Overview:
The Vaiseshika school is one of the six major schools of ancient Indian philosophy. Founded by sage Kanada, it primarily focuses on metaphysics and epistemology. The school presents a detailed analysis of the physical world and the nature of reality.

Statement 1: It believes in the physicality of the universe
Explanation:
The Vaiseshika school indeed believes in the physicality of the universe. It argues that the universe is made up of six fundamental substances or padarthas, which are considered the building blocks of reality. These substances include:

1. Dravya (substance): According to Vaiseshika, all physical objects in the universe are composed of atoms and molecules. These atoms combine to form various substances.

2. Guna (quality): Guna refers to the inherent qualities or properties of substances. These qualities can be perceived through the senses, such as color, taste, smell, etc.

3. Karma (action): Karma refers to the activity or motion of substances. It is believed that substances can interact with each other and undergo changes.

4. Samanya (generality): Samanya refers to the universal or common attributes shared by a group of substances. For example, the generality of color can be attributed to all objects that possess color.

5. Vishesha (particularity): Vishesha refers to the unique or specific attributes of individual substances. It differentiates one object from another.

6. Samavaya (inherence): Samavaya refers to the inseparable connection between cause and effect or substance and attribute. It explains how the qualities are inherently present in substances.

Therefore, the Vaiseshika school's belief in the physicality of the universe is one of its core principles.

Statement 2: It developed the atomic theory
Explanation:
The statement is correct. The Vaiseshika school is credited with developing the atomic theory, known as "Anu" in Sanskrit. Sage Kanada, the founder of the school, proposed that all matter is composed of discrete, indivisible particles called atoms or Anu.

Kanada described atoms as the ultimate building blocks of reality and believed that they are eternal, indestructible, and indivisible. According to his atomic theory, the atoms combine in different ways to form larger objects, and the variations in the arrangement and combination of atoms explain the diversity of substances in the universe.

Kanada's atomic theory had a significant influence on later schools of Indian philosophy, as well as on scientific thought in India. It provided a foundation for understanding the physical composition of matter long before the concept of atoms was recognized in Western science.

Therefore, both statements 1 and 2 are correct, making option 'C' the correct answer.