
  Net loss ............................................    $ (8,575,299)    $   (944,455)    $(10,292,299)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
  Noncash transactions ................................           1,792            1,336           10,019
    Depreciation.......................................
    Loss on disposal of assets ........................              --               --           28,555
    Stock issued for services .........................       7,583,720          592,999        8,547,067
  Changes in assets and liabilities ...................              --           12,500           30,000
    Decrease in receivables............................
    (Increase) in other assets ........................        (105,556)              --          (94,985)
    Increase in accounts payable and accrued expenses .           6,037            2,090            3,375
    Increase (decrease) in accrued interest ...........          (8,530)           8,530               --
                                                           ------------     ------------     ------------
      Net cash used in operating activities ...........      (1,097,836)        (327,000)      (1,768,268)
                                                           ------------     ------------     ------------
Cash flows from investing activities:
  Acquisition of property and equipment ...............          (5,849)              --           (5,849)
  Proceeds from the sale of furniture and equipment ...              --               --            4,660
  Loan to officer .....................................        (200,000)              --         (200,000)
                                                           ------------     ------------     ------------
      Net cash used in investing activities ...........        (205,849)              --         (201,189)
                                                           ------------     ------------     ------------
Cash flows from financing activities:
  Repayment of debt ...................................        (110,000)              --         (110,000)
  Repayment of shareholder loans ......................              --               --          (10,000)
  Repayment of capital lease obligations ..............              --               --           (1,819)
  Proceeds from the issuance of preferred stock .......              --          235,000          482,500
  Proceeds from issuance of common stock ..............       3,936,400          132,450        4,190,058
                                                           ------------     ------------     ------------
      Net cash provided by financing activities .......       3,826,400          367,450        4,550,739
                                                           ------------     ------------     ------------
Net increase in cash and cash equivalents .............       2,522,715           40,450        2,581,282
Cash and cash equivalents, beginning of year ..........          62,185           21,735            3,618
                                                           ------------     ------------     ------------
Cash and cash equivalents, end of year ................    $  2,584,900     $     62,185     $  2,584,900
                                                           ============     ============     ============

Supplementary Disclosure of Cash Flow Information
Cash paid during the year for interest ................    $     13,719     $          8     $     16,316
                                                           ============     ============     ============
Cash paid during the year for income taxes ............    $         --     $         --     $         --
                                                           ============     ============     ============
</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 a
Company private placement.

       During 1998, the Company sold equipment for $4,660 in cash, with the
purchaser assuming $9,252 in lease obligations.


                 See accompanying notes to financial statements



                                      F-8
<PAGE>   25
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


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, 2000, the Company had cash of approximately $2,585,000
       which exceeded federally insured limits.

       c.     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.

       d.     Advertising and Promotion Costs

              Advertising and promotion costs, which totaled $17,512 in 2000 and
       $3,476 in 1999 are expensed as incurred.

       e.     Stock Options

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

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



                                      F-9
<PAGE>   26
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


       g.     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.

       h.     Net Loss Per Share

              Net loss per share is computed by dividing the loss attributable
       to common shareholders by the weighted average number of shares
       outstanding during the period, which was assumed to be 43,707,159 and
       31,111,746 for the years ended September 30, 2000 and 1999, respectively.
       Stock options and warrants are considered antidilutive and were not
       considered in the calculation.

2.     DEVELOPMENT STAGE OPERATIONS

              While in the development stage, the Company experienced
       significant operating losses during 2000 and 1999, of approximately
       $8,600,000 and $1,000,000 respectively, which raise substantial doubt
       about the Company's ability to continue as a going concern. Of the total
       net operating losses, approximately $7,600,000 and $600,000 related to
       stock issued for services in 2000 and 1999, respectively.

              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 $577,450 from the
       exercise of common stock warrants. Management believes that its current
       cash position (over $2,500,000 at September 30,2000) will be adequate to
       fund operations and research for the next fiscal year, until the Company
       can generate 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,
       2000 and 1999:

<TABLE>
<CAPTION>
                                                  2000        1999
                                                --------    --------
<S>                                             <C>         <C>
              Computer equipment ...........    $  8,907       3,057
              Office furniture .............       3,623       3,623
                                                --------    --------
                                                  12,530       6,680
              Less: accumulated depreciation       5,133       3,340
                                                --------    --------
                                                $  7,397       3,340
                                                ========    ========
</TABLE>

4.     LONG-TERM NOTE PAYABLE

              In February 1999, the Company issued a $110,000 promissory note to
       an individual, who had previously loaned money to Eden Systems, Inc., the
       Company's former subsidiary. The loan's terms provided for interest at
       10% through December 31, 2000, at which time all interest and principal
       was due. The loan was secured by 500,000 shares of the Company's common
       stock. The Company repaid the loan in March, 2000, and redeemed the
       500,000 shares of common stock.

5.     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 July 31, 1999. In conjunction with
       this offering, the expiration date of the warrants was


                                      F-10
<PAGE>   27
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


       extended until December 31, 2000. All preferred stock has been converted
       to common stock at September 30, 1999. This offering resulted in net
       proceeds to the Company of $482,500.

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

6.     LEASE COMMITMENTS

              The Company leases its headquarters in Phoenix, under a
       non-cancelable operating lease, which expires on September 30, 2001. The
       lease requires monthly payments of $4,320 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 office,
       which expires on August 31, 2003. The lease requires monthly payments
       which range from $3,878 to $4,275 plus increases in operating expenses.
       It contains no renewal or purchase options.

              Future minimum lease obligations at September 30, 2000 are as
       follows:

<TABLE>
              YEAR ENDING SEPTEMBER 30,
              -------------------------
<S>                                                               <C>
              2001............................................    $ 98,569
              2002............................................      49,056
              2003............................................      47,025
                                                                  --------
                                                                  $194,650
                                                                  ========
</TABLE>

              Rent expense for the years ended September 30, 2000 and 1999 was
       approximately $32,840 and $26,500, respectively.

7.     INCOME TAXES

              Deferred income taxes consist of the following at September 30,
       2000 and 1999:



                                      F-11
<PAGE>   28
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                           2000            1999
                                                                       -----------     -----------
<S>                                                                    <C>             <C>
              Tax Benefit of net operating loss carry forwards and
                start up costs ....................................    $ 3,860,000     $   430,000
              Valuation allowance .................................     (3,860,000)       (430,000)
                                                                       -----------     -----------
                                                                       $        --     $        --
                                                                       ===========     ===========
</TABLE>

              A reconciliation of expected to actual taxes follows:

<TABLE>
<S>                                                                    <C>             <C>
              Expected federal and state tax recovery at 40% ......    $(3,430,000)    $  (379,000)
              Tax benefits not realized -- valuation allowance ....      3,430,000         379,000
                                                                       -----------     -----------
              Financial statement recovery of income taxes ........    $        --     $        --
                                                                       ===========     ===========
</TABLE>


              The Company has recorded valuation allowances to offset the value
       of deferred tax assets, since it has recorded losses from operations
       since 1996 and the utilization of those assets is uncertain. During
       fiscal 2000 and 1999, the valuation allowance increased by $3,430,000 and
       $379,000 respectively.

              The Company has net operating loss carryforwards of approximately
       $9,650,000 at September 30, 1999, which may be used to offset future
       federal taxable income through 2020 and state taxable income through
       2005.

              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.

8.     RELATED PARTY TRANSACTIONS

              The Company incurred professional and consulting fees, in
       connection with product research and development and operations of
       approximately $11,804,000 and $793,000 to various officers and key
       consultants of the Company during the years ended September 30, 2000 and
       1999, respectively. Of this amount, $3,712,500 is being deferred and
       amortized over the term of the employment contract, as noted below.

              The above fees have been restated as of August 13, 2001 to reflect
       a 10% discount (originally recorded at 50% 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. This change in
       estimate was to increase the value of the stock, related compensation and
       the net loss for the year by $4,055,962 and $245,370 in fiscal years 2000
       and 1999. Net loss per share amounts for fiscal years 2000 and 1999 were
       originally reported as $(0.10) and $(0.02), respectively, have been
       restated to $(.20) and $(.03), respectively.

              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 is being deferred and
       amortized over the three-year term of Dr. Hashemi's employment contract.



                                      F-12
<PAGE>   29
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


              Loan to officer consists of a $200,000, 10% promissory note from
       its chairman due December 1, 2000. As of September 30, 2000, the Company
       has recorded interest income and accrued interest receivable of $9,275.
       In December, 2000 the Board authorized the extension of the loan to
       officer until December 1, 2001.

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

9.     SALE OF SUBSIDIARIES

              Effective September 30, 1997, the Company sold its interest in
       both the water treatment and retail divisions of Eden Systems, Inc. The
       Company was to receive a down payment of $25,000 and additional payments
       based upon a percentage of the future sales generated by Eden's
       acquirers. The Company received $25,000 from the sale during the year
       ended September 30, 1997 and $12,500 during the year ended September 30,
       1999. No additional payments have been received since that time, nor does
       management expect to receive any additional payments related to the sale.

10.    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, 2000, 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 note
       receivable is assumed to be the fair value, since the rate specified in
       the note approximates current market rates.

11.    STOCK OPTIONS

              The Company from time to time issues stock options for the
       purchase of restricted stock to directors, officers, employees and
       consultants. The Company does not have a qualified stock option plan for
       its executives and employees.

              The Company adopted Statement of Financial Accounting Standards
       No. 123 (FAS 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, 2000, all outstanding stock options were
       vested, and fully exercised.

              In accordance with FAS 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 proforma footnote
       purposes with the following assumptions used for grants in all years;
       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 1999
       and 2000.



                                      F-13
<PAGE>   30
                         NATIONAL SCIENTIFIC CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999


<TABLE>
<CAPTION>
                                                                      WEIGHTED    WEIGHTED
                                                          NUMBER       AVERAGE    AVERAGE
                                                            OF        EXERCISE      FAIR
                                                          SHARES       PRICE       VALUE
                                                         --------     --------    --------
<S>                                                      <C>          <C>         <C>
              Options Outstanding, September 30, 1998     318,000         .09        .18
                 Granted ............................     270,000         .09        .17
                 Exercised ..........................    (496,000)        .10        .16
                 Canceled ...........................          --          --         --
                                                         --------

              Options Outstanding, September 30, 1999      92,000         .09        .17
                                                         --------
                 Granted ............................     256,000         .10        .19
                 Exercised ..........................    (348,000)        .10        .17
                 Canceled ...........................          --          --         --
                                                         --------

              Options Outstanding, September 30, 2000          --
                                                         ========
</TABLE>

12.    SUBSEQUENT EVENTS

              On November 13, 2000, the Company filed legal action against a
       former director and officer of Company and his spouse. The Company's
       complaint alleges that certain sales and subsequent purchases of the
       Company's common stock are in violation of Section 16(b) of the
       Securities and Exchange Act of 1934, 15 U.S.C. Section 78p(b). The
       Company claims that both the sale and purchase transactions were ordered
       and completed within a six-month restriction period. Section 16(b) of the
       Act requires that any profits realized by an officer and or director from
       the purchase and sale within a six month period are subject to
       disgorgement and must be returned to the Company. The Company has asked
       for an accounting of these transactions and disgorgement of any profits
       made on the sales and purchases of the Company's common stock within the
       restricted time period.

              In December 2000, the Board of Directors of the Company approved
       the Company's 2000 Stock Option Plan. Currently 7,000,000 shares of
       common stock are reserved for issuance upon exercise of options granted
       under the 2000 Plan. The 2000 Plan will be submitted to the Company's
       shareholders for approval at the Company's 2001 Annual Meeting of
       Shareholders.





                                      F-14
<PAGE>   31
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER      DESCRIPTION
    ------      -----------
<S>             <C>
      3.1       Articles of Incorporation*
      3.2       Form of Bylaws*
     10.1       Employment Agreement dated December 1, 2000 between Sam H. Carr
                and the Company
     10.2       Employment Agreement dated December 1, 2000 between Michael
                Grollman and the Company
     10.3       2000 Stock Option Plan
     10.4       Warrant Agreement as part of Private Offering dated August 1,
                1999*
     10.5       Warrant Agreement as part of Private Offering dated March 15,
                1998*
     10.6       Lease Agreement between Targun Properties, Inc. and the
                Registrant dated August 21, 1998*
     10.6(i)    First Lease Addendum between Targun Properties, Inc. and the
                Registrant dated July 27, 1999*
     10.6(ii)   Second Lease Addendum between Targun Properties, Inc. and the
                Registrant dated September 15, 1999*
     10.7       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the HETROJUNCTION BIPOLAR
                TRANSISTOR HAVING WIDE BANDGAP, LOW INTERDIFFUSION BASE-EMITTER
                JUNCTION*
     10.8       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the VERTICAL HETROJUNCTION
                BIPOLAR TRANSISTOR*
     10.9       Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the MONOLITHIC INDUCTOR WITH
                MAGNETIC FLUX LINES GUIDED AWAY FROM SUBSTRATE*
     10.10      Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the MONOLITHIC INDUCTOR WITH
                MAGNETIC FLUX LINES GUIDED AWAY FROM SUBSTRATE Continuation in
                Part*
     10.11      Assignment Agreement between El-Badawy Amien El-Sharawy, Majid
                M. Hashemi and the Registrant for the STATIC MEMORY CELL WITH
                LOAD CIRCUIT USING A TUNNEL DIODE*
     10.12      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the TE MODE DIELECTRIC RESONATOR*
     10.13      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the DISTRIBUTED AMPLIFIER AND METHOD THEREFOR*
     10.14      Assignment Agreement between El-Badawy Amien El-Sharawy and the
                Registrant for the DISTRIBUTED AMPLIFIER Continuation in Part*
      22        List of Subsidiaries - NSC has no subsidiaries
      27        Financial Data Schedule
</TABLE>


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