SB-2/A 1 p65174a2sb-2a.htm SB-2/A sb-2a

As Filed with the Securities and Exchange Commission on July 27, 2001

File No. 333-62430

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

AMENDMENT NO. 2 TO
FORM SB-2

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933

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

         
Texas   3674   86-0837077
(State or Other
Jurisdiction of
Incorporation or
Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

4455 East Camelback Road, Suite E160
Phoenix, Arizona 85018
(602) 954-1492

(Address and Telephone Number of Principal Executive Offices)

CT Corporation System
3225 North Central Avenue, Suite 1601
Phoenix, Arizona 85012
(602) 277-4792
(Name, Address and Telephone Number of Agent for Service)

Copies to:

Gregory R. Hall, Esq.
Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
(602) 528-4000

     Approximate date of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering [   ]                          

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering [   ]                          

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering [   ]                          

     If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box [   ]

Calculation of Registration Fee

                             
        Proposed   Proposed        
Title of each   Number of   Maximum   Maximum        
Class of Securities   Shares   Offering Price   Aggregate   Amount of
Being Registered   Registered   Per Share   Offering Price   Registration Fee

 
 
 
 
Common Stock,
$.01 par value
 
Up to
17,777,778(1)
  (2)   $ 24,000,000 (3)   $ 6,000 (4)
Common Stock,(5)
$.01 par value
 
824,402
  $1.67   $ 1,376,751     $ 345 (4)
Total
 
Up to
18,602,180
  Not Applicable   $ 25,376,751     $ 6,345 (4)


(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and (o) of the Securities Act of 1933, as amended, on the basis of the average of the high and low sale prices of the common stock on May 18, 2001, as reported on the OTC Bulletin Board.
(2)   The price per share will vary based on the volume-weighted average daily price of National Scientific Corporation’s common stock during the draw down periods provided for in the common stock purchase agreement described in this registration statement. The purchase price will be equal to 92% of the volume weighted average daily price for each trading day within such draw down pricing periods. The common stock purchase agreement allows for up to 24 draws over a 24-month period in drawn down amounts of up to the lesser of (i) $1,000,000 and (ii) 6% of the weighted average price for the common stock for the 60 calendar days immediately prior to the first day of the draw down pricing period multiplied by the total trading volume in respect of the common stock for such period.
(3)   This represents the maximum purchase price that Coriander Enterprises Limited is obligated to pay us under the common stock purchase agreement. The maximum net proceeds we can receive is $24,000,000 less a 6% cash placement fee to our placement agent and $1,000 in escrow fees and expenses per settlement period, not to exceed an aggregate of $48,000.
(4)   Previously paid.
(5)   These shares represent shares issuable upon the exercise of the warrants issued to Coriander Enterprises Limited and to our placement agent, Ladenburg Thalmann & Co. Inc.

     The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective on such date as the Commission, acting pursuant to Section 8(a) of the Securities Act of 1933, as amended, may determine.

 


The information in this prospectus is not complete and may be changed. The selling securityholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, Dated July 25, 2001

Prospectus

18,602,180 Shares of Common Stock

     This prospectus relates to the 18,602,180 shares of our common stock being registered for possible resale, from time to time, by Coriander Enterprises Limited and Ladenburg Thalmann & Co. Inc. Of such shares, 824,402 shares are reserved for issuance upon exercise of warrants that have been granted to Coriander Enterprises and Ladenburg Thalmann and the 17,777,778 remaining shares may be issued pursuant to a common stock purchase agreement we entered into with Coriander Enterprises that establishes an equity line of credit. Under the common stock purchase agreement, Coriander Enterprises will purchase shares of our common stock at an 8% discount to the market price of such common stock. See “The Common Stock Purchase Agreement” beginning on page 11.

     Coriander Enterprises is an “underwriter” within the meaning of the Securities Act of 1933 in connection with its resale of our common stock.

     Our common stock is traded on the OTC Bulletin Board under the symbol “NSCT.” On June 5, 2001, the closing bid price of our common stock was $1.22 per share.

     Investing in our common stock involves risks, which are described in the “risk factors” section beginning on page 4 of this prospectus.

     Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is ___________, 2001.


Prospectus Summary
The Offering
Risk Factors
A Note About Forward-Looking Statements
Use of Proceeds
Dilution
Market for Common Equity and Related Stockholder Matters
Dividends
Determination of Offering Price
The Common Stock Purchase Agreement
Plan of Distribution
Selling Securityholders
Management’s Discussion and Analysis and Plan of Operation
Table of Contents
Business
Legal Proceedings
Security Ownership of Certain Beneficial Owners and Management
Description of Securities
Interests of Named Experts and Counsel
Description of Property
Certain Relationships and Related Transactions
Executive Compensation
Compensation/Employment Agreements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Financial Statements
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Changes in Shareholders’ Equity
Statements of Cash Flows
Notes to Financial Statements
Unaudited Condensed Balance Sheet
Unaudited Condensed Statements of Operations
Unaudited Condensed Statements of Cash Flows
Statements of Changes in Shareholders’ Equity (Deficit)
Notes To Financial Statements
PART II
Information Not Required In The Prospectus
Item 24. Indemnification of Directors and Officers
Item 25. Other Expenses of Issuance and Distribution
Item 26. Recent Sales of Unregistered Securities
Item 27. Exhibits
Item 28. Undertakings
Signatures
Exhibits
SB-2/A
EX-10.10
EX-10.11
EX-10.12
EX-10.13
EX-10.14
EX-10.15
EX-10.16
EX-10.17
EX-23.1

Table of Contents

         
    Page
   
Prospectus Summary
    1  
The Offering
    2  
Risk Factors
    4  
A Note About Forward-Looking Statements
    9  
Use of Proceeds
    9  
Dilution
    9  
Market for Common Equity and Related Stockholder Matters
    10  
Dividends
    11  
Determination of Offering Price
    11  
The Common Stock Purchase Agreement
    11  
Plan of Distribution
    18  
Selling Securityholders
    22  
Management’s Discussion and Analysis and Plan of Operation
    24  
Business
    27  
Legal Proceedings
    34  
Security Ownership of Certain Beneficial Owners and Management
    36  
Description of Securities
    38  
Interests of Named Experts and Counsel
    41  
Description of Property
    41  
Certain Relationships and Related Transactions
    42  
Executive Compensation
    42  
Compensation/Employment Agreements
    43  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    44  
Financial Statements
    1  
PART II
    1  
Information Not Required In The Prospectus
    1  
Item 24. Indemnification of Directors and Officers
    1  
Item 25. Other Expenses of Issuance and Distribution
    3  
Item 26. Recent Sales of Unregistered Securities
    3  
Item 27. Exhibits
    4  
Item 28. Undertakings
    4  
Signatures
    6  
Exhibits
    7  

-i-


Prospectus Summary

     This summary highlights important information regarding our business and this offering. You should read the entire prospectus carefully, including “risk factors” and our financial statements and related notes, before deciding to invest in our common stock.

National Scientific Corporation

     National Scientific Corporation’s core business focuses on the research and development of devices and designs that are intended to enhance the performance of various products commonly used in the electronics industry. We primarily design products that we believe will have a broad application and acceptance in the commercial marketplace.

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

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

     To generate revenue to fund our core business and implement our business plan, we are currently engaged in the import/export business of distributing electronic and other semiconductor-related products to customers in Asia.

     We generated no revenues from our operations for the fiscal years ended September 30, 1999 and 2000. At March 31, 2001, we had an accumulated deficit of $14,129,483. Our revenues for the fiscal quarter ended March 31, 2001, were $317,780, which were attributable to our import/export distribution business.

     We originally incorporated in Texas in 1953. Prior to 1996, our business primarily involved maintaining mortgage portfolios. In 1996 we abandoned this line of business. Our principal executive offices are located at 4455 East Camelback Road, Suite E160, Phoenix, Arizona 85018. Our telephone number is (602) 954-1492.

1


The Offering

     This prospectus covers up to 18,602,180 shares of National Scientific common stock which may be sold by the selling securityholders, Coriander Enterprises and Ladenburg Thalmann. The number of shares of common stock currently not outstanding and subject to this prospectus represents approximately 39.3% of our issued and outstanding common stock as of May 18, 2001, and approximately 28.7% of our issued and outstanding common stock after issuance of all shares issuable under outstanding options or warrants as described in this prospectus.

     On May 14, 2001, we entered into a common stock purchase agreement with Coriander Enterprises Limited, a British Virgin Islands corporation, for the future issuance and sale of shares of our common stock. This common stock purchase agreement establishes what is sometimes termed an equity line of credit or an equity draw down facility. Under this arrangement, we, at our sole discretion, may make up to approximately 24 draw down requests over a two year period, pursuant to which Coriander Enterprises is obligated to purchase up to $24 million of our common stock, at prices that will vary based on the market price of our common stock, but will be below the market price of our common stock at the time of such sale.

     In general, if we elect to sell shares of our common stock or draw down on the equity facility, the minimum amount we can draw down at any one time is $50,000 and the maximum amount will be the lesser of $1,000,000 or 6% of the weighted average price of our common stock for the 60 days prior to the date we request a draw down multiplied by the total trading volume of our common stock for such 60 day period. We can make one draw down request every 22 trading days, up to a maximum of 24 draw downs during the 2-year period of the common stock purchase agreement, provided that we cannot sell more than $24 million worth of shares of our common stock in total under the facility and may in practice only be able to sell a much lower amount.

     The total number of shares that may be issued under the facility will depend on a number of factors, including the market price and trading volume of our common stock during each draw down period. The purchase price for any shares issued under the facility will be equal to 92% of the volume-weighted average price of our common stock over the 22 trading day period following our draw down request. The proceeds we receive from each draw down will also be reduced by a 6% fee payable to Ladenburg Thalmann, the placement agent that introduced Coriander Enterprises to us, and a $1,000 fee payable to the escrow agent each time we settle a draw down. If, after we make a draw down request, the price of our common stock drops below the minimum threshold price that we specify in the draw down request, we will not sell shares to Coriander Enterprises below such minimum threshold price. The threshold price will be established by our board of directors or by a pricing committee appointed by our board at the time of each draw down request. For more details on the maximum draw down amount, the calculation of the purchase price and the number of shares we may issue, see “The Common Stock Purchase Agreement —The Draw Down Procedure and the Stock Purchases,” beginning on page 12.

2


Selected Summary Financial Information

                                 
                            Six Months
                            Ended
    Year Ended September 30,   March 31,
   
  2001
    1998   1999   2000   (Unaudited)
   
 
 
 
Statement of Income Data:
                               
Net Revenues(1)
  $     $     $     $ 317,780  
Direct cost of revenues
                      312,000  
Gross profit
                      5,780  
Other operating expenses
    206,863       65,398       197,536       558,981  
Salaries and benefits
    73,706                   311,433  
Consulting fees, related party
    75,725       455,050       2,904,208       422,008  
Research and development
    321,067       130,463       1,433,751       514,259  
Stock Compensation
    64,040       40,916       50,320       4,014,842  
 
   
     
     
     
 
Income (loss) from operations
    (741,401 )     (691,827 )     (4,585,815 )     (5,815,743 )
Other income (expense) – net
    (31,144 )     (7,258 )     66,478       71,907  
 
   
     
     
     
 
Net loss
  $ (772,545 )   $ (699,085 )   $ (4,519,337 )   $ (5,743,836 )
 
                               
Net loss per common share basic and diluted(2)   $ (0.04 )   $ (0.02 )   $ (0.10 )   $ (0.12 )
 
   
     
     
     
 
                                 
    As of September 30,        
   
  March 31,
    1998   1999   2000   2001
   
 
 
 
Balance Sheet Data:
                               
Cash and cash equivalents(3)
  $ 21,735     $ 62,185     $ 2,584,900     $ 1,934,817  
Working capital
    16,408       33,738       2,864,502       2,311,071  
Total current assets
    34,235       62,185       2,890,456       2,353,994  
Long-term debt, less current portion
    110,000                    
Series B Convertible Preferred Stock
    1,500                    
Total stockholders’ (deficit) equity
    (88,916 )     (72,922 )     2,871,899       2,454,635  


(1)   Revenues resulted from exports of electronic products to Asia purchased in the United States.
(2)   Excludes options and warrants as they are antidilutive.
(3)   Increase in cash in 2000 resulted from exercise of warrants.

3


Risk Factors

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

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

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

We have a history of losses and we may never achieve or sustain profitability.

     We have experienced significant losses and negative cash flows from our research and development endeavors since we began such activities in 1996. As of March 31, 2001, we had an accumulated deficit of $14,129,483. We had no revenues for the fiscal years ended September 30, 1999 and 2000. Although we reported revenues of $317,780 during the fiscal quarter ended March 31, 2001, such revenues were derived from our import and export activities. The future profitability of our core business will depend primarily on our ability to generate revenues from the sale of our products and the licensing of our technology. We may find it necessary to accelerate expenditures relating to the sale or licensing of our products. If our revenue grows at a slower rate than we anticipate, or if our expenditures exceed our expectations or cannot be adjusted to reflect slower revenue growth, we may not achieve or sustain profitability.

If we are unable to obtain additional capital from other financings, we may have to significantly curtail the scope of our operations and alter our business model.

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

4


or respond to competitive pressures, any of which could cause us to significantly curtail the scope of our operations and alter our business model.

     The maximum draw down amount every 22 trading days under our equity line facility is the lesser of $1,000,000 or 6% of the weighted average price of our stock for the 60 days period prior to the draw down multiplied by the total trading volume for that 60 day period. If our stock price and trading volume fall below established levels, then we will not be able to draw down all $24 million pursuant to the proposed equity line facility with Coriander Enterprises. During the 12 months ended May 31, 2001, our stock price ranged from a high of $8.88 to a low of $1.00 per share and our average daily trading volume was 194,267 shares. In addition, business and economic conditions may not make it feasible for us to make a draw down pursuant to the facility. Further, if our common stock is delisted from the OTC Bulletin Board, we fail to keep, the registration statement effective, or we experience a material adverse change to our business. Coriander Enterprises would not be obligated to purchase shares subject to a draw down notice. A number of factors may limit our ability to access all or part of our equity line, which could cause us to curtail or cease our operations.

Our business model is unproven and could fail.

     Our business model and profit potential are unproven and we cannot assure you that we will be able to become profitable. To achieve profitability with regard to our patented technologies, we must successfully develop prototypes of our inventions and designs and establish partnerships and strategic relationships with third parties to commercialize such inventions and designs. Our revenue model depends heavily on revenue generated from the licensing of our inventions and designs. To become profitable, we must achieve and maintain a broad market acceptance of our inventions and designs with both the users of such products and those third parties to whom we license such products. If we are unable to successfully establish such partnerships and strategic relationships and achieve broad market acceptance of our technology, we may be unable to generate revenue from our business and the value of your investment could be significantly reduced.

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

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

5


If the foreign markets that we plan to do business in prove volatile, our ability to generate revenue from such markets may be negatively impacted, which may in turn cause a decline in our profitability.

     Our business plan contemplates that we will conduct operations in foreign markets such as the Asia-Pacific region. Our overall operating performance may be impacted by the volatile economic situation in the Asia-Pacific region. This volatility has increased the uncertainty with respect to the long-term viability of certain of our customers and suppliers in the region, including such areas as Japan and other countries in the Asia-Pacific region, principally Malaysia, Taiwan, South Korea and Hong Kong. Any material change in the economic situation in such countries could negatively impact our ability to generate revenue from such markets and, therefore, cause a decline in our profitability and stock price.

Our international operations may be negatively impacted by the occurrence of one or more of the risks inherent in operating abroad.

     Our international sales and operations are subject to a number of risks inherent in selling and operating abroad. These include risks regarding:

    Currency exchange rate fluctuations;
 
    Local economic and political conditions;
 
    Disruptions of capital and trading markets;
 
    Restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs);
 
    Changes in legal or regulatory requirements;
 
    Import or export licensing requirements;
 
    Limitations on the repatriation of funds;
 
    Difficulty in obtaining distribution and support;
 
    Nationalization;
 
    The laws and policies of the Unites States affecting trade, foreign investment and loans; and
 
    Tax laws.

     If one or more of the above risks arises in the conduct of our international operations, our profitability may be negatively impacted.

6


If we are unable to keep pace with technological developments in the highly competitive and rapidly evolving semiconductor industry, we may not be able to successfully market our products or generate revenue.

     We compete in the semiconductor industry, which is characterized by intense competition, rapid technological change, short product cycles and evolving industry standards and continual price erosion. Our competitors include many large domestic and foreign companies that have substantially greater financial, technical and management resources. Our competitors include specialized, rapidly growing companies that sell products in the same markets that we will target. We cannot assure you that the price and performance of our products will be superior relative to the products of our competitors and that we will successfully stay ahead of or keep pace with the rapid technological changes in the semiconductor industry. Our failure to stay ahead of or keep pace with technological developments and emerging standards within the semiconductor industry may result in lower prices of our products, lack of a market for our products, fewer customer orders than our competitors, reduced revenues, reduced gross margins and a lower market share of our products.

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

     The semiconductor industry historically has experienced cyclical fluctuations with respect to the demand and supply for semiconductor products. As a result, we may experience periodic declines in sales or the prices of our products as a result of the following:

    Rapid technological change, product obsolescence and price erosion in our products;
 
    Maturing product cycles in our products or products sold by our customers;
 
    Increases in worldwide manufacturing capacity for semiconductors, resulting in declining prices; and
 
    Changes in general economic conditions, which may cause declines in our product markets or the markets of our suppliers and customers.

     The semiconductor industry also has experienced periods of rapid expansion of production capacity. Even when the demand for such products remains constant, the availability of additional excess production capacity in the industry creates competitive pressure that can degrade pricing levels, which can reduce revenues. Furthermore, customers who benefit from shorter lead times may defer some purchases to future periods, which could affect the demand for our products and our ability to generate revenues for the short term. As a result, we may experience downturns or fluctuations in customer demand for our products in the future resulting in a decline in our revenues and a corresponding decline in our profitability.

7


If we fail to protect our proprietary rights, we may lose market and revenue opportunities and we may suffer a decline in profitability.

     Our success is dependent upon the protection of our proprietary rights. In the high-tech industry, intellectual property is an important asset that is always at risk of infringement. We may incur costs to obtain patents and defend our intellectual property and rely upon the laws of the United States and of foreign countries in which we develop, manufacture, or sell our products to protect our proprietary rights. However, there can be no assurance that these proprietary rights will provide competitive advantages, or that other parties will not challenge, invalidate or circumvent these rights. Infringement upon our proprietary rights by a third party could result in uncompensated lost market and revenue opportunities for us.

     Other parties may assert that our products, processes or other technology infringe upon their patents or other intellectual property rights. In such cases, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms or defending our position. However, if we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, our profitability may decline.

Our common stock has experienced in the past, and is expected to experience in the future, significant price and volume volatility, which substantially increases the risk of loss to our stockholders.

     Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. In fiscal 2000, our stock price ranged from a high of $19.125 to a low of $0.205 per share, and in the first two quarters of fiscal 2001, our stock price ranged form a high of $5.06 to a low of $1.04. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss due to potential liquidity and the possibility that our common stock may suffer greater declines.

We are subject to the “penny stock” rules which may make buying or selling our common stock more difficult.

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

8


A Note About Forward-Looking Statements

     This prospectus contains various forward-looking statements that are based on our beliefs as well as assumptions made by and information currently available to us. When used in this prospectus, the words “believe,” “expect,” “anticipate,” “estimate,” “plan” and similar expressions are intended to identify forward-looking statements. These statements are subject to certain risks, uncertainties, and assumptions, including those identified under “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected.

Use of Proceeds

     We will not receive any proceeds from Coriander Enterprises’ sale of shares of our common stock. However, we will receive the proceeds from any sale of common stock to Coriander Enterprises under the common stock purchase agreement described in this prospectus and upon the exercise of Coriander Enterprises’ warrants and Ladenburg Thalmann’s warrants, when, and if, they exercise the warrants.

     We expect to use substantially all the net proceeds for general corporate purposes, including working capital, research and development and expansion of sales and marketing activities. The amounts we actually expend for working capital and other purposes may vary significantly and will depend on a number of factors including, but not limited to, the actual net proceeds received, the amount of our future revenues and other factors described under “Risk Factors.” Accordingly, our management will retain broad discretion in the allocation of the net proceeds. A portion of the net proceeds may also be used to acquire or invest in complementary businesses, technologies, product lines or products. We have no current plans, agreements or commitments with respect to any of these transactions, and we are not currently engaged in any negotiations with respect to any of these transactions.

Dilution

     The issuance of further shares and the eligibility of issued shares for resale will dilute our common stock and may lower the price of our common stock. If you invest in our common stock, your interest will be diluted to the extent of the difference between the price per share you pay for the common stock and the pro forma as adjusted net tangible book value per share of our common stock at the time of sale. We calculate net tangible book value per share by calculating the total assets less intangible assets and total liabilities, and dividing it by the number of outstanding shares of common stock.

     The net tangible book value of our common stock as of March 31, 2001, was $2,434,635, or approximately $0.05 per share. Assuming that we issued on March 31, 2001, a total of 17,777,778 shares to Coriander Enterprises under the common stock purchase agreement at $1.24 per share, representing 92% of the closing price for our common stock on May 18, 2001, and we paid our placement agent a 6% placement fee, we would receive a net price per share of $1.16, and accordingly, our pro forma net tangible book value at the end of that transaction

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would be $23,026,635, or $0.35 per share. This represents an immediate increase in the pro forma net tangible book value of $0.30 per share to existing shareholders on March 31, 2001.

     If Coriander Enterprises then resold all 17,777,778 shares to the public using this prospectus at the $1.35 per share market price of our common stock on May 18, 2001, then the purchasers of our common stock under this prospectus would realize an immediate dilution of approximately $0.89 per share. The actual dilution to the purchasers under this prospectus may be greater or less than in this example, depending on the actual price paid for shares, the actual prices at which we issue shares under the common stock purchase agreement and how many of the vested options and warrants outstanding have been exercised at the time of the investment. The foregoing calculation does not take into account any vested options or warrants that may be exercised before the purchase of such shares including the warrants to purchase an aggregate of 824,402 shares of our common stock issued to Coriander Enterprises and Ladenburg Thalmann at an exercise price of $1.67 per share.

     In the future we may issue additional shares, options and warrants, and we may grant additional stock options to our employees, officers, directors and consultants under our stock option plan, all of which may further dilute our net tangible book value.

Market for Common Equity and Related Stockholder Matters

     Our common stock is quoted and traded on a limited and sporadic basis on the OTC Bulletin Board operated by The Nasdaq Stock Market, Inc. under the trading symbol “NSCT.” The limited and sporadic trading does not constitute, nor should it be considered, an established public trading market for our common stock. The following table sets forth the high and low closing bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board, Nasdaq Trading and Market Services. Such quotations reflect inter-dealer prices, without real mark-up, mark-down or commissions, and may not necessarily represent actual transactions. We have 418 stockholders of record of our common stock as of May 18, 2001.

                 
    High   Low
   
 
Fiscal 2001
               
Third Quarter (through May 31, 2001)
  $ 1.81     $ 1.09  
Second Quarter
  $ 3.182     $ 1.260  
First Quarter
  $ 5.062     $ 1.040  
                 
    High   Low
   
 
Fiscal 2000
               
Fourth Quarter
  $ 8.25     $ 4.969  
Third Quarter
  $ 10.187     $ 3.875  
Second Quarter
  $ 19.125     $ 1.625  
First Quarter
  $ 3.187     $ 0.205  
                 
    High   Low
   
 
Fiscal 1999
               
Fourth Quarter
  $ 0.31     $ 0.170  
Third Quarter
  $ 0.296     $ 0.130  
Second Quarter
  $ 0.39     $ 0.10  
First Quarter
  $ 0.26     $ 0.11  

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Dividends

     We have never declared or paid any cash dividends on our common stock. We anticipate that any earnings will be retained for development and expansion of our business and we do not anticipate paying any cash dividends in the near future. Our board of directors has sole discretion to pay cash dividends with respect to our common stock based on our financial condition, results of operations, capital requirements, contractual obligations and other relevant factors.

Determination of Offering Price

     The per share price of our common stock will be determined by a formula set forth in the common stock purchase agreement based on the volume weighted average market price of our common stock for the 60 day period preceding our request for a draw less an 8% discount. Please review the immediately following Common Stock Purchase Agreement section of this prospectus for a more detailed description of how the offering price is calculated.

The Common Stock Purchase Agreement

     We entered into a common stock purchase agreement on May 14, 2001, with Coriander Enterprises Limited, a British Virgin Islands corporation, for the future issuance and purchase of shares of our common stock. This common stock purchase agreement establishes what is sometimes termed an equity line of credit or an equity draw down facility.

     In general, the draw down facility operates as follows: the investor, Coriander Enterprises, has committed to provide us up to $24 million as we request it over a 24 month period, in return for common stock we issue to Coriander Enterprises. Once every 22 trading days, we may request a draw. The amount we can draw at each request must be at least $50,000. The maximum amount we can actually draw for each request is also limited to the lesser of $1,000,000 and 6% of the weighted average price of our common stock for the 60 days prior to the date of our request multiplied by the total trading volume of our common stock for such 60 day period. We may request a maximum of 24 draws during the 24-month period. We are under no obligation to issue any shares to Coriander Enterprises or to request a draw down during any period.

     Each 22-day trading period following a draw down request is divided into two 11 trading day settlement periods. After each 11 trading day settlement period, the final draw down amount for that settlement period is determined. We are entitled to receive funds on the 13th trading day and the 24th trading day following the delivery of a draw down notice. The final draw down amount will be reduced by 1/22 for each day during which any of the events described under “Amount of Draw Down” on page 12 occurs. We then use the formulas in the common stock purchase agreement to determine the number of shares that we will issue to Coriander Enterprises in return for our requested draw down amount. The formulas for determining the actual draw down amounts, the number of shares that we issue to Coriander Enterprises and the price per share paid by Coriander Enterprises are described in detail in the common stock

11


purchase agreement. The aggregate total of all draw downs under the equity draw down facility cannot exceed $24 million.

     The per share dollar amount that Coriander Enterprises pays for our common stock for each draw down includes a 8% discount to the average daily market price of our common stock for each day during the 22 day trading period after our draw down request, weighted by trading volume during each such trading day. We will receive the amount of the draw down less an escrow agent fee of $1,000 and a placement fee equal to 6% of gross proceeds payable to the placement agent, Ladenburg Thalmann, which introduced Coriander Enterprises to us. The price per share that Coriander Enterprises ultimately pays is determined by dividing the final draw down amount by the number of shares that we issue to Coriander Enterprises.

     The common stock purchase agreement prohibits us from drawing funds if the issuance of shares of common stock to Coriander Enterprises pursuant to the draw down would cause the Coriander Enterprises to beneficially own more than 9.9% of our issued and outstanding common stock at the time of issuance. In such cases, we will not be permitted to issue the shares otherwise issuable pursuant to the draw down and Coriander Enterprises will not be obligated to purchase those shares. Of course, Coriander Enterprise may resell the shares it holds, thereby reducing the number of shares it beneficially owns, which would enable us to issue additional shares to Coriander Enterprises without violating this 9.9% condition.

     In connection with the common stock purchase agreement, we issued to Coriander Enterprises at the initial closing a warrant to purchase up to 412,201 shares of our common stock. The warrant has a term from its date of issuance of 3 years. The exercise price of the warrant is $1.67. Coriander Enterprises is under no obligation to exercise this warrant. We also issued an identical warrant to Ladenburg Thalmann. Neither Coriander Enterprises nor National Scientific may assign their respective rights or obligations under the common stock purchase agreement or any provisions of that agreement.

The Draw Down Procedure and the Stock Purchases

     We may request a draw down by faxing to Coriander Enterprises a draw down notice, stating the amount of the draw down that we wish to exercise and the minimum threshold price at which we are willing to sell the shares.

Amount of the Draw Down

     No draw down can be less than $50,000 or more than the lesser of $1 million or 6% of the weighted average price of our common stock for the 60 days prior to the date of our draw down request multiplied by the total trading volume of our common stock for the 60 days prior to our draw down request.

     Additionally, if any of the following events occur during the pricing period, the investment amount for that pricing period will be reduced by 1/22:

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    the volume weighted average price of our common stock is less than the minimum threshold price we designate;
 
    our common stock is suspended for more than three hours, in the aggregate, or if any trading day is shortened because of a public holiday; or
 
    if sales of previously drawn down shares pursuant to the registration statement of which this prospectus is a part are suspended by us because of certain potentially material events for more than three hours, in the aggregate.

     The volume weighted average price of any trading day during a pricing period on which one of the above events occurs will not be used in the calculation of the pricing of the shares purchased during that pricing period.

     Thus, with respect to the first bullet above, if our pricing committee sets a threshold price too high, and if our stock price does not consistently meet that level during the 22 trading days after our draw down request, then the amount that we can draw and the number of shares that we will issue to Coriander Enterprises will be reduced. On the other hand, if we set a threshold price too low and our stock price falls significantly but stays above the threshold price, we will have to issue a greater number of shares to Coriander Enterprises at the reduced price. If we draw on the equity draw down facility, then we cannot make another draw down request until the following draw down period.

Number of Shares

     The 22 trading days immediately following the draw down notice are used to determine the number of shares that we will issue in return for the investment amount provided by Coriander Enterprises, which then allows us to calculate the price per share that Coriander Enterprises will pay for our shares.

     To determine the number of shares of common stock that we can issue in connection with a draw down, take 1/22 of the draw down amount determined by the formula above, and for each of the 22 trading days immediately following the date on which we give notice of a draw down, divide it by 92% of the volume-weighted average daily trading price of our common stock for that day. The 92% accounts for Coriander Enterprises’ 8% discount. The sum of these 22 daily calculations produces the number of common shares that we will issue, unless, as described above, the volume-weighted average daily price for any given trading day is below the threshold amount, trading is suspended for any given trading day or sales made pursuant to the registration statement is suspended, in which case those days are ignored in the calculation.

Sample Calculation of Stock Purchases

     The following is an example of the calculation of the draw down amount and the number of shares we would issue to Coriander Enterprises in connection with that draw down based on the assumptions noted in the discussion below.

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Sample Draw Down Amount Calculation

     For purposes of this example, suppose that we provide a draw down notice to Coriander Enterprises, and that we set the threshold price at $1.00 per share, below which we will not sell any shares to Coriander Enterprises during this draw down period. Suppose further that the total daily trading volume for the 60 days prior to our draw down notice is 5,000,000 shares and that the average of the volume-weighted average daily prices of our common stock for the 60 days prior to the notice is $1.50. Under these hypothetical numbers, the maximum amount of the draw down is as follows:

    the total trading volume for the 60 days prior to our draw down notice, 5,000,000, multiplied by
 
    the average of the volume-weighted average daily prices of our common stock for the 60 days prior to the draw down notice, $1.50, multiplied by 6%
 
    equals $450,000.00.

     The maximum amount we can draw down under the formula is therefore capped at $450,000.00, subject to further reductions if the volume-weighted average daily price of our common stock for any of the 22 trading days following the draw down notice is below the threshold price we set of $1.00. For example, if the volume-weighted average daily price of our common stock is below $1.00 on three of those 22 days, the $450,000.00 would be reduced by 1/22 for each of those days and our draw down amount would be 19/22 of $450,000.00, or $388,636.36.

Sample Calculation of Number of Shares

     Using the same hypothetical numbers set forth above, and assuming that the volume-weighted average daily price for our common stock is as set forth in the table below, the number of shares to be issued based on any trading day during the draw down period can be calculated as follows:

       1/22 of the draw down amount of $450,000.00 divided by
 
       92% of the volume-weighted average daily price.

     For example, for the first trading day in the example in the table below, the calculation is as follows: 1/22 of $450,000.00 is $20,454.55. Divide $20,454.55 by $1.84, representing 92% of the volume-weighted average daily price for that day of $2.00 per share, to get 11,117 shares. Perform this calculation for each of the 22 measuring days during the draw down period, excluding any days on which the volume-weighted average daily price is below the $1.00 threshold price, and add the results to determine the number of shares to be issued. In the table below, there are three days that must be excluded: days 20, 21 and 22.

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     After excluding the days that are below the threshold price, the amount of our draw down in this example would be $388,636.07. The total number of shares that we would issue to Coriander Enterprises for this draw down request would be 283,157 shares, so long as those shares do not cause the Coriander Enterprises’ beneficial ownership to exceed 9.9% of our issued and outstanding common stock. If we divide the draw down amount by the number of shares issued, Coriander Enterprises would pay $1.37 per share in this example.

                           
      Volume Weighted   Draw down   Number of
Trading Day   Average Price(1)   Amount   Shares

 
 
 
 
1
  $ 2.000     $ 20,454.53       11,117  
 
2
  $ 1.820     $ 20,454.53       12,216  
 
3
  $ 1.820     $ 20,454.53       12,216  
 
4
  $ 1.600     $ 20,454.53       13,896  
 
5
  $ 1.575     $ 20,454.53       14,116  
 
6
  $ 1.575     $ 20,454.53       14,116  
 
7
  $ 1.250     $ 20,454.53       17,787  
 
8
  $ 1.150     $ 20,454.53       19,330  
 
9
  $ 1.300     $ 20,454.53       17,102  
 
10
  $ 1.345     $ 20,454.53       16,530  
 
11
  $ 1.461     $ 20,454.53       15,218  
 
12
  $ 1.461     $ 20,454.53       15,218  
 
13
  $ 1.575     $ 20,454.53       14,116  
 
14
  $ 1.461     $ 20,454.53       15,218  
 
15
  $ 1.345     $ 20,454.53       16,530  
 
16
  $ 1.550     $ 20,454.53       14,344  
 
17
  $ 1.565     $ 20,454.53       14,207  
 
18
  $ 1.622     $ 20,454.53       13,707  
 
19
  $ 1.375     $ 20,454.53       16,170  
 
20
  $ 0.800 (2)     0       0  
 
21
  $ 0.750 (2)     0       0  
 
22
  $ 0.750 (2)     0       0  
 
           
     
 
 
          $ 388,636.07       283,157  


(1)   The share prices are illustrative only and should not be interpreted as a forecast of share prices or the expected or historical volatility of the share prices of our common stock.
(2)   Excluded because the volume-weighted average daily price is below the threshold specified in our hypothetical draw down notice.

     The maximum amount of our draw down for the sample period is $388,636.07 less a 6% cash fee paid to the placement agent of $23,318.16, less a $1,000 escrow fee per settlement, for net proceeds to us of approximately $363,317.91, which amount may be settled by us on the 13th and 24th trading day after each draw down price period commences. The delivery of the requisite number of shares and payment of the draw down will take place through an escrow agent, Epstein, Becker & Green, P.C. of New York. The escrow agent pays the net proceeds to us, after subtracting its escrow fee, and 6% to Ladenburg Thalmann, our placement agent, in satisfaction of placement agent fees.

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Necessary Conditions Before Coriander Enterprises Is Obligated to Purchase Our Shares

     The following conditions must be satisfied at the time of each draw down request before Coriander Enterprises is obligated to purchase any shares under the common stock purchase agreement:

    a registration statement for the shares must be declared effective by the Securities and Exchange Commission and must remain effective and available as of the draw down settlement date for making resales of the shares of common stock purchased by Coriander Enterprises;
 
    trading in our common stock must not have been suspended by the Securities and Exchange Commission or the OTC Bulletin Board, nor shall minimum prices have been established on securities whose trades are reported on The Nasdaq National Market;
 
    we must not have merged or consolidated with or into another company or transferred all or substantially all of our assets to another company, unless the acquiring company has agreed to honor the common stock purchase agreement; and
 
    no statute, rule, regulation, executive order, decree, ruling or injunction may be in effect which prohibits consummation of the transactions contemplated by the common stock purchase agreement.

     A further condition is that no material adverse effect, as such term is defined in the common stock purchase agreement, shall have occurred. Furthermore, Coriander Enterprises may not purchase more than 9.9% of our common shares issued and outstanding on any given date.

Restrictions on Future Financings

     The common stock purchase agreement limits our ability to raise capital by selling securities to third parties at a discount during the term of the common stock purchase agreement. We may, however, sell securities at a discount in the following situations:

    under any presently existing or future employee benefit plan, which plan has been or may be approved by our stockholders;
 
    under any compensatory plan for a full-time employee or key consultant;
 
    in an underwritten registered public offering;
 
    in connection with a strategic partnership or other business transaction, the principal purpose of which is not to raise money;

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    in connection with a private placement of securities if the purchasers do not have registration rights; or
 
    a transaction to which Coriander Enterprises gives its written approval.

Termination of the Common Stock Purchase Agreement

     The equity draw down facility established by the common stock purchase agreement will terminate 24 months from the effective date of the registration statement of which this prospectus forms a part. The facility shall also terminate if the following events occur:

    We file for protection from creditors;
 
    Our common stock is delisted from the OTC Bulletin Board, and not promptly relisted on the OTC Bulletin Board, Nasdaq, Nasdaq SmallCap Market, the American Stock Exchange or the New York Stock Exchange; or
 
    An event resulting in a material adverse effect as defined in the common stock purchase agreement has occurred and has not been cured within 30 days of written notice thereof from Coriander Enterprises.

Costs of Closing the Transaction

     Prior to the initial closing of the transaction on May 14, 2001, we paid Ladenburg Thalmann $35,000 to cover its legal expenses. At the initial closing, we became obligated to pay Coriander Enterprises $35,000 to cover its legal expenses. As additional consideration, we granted Coriander Enterprises and Ladenburg Thalmann each a warrant to purchase up to 412,201 shares of common stock at a price of $1.67 per share at any time prior to May 14, 2004. Neither Coriander Enterprises nor Ladenburg Thalmann is obligated to exercise its warrant.

Issuance of shares to Coriander Enterprises under the common stock purchase agreement and other issuances of our common stock may cause significant dilution to our stockholders and may cause the market price of our common stock to decline.

     The resale by Coriander Enterprises of our common stock that it purchases pursuant to the common stock purchase agreement will increase the number of our publicly traded shares, which could depress the market price of our common stock. Moreover, as all the shares we sell to Coriander Enterprises will be available for immediate resale, the mere prospect of our sales to it could depress the market price for our common stock. The shares of our common stock issuable to Coriander Enterprises under the equity line facility will be sold at an 8% discount to the volume-weighted average daily price of our common stock during the applicable draw down period and the proceeds paid to us upon each draw down will be net of a 6% placement fee to our placement agent, Ladenburg Thalmann, and an escrow fee of $1,000 per settlement period. If we were to require Coriander Enterprises to purchase our common stock at a time our stock price is very low, our existing common stockholders would experience substantial dilution. The issuance

17


of shares to Coriander Enterprises will therefore dilute the equity interest of existing stockholders and could have an adverse effect on the market price of our common stock.

     Additionally, certain events over which we have no control may result in the issuance of additional shares of our common stock, which would dilute our stockholders’ ownership percentages in our company. We may issue additional shares of our common stock or preferred stock to raise additional capital or finance acquisitions, or upon the exercise or conversion of outstanding options and warrants.

     As of May 18, 2001, there were outstanding warrants and options to acquire up to 8,944,501 shares of common stock at prices ranging from $0.29 to $3.00 per share. If exercised, these securities will dilute the percentage ownership of holders of outstanding common stock of our company and depress the price of our common stock. These securities, unlike the common stock, provide for anti-dilution protection upon the occurrence of stock splits, redemptions, mergers, reclassifications, reorganizations and other similar corporate transactions. If one or more of these events occurs, the number of shares of common stock that may be acquired upon conversion or exercise would increase and have a dilutive effect on common stock shareholders and could depress the price of our common stock.

Plan of Distribution

Manner of Sale

     Coriander Enterprises is offering shares of our common stock for its account as statutory underwriter, and not for our account. We will not receive any proceeds from the sale of our common stock by Coriander Enterprises. Coriander Enterprises may be offering for sale up to 17,777,778 common shares which it may acquire pursuant to the terms of the stock purchase agreement more fully described under the section of this prospectus entitled “The Common Stock Purchase Agreement.” Coriander Enterprises is a statutory underwriter within the meaning of the Securities Act of 1933 in connection with such sales of common shares and will be acting as an underwriter in its resales of our common stock under this prospectus. Coriander Enterprises has, prior to any sales, agreed not to effect any offers or sales of the common shares in any manner other than as specified in this prospectus and not to purchase or induce others to purchase common shares in violation of any applicable state and federal securities laws, rules and regulations and the rules and regulations of NASD. We will pay the costs of registering the shares under this prospectus, including legal fees.

     To permit Coriander Enterprises to resell the common stock issued to it under the stock purchase agreement, we agreed to register those shares and to maintain that registration. To that end, we have agreed with Coriander Enterprises that we will prepare and file such amendments and supplements to the registration statement and the prospectus as may be necessary in accordance with the Securities Act and the rules and regulations promulgated thereunder, to keep it effective until the earliest of any of the following dates:

    the date after which all of the shares held by Coriander Enterprises or its transferees that are covered by the registration statement have been sold by Coriander Enterprises or its transferees pursuant to such registration statement;

18


    the date after which all of the shares held by Coriander Enterprises or its transferees that are covered by the registration statement may be sold, in the opinion of our counsel, without restriction under the Securities Act of 1933; or
 
    the date after which all of the shares held by Coriander Enterprises or its transferees may be sold without any volume or manner limitations pursuant to Rule 144(k) under the Securities Act.

     Shares of common stock offered through this prospectus may be sold from time to time by Coriander Enterprises or Ladenburg Thalmann.

     Sales may be made on the OTC Bulletin Board, on the over-the-counter market or otherwise at prices and at terms then prevailing or at prices related to the then current market price, or in negotiated private transactions, or in a combination of these methods. Coriander Enterprises will act independently of us in making decisions with respect to the form, timing, manner and size of each sale. We have been informed by Coriander Enterprises and Ladenburg Thalmann that there are no existing arrangements between it and any other stockholder, broker, dealer, underwriter or agent relating to the distribution of this prospectus. Coriander Enterprises is an underwriter in connection with resales of its shares.

     Coriander Enterprises and Ladenburg Thalmann may resell Shares of our common stock in one or more of the following manners:

    a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;
 
    purchases by a broker or dealer for its account under this prospectus; or
 
    ordinary brokerage transactions and transactions in which the broker solicits purchases.

     In effecting sales, brokers or dealers engaged by Coriander Enterprises or Ladenburg Thalmann may arrange for other brokers or dealers to participate. Except as disclosed in a supplement to this prospectus, no broker-dealer will be paid more than a customary brokerage commission in connection with any sale of the common stock by Coriander Enterprises or Ladenburg Thalmann. Brokers or dealers may receive commissions, discounts or other concessions from the selling stockholders in amounts to be negotiated immediately prior to the sale. The compensation to a particular broker-dealer may be in excess of customary commissions. Profits on any resale of the common stock as a principal by such broker-dealers and any commissions received by such broker-dealers may be deemed to be underwriting discounts and commissions under the Securities Act of 1933. Any broker-dealer participating in such transactions as agent may receive commissions from Coriander Enterprises, and, if they act as agent for the purchaser of such common stock, from such purchaser as well.

     Broker-dealers who acquire common shares as principal may thereafter resell such common stock from time to time in transactions, which may involve crosses and block

19


transactions and which may involve sales to and through other broker-dealers, including transactions of the nature described above, in the over-the-counter market, in negotiated transactions or otherwise at market prices prevailing at the time of sale or at negotiated prices, and in connection with such resales may pay to or receive from the purchasers of such common stock commissions computed as described above. Brokers or dealers who acquire common stock as principal and any other participating brokers or dealers may be deemed to be underwriters in connection with resales of the common stock.

     In addition, any common stock covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. However, since Coriander Enterprises is an underwriter, Rule 144 of the Securities Act is not available to Coriander Enterprises in its sale of its shares of our common stock. We will not receive any of the proceeds from Coriander Enterprises’ sale of shares, although we have paid the expenses of preparing this prospectus and the related registration statement of which it is a part.

     Coriander Enterprises is subject to the applicable provisions of the Exchange Act, including without limitation, Rule 10b-5 thereunder. Under applicable rules and regulations under the Exchange Act, any person engaged in a distribution of the common stock may not simultaneously purchase such securities for a period beginning when such person becomes a distribution participant and ending upon such person’s completion of participation in a distribution. In addition, in connection with the transactions in the common stock, Coriander Enterprises will be subject to applicable provisions of the Exchange Act and the rules and regulations under that Act, including, without limitation, the rules set forth above. These restrictions may affect the marketability of the common stock.

     Coriander Enterprises and Ladenburg Thalmann will pay all commissions and its own expenses, if any, associated with the sale of the common stock, other than the expenses associated with preparing this prospectus and the registration statement of which it is a part.

Underwriting Compensation and Expenses

     The underwriting compensation for Coriander Enterprises will depend on the amount of financing that we are able to obtain under the stock purchase agreement, up to a maximum of approximately $1,920,000 if we are able to obtain the entire $24,000,000 in financing. Coriander Enterprises will purchase shares under the common stock purchase agreement at a price equal to 92% of the volume-weighted average daily price of our common stock reported on the OTC Bulletin Board, for each day in the pricing period with respect to each draw down request.

     We also issued to Coriander Enterprises a warrant to purchase 412,201 shares of our common stock at an exercise price of $1.67. The warrant expires three years from the date of issuance.

     In addition, we are obligated to pay Ladenburg Thalmann, as compensation for its services as placement agent, a cash fee equal to 6% of the gross proceeds received from Coriander Enterprises under the common stock purchase agreement for draw downs under the equity line facility. The compensation to Ladenburg Thalmann will depend on the amount of

20


financing that we are able to obtain under the stock purchase agreement, up to a maximum of approximately $1,440,000 if we obtain the entire $24,000,000 in financing. We also issued to Ladenburg Thalmann a warrant to purchase 412,201 shares of our common stock at an exercise price of $1.67. The warrant also expires three years from the date of issuance.

Limited Grant of Registration Rights

     We granted registration rights to Coriander Enterprises to enable it to sell the common stock it purchases under the common stock purchase agreement. In connection with any such registration, we will have no obligation:

    to assist or cooperate with Coriander Enterprises in the offering or disposition of such shares;
 
    to indemnify or hold harmless the holders of any such shares, other than Coriander Enterprises, or any underwriter designated by such holders;
 
    to obtain a commitment from an underwriter relative to the sale of any such shares; or
 
    to include such shares within any underwritten offering we do.

     We will assume no obligation or responsibility whatsoever to determine a method of disposition for such shares or to otherwise include such shares within the confines of any registered offering other than the registration statement of which this prospectus is a part.

     We will use our best efforts to file, during any period during which we are required to do so under our registration rights agreement with Coriander Enterprises, one or more post-effective amendments to the registration statement of which this prospectus is a part to describe any material information with respect to the plan of distribution not previously disclosed in this prospectus or any material change to such information in this prospectus. This obligation may include, to the extent required under the Securities Act of 1933, that a supplemental prospectus be filed, disclosing

    the name of any broker-dealers;
 
    the number of common shares involved;
 
    the price at which the common shares are to be sold;
 
    the commissions paid or discounts or concessions allowed to broker-dealers, where applicable;
 
    that broker-dealers did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, as supplemented; and
 
    any other facts material to the transaction.

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     Our registration rights agreement with Coriander Enterprises permits us to restrict the resale of the shares Coriander Enterprises has purchased from us under the common stock purchase agreement for a period of time sufficient to permit us to amend or supplement this prospectus to include material information. If we restrict Coriander Enterprises during any pricing period or the ten consecutive business days after a pricing period, and our stock price declines during the restriction period, we are required to pay to Coriander Enterprises cash to compensate Coriander Enterprises for its inability to sell shares during the restriction period. The amount we would be required to pay would be the difference between the highest daily volume weighted average price of the common stock during the restriction period and the volume weighted average price of such shares on the trading day immediately following a properly delivered notice to Coriander Enterprises that the restriction period has ended.

Selling Securityholders

     The following table sets forth the name of each selling securityholder, the number of shares of common stock and the number of shares underlying the warrants owned by each selling securityholder. Because the selling securityholders may sell all, a portion or none of their shares, no estimate can be made of the aggregate number of shares that may actually be sold by any selling securityholder or that may be subsequently owned by any selling securityholder.

     The shares offered by this prospectus may be sold from time to time by the selling securityholders listed below.

                         
            Private Equity   Total Shares
Name   Warrants   Line Shares   Registered

 
 
 
Coriander Enterprises(1)
    412,201       17,777,778       18,189,979  
Ladenburg Thalmann(3)
    412,201 (4)     - - -       412,201  


(1)   The directors of Coriander Enterprises exercise voting or investment control over the securities attributed to Coriander Enterprises. The directors of Coriander Enterprises are David Sims and Lamberto Banchetti.
(2)   Other than the warrants we issued to Coriander Enterprises in connection with the common stock purchase agreement, Coriander Enterprises does not currently own any of our securities as of the date of this prospectus. Other than its obligation to purchase common shares under the common stock purchase agreement, it has no other commitments or arrangements to purchase or sell any of our securities. There are no business relationships between Coriander Enterprises and us other than the equity line provided for in the common stock purchase agreement. For a discussion of the shares to be purchased or sold by Coriander Enterprises, see “The Common Stock Purchase Agreement.”
(3)   The directors of Ladenburg Thalmann exercise voting or investment control over the securities attributed to Ladenburg Thalmann. The directors of Ladenburg Thalmann are Victor M. Rivas, Robert Gorczakowski, Wolfgang Janka, Holger Timm, and Jonathan Groveman.
(4)   We issued warrants to purchase an aggregate of 412,201 shares of our common stock to Ladenburg Thalmann as partial consideration for its services in connection with the equity line provided for in the common stock purchase agreement.

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Coriander Enterprises

     Coriander Enterprises is engaged in the business of investing in publicly traded equity securities for its own account. Coriander Enterprises’ principal offices are located at c/o Beacom Capital Management, Harbour House, 2nd Floor, Waterfront Drive, Road Town, Tortola, British Virgin Islands. Coriander Enterprises does not currently own any of our securities as of the date of this prospectus. Other than its obligation to purchase common shares under the common stock purchase agreement, it has no other commitments or arrangements to purchase or sell any of our securities. There are no business relationships between Coriander Enterprises and us other than as contemplated by the common stock purchase agreement.

Placement Agent

     Ladenburg Thalmann has acted as placement agent in connection with the equity line of credit. Ladenburg Thalmann introduced us to Coriander Enterprises and assisted us with structuring the equity line of credit with Coriander Enterprises. Ladenburg Thalmann’s duties as placement agent were undertaken on a reasonable best efforts basis only. It made no commitment to purchase shares from us and did not ensure us of the successful placement of any securities. Ladenburg Thalmann currently owns some of our securities. Ladenburg Thalmann is a registered broker dealer.

     Coriander Enterprises and Ladenburg Thalmann have not held any positions or offices or had material relationships with us or any of our affiliates within the past three years other than as a result of the ownership of our common stock. If, in the future, Coriander Enterprises’ or Ladenburg Thalmann’s relationship with us changes, we will amend or supplement this prospectus to update this disclosure.

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Management’s Discussion and Analysis and Plan of Operation

Overview

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

    Research, including clinical trials;
 
    Product development of electrical devices and components;
 
    Development of markets and distribution channels;
 
    Negotiation of strategic alliances;
 
    Patent applications;
 
    Raising capital;
 
    Development of corporate infrastructure; and
 
    Initial operations, which began in May 1996.

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

Results Of Operations

Comparison of Fiscal Years Ended September 30, 2000 and 1999

     We generated no revenue for the fiscal years ended September 30, 2000 and September 30, 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 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 $4,585,815 in fiscal year end September 30, 2000 from $691,827 for the previous fiscal year end. We issued restricted common stock as payment for

24


research, consulting and capital formation expenses that totaled approximately $3,200,000 in fiscal 2000 and $350,000 in fiscal 1999, in order to conserve cash during both years. Cash expenditures increased and we paid cash for costs and expenses in the approximate sum of $1.0 million and $349,000 for fiscal 2000 and 1999, respectively.

     The interest expense of approximately $5,200 in fiscal 2000 reflects interest paid for a note payable in the amount of $110,000. We paid the note payable in full in March 2000. We currently have no outstanding debt, and we do not pay any interest charges.

Comparison of Six Months Ended March 31, 2001 and 2000

     Revenues generated during the six month period ended March 31, 2001, totaled $317,780 and resulted from the export of electronic products we purchased from a third party. The export of products is not representative of our principal operations, which is the development and commercialization of patented technology. Therefore, we remain in the development stage.

     Operating expenses for the six months ended March 31, 2001, increased to approximately $5.8 million, compared to $970,000 for the six month period ended March 31, 2000. This increase was primarily attributable to the issuance of common stock to Dr. Majid Hashemi, our then President and Chief Technical Officer. Additionally, beginning in December 2000, we employed an additional 8 employees in our corporate office, which constitutes our entire management team. In addition, in September 2000 we opened our research and development facility in San Jose, California, which now consists of five additional full time employees.

     The employment agreement with Dr. Hashemi became effective as of December 1, 2000. Prior to his employment, Dr. Hashemi served as an independent consultant to us. The 1,325,000 shares of restricted common stock previously granted to him have been exchanged for options to purchase 2,100,000 and 666,700 shares of common stock at per share exercise prices of $.46 and $.29, respectively. These exercise prices represented 25% of the fair market value of the common stock on December 1, 2000 and January 1, 2001, respectively. Compensation expense of approximately $3.4 million for these below market option grants was recorded in the quarter ended December 31, 2000.

     Salaries and benefits have increased for the six months ended March 31, 2001 over the same period in fiscal 2000 by approximately $311,000 due to the addition of the Chief Executive Officer, Chief Operating and Financial Officers, the Global Director of Marketing, and other corporate support staff. In addition, research and development costs have increased approximately $218,000 for the six months ended March 31, 2001 over the same period in fiscal 2000. Research and development costs increased due primarily to opening our San Jose, California research facility and hiring an additional research scientist and two technical support personnel.

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Liquidity and Capital Resources

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

     In March, 2001, we established a $500,000 revolving credit facility with Wells Fargo HSBC Trade Bank to facilitate our import/export business. Amounts borrowed under the facility are secured by a cash deposit in the sum of $714,286. As of June 30, 2001, $200,000 had been drawn on the line of credit.

     As of March 31, 2001, we had cash and cash equivalents totaling $1,934,817 and total current assets were $2,353,994, compared to cash and cash equivalents totaling $2,584,900 at September 30, 2000. We have recently initiated product marketing efforts after several years of research and development and have not recovered our investment in terms of both cash flow and profitability.

     Net cash used for operating activities was $1,668,000 for the six months ended March 31, 2001, compared to $348,000 for the comparable period in fiscal 2000.

     As of March 31, 2001, we had an accumulated deficit of $14,129,483, as compared to an accumulated deficit of $8,385,647 at September 30, 2000.

Plan of Operation

     We believe that our current cash position, anticipated proceeds from the equity line of credit and potential proceeds from the exercise of outstanding warrants, together with any cash generated from operations to be sufficient to continue operations for the next twelve months. Such future requirements are based upon management’s best estimates based upon current conditions and the most recent results of operations. Should our stock price not support the sufficient access to cash under the equity line of credit, or the exercise of options, alternative financing will be pursued. However, there can be no assurance that alternative financing will be available.

Organization within Last Five Years

     We changed our name to National Scientific Corporation and commenced our current business operations in May 1996. We originally incorporated in Texas as American Mortgage Company, Inc. in 1953. From 1953 to 1996, our business involved buying and selling mortgages and maintaining various mortgage portfolios, but we have abandoned this line of business. In 1996, we also acquired a water reclamation business that sold environmentally sensitive cleaning products. We sold this business in September 1997 and have subsequently focused on our current business of developing our electrical performance-enhancing devices and designs.

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Table of Contents

Business

General

     Our primary business involves the research and development of devices and designs that will enhance the performance of various products commonly used in the electronics industry. We have obtained several patents on our devices and designs and have developed several working prototypes of such devices and designs. In the future, we intend to develop enhancements to our existing devices and designs as well as develop new technologies that are complementary to our existing technologies.

     Although we have not brought any of our devices and designs to market, we anticipate generating revenue by entering into strategic alliance relationships with third parties to manufacture and/or license the technology underlying our devices and designs. We have established strategic relationships with various third-parties to facilitate the commercialization of our technologies. We plan to enter into additional strategic alliance arrangements to manufacture and/or license our technology in the near future.

     To generate revenue to fund our core business in the short-term, we are currently engaged in the import/export business of distributing electronic products to customers in Asia and the United States. We have entered into several strategic relationships with several entities with respect to our import/export business.

Products

     We have developed the following devices and designs that we will seek to bring to market in the near future:

         
Device Name   Use and Function of Device   Status of Prototype

 
 
Static Random Access Memory and TMOS™ Memory Core   Used in digital computing devices such as microcomputers and workstations and battery powered devices such as cellular phones and handheld computers that require a memory function.   Prototypes currently under production. Some limited but incomplete samples produced at Stamford are stored at National Scientific in Phoenix.
Mode Dielectric Resonator   Used in many applications including radar detectors, speed guns, automatic door openers, cellular portable phones and satellites. The resonator’s most common application is as a component of radio devices. The resonator does this by producing a current of predictable size when stimulated by a specific frequency of radio signal.   Prototype available at National Scientific in Phoenix and as TEMEX in France.
Power Management Devices
(Thyristors)
  Prevents voltage damage by limiting voltages and shunning surge currents away from sensitive circuits in telecommunications, and computer products and multimedia and data processing system applications.   Production samples available at National Scientific in Phoenix. Product is currently shipping.

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Device Name   Use and Function of Device   Status of Prototype

 
 
High Frequency Wireless
Transceiver
  Allows the transmission and reception of radio waves and is used in a variety of radio devices.   Prototype of the reception portion of this circuit available at National Scientific in San Jose.
Distributed Amplifier   Used in all electronic products that require some level of power increase such as telecommunications, microwave, internet communications, automotive and biomedical products as well as automated manufacturing products.   Prototype available.
Monolithic Inductor   Used in a wide range of electronic circuits for telecommunications applications. The inductor’s most common application is as a component of a radio device. The inductor does this, usually in conjunction with a capacitor, by producing an amplified current when stimulated by a specific frequency of radio signal.   Prototype available. Additional prototypes are under production.
Heterojunction Bipolar
Transistor
  Used in the manufacture of electronic devices such as cellular phones, satellites, and automotive circuitry. Transistors provide electronic control over current flow, and are a part of many electronic circuits. Heterojunction bipolar transistors are used most frequently as parts of radio devices.   No prototype available at this time.

     Since 1996, our core business has focused on researching, developing and testing the above devices and designs at our research and development facilities in Phoenix, Arizona and San Jose, California. Prototypes or samples of the Monolithic Inductor, Distributed Amplifier, Mode Dielectric Resonator, and Thyristor are available at National Scientific in Phoenix. Limited but incomplete prototypes of the Static Random Access Memory and TMOS™ Memory cell is available at National Scientific in Phoenix, and additional prototypes are currently being manufactured at NMRC in Ireland. Limited but incomplete prototypes of the High Frequency Wireless Transceiver are available our San Jose facility. No prototype of the Heterojunction Bipolar Transistor or the entire High Frequency Wireless Transceiver are yet available.

     In May, 2001 we engaged National Microelectronics Research Center located in Cork, Ireland to manufacture prototypes of our Static Random Access Memory and TMOS™ Memory Core. National Microelectronics Research Center was engaged after approximately six months of development was concluded at Stanford University in Northern California. The development work at Stanford proved incomplete, as the products produced were contaminated and could not be effectively tested. As a result, National Microelectronics Research Center has been engaged to assist us in the simulation, manufacturer, design revision and testing of our TMOS™ Memory cell. Our engineers provided National Microelectronics Research Center with the computer generated designs in early June. Work at National Microelectronics Research Center began

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immediately and we expect to see some test results of at least a portion of the product before the end of our fiscal year in September 2001.

     We entered into a development licensing agreement for a dielectric resonator with TEMEX, a subsidiary of TEKELEC Group, a French corporation. Under the agreement, we have granted a limited manufacturing license to TEMEX to our intellectual property relating to our dielectric resonator for a ten-dollar fee. TEMEX will produce samples or prototypes of our dielectric resonator and provide reports regarding the technical performance of our dielectric resonator. We will make these prototypes and reports available to our customers. TEMEX’s ability to use our data ad information is limited. Rights to any inventions created during the term of the agreement will be held by the inventor. The term of the agreement is for six months unless otherwise renewed. It may be terminated at any time by mutual consent of the parties. If our existing licensing arrangement with TEMEX is successful, we intend to negotiate a more comprehensive licensing agreement by the end of 2001.

     In May, 2001, we entered into an exclusive distribution agreement with Phoenix Semiconductor, Inc., which grants us the exclusive right to purchase and distribute power management electronic devices using Thyristor™ and related technologies. Thyristors are electronic components that are needed for protection of electronic circuits in virtually all telecommunications and computer equipment. Thyristors have been in production around the world for over 20 years. We have engaged Phoenix Semiconductor in Arizona, and intend to sell the products to retailers, wholesalers and other customers under our own brand name. There are no restrictions on our distribution of these products. We contracted to pay Phoenix Semiconductor a license fee based on a percentage of revenue that we earn on the sales of the licensed products. In conjunction with the contracting for the manufacture of thyristors, we have received a purchase order for 14 million thyristors to be delivered over the next twelve months. Sales from this purchase order are estimated to be approximately $1 million. Delivery of product under this purchase order is expected to begin before the end of this fiscal year. We believe our association with the quality products of Phoenix Semiconductor will build our reputation in the semiconductor industry and increase awareness of our name in Arizona and surrounding states.

     We entered into three identical purchase & licensing contracts with Sungil Computech, Maroo Electrotech and Ozaki Korea Co., Ltd, respectively, in January of 2001. These purchase and licensing contracts are our form agreements for purchasing from vendors any equipment or software we may need. The purchase and licensing agreements set forth our agreement to purchase various equipment, services and software from Sungil Computech, Maroo Electrotech and Ozaki Korea Co., Ltd pursuant to the terms set forth in purchase orders to be completed on an as-needed basis. Risk of loss remains with the vendors until we receive the equipment or software. The purchase and licensing contracts are set for a term of two years but either party to the contract may terminate the contract upon giving 90 day’s notice to other party. We have not purchased, and are not currently in the process of purchasing, any material amount of equipment or software under any of these agreements.

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

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suppliers of raw materials, although our agreements with them typically do not require them to assure a source of necessary raw materials.

     In March 2000, we entered into a memorandum of understanding with a leading Taiwanese foundry, United Microelectronics Corporation. United Microelectronics has agreed to provide manufacturing capacity, utilizing its patented process technology, for production of some of our designs for radio devices. United Microelectronics Corporation is currently in process of producing the first batch of samples of our designs for the receiver portion of our High Frequency Wireless Transceiver. Substantial work is still required to complete the final version of the transceiver and commence the sale of such technology. The receiver portion can be produced as a stand-alone product. We have not yet obtained any sales contract for the receiver. While no biding agreement has been negotiated to date, we believe a strategic alliance with United Microelectronics, given its high-speed process capacity, will aid in the advancement of our production of wireless products as well as enhance our existing development and production relationships.

     Our remaining products, including the heterojunction bipolar transistor, monolithic inductor and distributed amplifier, are in various stages of development. We have created prototypes for the distributed amplifier and inductor, but not the heterojunction bipolar transistor. It is our intent to approach appropriate third party contractors to develop each of these products. It is unlikely, however, that any of these three products will be completed and ready for production within the next six months.

Other Strategic Relationships

     We entered into a Teaming Agreement with Ramtron International Corporation in March 2001 to assist Ramtron in identifying manufacturers in Malaysia that have the capability to manufacture Ramtron’s patented electronic memory devices. Under the Teaming Agreement, we have agreed to act as the prime contractor in submitting work proposals to the Malaysian government. Our proposals will identify Ramtron as our subcontractor, the type of memory devices we would like to develop in Malaysia, specifically Ramtron’s patented memory devices, cost information and background data on us and Ramtron and our key personnel. If the proposals are accepted by the Malaysian government and corresponding contracts are executed by us and the Malaysian government, Ramtron will provide us with design, device and process engineering support to enable us to properly coordinate the manufacturing and marketing of Ramtron’s patented memory devices. Ramtron has granted to us revenue and licensing rights to manufacture its patented memory devices in Malaysia, and to assist in developing enhancements to these products. Under the Teaming Agreement each party retains the rights to any inventions produced during the duration of the agreement. Additionally, both we and Ramtron are limited in the use of the other’s data and information for the purpose of procuring and executing contracts obtained from the Malaysian government.

     We entered into a non-binding memorandum of understanding with AIC Semiconductor Sdn. Bhd., a Malaysian corporation, on June 21, 2001. The memorandum contemplates the negotiation and execution of a definitive agreement regarding a licensing and technology transfer arrangement in which we would license yet to be determined technologies to AIC to manufacture in Malaysia. Both AIC and National Scientific would be responsible for marketing and sales of the Malaysian manufactured products.

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Product Testing and Prototype Development Process

     We use three major kinds of tests in our product commercialization process. The first test battery is the Proof of Concept Prototype Tests. Although the specific experiments executed vary depending on what kinds of devices are being evaluated, this battery of tests establishes that the proposed physics of the product as described in the patent and in simulations matches with actual physical experimental results in the lab. A product that passes the proof of concept tests is not usually in the form where it can be sold, and further development usually will be required. The second battery of tests is the Production Prototype tests. Although the specific experiments executed vary depending on what kinds of devices are being evaluated. This battery of tests establishes that the device can be produced in a form suitable for sale to end-users. A product that passes the production prototype tests is usually in the form where it can be sold to end-users, but uncertainty about costs and quality during mass manufacturing still remain. Further development usually will be required. The last battery is the Production Sample Tests. Although the specific experiments executed vary depending on what kinds of devices are being evaluated, this battery of tests establishes that the product which the mass manufacturing process delivers meets all required end-user specifications and can be delivered at the planned cost. A product that passes the Production Sample Tests is in the form where it can be sold to end-users. Production Sample Tests will continue during the life of the product’s manufacture to ensure a level of consistent quality.

             
Prototype Testing Status Summary, July 2001

    Proof of Concept   Production   Production Sample
Device Name   Prototype Tests   Prototype Tests   Tests

 
 
 
Static Random Access Memory and
TMOS™ Memory Core
  In Progress   - - -   - - -
Mode Dielectric Resonator   Complete   In Progress   - - -
Power Management Devices (Thyristors)   Complete   Complete   Complete
High Frequency Wireless Transceiver   In Progress   - - -   - - -
Distributed Amplifier   Complete   - - -   - - -
Monolithic Inductor   Complete   In Progress   - - -
Heterojunction Bipolar Transistor   Not Started   - - -   - - -

Distribution of Electronic and Semiconductor Products

     We recently entered into the business of distributing electronic and other semiconductor related products to customers in Asia and the United States. We have generated gross revenue of approximately $317,780 during the fiscal quarter ended March 31, 2001, from our distribution business. We plan to use the revenue generated from our distribution business to help fund our core business of researching, developing and licensing our patented technologies.

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     In January 2001, we entered into an import/export agreement with E4world Corp., an entity in which one of our directors, Dr. Richard Kim, is also Chairman of the Board of Directors. E4world coordinates the logistics of the import of Korean-manufactured personal computer/electronic components to U.S. distributors. Under the terms of the agreement, E4world provides us with supporting contractual relationships among the Korean and U.S. participants to properly conduct our redistribution of the Korean-manufactured products and other products. E4world has committed to provide us access to the resale of $10 million worth of personal computer/electronic components over the next year. E4world secures non-cancelable purchase orders from U.S. distributors on behalf of National Scientific. We, in turn, issue purchase orders to the Korean manufactures and purchase the products directly from such manufacturers and then resell these products to the U.S. distributors in accordance with the terms of the non-cancelable purchase orders. We pay E4world a commission on all sales made to U.S. distributors made pursuant to our agreement with E4world. As of March 31, 2001, we have advanced $100,000 to E4world as prepayment of future commissions, which was secured by a note bearing interest per annum on the amount advanced but not yet earned as commissions.

     We have also entered into a series of non-binding multi-year contracts with Korean technology manufacturers, which are currently dormant. Under these contracts, we have the right to buy semiconductor-related parts and products from U.S. manufacturers and distribute these products to the Korean technology manufacturers. We would also be redistributing the electronic products of the Korean technology manufacturers to U.S. customers. We also have the right to license them our patented designs, if we choose to do so, but neither party is required to execute such additional license agreements.

     Since we have not realized any revenue from our core business, we believe the revenue derived from these contracts will assist us in funding the expansion of our business infrastructure, and to facilitate our transformation from a primarily research and development company to a more complete and operational full-line business, including building our experience in importing offshore manufactured components and assemblies and creating relationships with access to U.S. and international distribution channels.

Intellectual Property

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

     The United States Patent and Trademark Office has granted us patents on all of our devices and designs except for our wireless transceiver. We have filed United States and international patent applications for our wireless transceiver device. Patents issued by the United States Patent and Trademark Office have a term of 20 years from the date of filing. We plan to file additional patent applications for enhancements to our existing devices and designs as well as additional devices and designs that we develop.

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     We have also filed international patent applications pursuant to the Patent Cooperation Treaty. We have filed international patent applications corresponding to each of our U.S. patents pursuant to the Patent Cooperation Treaty. Filing a patent application pursuant to the Patent Cooperation Treaty will enable us to apply for patent protection in over 100 countries that have ratified the Patent Cooperation Treaty. We have filed for patents in Japan and the European Union for the Forming Heterojunction Bipolar Transistor. Generally, an international patent application filed pursuant to the Patent Cooperation Treaty takes approximately 1 year to be examined. We anticipate that most of our international patent applications will be examined by the end of 2003. We intend to file additional Patent Cooperation Treaty patent applications that may be examined after that date.

     The following table summarizes all of our patents and patent applications for our devices and designs:

                 
Title   Patent No.   Term Expires   Country

 
 
 
Heterojunction Bipolar
Transistor
    5,912,481 6,171,920     September 29, 2017   United States
Monolithic Inductor with
Magnetic Flux Lines Guided
Away From Substrate
    6,013,939     October 31, 2017   United States
Distributed Amplifier and
Method
    6,008,694     July 10, 2018   United States
Dielectric Resonator     6,169,407     June 18, 2018   United States
Static Memory Cell     6,104,631     December 17, 2014
(Additional patent
pending on
enhancements, on
which we have been
granted a Notice of
Allowance in May
2001 with all
claims intact)
  United States
High Frequency Wireless
Receiver
        patent pending on
PLL section of
design
  United States

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

Industry

     Based on our review of publicly available data relating to the products and manufacturing processes of the major semiconductor manufacturing companies, we believe that the increased performance and efficiencies inherent in our devices, designs and process will be of interest to many key sectors of the semiconductor industry. The largest target market for our products is the Static Random Access Memory market, where worldwide sales are expected to be around $45 billion in 2001, according to Semiconductor Industry Association Annual Worldwide Market Forecast (updated July 2001). The same study reports that the Thyristor market in 2001 is expected to exceed $700M globally. According to Carners In-Stat Group, a leading independent electronics industry research group, from a July 2000 report on Bluetooth technology. “The [market] opportunity for [Bluetooth] radio and baseband solutions will surpass $1.5 billion in shipments by the end of 2002 and soar to almost $5 billion by 2005.” Market size for the other devices is more difficult to quantify, due to the numerous wide and diverse applications in which these technologies are imbedded within. However, given the overall electronics global market size is approximately $220 billion in 2001 according to the Semiconductor Industry Association, we believe that all the products are targeted at markets within the electronics industry that can be substantial. The semiconductor industry is characterized by intense competition. Although we believe our technologies are competitive, our technologies experience intense competition from numerous domestic and foreign companies that have substantially greater financial, technical, manufacturing and marketing resources than us.

Competition

     We compete in the semiconductor industry, which is characterized by rapid technological change, short product cycles and evolving industry standards and continual price erosion. Our competitors include many large domestic and foreign companies with greater name recognition and substantially greater financial, technical and management resources. Our competitors include specialized, rapidly growing companies that sell products in the same markets that we will target. We cannot assure you that the price and performance of our products will be superior relative to the products of our competitors and that we will successfully stay ahead of or keep pace with the rapid technological changes in the semiconductor industry. Our failure to stay ahead of or keep pace with technological developments and emerging standards within the semiconductor industry may result in lower prices of our products, lack of a market for our products, fewer customer orders than our competitors, reduced revenues, reduced gross margins and a lower market share of our products. Companies in our industry compete in terms of their

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ability to develop innovative technologies and bring those technologies to commercialization quickly.

Government Regulation

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

Employees

     We have eleven full time employees. Eight employees work in our Phoenix, Arizona corporate office and three employees work in our research and development facility in San Jose, California.

Legal Proceedings

     We are not involved in any material pending legal proceedings other than ordinary routine litigation considered to be incidental to our business.

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Directors, Executive Officers, Promoters and Control Persons

     The following table sets forth our directors, executive officers, significant employees and consultants and their respective ages and positions:

             
Name   Age   Position

 
 
Lou L. Ross     72     Chief Executive Officer, Chairman of the Board
Majid Hashemi     39     Director, Group President, Chief Technology Officer
Michael A. Grollman     39     Director, President, Chief Operating Officer
Sam H. Carr     44     Director, Senior Vice President, Chief Financial Officer
Richard C. Kim     42     Director
Charles E. Martin     41     Director

     Directors, Executive Officers and Significant Advisors

     Lou L. Ross. Mr. Ross has served as our Chairman of the Board and Director since 1996 and assumed Chief Executive Officer duties in March 1998. Mr. Ross served as Chief Executive Officer 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. Mr. Hashemi became our Group President in December 2000. Mr. Hashemi also previously served as our President from September 2000 to December 2000. From 1995 to 2000, he served as the principal design engineer for National Semiconductor located in Silicon Valley. He served as a Senior Device Engineer at Motorola from 1993 to 1995. Mr. Hashemi received his Masters of Science in electrical engineering from the University of California at Los Angeles and his Ph.D. in electrical engineering from North Carolina State University.

     Michael A. Grollman. Mr. Grollman first became our Chief Operating Officer in October 2000. We appointed Mr. Grollman our President in April 2001. From 1998 to September 2000, Mr. Grollman served as Regional Service Director of MicroAge, Inc., a company that provides custom-configured technology solutions to businesses. He served as General Manager, Executive Vice President and Chief Technology Officer for Advanced Information Systems from 1987 to 1998. Mr. Grollman received his Bachelor of Science degree in chemistry from the State University of New York, and expects to receive his MBA from Arizona State University in 2002.

     Sam H. Carr. Mr. Carr joined us as 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., from 1997 to 2000. From 1996 to 1997, Mr. Carr served as Chief Financial Officer and Chief Development Officer for a consolidator of podiatry practices. Mr. Carr received his Bachelor of Business Administration from the University of Texas at Austin and an Executive MBA from the University of New Mexico. Mr. Carr is also a certified public accountant.

36


     Richard C. Kim. Mr. Kim has served as one of our directors since October 2000. Mr. Kim currently serves as a director and Chairman of E4world Corp., formerly known as KoreaStation. Mr. Kim became a director of KoreaStation in September 1999 and continued his service in the successor entity, E4world Corp., commencing on January 1, 2001. Mr. Kim also co-founded OHost Corporation, a subsidiary of E4world Corp. Mr. Kim received his Bachelor of Science degree in electrical engineering and computer science from the University of California at Berkeley and his Master of Science and Ph.D. in electrical engineering from the University of Minnesota.

     Charles E. Martin. Mr. Martin co-founded Kinetic Thinking, a management consulting firm that specializes in technology-based solutions for process improvement and strategic direction, and has been President since its inception in November 1999. From July 1997 to November 1999, Mr. Martin served as Chief Information Officer for MicroAge, Inc. He also held the position of Vice President of Professional Services in Ecadvantage, MicroAge’s electronic commerce subsidiary. Before MicroAge, Mr. Martin worked for Solutions Consulting from July 1996 until July 1997, Ernst &Young, LLP from February 1995 until July 1996 and Digital Equipment Corporation for the two years prior. Mr. Martin served in the U.S. Navy submarine service. Mr. Martin received his Bachelor of Science degree in accounting from Arizona State University.

Security Ownership of Certain Beneficial
Owners and Management

     The following table sets forth, as of May 18, 2001, certain information with respect to beneficial share ownership by each of our executive officers and directors, by all executive officers and directors as a group and by all persons known to management to own more than 5% of our outstanding common stock. Except as otherwise indicated, the shareholders listed have sole investment and voting power with respect to their shares. The amounts and percentages are based on 47,357,498 shares of common stock outstanding as of May 18, 2001.

                 
    Number of        
    Common Shares   Percent of
Name of Beneficial Owner(1)   Beneficially Owned   Outstanding shares

 
 
Lou L. Ross
    3,455,040 (2)     7.3 %
Majid Hashemi
    2,866,700 (3)     5.7 %
Michael A. Grollman
    750,000 (4)     1.6 %
Sam H. Carr
    750,000 (5)     1.6 %
Richard C. Kim
    20,000 (6)     *  
Charles E. Martin
    5,000 (7)     *  
All officers and directors as a group (5 persons)
    7,846,740       16.2 %


(1)   A person is deemed to be the beneficial owner of securities that can be acquired within 60 days from the date set forth above through the exercise of any option, warrant or right. Shares of common stock subject to options, warrants or rights that are currently exercisable or exercisable within 60 days are deemed

37


    outstanding for computing the percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the percentage of any other person.
(2)   Includes 1,000,000 shares held by Mr. Ross’ wife.
(3)   Includes 2,766,700 shares underlying currently exercisable stock options.
(4)   Includes 650,000 shares underlying currently exercisable stock options.
(5)   Includes 750,000 shares underlying currently exercisable stock options.
(6)   Includes 20,000 shares underlying currently exercisable stock options.
(7)   Includes 5,000 shares underlying currently exercisable stock options.
*   Indicates less than 1%.

38


Description of Securities

Common Stock

     As of May 18, 2001, we are authorized to issue up to 120,000,000 shares of common stock, par value $0.01 per share. As of the date of this prospectus, there were 47,357,498 shares of common stock outstanding and 418 holders of record of common stock. Each holder of common stock is entitled to one vote for each share held on all matters. Our articles of incorporation and bylaws do not provide for cumulative voting in elections of directors and all other matters brought before stockholder meetings.

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

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

Preferred Stock

     Our board of directors is authorized by our articles of incorporation to issue up to 4,000,000 shares of one or more series of preferred stock, par value $.10 per share. No shares of such preferred stock have been authorized for issuance by our board of directors, and we have no present plans to issue any such shares. In the event that the board of directors issues shares of serial preferred stock, it may exercise its discretion in establishing the terms of such preferred stock.

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

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

39


     If our company liquidates, dissolves or winds up, the holders of our preferred stock may be entitled to receive preferential cash distributions fixed by our board of directors when creating the particular preferred stock series before the holders of our common stock are entitled to receive anything. Preferred stock authorized by our board of directors could be redeemable or convertible into shares of any other class or series of our stock.

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

Stock Option Plan

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

Summary of 2000 Plan

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

Administration

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

Eligibility

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

     Incentive Options. Incentive stock options may be granted only to our employees who, in the judgment of the committee or our board of directors, are responsible for our management or our success and who, at the time of the granting of the incentive stock option, are also our employees. No incentive stock option may be granted under the 2000 Stock Option Plan to any individual who would, immediately before the grant of such incentive stock option, directly or indirectly, own more than 10% of the total combined voting power of all classes of our capital stock unless:

    such incentive stock option is granted at an option price not less than 110% of the fair market value of the shares on the date the incentive stock option is granted; and
 
    such incentive stock option expires on a date not later than five years from the date the incentive stock option is granted.

40


Option Price

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

Exercise of Options

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

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

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

Acceleration and Exercise Upon Change of Control

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

41


Payment For Option Shares

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

Termination of the 2000 Stock Option Plan

     The 2000 Stock Option Plan will terminate on December 1, 2010, unless our board of directors terminates the 2000 Stock Option Plan prior to its expiration date. Any option outstanding under the 2000 Stock Option Plan at the time of termination shall remain in effect until the option is exercised or expires.

Amendment of the 2000 Stock Option Plan

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

Transferability of Options

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

Issuance and Reservation of Shares

     We have issued options to purchase an aggregate of 4,914,501 shares of our common stock. We have reserved a total of 7,000,000 shares of our common stock for issuance under the 2000 Stock Option Plan.

Interests of Named Experts and Counsel

     None.

Description of Property

     We lease 1,290 square feet of office space in Phoenix, Arizona for our corporate offices. The lease for the Phoenix facility expires September 30, 2001 and is at a rental rate of $5,832 per month. Additionally, we lease 1,551 square feet of office space in San Jose, California for our research and development efforts. The San Jose lease expires August 31, 2003, is non-cancelable

42


and is at a rental rate that ranges from $3,878 to $4,275 per month, plus increases in operating expenses.

Certain Relationships and Related Transactions

     During fiscal 2000, we loaned Lou L. Ross, Chairman, $200,000, for which he signed a nine percent (9%) note payable to us, with a due date of December 1, 2000. As of September 30, 2000, we had recorded interest income and accrued interest receivable of $9,275. We extended the term of the note with Mr. Ross to December 1, 2001.

     In September 1999, Mr. Ross purchased from us 1,580,040 shares of restricted common stock in exchange for 840,000 shares of our common stock which he had held for more than one year. In connection with this transaction, we agreed to pay to Mr. Ross 4% of our gross revenue.

     As described in the strategic alliance section of this prospectus, we have advanced $100,000 in pre-paid commissions to E4world Corp. Dr. Richard Kim, a director of our company, is a director of E4world Corp.

Executive Compensation

     The following table lists the total compensation for our Chief Executive Officer and Corporate Secretary, and each other executive officer whose total salary and non-cash compensation exceeded $100,000 for fiscal 2000, 1999 and 1998.

Summary Compensation Table

                                                                 
            Annual Compensation   Long-Term Compensation
           
 
                                    Awards   Payouts
                                   
 
                                            Securities                
                            Other           Under-                
                            Annual   Restricted   lying           All other
                            Compen-   Stock   Options/   LTIP   Compen-
Name And Principal           Salary(1)   Bonus   sation   Award(s)   SARs   Payout   sation
Position   Year   ($)   ($)   ($)   ($)   (#)   ($)   ($)

 
 
 
 
 
 
 
 
Lou L. Ross, CEO and Chairman
    2000       110,591                                      
 
    1999       14,600                                      
 
    1998       2,500                                      
Majid Hashemi, President
    2000       238,500             4,847,265 (2)                        
Vernon M. Traylor(3)
    2000       117,591             36,000 (2)                        
 
    1999       68,700             240,000 (2)                        
 
    1998       22,500             55,000 (2)                        


(1)   Amounts shown include compensation we paid pursuant to independent contractor arrangements.

43


(2)   Restricted Common Shares valued at fifty percent of the closing sales price for the Common Shares on the date of issuance, issued in lieu of cash compensation.
(3)   Effective August 1, 2000, Mr. Traylor is no longer under contract with us.

     Our current officers that are not required to be listed in the foregoing table are: Sam Carr, Chief Financial Officer and Michael Grollman, President. Mr. Carr’s and Mr. Grollman’s respective employment agreements are summarized below.

Compensation/Employment Agreements

     Throughout fiscal 2000, we engaged Mr. Ross as an independent contractor. We have an arrangement with Mr. Ross that includes compensation of $9,500 per month, subject to our cash availability. In addition, in connection with an equity transaction in September 1999, Mr. Ross received the right to collect 4% of our gross revenues. However, Mr. Ross has waived that right as of March 31, 2001 for all past and current gross revenues. Effective December 1, 2000, Mr. Ross became one of our full time employees. We are in the process of negotiating the terms of his employment agreement.

     We appointed Mr. Hashemi as our President on September 1, 2000. Effective that date, we also contracted with Mr. Hashemi as an independent contractor, with an annual base compensation of $240,000, plus $12,000 annually to assist in the purchase of health insurance and other benefits. We entered into a one-year contract with Mr. Hashemi, with automatic renewals for terms of one year unless either Mr. Hashemi or we terminate the contract. On September 1, 2000 we paid Mr. Hashemi $100,000 as an initial payment for contracting with us. He also received 1.0 million restricted shares of our common stock in September, 2000. Mr. Hashemi’s independent contractor contract also called for the issuance of 250,000 shares of stock each on December 1, 2000, February 1, 2001 and April 1, 2001. Mr. Hashemi must return any and all of our stock issued to him and forfeit his rights to purchase additional stock in our company in the event that he is terminated for any reason other than death on or before January 1, 2003.

     Effective December 1, 2000, Mr. Hashemi became our employee under a one year, self renewing employment agreement with a base annual salary of $252,000. The 1,325,000 shares of restricted common stock previously granted to him have been exchanged for options to purchase 2,100,000 and 666,700 shares of common stock at per share exercise prices of $.46 and $.29, respectively. These exercise prices represented 25% of the fair market value of the common stock on December 1, 2000 and January 1, 2001, respectively. Compensation expense of approximately $3.4 million for these below market option grants was recorded in the quarter ended December 31, 2000. In the event we terminate Mr. Hashemi’s employment following a change in control or a sale of substantially all of our assets, Mr. Hashemi would receive one hundred fifty percent (150%) of his then current year’s annual salary.

     Mr. Grollman served as one of our independent contractors from October 7, 2000 until November 30, 2000. Effective December 1, 2000, we employed Mr. Grollman under a one year employment agreement to serve as our Chief Operating Officer. We appointed Mr. Grollman our President in April, 2001. His employment agreement automatically renews for

44


additional one-year terms unless either party terminates it before the renewal. Mr. Grollman’s employment agreement calls for an annual gross salary of $180,000.00, payable semi-monthly. As part of his employment agreement, we granted Mr. Grollman 100,000 restricted shares of our common stock on December 1, 2000. Also on December 1, 2000, we granted Mr. Grollman fully vested options to purchase 500,000 shares of our common stock at the closing sale price as of December 1, 2000. We have included additional option grants in Mr. Grollman’s employment agreement for each whole dollar amount increase in the market value of our common stock. The whole dollar amount increase is measured over a moving two-week average. For each whole dollar amount attained between $1 and $15 inclusive, Mr. Grollman will receive 75,000 options at the whole dollar amount option price. Mr. Grollman’s employment agreement contemplates the granting of additional options at various but declining levels for increases in stock value up to $50 per share of our common stock. Mr. Grollman has received an option to purchase 75,000 shares of our common stock at $2.00 per share and an option to purchase 75,000 shares of our common stock at $3.00 per share pursuant to his employment agreement. In the event of a change in control or sale of substantially all of our assets, our employment agreement with Mr. Grollman automatically terminates, and Mr. Grollman will receive 150% of his then current year’s annual salary.

     Mr. Carr served as one of our independent employment contractors from October 15, 2000 until November 30, 2000. Effective December 1, 2000, we employed Mr. Carr under a one-year employment agreement as our Chief Financial Officer. The employment agreement automatically renews for additional one-year terms unless either party terminates it prior to renewal. Mr. Carr’s employment agreement calls for an annual gross salary of $180,000, payable semi-monthly. Also in accordance with his employment agreement, on December 1, 2000, we granted Mr. Carr vested options to purchase 100,000 shares of our common stock at a price equal to 25% of the closing price per share on December 1, 2000. Also on December 1, 2000, we granted Mr. Carr 500,000 fully vested options to purchase shares of our common stock at the closing sale price of the shares on December 1, 2000. We have included additional option grants in Mr. Carr’s employment agreement for each whole dollar amount increase in the market value of our common stock. The whole dollar amount increase is measured over a moving two-week average. For each whole dollar amount attained between $1 and $15 inclusive, Mr. Carr will receive 75,000 options at the whole dollar amount option price. Mr. Carr’s employment agreement contemplates the granting of additional options at various but declining levels for increases in stock value up to $50 per share of our common stock. Mr. Carr has received an option to purchase 75,000 shares of our common stock at $2.00 per share and an option to purchase 75,000 shares of our common stock at $3.00 per share pursuant to his employment agreement. In the event of a change in control or sale of substantially all our assets, our employment agreement with Mr. Carr automatically terminates, and Mr. Carr will receive 150% of the then current year’s annual salary.

Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure

     None.

45


Where You Can Find More Information

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

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

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

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

46


NATIONAL SCIENTIFIC CORPORATION

Financial Statements
Year ended September 30, 2000

           
Report of Hurley & Company, Independent Auditors
    F-2  
Audited Financial Statements
 
Balance Sheets
    F-3  
 
Statements of Operations
    F-4  
 
Statements of Changes in Shareholders’ Equity
    F-5  
 
Statement of Cash Flows
    F-8  
 
Notes to Financial Statements
    F-10  
Unaudited Financial Statements
 
Condensed Balance Sheets (Six Month Period)
    F-17  
 
Condensed Statements of Operations (Six Month Period)
    F-18  
 
Condensed Statements of Cash Flows (Six Month Period)
    F-19  
 
Condensed Statements of Changes in Shareholders’ Equity
    F-21  
 
Notes to Condensed Financial Statements
    F-22  

F-1


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, 1999 (inception of development stage) through September 30, 2000. These financial statements are the responsibility of 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 generally accepted auditing standards. 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 operations and cash flows for each of the two years in the period ended September 30, 2000 and from September 30, 1999 (inception of development stage) through September 30, 2000 in conformity with generally accepted accounting principles.

     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 $5,000,000. 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

F-2


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Balance Sheets
September 30, 2000 and 1999

                         
            2000   1999
           
 
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
    12,848,088       3,432,945  
   
Less deferred stock compensation
    (2,062,500 )      
   
Accumulated deficit
    (8,385,647 )     (3,866,310 )
   
Receivable for return of stock
          (5,000 )
 
   
     
 
     
Total shareholders’ equity (deficit)
    2,871,899       (72,922 )
 
   
     
 
 
  $ 2,897,853     $ 65,525  
 
   
     
 

See accompanying notes to financial statements

F-3


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Statements of Operations
For the Years Ended September 30, 2000, 1999, and Development Stage

                           
                      Development
      2000   1999   Stage
     
 
 
Revenues
                 
Costs and expenses
 
Consulting fees, related party
  $ 2,904,208     $ 455,050     $ 3,434,983  
 
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
    4,585,815       691,827       6,019,043  
 
   
     
     
 
Net loss from operations
    (4,585,815 )     (691,827 )     (6,019,043 )
 
   
     
     
 

                       
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
    (4,519,337 )     (699,085 )     (5,990,967 )
Provision for income taxes (benefit)
                 
 
   
     
     
 
Net loss
  $ (4,519,337 )   $ (699,085 )   $ (5,990,967 )
 
   
     
     
 
Net loss per common share, basic and diluted
    (0.10 )     (0.02 )        

See accompanying notes to financial statements

F-4


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Statements of Changes in Shareholders’ Equity
For the Years Ended September 30, 2000, 1999 and Development Stage

                                                           
      Common Stock   Preferred Stock                        
     
 
                       
                      Number                                
      Number of           of           Additional   Accumulated        
      Shares   Amount   Shares   Amount   Paid-In Capital   Deficit   Total
     
 
 
 
 
 
 

Balance, September 30, 1999
    36,544,289     $ 365,443           $     $ 3,432,945     $ (3,866,310 )   $ (67,922 )
Stock and options issued for services
                                                       
 
Price per share ranged
                                                       
 
$0.19 to $0.97
    1,479,130       4,791                   560,904             575,695  
 
$1.50 to $1.86
    137,667       1,376                   247,782             249,158  
 
$2.50
    136,000       1,360                   338,640             340,000  
 
$2.88 to $2.95
    4,832       49                   13,951             14,000  
 
$4.13 to $4.89
    1,060,000       10,600                   4,400,805             4,411,405  

Deferred stock compensation
                            (2,062,500 )           (2,062,500 )

Private placement sold at:
                                                       
 
$0.10
    2,790,000       27,900                   251,100             279,000  
 
$0.36
    975,000       9,750                   341,250             351,000  

Exercise of options and warrants
                                                       
 
$0.05 to $0.10
    348,000       3,480                   30,670             34,150  
 
$1.00
    2,972,250       29,723                   2,942,527             2,972,250  
 
$1.50
    120,000       1,200                   178,800             180,000  

Retired stock to collateralize loan
    (500,000 )     (5,000 )                             (5,000 )

Stock converted by director family member
    1,128,600       11,286                   108,714             120,000  

Net loss
                                  (4,519,337 )     (4,519,337 )
 
   
     
     
             
     
     
 
Balance, September 30, 2000
    47,195,768     $ 471,958                 $ 10,785,588     $ (8,386,647 )   $ 2,871,899  
 
   
     
     
     
     
     
     
 

See accompanying notes to financial statements

F-5


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Statements of Changes in Shareholders’ Equity (Continued)
For the Years Ended September 30, 2000, 1999 and Development Stage

                                                           
      Common Stock   Preferred Stock                        
     
 
                       
                      Number                                
      Number of           of           Additional   Accumulated        
      Shares   Amount   Shares   Amount   Paid-In Capital   Deficit   Total
     
 
 
 
 
 
 

Balance, September 30, 1998
    25,331,849     $ 253,318       15,000     $ 1,500     $ 2,823,491     $ (3,167,225 )   $ (88,916 )

Stock and options issued for services Price per share ranged
                                                       
 
$0.05 to $0.10
    3,020,000       30,200                   298,229             328,429  
 
$0.11 to $0.15
    145,000       1,450                   17,750             19,200  

Preferred stock offering at: $5.00
                47,000       4,700       230,300             235,000  

Preferred stock conversion
    6,200,000       62,000       (62,000 )     (6,200 )     (55,800 )            

Private placement at: $0.25
    400,000       4,000                   96,000             100,000  

Exercise of options and warrants
                                                       
 
$0.02 to $0.10
    496,000       4,960                   27,490             32,450  

Issued stock to collateralize loan
    500,000       5,000                               5,000  

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

Net loss
                                  (699,085 )     (699,085 )
 
   
     
     
             
     
     
 

Balance, September 30, 1999
    36,544,289     $ 365,443                 $ 3,432,945     $ (3,866,310 )   $ (67,922 )
 
   
     
     
     
     
     
         

See accompanying notes to financial statements

F-6


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Statements of Cash Flows
For the Years Ended September 30, 2000, 1999 and Development Stage

                             
                        Development
        2000   1999   Stage
       
 
 
Cash flows from operating activities:
                       
 
Net loss
  $ (4,519,337 )   $ (699,085 )   $ (5,990,967 )
 
Adjustments to reconcile net loss to net cash used in operating activities:
                       
 
Depreciation
    1,792       1,336       10,019  
 
Loss on disposal of assets
                28,555  
 
Stock issued for services
    5,539,938       347,629       6,257,915  
 
Decrease (increase) in receivables
          12,500       30,000  
 
Decrease (increase) in other assets
    (105,556 )           (94,985 )
 
Increase (decrease) 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
    914,344       (327,000 )     243,912  
 
   
     
     
 

Cash flows from investing activities:
                       
 
Acquisition of property and equipment
    (5,849 )           (5,849 )
 
Proceeds from the sale of furniture and equipment
                4,660  
 
Loans to shareholders
    (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  
 
Deferred stock compensation
    (2,062,500 )           (2,062,500 )

F-7


                             
                        Development
        2000   1999   Stage
       
 
 
 
Proceeds from issuance of common stock
    3,986,720       132,450       4,240,378  
 
   
     
     
 

   
Net cash provided by financing activities
    1,814,220       367,450       2,538,559  
 
   
     
     
 

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
                 
 
   
     
     
 

Summary of Non-Cash Investing and Financing Activities

     During 1999, National Scientific 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, National Scientific sold equipment for $4,660 in cash, with the purchaser assuming $9,252 in lease obligations.

See accompanying notes to financial statements

F-8


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 $2,360,000, 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.

F-9


  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 under the asset and liability method. 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.

  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 and Going Concern Uncertainty

       While in the development stage, the Company experienced significant operating losses during 2000 and 1999, approximately $4,600,000 and $700,000, respectively, while raise substantial doubt about there Company’s ability to continue as a going concern. Of the total net operating losses, approximately $3,500,000 and $350,000 related to stock issued for services in 2000 and 1999, respectively.

F-10


       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 has 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:

                 
    2000   1999
   
 
Computer equipment
  $ 8,907       3,057  
Office furniture
    3,627       3,623  
 
   
     
 
 
    12,530       6,680  
Less: accumulated depreciation
    5,133       3,340  
 
   
     
 

 
  $ 7,397       3,340  
 
   
     
 

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 extended until December 31, 2000. All preferred

F-11


  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 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 $72,000. 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.

F-12


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

         
Year ending September 30,
2001   $ 98,569  
2002
    49,056  
2003
    47,025  
 
   
 

 
  $ 194,650  
 
   
 

       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:

                   
      2000   1999
     
 
Net operating loss carryforwards and startup costs
  $ 2,140,000     $ 1,160,000  
Valuation allowance
    (2,140,000 )     (1,160,000 )
 
   
     
 
 
  $     $  
 
   
     
 

               
 
A reconciliation of expected to actual taxes follows:
               

               
Expected federal and state tax recovery at 40%
  $ (1,800,000 )   $ (279,000 )
Stock compensation
    825,000        
Tax benefits not realized – valuation allowance
    975,000       279,000  
 
   
     
 

Financial statement recovery of income taxes
  $     $  
 
   
     
 

       The Company has recorded valuation allowances to offset the value of deferred tax assets, since it has recorded losses from operations since 1996 and the utilization of those assets is uncertain. During fiscal 2000 and 1999, the valuation allowance increased by $1,215,000 and $254,000 respectively.

       The Company has net operating loss carryforwards of approximately $5,300,000 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.

F-13


8.   Related Party Transactions

       The Company paid professional and consulting fees, in connection with product research and development and operations of approximately $6,098,000 and $548,000 to various officers and key consultants of the Company during the years ended September 30, 2000 and 1999, respectively. Of this amount, $2,062,500 is being deferred and amortized over the term of the employment contract.

       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

F-14


  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.

                           
              Weighted        
              Average   Weighted
      Number of   Exercise   Average
      Shares   Price   Fair Value
     
 
 

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
                     
 
   
                 

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

F-15


  sales and subsequent purchases of the Company’s common stock are in violation of §16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. §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-16


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Balance Sheet
March 31, 2001

                 
            2001
           
        ASSETS        
Current assets:        
  Cash and cash equivalents   $ 1,934,817  
  Loan to officer     200,000  
  Notes receivable     150,000  
  Other assets     69,177  
     
 
    Total current assets     2,353,994  
     
 
Property and equipment, net     123,564  
     
 
    $ 2,477,558  
     
 
      LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)        
Current liabilities:        
  Accounts payable and accrued expenses   $ 42,923  
     
 
    Total current liabilities     42,923  
     
 
Commitments, contingencies and subsequent events (see notes)        
Shareholders’ equity:        
  Preferred stock, par value $.10; 4,000,000 shares authorized, No shares issued and outstanding      
    Common stock, par value $.01; 120,000,000 shares authorized 47,282,498 shares issued and outstanding     472,825  
  Additional paid-in-capital     14,255,851  
  Add common stock options exercisable     1,835,442  
  Accumulated deficit     (14,129,483 )
     
 
    Total shareholders’ equity     2,434,635  
     
 
    $ 2,477,558  
     
 

The notes are an integral part of these financial statements.

F-17


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Operations
For the Quarters Ended and Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

                                           
                                      Cumulative
      Three Months Ended   Six Months Ended   Development
      March 31, 2001   March 31, 2000   March 31, 2001   March 31, 2000   Stage
     
 
 
 
 
Revenues   $ 317,780     $     $ 317,780     $     $ 317,780  
Cost of sales     312,000             312,000             312,000  
       
     
     
     
     
 
  Gross profit     5,780             5,780             5,780  
Operating expenses                                        
  Salaries and benefits     181,802             311,433             385,139  
  Consulting fees, related party           115,540       422,008       520,540       3,856,991  
  Research and development     327,824       218,259       514,259       296,286       2,399,540  
  Stock compensation     571,682             4,014,842       50,320       4,170,118  
  Other     344,292       41,291       558,981       103,615       1,028,778  
       
     
     
     
     
 
        1,425,600       375,090       5,821,523       970,761       11,840,566  
       
     
     
     
     
 
Net loss from operations     (1,419,820 )     (375,090 )     (5,815,743 )     (970,761 )     (11,834,786 )
       
     
     
     
     
 
Other income (expense)                                        
  Interest and other income     29,163       9,086       71,907       13,160       144,854  
  Interest expense           (2,439 )           (5,189 )     (16,316 )
  Loss on disposal of assets                             (28,555 )
       
     
     
     
     
 
        29,163       6,647       71,907       7,971       99,983  
       
     
     
     
     
 
Net loss before income tax     (1,390,657 )     (368,443 )     (5,743,836 )     (962,790 )     (11,734,803 )
Provision for income taxes                              
       
     
     
     
     
 
Net loss   $ (1,390,657 )   $ (368,443 )   $ (5,743,836 )   $ (962,790 )   $ (11,734,803 )
       
     
     
     
     
 
Net loss per common share, basic and diluted   $ (.03 )   $ (.01 )   $ (0.12 )     (.02 )        
       
     
     
     
     
 

The notes are an integral part of these financial statements.

F-18


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

                               
                          Cumulative
          Six Months Ended   Development
          March 31, 2001   March 31, 2000   Stage
         
 
 
Cash flows from operating activities:
                       
 
Net loss
  $ (5,743,836 )   $ (962,790 )   $ (11,734,803 )
 
Adjustments to reconcile net loss to net cash used in operating activities:
                       
   
Depreciation
    7,433       668       17,452  
   
Loss on disposal of assets
                28,555  
   
Stock and options issued for services
    952,342       598,289       7,210,257  
   
Amortization of deferred stock compensation
    3,062,500               1,000,000  
   
Decrease in receivables
                30,000  
   
(Increase) decrease in other assets
    36,379       (4,174 )     (58,606 )
   
Increase (decrease) in accounts payable and accrued expenses
    16,969       28,669       20,344  
   
Increase (decrease) in accrued interest expense
          (8,530 )      
 
   
     
     
 
     
Net cash used in operating activities
    (1,668,213 )     (347,868 )     (3,486,801 )
 
   
     
     
 
Cash flows from investing activities:
                       
 
Loans issued
    (200,000 )           (400,000 )
 
Repayment of loans
    50,000             50,000  
 
Acquisition of property and equipment
    (123,600 )             (129,449 )
 
Proceeds from the sale of furniture and equipment
                4,660  
 
   
     
     
 
     
Net cash used in investing activities
    (273,600 )           (474,789 )
 
   
     
     
 
Cash flows from financing activities:
                       
 
Repayment of shareholder loans
                (10,000 )
 
Repayment of notes payable
          (110,000 )     (110,000 )
 
Repayment of capital lease obligations
                (1,819 )
 
Proceeds from the issuance of common stock
    1,291,730       2,419,150       5,532,108  
 
Proceeds from the issuance of preferred stock
                482,500  
 
   
     
     
 
     
Net cash provided by financing activities
    1,291,730       2,309,150       5,892,789  
 
   
     
     
 
Net increase (decrease) in cash and cash equivalents
    (650,083 )     1,961,282       1,931,199  
Cash and cash equivalents, beginning of period
    2,584,900       62,185       3,618  
 
   
     
     
 
Cash and cash equivalents, end of period
  $ 1,934,817     $ 2,023,467     $ 1,934,817  
 
   
     
     
 

The notes are an integral part of these financial statements.

F-19


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Unaudited Condensed Statements of Cash Flows
For the Six Months Ended March 31, 2001 and 2000, and
For the Period from October 1, 1997 (Inception of Development Stage)
Through March 31, 2001

Supplementary Disclosure of Cash Flow Information

                         
                    Cumulative
    Six Months Ended   Development
    March 31, 2001   March 31, 2000   Stage
   
 
 
Cash paid during the period for interest
          13,720       2,597  
 
   
     
     
 
Cash paid during the period for income taxes
                 
 
   
     
     
 

Summary of Non-Cash Investing and Financing Activities

     During the quarter-ended December 31, 1999, the Company issued 1,128,600 shares of restricted common stock to a Director’s family member in exchange for 580,000 shares of unrestricted common stock.

The notes are an integral part of these financial statements.

F-20


NATIONAL SCIENTIFIC CORPORATION
(A Development Stage Company)
Statements of Changes in Shareholders’ Equity (Deficit)
For the Six Months Ended March 31, 2001

                                                             
      Common Stock   Preferred Stock                          
     
 
                         
                                      Additional                  
      Number of           Number of           Paid-In   Accumulated          
      Shares   Amount   Shares   Amount   Capital   Deficit   Total
     
 
 
 
 
 
 
Balance, September 30, 2000
    47,195,768       471,958                   10,785,588       (8,365,647 )     2,871,899  
Stock issued for services
                                                       
 
Share price of $2.40
    5,000       50                   11,950             12,000  
 
Share price of $1.84
    100,000       1,000                   91,000             92,000  
 
Share price of $0.86
    15,000       150                   12,750             12,900  
Exercise of warrants and options
    1,291,730       12,917                   1,278,813             1,291,730  
Amortization of stock compensation
                            2,062,500             2,062,500  
Exchange of stock for options
    (1,325,000 )     (13,250 )                 13,250              
Common stock options exercisable
                            1,835,442             1,835,442  
Net loss
                                  (5,743,836 )     (5,743,836 )
 
   
     
     
     
     
     
     
 
Balance, March 31, 2001
    47,282,498       472,825                   16,091,293       (14,129,483 )     2,434,635  
 
   
     
     
     
     
     
     
 

     The notes are an integral part of these financial statements.

F-23


NATIONAL SCIENTIFIC CORPORATION

Notes To Financial Statements

1.   Basis of Presentation
 
    The accompanying financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”), pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), and are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations for the three and six months ended March 31, 2001, are not necessarily indicative of the results to be expected for the full fiscal year.
 
    These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-KSB for the fiscal year ended September 30, 2000.
 
2.   Revenues
 
    We are a development stage company. Revenues generated during the three month period ended March 31, 2001 totaled $317,780 and resulted from the export of electronic products we purchased from a third party. The export of purchased product is not representative of the principal operations of the Company, which is the development and commercialization of patented technology. Therefore, the Company remains in the development stage. The profit margins are low on these exports, but generate some cash to allow the Company to continue to grow its corporate infrastructure.
 
3.   Employment Agreement
 
    The employment agreement with Dr. Hashemi became effective as of December 1, 2000. The 1,325,000 shares of restricted common stock previously granted to him have been exchanged for options to purchase 2,100,000 and 666,700 shares of common stock at per share exercise prices of $.46 and $.29, respectively. These exercise prices represented 25% of the fair market value of the common stock on December 1, 2000 and January 1, 2001, respectively. Compensation expense of $3,418,260 for these below market option grants was recorded in the quarter ended December 31, 2000.
 
4.   Issuance of Common Stock
 
    During the three months ended March 31, 2001, there were no issuances of common stock. During the three months ended December 31, 2000, the Company received $1,291,730 and issued 1,291,730 shares of restricted common stock in connection with the exercise of its $1.00 common stock warrants. The Company also issued 100,000 shares of restricted common stock valued at $92,000 to consultants and principals as

F-22


    compensation for services rendered. During the three months ended December 31, 2000, the Company issued 20,000 shares of restricted common stock valued at $24,900 to consultants as compensation for services.
 
    During the quarter ended March 31, 2000, the Company received $750,000 from a private placement of common stock. In conjunction with the private placement, the Company issued 600,000 shares of restricted stock valued at $72,000 to a principal and a consultant of the Company. The Company also issued 500,000 shares of restricted common stock to consultants as compensation for services.
 
5.   Stock Options
 
    The Company from time to time issues stock options for the purchase of common stock to directors, officers, employees and consultants. The Company adopted a qualified stock option plan for its executives and employees in December 2000.
 
    The Company adopted Accounting Practices Bulletin (“ABP”) Opinion 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for the plan. Accordingly, for employees and directors compensation expense is equal to the difference between the exercise price of the options granted and the fair value of the common stock at the date of grant. Compensation of $571,682 was recognized for the quarter ended March 31, 2001. Under the terms of the Company’s stock options granted to certain directors, officers, employees and consultants, the Board of Directors, at its sole discretion, determines at the time of grant when certain options granted shall be fully vested and exercisable. At March 31, 2001, vested options outstanding were 4,560,001 and non-vested outstanding options were 287,000.
 
    In accordance with APB Opinion 25, the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for pro forma footnote purposes with the following assumptions used for grants in all years; dividend yield of 0%, risk-free interest rate of 5%, and expected option life of 5 years. Expected volatility was assumed to be 100% as of the date of issue.

                   
              Weighted
      Number   Average
      of   Exercise
      Shares   Price
     
 
Options Outstanding, September 30, 2000
           
 
Granted
    4,938,668     $ 0.87  
 
Forfeited
    (91,667 )   $ 0.84  
 
Exercised
           
Options Outstanding, March 31, 2001
    4,847,001     $ 0.87  

F-23


    Had the Company fully adopted State of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” the loss from operations for the second fiscal quarter ended March 31, 2001, would have been approximately ($8.8) million and basic loss per share would have been ($0.18).
 
6.   Loan to Officer
 
    During the quarter ended December 31, 2000, the Company renewed a loan with a director and officer for $200,000, bearing interest at 10% per annum and due on December 1, 2001. As of March 31, 2001, accrued interest on this note totaled $19,275.
 
7.   Notes Receivable
 
    In January 2001, the Company loaned $100,000 to Phoenix Semiconductor, Inc., as part of a comprehensive business relationship. This loan bears interest at the rate of 12% per annum and is due and payable in two installments of $50,000 plus accrued interest in March and April 2001. At March 31, 2001, $50,000 of this loan plus accrued interest was outstanding. See Note 9 below.
 
    Also in January 2001, the Company loaned $ 100,000 to an entity bearing interest at the rate of 12% per annum. The Chairman of the Board of the entity is also a director of the Company. The loan is due and payable in July 2001.
 
8.   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 47,474,131 and 41,898,332 for the six months ended March 31, 2001 and 2000, respectively. Stock options and warrants are considered anti-dilutive and were not considered in the calculation.
 
9.   Subsequent Event
 
    In May 2001, we entered into an agreement with Phoenix Semiconductor, Inc. (PSI) which grants the Company exclusive distribution rights for certain Thyristor and Schottky wafer related products produced by PSI. Under the terms of the agreement, PSI has agreed to manufacture wafers containing these products for the Company. In return, the Company intends to market and sell these wafers or packaged products to third parties. The agreement has a one-year term and is renewable at the option of the Company for additional one-year terms. We expect production of wafers to begin in the third fiscal quarter of 2001 and sales of these products to be recorded in the final quarter of fiscal 2001.

F-24


     No dealer, salesman or other person has been authorized to give any information or to make representations other than those contained in this prospectus, and if given or made, such information or representations must not be relied upon as having been authorized by us or the selling securityholders. Neither the delivery of this prospectus nor any sale hereunder will, under any circumstances, create an implication that the information herein is correct as of any time subsequent to its date. This prospectus does not constitute an offer to or solicitation of offers by anyone in any jurisdiction in which such an offer or solicitation is not authorized or in which the person making such an offer is not qualified to do so or to anyone to whom it is unlawful to make such an offer or solicitation.

18,602,180 SHARES
 

NATIONAL SCIENTIFIC CORPORATION

 
COMMON STOCK

 

PROSPECTUS

___________________, 2001


PART II

Information Not Required In The Prospectus

Item 24. Indemnification of Directors and Officers

Articles of Incorporation

     Our articles of incorporation provide that no director shall incur liability to our company or our shareholders for monetary damages resulting from an act or omission in a director’s capacity as a director occurring after August 31, 1987, except for:

    Any breach of the director’s duty of loyalty to our shareholders and us.
 
    Acts and omissions not taken in good faith or which involve intentional misconduct or a knowing violation of law.
 
    Any transaction from which a director received an improper benefit.
 
    Acts or omissions for which the liability of a director is expressly provided by statute.
 
    Acts related to an unlawful stock repurchase or dividend.

Texas General Corporation Law

     Under Texas law, a corporation may indemnify a director or officer or other person who was, is, or is threatened to be made a named defendant or respondent in a proceeding because the person is or was a director, officer, employee or agent of the corporation, if it is determined that the person:

    conducted himself or herself in good faith;
 
    reasonably believed, in the case of conduct in his or her official capacity as a director or officer of the corporation, that his or her conduct was in the corporation’s best interests, and, in all other cases, that his or her conduct was at least not opposed to the corporation’s best interests; and
 
    in the case of any criminal proceeding had no reasonable cause to believe that his or her conduct was unlawful.

     A person entitled to indemnification under these provisions may be indemnified against judgments, penalties (including excise and similar taxes), fines, settlements and reasonable expenses he or she actually incurs in connection with the proceeding. If the person is found liable to the corporation or is found liable on the basis that personal benefit was improperly received by the person, the indemnification is limited to reasonable expenses actually incurred by the person in connection with the proceeding, and shall not be made in respect of any proceeding in which

II-1


the person is found liable for willful or intentional misconduct in the performance of his or her duty to the corporation.

Commission Policy on Indemnification

     Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to contracts, statutes, or otherwise, the SEC has advised us that in its opinion, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether our indemnification is against public policy as expressed in the Securities Act, and we will be governed by the final adjudication of such issue.

Indemnification Agreements

     We have recently entered into indemnification agreements with our officers and directors providing for our indemnification of our officers and directors to the fullest extent allowed under Texas law.

     We have agreed to provide customary indemnification to Coriander Enterprises for any losses or liabilities suffered by it based upon material misstatements or omissions from the common stock purchase agreement, registration statement and prospectus, except as they relate to information supplied by Coriander Enterprise Limited to us for inclusion in the registration statement and prospectus.

     We also have agreed to indemnify Ladenburg Thalmann and its representatives, affiliates and controlling persons from and against all liabilities, damages, and expenses arising out of the following:

    Any of our actions or failure to act and/or any action or failure to act of our affiliates, employees or agents in connection with this prospectus or final prospectus.
 
    Any untrue statement or alleged untrue statement of material fact contained in any of the financial or other information contained in this prospectus or final prospectus.
 
    The omission or alleged omission of a material fact required to be stated in this prospectus or prospectus in or necessary to make the statements in this prospectus or prospectus not misleading.

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     We do not have an obligation to indemnify the Ladenburg Thalmann for any liabilities, damages or expenses if it is finally and judicially determined that the Ladenburg Thalmann incurred such liabilities, damages or expenses from Ladenburg Thalmann’s gross negligence or bad faith.

Item 25. Other Expenses of Issuance and Distribution

     The following table sets for the expenses, other than any underwriting discount and commissions, in connection with the issuance and distribution of securities being offered. All amounts indicated are estimates:

         
Registration Fee
  $ 6,345  
Accounting fees and expenses
  $ 15,000  
Printing and engraving
  $ 50,000  
Blue sky and legal investment fees and expenses
  $ 5,000  
Legal fees and expenses
  $ 150,000  
Miscellaneous fees and expenses
  $ 10,000  
 
   
 
Total
  $ 236,345  

Item 26. Recent Sales of Unregistered Securities

     On March 15, 1998, we offered $250,000 worth of our preferred stock at $5,000 per unit. The offering expired July 31, 1999. 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 were exercisable at $1 per share and scheduled to expire March 15, 2000. On October 8, 1998, we decided to offer an additional 50 units under the terms of the March 15, 1998 offering. In conjunction with this offering, the expiration date of the warrants was extended until December 31, 2000. A11 preferred stock has been converted to common stock as of September 30, 1999. We received net proceeds in the sum of $482,500.

     On August 1, 1999, we commenced a $300,000 offering at $10,000 per unit. Each unit consisted of 30,000 shares of unrestricted common stock that spouse of our Chairman was to transfer to the investor 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. This offering was amended twice and each unit was revised to consist of 5,000 shares of common stock the Chairman’s spouse was to transfer, to investors 25,000 shares of restricted common stock and 50,000 warrants. This offering generated $750,000 for us and resulted in the issuance of 3,765,000 shares of our common stock.

     In consideration of the Chairman’s spouse’s transfer of 840,000 shares of her unrestricted common stock in connection with the foregoing offering, we, at her direction, issued to her spouse, our Chairman, 1,580,040 shares of restricted common stock and agreed that the

II-3


Chairman would receive 4% of all our future corporate gross revenues generated from the sale of our products.

     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 under the offering, 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. However, the offering did meet the $150,000 requirement, so we issued 600,000 shares of restricted common stock valued at $72,000. We also issued 300,000 shares to a key consultant during the year ends September 30, 2000 in conjunction with attaining goals related to our stock value.

     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.

     In conjunction with the consummation of the draw down facility/equity line of credit, we issued warrants to purchase 412,201 shares of common stock to each of Coriander Enterprises and Ladenburg Thalmann. Each warrant has a per share exercise price of $1.67.

     We obtained subscription agreements and investor questionnaires from all the participants in the foregoing private offerings. Therefore, we relied upon the exemption found in Section 4(2) of the Securities Act of 1933, as amended for the foregoing private placements of our securities.

Item 27. Exhibits

Item 28. Undertakings

     1.     The undersigned Registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

          (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933.

          (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; provided, however, that paragraphs (a) and (b) shall not apply if such information is contained in periodic reports filed by the Registrant under Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference into this Registration Statement.

          

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          (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

     2.     The undersigned Registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     3.     The undersigned Registrant hereby undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

     4.     The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant’s annual report under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report under Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference into this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

     5.     The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to securityholders that is incorporated by reference in the prospectus and furnished under and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information.

     6.     Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the undersigned Registrant according the foregoing provisions, or otherwise, the undersigned Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

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Signatures

     In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this amendment to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Phoenix, State of Arizona, on July 12, 2001.

     
  NATIONAL SCIENTIFIC CORPORATION
 
 
  By: /s/ Michael A. Grollman          
    Michael A. Grollman
President

     In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

         
Signature   Title   Date

 
 
 
          *

Lou L. Ross
  Chief Executive Officer,
Chairman of the Board
  July 27, 2001
 
          /s/ Michael A. Grollman

Michael A. Grollman
  President, Director   July 27, 2001
 
          *

Sam H. Carr
  Chief Financial Officer
Director
  July 27, 2001
 
          *

Dr. Richard C. Kim
  Director   July 27, 2001
 
          *

Charles E. Martin
  Director   July 27, 2001
 
* /s/ Michael A. Grollman
Attorney in Fact
       

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Exhibits

     The Exhibits and Financial Statement Schedules to the Registration Statement are listed in the Exhibit Index, which appears in this Registration Statement and is hereby incorporated herein by reference.

     
Exhibit Number   Description

 
2.1   Common Stock Purchase Agreement*
2.2   Form of Warrant*
2.3   Escrow Agreement*
2.4   Registration Rights Agreement*
3.1   Articles of Incorporation(1)
3.2   Bylaws(1)
5.1   Legal Opinion of Squire, Sanders & Dempsey L.L.P.*
10.1   Employment Agreement between National Scientific Corporation and Sam H. Carr(4)
10.2   Employment Agreement between National Scientific Corporation and Michael A. Grollman(4)
10.3   Amended and Restated 2000 Stock Option Plan(3)
10.4   Master Purchase and Licensing Contract, dated January 12, 2001, between National Scientific Corporation and Sungil Computech(3)
10.5   Master Purchase and Licensing Contract, dated January 12, 2001, between National Scientific Corporation and Maroo Electrotech Co. Ltd.(3)
10.6   Master Purchase and Licensing Agreement, dated January 12, 2001, between National Scientific Corporation and Ozaki Korea Co., Ltd.(3)
10.7   Employment Agreement, dated December 1, 2000, between National Scientific Corporation and Majid Hashemi(2)
10.8   Letter Agreement, dated January 4, 2001, between E4World Corp. and National Scientific Corporation(2)
10.9   Exclusive Distributorship Agreement dated May 8, 2001, between National Scientific Corporation and Phoenix Semiconductor, Inc.*
10.10   Lease Agreement between National Scientific and Borelli Investment Company, dated August 17, 2000.
10.11   Lease & Service Agreement between National Scientific and Targun Properties, Inc., dated October 1, 2000.
10.12   Credit Agreement between National Scientific and Wells Fargo HSBC Trade Bank, N.A., dated March 29, 2001.
10.13   Memorandum of Understanding between National Scientific and AIC Semiconductor Sdn. Bhd., dated June 21, 2001.
10.14   Teaming Agreement between National Scientific and Ramtron International Corporation, dated March 2, 2001.
10.15   Memorandum of Understanding between National Scientific and UMC Group (USA), dated March 28, 2000.

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Exhibit Number   Description

 
10.16   Developmental Licensing Agreement between National Scientific and TEMEX, dated June 26, 2001.
10.17   Single Principal Payment Note in the sum of $200,000, made by Lou L. Ross in favor of National Scientific Corporation, dated December 1, 1999.
23.1   Consent of Hurley & Company
23.2   Consent of Squire, Sanders & Dempsey L.L.P. (included in Exhibit 5.1)
24   Power of Attorney (included on signature page)


*   Previously filed.
(1)   Incorporated by reference to the Registrant’s Form 10-SB filed on or about January 3, 2000.
(2)   Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended March 31, 2001 and filed on or about May 15, 2001.
(3)   Incorporated by reference to the Registrant’s Form 10-QSB for the quarter ended December 31, 2000 and filed on or about February 14, 2001.
(4)   Incorporated by reference to the Registrant’s Form 10-KSB for the year ended September 30, 2000 and filed on or about December 19, 2000.

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