FASC - KDS Micronex - SEC Filing

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FORM 10-QSB/A-1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[x]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from __________ to __________

Commission File Number 0-27094

FIRST AMERICAN SCIENTIFIC CORP.

(Exact name of small business issuer as specified in its charter)

Nevada

88-0338315

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification No.)

100 Park Royal South, Suite 811
West Vancouver, B.C. CANADA V7T 1A2

(Address of principal executive offices)

(604) 913-9035
(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ x ] No [ ]

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Board of Directors
First American Scientific Corp.
Vancouver, BC

INDEPENDENT ACCOUNTANT'S REVIEW REPORT

We have reviewed the accompanying consolidated balance sheet of First American Scientific Corp. as of September 30, 2002 and the related statements of operations, stockholders' equity, and cash flows for the three months ended September 2002 and 2001. These financial statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The financial statements for the year ended June 30, 2002 were audited by us and we expressed an unqualified opinion on them in our report dated September 12, 2002, but we have not performed any auditing procedures since that date.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. As discussed in Note 2, the Company has an accumulated deficit of $9,227,958 at September 30, 2002 and has limited sales volume. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 13, to the financial statements, an error resulting in an understatement of $76,196 in previously reported expenses as of September 30, 2002. Accordingly, an adjustment has been made to the accompanying financial statements as of September 30, 2002 to correct the error.

/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
November 12, 2002, except for Note 13, which is dated February 21, 2003.

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FIRST AMERICAN SCIENTIFIC CORP. CONSOLIDATED BALANCE SHEETS
					September 30, 2002		June 30, 2002
ASSETS					(unaudited)
					Restated		Restated
CURRENT ASSETS
	Cash			$	17,082	$	126,144
	Accounts receivable				172,433		130,932
	Refundable research and development tax credit				83,501		83,085
	Sales tax refunds				-		27,957
	Prepaid expenses and other assets				6,250		10,000
	Inventory				490,442		490,442
			TOTAL CURRENT ASSETS		769,708		868,560
PROPERTY AND EQUIPMENT
	Property and equipment				311,631		311,631
	Less: Accumulated depreciation				(100,121)		(90,295)
			TOTAL PROPERTY AND EQUIPMENT		211,510		221,336
OTHER ASSETS
	Technology rights, net of amortization				1,247,992		1,279,743
	Patents and manufacturing rights, net of amortization				159,827		172,327
	Deposits				1,432		1,432
			TOTAL OTHER ASSETS		1,409,251		1,453,502
NET ASSETS DISTRIBUTED TO SUBSIDIARY					-		268,835
TOTAL ASSETS				$	2,390,469	$	2,812,233

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable and accrued expenses			$	140,676	$	127,880
	Accounts payable to related parties				60,788		152,192
			TOTAL CURRENT LIABILITIES		201,464		280,072
LONG TERM LIABILITIES
	Notes payable to related parties				38,107		-
	Notes payable				31,415		-
			TOTAL LONG-TERM LIABILITIES		69,522		-
COMMITMENTS AND CONTINGENCIES					-		6,127
MINORITY INTEREST IN SUBSIDIARY					192,350		243,590
STOCKHOLDERS' EQUITY
	Common stock - $.001 par value,
		200,000,000 shares authorized; and 145,764,921
		142,213,018 shares issued and outstanding, respectively			145,765		142,213
	Additional paid-in capital				10,815,717		11,105,694
	Stock options				195,780		195,780
	Accumulated deficit				(9,227,958)		(9,151,400)
	Accumulated other comprehensive income (loss)				(2,171)		(9,843)
			TOTAL STOCKHOLDERS' EQUITY		1,927,133		2,282,444
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY				$	2,390,469	$	2,812,233

See accountant's review report and accompanying notes.
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FIRST AMERICAN SCIENTIFIC CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

Three Months Ended
September 30,

2002
(unaudited)
Restated

2001
(unaudited)
Restated

REVENUES

$

5,962

$

-

COST OF SALES

-

-

GROSS PROFIT

5,962

-

OPERATING EXPENSES

Amortization and depreciation

54,077

65,366

Professional services

86,450

-

Wages

133,197

138,393

Research and development

10,109

9,231

General and administration

104,919

6,941

Total Operating Expenses

388,752

219,931

LOSS FROM CONTINUING OPERATIONS

(382,790)

(219,931)

LOSS FROM DISTRIBUTED SUBSIDIARY

(76,882)

(67,661)

LOSS BEFORE INCOME TAXES

(459,672)

(287,592)

INCOME TAXES

-

-

NET LOSS BEFORE ALLOCATION TO MINORITY INTEREST

(459,672)

(287,592)

ALLOCATION OF LOSS TO MINORITY INTEREST

51,240

-

NET LOSS

(408,432)

(287,592)

OTHER COMPREHENSIVE INCOME (LOSS)

Foreign currency translation gain (loss)

7,672

(1,399)

COMPREHENSIVE NET LOSS

$

(400,760)

$

(288,991)

NET LOSS PER COMMON SHARE,

BASIC AND DILUTED

$

nil

$

nil

WEIGHTED AVERAGE NUMBER OF

COMMON SHARES OUTSTANDING, BASIC AND DILUTED

144,429,101

131,416,351

See accountant's review report and accompanying notes.
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FIRST AMERICAN SCIENTIFIC CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Common Stock

Additional Paid-in
Capital

Stock
Options

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (loss)

Total Stockholders'
Equity

Shares

Amount

Balance, June 30, 2001

130,733,018

130,733

9,959,034

218,210

(7,013,749)

(2,557)

3,291,671

Common stock issued for cash of $189,850 and services of $82,850 at $0.09 per share

2,885,000

2,885

269,815

-

-

-

272,700

Common stock issued for compensation at $0.09 per share

3,600,000

3,600

316,880

-

-

-

320,480

Common stock issued for legal services at $0.10 per share

250,000

250

24,750

-

-

-

25,000

Common stock issued for KDS machine at $0.09 per share

500,000

500

44,500

45,000

Common stock issued for equipment at $0.13 per share

100,000

100

12,740

12,840

Common stock issued for accounts payable at $0.095 per share

100,000

100

9,400

9,500

Common stock issued from options for services at $0.09 per share

3,925,000

3,925

453,695

(100,210)

357,410

Common stock issued for rent expenses at $0.125 per share

120,000

120

14,880

-

-

-

15,000

Options issued for services

77,780

77,780

Foreign currency translation loss

-

-

-

-

-

(7,286)

(7,286)

Net loss for the year ended June 30, 2002

-

-

-

-

(2,137,651)

-

(2,137,651)

Balance, June 30, 2002

142,213,018

142,213

11,105,694

195,780

(9,151,400)

(9,843)

2,282,444

Net assets distributed to shareholders of VideoMovieHouse

-

-

(523,827)

-

331,874

-

(191,953)

Common stock issued for consulting services at $0.07 per share

1,201,903

1,202

78,450

-

-

-

79,652

Common stock issued as compensation at $0.07 per share

2,000,000

2,000

138,000

-

-

-

140,000

Common stock issued for legal fees at $0.05 per share

250,000

250

12,500

-

-

-

12,750

Common stock issued for professional services at $0.05 per share

100,000

100

4,900

-

-

-

5,000

Foreign currency translation loss

-

-

-

-

-

7,672

7,672

Net loss for the three months ended September 30, 2002

-

-

-

-

(408,432)

-

(408,432)

Balance, September 30, 2002, unaudited

145,764,921

$

145,765

$

10,815,717

$

195,780

$

(9,227,958)

$

(2,171)

$

1,927,133

See accountant's review report and accompanying notes.
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FIRST AMERICAN SCIENTIFIC CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS

				Three Months Ended September 30,
				2002		2001
				(unaudited)		(unaudited)
				Restated		Restated
	CASH FLOWS PROVIDED (USED) IN OPERATING ACTIVITIES
	Net loss		$	(408,432)	$	(287,592)
	Discontinued operations			76,882		67,661
	Loss allocated to minority interest			(51,240)		-
	Depreciation and amortization			54,077		65,366
	Stock issued for services and compensation			-		34,000
	Stock issued for services			97,102		-
	Adjustments to reconcile net loss to net cash
		used by operations:
		Amounts used from trust for accounts payable		-		42,793
		Decrease (increase) in accounts receivable		(41,501)		(22,606)
		Decrease (increase) in taxes and tax credits		27,541		-
		Decrease (increase) in inventory		-		(128,102)
		Decrease (increase) in deposits and prepaid expenses		3,750		32,607
		(Decrease) increase in accounts payable		6,669		(20,779)
		(Decrease) increase in accounts payable, related party		75,420		80,000
Net cash (used) in operating activities				(159,732)		(136,652)
CASH FLOWS PROVIDED (USED) IN INVESTING ACTIVITIES
		Investment in discontinued operations		14,143		(55,422)
Net cash used in investing activities				14,143		(55,422)
CASH FLOWS PROVIDED (USED) IN FINANCING ACTIVITIES
		Notes payable, related parties		25,183		9,669
		Proceeds from borrowing		31,415		-
		Repayment of borrowing, related party		(13,900)		-
		Proceeds from sales of stock		-		12,500
Net cash provided by financing activities				42,698		22,169
NET INCREASE (DECREASE) IN CASH				(102,891)		(169,905)
Other comprehensive loss				(6,171)		(1,399)
CASH - Beginning of year				126,144		175,147
CASH - End of period			$	17,082	$	3,843
SUPPLEMENTAL CASHFLOW DISCLOSURES:
	Interest Expense		$	-	$	-
	Income Taxes		$	-	$	-

NON-CASH TRANSACTIONS:
	Common stock issued for services and compensation		$	97,102	$	34,000
	Common stock issued for accured compensation			140,000	$	-
	Distribution of assets in spin-off wholly owned subsidiary		$	191,501	$	-

See accountant's review report.
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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

First American Scientific Corp. (hereinafter "the Company" or "FASC") was incorporated in April 1995 under the laws of the State of Nevada primarily for the purpose of manufacturing and operating equipment referred to as the KDS Micronex System. This patented process has the capability of reducing industrial material such as limestone, gypsum, zeolite, wood chips, bio-waste, rubber and ore containing precious metals to a fine talcum-like powder. The process can significantly increase the end value of the host material. The Company maintains an office in West Vancouver, British Columbia, Canada and a demonstration and sales office in Cloverdale, British Columbia, Canada.

In September 1999, the Company entered into an agreement with VMH VideoMovieHouse.com Inc., ("VMH"), a British Columbia company, whereby the Company acquired 100% of the common shares and the technology of VMH in return for a cash consideration of $250,000. (See Note 7). VMH possesses domain names, a web page, and technology for the sale of videos, DVD's, and CD's through the internet. In 2001, the Company elected to spin off VMH into its own separate entity which became a fully reporting OTC publicly traded company in August 2002. See Note 11.

The Company formed First American Power Corp, formerly 521345 BC Ltd., a wholly owned subsidiary, in 1998 in order to provide research and development services eligible for Canadian research and development credits exclusively to First American Scientific Corp. and, when feasible, to operate a profitable production facility in Canada.

The Company formed Alternative Green Energy Systems, Inc. (hereinafter "AGES"), a Canadian Corporation, in 2002 for the purpose of using FASC's licensed technology and patents to manufacture, sell, operate and use KDS machines in combination with available expertise in wood dust burning technology. The Company owns 43.48% of AGES and has management control of AGES. William E. Barber owns 43.48% and Hydro-Quebec Capitech Inc. owns 13.04% of AGES. The Company reports financial information from AGES on a consolidated basis due to the control feature in the agreement. AGES maintains a facility in Montreal, Canada. See Note 10.

The Company's year-end is June 30 ^th .

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of First American Scientific Corp. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued statement SFAS No. 121 titled "Accounting for Impairment of Long-lived Assets." In complying with this standard, the Company reviews its long-lived assets quarterly to determine if any events or changes in circumstances have transpired which indicate that the carrying value of its assets may not be recoverable. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by its assets to their respective carrying amounts.

The Company impaired the carrying value of its assets from its former facility in California during the year ended June 30, 2002. See Note 3.

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (hereinafter "SFAS No. 144"). SFAS No. 144 replaces SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This standard establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations. SFAS No. 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged. The Company believes the adoption of SFAS No. 144 will not have a further material impact on the financial statements of the Company at September 30, 2002.

Interim Financial Statements
The interim financial statements for the period ended September 30, 2002, included herein, have not been audited, at the request of the Company. They reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations for the period. All such adjustments are normal recurring adjustments. The results of operations for the period presented is not necessarily indicative of the results to be expected for the full fiscal year.

Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of operations.

As shown in the accompanying financial statements, the Company has incurred an accumulated deficit of $9,227,958 through September 30, 2002. Although the Company recorded $5,962 in sales during the three months ended September 30, 2002, it also generated a net loss of $408,432. These factors raise substantial doubt about the Company's ability to continue as a going concern.

F-7

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Going Concern (continued)
Management plans to undertake a comprehensive review of its ongoing business to substantially increase sales through current channels and develop new sales opportunities. Management has also established plans designed to increase the sales of the Company's products by continued research and development and combining technology through AGES.

Management intends to seek new capital from new equity securities offerings that will, if successful, provide funds needed to increase liquidity, fund internal growth and fully implement its business plan. However, there is no assurance that the Company will raise the required capital. If the Company is unable to raise the required capital, then it will assess its future business viability.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

Accounting Method
The Company uses the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 133"), as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities" Deferral of the Effective Date of FASB No. 133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which is effective for the Company as of January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.

At September 30, 2002, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

F-8

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Loss Per Share
In June 1999, the Company adopted Statement of Financial Accounting Standards Statement (SFAS) No. 128, "Earnings Per Share". Basic earnings (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net loss per share is the same as basic net loss per share, as the inclusion of common stock equivalents would be antidilutive.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Minority Interest
At September 30, 2002, minority shareholders held an approximately 56.52% interest in Alternative Green Energy Systems, Inc. (AGES). The related minority interest is shown on the accompanying balance sheet. FASC has financial and management control of AGES. See Note 10.

Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents.

Prepaid Expenses
Prepaid expenses consist of rent paid in advance that will be amortized as used.

Fair Value of Financial Instruments
The carrying amounts for cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair value.

Concentration of Risk
The Company maintains its cash accounts in primarily one commercial bank in Vancouver, British Columbia, Canada. The Company's cash accounts are business checking accounts in Canadian and United States dollars. The United States dollar account in the amount of $9,619 is not insured.

Restatement and Reclassification
Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2002 presentation. The reclassification principally consists of revised reporting of operating results of VideoMovieHouse.com Inc. which was spun off in August 2002, and not included in discontinued operations in the prior fiscal periods. However, in the current fiscal period, the operating results of VideoMovieHouse.com Inc. have been reclassified as discontinued operations for all periods presented.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated into U.S. dollars at the period-end exchange rates, and revenue and expenses are translated at the average exchange rates during the period. Exchange differences arising on translation are disclosed as a separate component of shareholders' equity. Realized gains and losses from foreign currency transactions are reflected in the Company's results of operations.

Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by SFAS No. 109 to allow recognition of such an asset.

At September 30, 2002, the Company had net deferred tax assets of approximately $1,700,000 principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established at December 31, 2002. The significant components of the deferred tax asset at September 30, 2002 and June 30, 2002 were as follows:

			September 30, 2002		June 20, 2002
Net operating loss carryforward including effective Refundable R and D tax credits of $83,501		$	7,200,000	$	6,500,000
Stock options issued under a non-qualified plan:
	For the three months ended September 30, 2002		230,000
	For the year ended June 30, 2002				945,860

Deferred tax asset			1,700,000		1,380,000
Deferred tax asset valuation allowance		$	(1,700,000)	$	(1,380,000)

At September 30, 2002, the Company has net operating loss carryforwards of approximately $6,900,000, which expire in the years 2015 through 2021. The Company recognized approximately $230,000 of losses from issuance of restricted common stock and stock options for services in fiscal 2003, which are not deductible for tax purposes and are not included in the above calculation of deferred tax assets.

F-10

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. It is impracticable to estimate the amount of compensation for future absences, and, accordingly, no liability has been recorded in the accompanying financial statements. The Company's policy is to recognize the costs of compensated absences when actually paid to employees.

Segment Information
At August 2002 because of the spin off of VMH VideoMovieHouse.com Inc., the Company no longer has more than one operating segment.

Revenue and Cost Recognition
Revenues from the sale of KDS machines are recognized when there is a sales contract, all terms of the contract have been completed, collectibility is reasonably assured and the products are delivered.

KDS machine costs include applicable direct material and labor costs and related indirect costs. Changes in job performance, job conditions, and estimated profitability may result in revisions to product costs, which are recognized in the period in which the revisions are determined.

Accounts Receivable
The Company's policy is to accrue interest on trade receivables 30 days after invoice date. A receivable is considered past due if payments have not been received by the Company for 90 days. Every effort is made to collect on the accounts or to take possession of the equipment. During the year ended June 30, 2002, the Company sold a KDS machine for $285,000 plus tax. The purchaser made a non-refundable down payment of $37,500.After June 30, 2002, but before the release of the audited financial statements, the Company became aware that the purchaser would be unable to meet the agreed upon financing arrangements and the balance due on this machine was fully reserved. This balance of $249,372 continues to be held in reserve at September 30, 2002. At the present time the Company is holding this machine on behalf of the original purchaser to allow them time to seek additional funding.

F-11

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Refundable Research and Development Tax Credits
The Canadian Government offers tax incentives to taxpayers carrying out scientific research and experimental development. They encourage Canadian companies to investigate better ways of doing things: provide better products and processes using advanced technologies. A 35% tax credit is available for Canadian owned companies with less than $200,000 taxable income in the previous year. AGES has prepared the forms and submitted to Revenue Canada for its refundable tax credits of $83,085 for the year ended June 30, 2002. This tax credit is included in the Company's net loss for its U.S. income tax calculation.

Sales Tax Refunds
The Canadian Government taxes goods and services when purchased. These taxes when paid, can be off-set against taxes due from the sales of goods and services by the Company. Any sale outside of Canada is not taxed for this purpose. At the end of each quarter all goods and services taxes paid are netted against the goods and service taxes due on sales. If the Company has paid more tax than it owes then the Company is due a refund.

Inventory
Inventories are stated at the lower of average cost or market. The cost of finished goods includes the cost of raw material, direct and indirect labor, and other indirect manufacturing costs.

The components of inventory are as follows:

September 30,
2002

June 30,
2002

Finished goods - 3 machines

345,000

$

345,000

Work in progress - 2 machines

145,442

145,442

$

490,442

$

490,442

Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (hereinafter "SFAS No. 146"). SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract.

SFAS No. 146 was issued in June 2002 and is effective for activities after September 30, 2002. The Company has not determined the impact on its financial position or results of operations from adopting SFAS No. 146.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of SFAS Statements No. 44, 4 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections" (hereinafter "SFAS No. 145"), which updates, clarifies and simplifies existing accounting pronouncements. SFAS No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded. As a result, SFAS No. 64, which amended SFAS No. 4, was rescinded, as it was no longer necessary. SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended SFAS No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Company adopted SFAS No. 145 and does not believe that the adoption will have a material effect on the financial statements of the Company at September 30, 2002.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Long-Lived Assets" (hereinafter "SFAS No. 144"), which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a "component of an entity" (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale, or has been disposed of, is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.

The Company adopted SFAS No. 144 effective August 1, 2001. Consequently, the operating results of VideoMovieHouse.com Inc. which was to be spun off at June 30, 2002 are included in discontinued operations. Assets and liabilities of VideoMovieHouse.com Inc. are included in net assets distributed to subsidiary at June 30, 2002.

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (hereinafter "SFAS No. 143"). SFAS No. 143 establishes guidelines related to the retirement of tangible long-lived assets of the Company and the associated retirement costs. This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived assets. This statement is effective for financial statements issued for the fiscal years beginning after June 15, 2002 and with earlier application encouraged. The Company adopted SFAS No.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounting Pronouncements (continued)
143 and the adoption did not have a material impact on the financial statements of the Company at September 30, 2002.

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (hereinafter "SFAS No. 141") and Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (hereinafter "SFAS No. 142"). SFAS No. 141 provides for the elimination of the pooling-of-interests method of accounting for business combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142 prohibits the amortization of goodwill and other intangible assets with indefinite lives and requires periodic reassessment of the underlying value of such assets for impairment. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. An early adoption provision exists for companies with fiscal years beginning after March 15, 2001. On June 30, 2001, the Company adopted SFAS No. 142. Application of the nonamortization provision of SFAS No. 142 resulted in no change to reported earnings in fiscal 2002 as the Company does not have assets with indeterminate lives.

Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (hereinafter "SFAS No. 130"). SFAS No. 130 establishes standards for reporting and displaying comprehensive income, its components and accumulated balances. SFAS No. 130 is effective for periods beginning after December 15, 1997. The Company adopted this accounting standard and its adoption is reflected in the accompanying financial statements.

Reclassifications
Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2002 presentation. In particular the reclassification includes the operating results of VideoMovieHouse.com Inc. which was spun off in August 2002, and not included in discontinued operations in the prior fiscal periods. However, in the current fiscal period, the operating results of Vidiomoviehouse.com Inc. have been reclassified to discontinued operations for all periods presented. See Note 11.

Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (hereinafter "SFAS No. 131") during the second quarter of 1999. SFAS No. 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available, evaluated regularly by the chief operating decision makers, or a decision making group, in deciding how to allocate resources and in assessing performance.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. The useful lives of property, plant and equipment for purposes of computing depreciation are five to forty years. The following is a summary of property, equipment, and accumulated depreciation:

	September 30, 2002	June 30, 2002
Kinetic disintegration equipment (KDS)	$236,557	$236,557
Plant assets and equipment	19,389	19,389
Office equipment	47,874	47,874
Leasehold improvements	7,811	7,811
Total assets	$311,631	$311,631
Less accumulated depreciation	(100,121)	(90,295)
	$211,510	$221,336

Depreciation expense for the three months ended September 30, 2002 and for the year ended June 30, 2002 was $9,827 and $58,475, respectively. The Company evaluates the recoverability of property and equipment when events and circumstances indicate that such assets might be impaired. The Company determines impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Maintenance and repairs are expensed as incurred. Replacements and betterments are capitalized. The cost and related reserves of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in results of operations.

During the year ended June 30, 2002, the Company determined that the value of three of its KDS machines was impaired. These machines were written down to the estimated market value of $150,000 each and reclassified as inventory. During the year ending June 30, 2002, one of these three machines was sold for $150,000. The Company also impaired all assets at its former facility in California. The Company recognized an impairment of $371,870 for both of these events.

NOTE 4 - TECHNOLOGY RIGHTS AND PATENTS

Technology Licenses

On June 22, 1995, the Company entered into a license agreement with Spectrasonic Corp. (hereinafter "Spectrasonic"), a related party, for the worldwide license to its unpatented Kinetic Disintegration Equipment (KDS) for use in rubber and glass recycling and disposal, for a period of ninety-nine years. The purchase price of this license and one SDM machine was $550,000, with license rights valued at $250,000. Since then, modifications were made to the first KDS machine, bringing its total cost to $440,740. This machine was transferred to the Company's subsidiary, 521345 BC Ltd., at its book value of $55,669.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 4 - TECHNOLOGY RIGHTS AND PATENTS (continued)

Technology Licenses (continued)
On February 22, 1996, the Company entered into an additional license agreement with Spectrasonic for the worldwide license to its unpatented Ultrasound Equipment for exclusive use in gypsum disintegration, disposal, recycling, remanufacturing or manufacturing of used or new raw materials. The purchase price of this license and one KDS machine for gypsum-related use was $775,000, with the parties agreeing that the technology license was valued at $425,000 and the gypsum KDS machine was valued at $350,000.

On May 17, 1996, the Company executed another agreement with Spectrasonic for the worldwide licenses to equipment (as yet unpatented) developed by Spectrasonic for use in disintegration, disposal, recycling, remanufacturing or manufacturing "any and all kinds of materials" for a period of ninety-nine years. The purchase price of this license was $1,047,000, which the Company paid by issuing to Spectrasonic 5,500,000 shares of First American common stock (with an aggregate deemed value of $802,000) and paid $168,000 in varying installment amounts between September 30, 1996 and January 2, 1997. The Company also recognized $77,000 in forgiveness of debt, which was recorded as additional paid-in capital.

On July 2, 1997, the Company finalized negotiations with Spectrasonic for all patents to be issued or pending, including all data pertaining to the patent process with respect to the Kinetic Disintegration Machine (KDS Machine) whose worldwide rights had been previously acquired by the Company. In the negotiations, the Company acquired all manufacturing rights applicable to the KDS machine technology. The Company has sole right and responsibility for manufacturing the machinery. Consideration to Spectrasonic was 1,000,000 common shares of the Company's stock at $0.25 per share issued on December 1, 1999.

Technology licenses, patents and manufacturing rights are stated at cost. Amortization is provided using the straight-line method over the estimated useful lives of the assets, which are five years for patents and manufacturing rights and fifteen years technology license and rights.

The following is a summary of technology licenses, patents and manufacturing rights and accumulated amortization:

September 30,
2002

June 30,
2002

Technology license and rights

$1,905,000

Patents and manufacturing rights

250,000

2,155,000

Less accumulated amortization

747,181

702,930

$1,407,819

$1,452,070

Amortization expense for the six months ended September 30, 2002 and the year ended June 30, 2002 was $44,250 and $143,667, respectively.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 5 - COMMON STOCK

During the three months ended September 30, 2002 the Company issued from options: 1,201,903 shares of common stock as payment for consulting services with a fair market value of $79,652; 2,000,000 shares of common stock as compensation with a fair market value of $140,000; 350,000 shares of common stock for professional services with a fair market value of $17,750.

During the year ended June 30, 2002 the Company issued from options 2,885,000 shares of common stock for cash of $189,850 and services valued at $82,850; 3,600,000 shares of common stock for compensation valued at $320,480; 250,000 shares of common stock for legal services valued at $25,000; 500,000 shares of common stock for a KDS machine valued at $45,000; 100,000 shares of common stock for equipment valued at $12,840; 100,000 shares of common stock in payment of an account payable of $9,500 and 120,000 shares of common stock as prepaid rent of its offices valued at $15,000. In addition, 3,925,000 common stock options were exercised for services valued at $457,620.

During the year ended June 30, 2001 the Company issued 22,166,545 shares of common stock for services valued at $1,353,805, which includes services for website development, inventory valued at $138,000, cash of $222,724, compensation valued at $262,762, commissions valued at $22,500. In addition, the Company issued 5,931,818 shares of common stock for cash in the amount of $231,050 and issued 1,813,637 shares of common stock as legal settlements valued at $262,500.

In June 2000, an amendment to the Company's articles of incorporation was approved, which increased the Company's authorized capital to 200,000,000 shares of common stock at a par value of $0.001 per share.

NOTE 6 - STOCK OPTIONS

The Company's board of directors approved the First American Scientific Corp. 2003 non-qualifying stock option plan. This plan allows the Company to distribute up to 10,000,000 shares of common stock options at a maximum share price of $0.75 to persons employed or associated with the Company. During the three months ended September 30, 2002 the Company granted 5,050,000 common stock options at the fair market value of the common stock at the date of grant. These options were granted for compensation and services at the average exercise price of $0.07. This plan was not approved by the Company's security holders.

During the year ended June 30, 2002, the Company granted 10,505,000 options for compensation, services, expenses and cash at an average exercise price of $0.09. All options were exercised immediately. The options were granted at the fair market value of the stock on each grant date.

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FIRST AMERICAN SCIENTIFIC CORP.
Notes to Consolidated Financial Statements
September 30, 2002

NOTE 6 - STOCK OPTIONS (continued)