UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-KSB



(Mark One)

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

For the fiscal year ended December 31, 2001

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 0-12914



INNOVATIVE COATINGS CORPORATION

(Name of small business issuer in its charter)





|Georgia                                                        |  | 58-2337027                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



1650 Airport Drive, Suite 110, Kennesaw, Georgia 30144

(Address of principal executive offices) (Zip Code)



Issuer's telephone number: (770) 919-0100



Securities registered under Section 12(b) of the Exchange Act: None



Securities registered under Section 12(g) of the Exchange Act:

Common Stock, no par value

(Title of class)



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 ___  No X

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

The issuer's revenues for its most recent fiscal year: $918,703.

The aggregate market value of the shares of Common Stock held by non-affiliates of the Registrant, as of April 18, 2002 was $2,347,288.20 based on the closing price of $0.60 per share as reported by the trading and market services of the OTC Bulletin Board.

As of April 18, 2002, the Registrant had outstanding 7,912,147 shares of its Common Stock, no par value.

PART I

ITEM 1. DESCRIPTION OF BUSINESS.

Corporate History

The Company was incorporated in August 1997, as a Georgia corporation and is headquartered in Kennesaw, Georgia.  The Company was formed to develop, manufacture and market specially formulated coating systems and related applications equipment utilizing polyurea-based polymers.  The Company's objective is to become a leading producer and licensor of polyurea-based formulation or coating systems and multi-component spray application equipment.

The Company's administrative offices are located at 1650 Airport Rd., Suite 110, Kennesaw, Georgia 30144, and its telephone number is (770) 919-0100.

Polyurea Polymers

Polyurea polymers create, when cured, either a hard, impermeable substance or a flexible rubbery substance, depending on the formulation used.  Because the cure time is so short, typically a few seconds, polyurea polymers avoid many of the problems associated with the application of polyurethane coatings, especially in high moisture and low temperature environments.  However, the coatings industry has been slow to adopt the use of polyurea polymers primarily because of application problems created by the short cure time of polyurea polymers.  In addition, the lack of in-depth knowledge of the chemistry and formulations for specific applications has prevented many companies from converting to polyurea coatings.

Polyurea is a substitute for polyurethane with the following relative advantages and disadvantages:

- Polyurea costs between 10% and 35% more than polyurethane.
- Polyurea has higher tensile strength than polyurethane.
- Polyurea has higher abrasion resistance than polyurethane.
- Unlike polyurethanes, polyurea contains no volatile organic compounds (VOC's), thus causing less harm to the environment.
- Polyurea can be sprayed in any ambient weather, unlike polyurethane which cannot be sprayed in high humidity or low temperature conditions.
- Polyurea is not colorfast except in dark (i.e black, blue, grey) colors, whereas polyurethane can be made colorfast in many colors, including white.
- Innovative's Class A-rated polyurea does not require agitation while spraying, whereas all known Class A-rated polyurethanes require agitation.
- Polyurea requires heat applied to spray hoses or chemicals in order to increase viscosity so that chemicals will flow freely when reaching spray gun.  Polyurethane may require substantially less heat since it contains VOC's or solvents to increase viscosity.
- Polyurea cures (tack free) in 5 to 45 seconds (depending on the formula) as opposed to 2 to 24 hours for polyurethane.
- Polyurea adheres to most substrates without a primer whereas polyurethane usually requires a primer.

Production of polyurea polymers does not require specialized equipment or handling due to the non-volatility of the chemistry. Precision mixing and repackaging are the primary production functions.  Production can be easily expanded through the use of larger tanks, mixers, and materials handling equipment. Products are delivered in 55-gallon drums, one of component A and another of component B and are all premixed before shipment.  These materials require no special handling for shipment and can be shipped via truck, rail, sea, or air.

Polyurea polymers require specialized spray equipment because the cure time is so short.  Polyurea polymers are applied by forcing two compounds to mix under high pressure (i.e., from 2,000 to 3,000 psi) at the tip of specialized spray nozzle.  The forced mixing of the two compounds causes the compounds to react with each other, producing a solid formulation within seconds.  Initial formulations were difficult to apply, and resulted in a rough surface, since the cure time was only 2 to 3 seconds.  However, the Company has developed proprietary formulations and techniques which have increased the reaction time to as much as 75 seconds, which makes the application easier and the finished surface smoother.  In addition, in order to apply the Company's coatings efficiently, the Company has developed a spray system capable of being manufactured at significantly less cost than polyurethane applications equipment currently on the market.

The Company has never had a problem with the availability of raw materials.  The Company does not utilize any principal or exclusive distributor for its raw materials, and has more than one source of supply for all of its raw materials. Some of the distributors the Company relies on for raw materials are Baychem Corporation, Ribeline Sales, and McCollough-Benton.

Primary Markets For Polyurea Polymers

Management has identified over 300 possible uses for its polyurea formulations or coatings systems. Of the identified uses to date, the Company has designated and/or developed the following uses for its coating systems:

- A three-step exterior insulation finish system (EIFS) that prevents moisture intrusion, provides significant impact resistance, and is termite proof;
- A direct applied-exterior finish system (DEFS) for commercial properties;
- Coatings for flotation devices;
- Coatings for metal rail car parts that come in constant contact with each other;
- A flexible coating on soft foam that provides a sanitary, seamless coating for athletic and handicap training equipment;
- Packaging material that meets strength and fire resistant criteria, such as flare packaging materials for the U.S. Military;
- Pipeline coatings for U.S. and international gas companies;
- Coatings for pallets and topboards;
- EPA Super Fund site containment;
- Asbestos containment;
- Roofing;
- Manufactured housing exterior finish and ceiling systems; and
- Anti-fouling coating for aquaculture industry.

Since its inception, management has focused its efforts on several flame and smoke resistant formulations of polyurea.  The Company has filed three patent applications for an EIFS coating system that provides a seal against moisture intrusion and enhances the strength of the EIFS wall structure.  Management believes that the EIFS industry, often referred to as the "synthetic stucco industry," is a potentially large market for its coating systems.  In addition to EIFS applications, the Company has designed and/or developed a number of coatings systems that have been tested and are available for fire resistant military products, flotation devices, athletic and handicap equipment, rail car equipment, commercial buildings, pipeline coatings, speaker boxes, food processing pallets and topboards, pharmaceutical industry pallets and topboards, EPA SuperFund site containment and asbestos containment.  To date, the Company has applied for patents covering its EIFS system and floatation devices, pallets, and pipeline coatings.

The Company has applied for the trademark InstaChem, the brand name of the Company's ployurea-based coatings.  InstaChem is a 100% "solids" liquid system sprayed through conventional two-component equipment.  No volatile or evaporative chemicals are used in the process; therefore, the Company's believes that its coatings do not impose an environmental threat due to VOC emissions.  InstaChem is insensitive to water and reacts regardless of ambient temperature changes.  The InstaChem system uses amine-terminated resins in one of the two components, which provide a fast and very consistent reaction with isocyanate (the "A component") without the use of catalysts.  Management believes that the Company's coating products offer excellent physical process properties such as adhesion, abrasion resistance, durability and rapid handling time.

The Company is attempting to procure the required building code and fire rating approvals for its EIFS system for use in residential and commercial construction at local levels. For the remainder of 2002, and until building code approval is obtained, the Company is pursuing sales of its coating systems to EIFS contractors using the coating for signage, exterior and interior moldings and other ornamental uses that do not require building code approval. In some cases, where permitted by local regulations, EIFS contractors are using the Company's products and accepting the Company's product warranty in lieu of building code approval.

The Architectural Shapes and Manufactured Housing Markets

Most of the Company's current sales are from customers that use polyurea polymers to produce stucco-type decorative moldings.  Currently, major customers of the Company's products for decorative moldings include Peachtree Signs, Georgia Foam, Creative Foam Shapes, and Disney.  The Company believes that its product is superior to any product currently available to this industry and anticipates additional growth in this market in 2002.

The Company recently developed an exterior insulation finish system ("EIFS") for the manufactured housing industry.  Research conducted with Cavalier Homes, Inc. has shown this system to be the only EIFS system that is feasible for manufactured housing.  In addition, the Company has also developed a non-cracking ceiling coating system for manufactured housing.  In April 2002, the Company entered into a letter of intent with a national manufactured housing products distributor to distribute the Company's ceiling coating system.  The Company estimates this market and the EIFS market for manufactured housing to be in excess of $100 million per year and $25 million per year, respectively.

Other Significant Uses of Polyurea Polymers

In addition to the above applications, uses of the Company's products are continuously being developed.  Other uses for which the Company is currently marketing its products include:

Railroad Parts - The Company has been supplying its products to a third party that has a contract to coat Thrall Railcar Manufacturing automobile rail car parts.  Specifically, parts that rub together while in use are spray coated to increase the useful life of the part.

Military Flares - The Company is in the initial stages of submitting a bid to the U.S. Navy to become a supplier of a polyurea coatings to military flare boxes.  The Company believes that its products provide an ideal coating for flare boxes because they are light, strong and fire resistant. To date, the Company has met or exceeded the test criteria presently set by the military contractor.  The Company has been issued a federal vendor number, and expects an order related to this within 2002.

Pallets - The Company is working with a national building products distributor to develop a contract to apply the Company's products to pallets and topboards.    Initial testing indicates that spraying pallets with polyurea polymers substantially increases their lives and renders them far easier to clean and sanitize.

Flotation Devices - The Company is working to develop a market for polyurea polymers as coatings for flotation devices used in rough or abrasive environments, such as sewage treatment plants.  The Company completed its first order with Georgia Foam in the last quarter of 2001, and expects additional orders in the future.

Pipelines - The Company is working to gain acceptance of polyurea polymers as a coating and sealant for joints on gas, oil and water transmission pipes.  The Company believes that polyurea polymers have the potential for significant use in the piping industry because they provide an effective seal and can be installed in the field much faster than current applications.  However, the Company has recently postponed safety testing of its products for this application, because of the cost and the need to use its capital to fund other product lines.

Speakers - Peavy Speakers has tested polyurea polymers as a sealant and finish coat on speakers.  Peavy has converted all four of its plants exclusively to the Company's products.  Based on the success of the product with Peavy Speakers, the Company has begun marketed its products to other members of the speaker industry. The Company does not have any written supply agreements with Peavy, but instead supplies its products on a purchase order basis as needed.

Roofing - The Company has tested polyurea polymers as a roof coating and sealant.  While the polyurea polymers appear to be an effective roof material, the Company's products must be UL tested before it can be used as a roofing material.  The Company does not anticipate obtaining UL testing for its products for this market due to the high cost of the tests (about $200,000) unless and until it raises substantial additional capital.  Instead, the Company is pursuing sales in product lines in which UL testing is not required, such as for exterior buildings and sheds.  For example, the Company is currently supplying its products on a purchase order basis to a third party that has a contract to coat exterior buildings located around microwave towers for Norfolk Southern.

Anti-fouling Coatings - The Company has recently conducted joint research with Poseidon Ocean Sciences, Inc. to develop a non-toxic antifouling coating for the marine industry.  This coating repels the growth of barnacle larvae instead of killing larvae.  The use of poisonous ingredients in anti-fouling coatings is being banned throughout the world over the next five years.  The Company has had very good initial success with no larvae attachment after eight months of exposure in concentrated tanks of barnacle larvae in seawater.  Development of a commercially viable coating is expected within the next year.

Business Strategy and Marketing

The Company's strategy is to develop specific formulations of polyurea polymers for application in specific markets.  Some of the markets are currently being serviced by polyurethane coatings, and others, such as rail car parts, are not currently using any coating. In most cases, the Company must invest significant time and money prior to generating significant revenue from a market.  The Company has recently constructed an application facility within its existing warehouse facility, and believes that there is a substantial market for the application of its products on a value-added basis for others.

The Company employs two inhouse sales personnel, whose sales efforts are concentrated on developing and servicing accounts for the Company's inhouse application facility, original equipment manufacturers, and high volume fixed location users.  The Company also has entered into agreements with two individuals to generate relationships with dealers/applicators, and expects to have an agreement with a third individual in the near future.  The agreements with the individuals are nonexclusive arrangements under which the individuals are paid a commission of 10% of equipment sales and 5% of chemical sales generated through their contacts.  In each case, the individuals have focused their efforts on developing a market for the company's products within a certain niche, such as insulated concrete forms.  The Company is actively seeking to expand its outside sales force since the outside sales personnel to date have proven to be a cost-effective way to generate sales of the Company's products.

Competition

At this time, the primary competition for the Company's products is suppliers of coating systems and applications equipment utilizing polyurethane-based polymers.  The use of polyurethane coatings and the current methods of its application are well-established and accepted by both consumers and the industry, many of whom may be indifferent to the benefits offered by the Company's products.  There are a number of competitors marketing polyurethane coatings and systems competitive with the Company's polyurea coatings, such as Futura.  In addition, the Company is subject to competition from other companies offering polyurea products, such as Specialty Products, Inc., Foamseal and Willamette Valley Company.  All of the Company's competitors have greater financial, technical and human resources than the Company.  However, none of the competitors are marketing polyurea products for the specific applications currently targeted by the Company.

The Company's polyurea coatings are distinguishable from its competitors in the following manner:

- The Company has the only Class A and Class B fire-rated polyurea coatings.
- The Company has the only "tack free" cure time in excess of 30 seconds, which allows its coatings to be applied on uneven surfaces to generate a smooth, coated surface.

Trademarks and Patents

The Company has applied for a federal trademark registration for InstaChem.  Notice of the trademark application was recently published, and no objections were received, but no formal trademark has been granted yet.  The Company has a registered patent (#6,026,760) for floatation devices, including those constructed of wood, styrene foam, and other materials coated with the Company's polyurea.  These devices include billets for docks, sewage and water treatment pond aeration floatation devices, and other applications.

In addition, the Company has four pending patent applications:

(1)	The Company has applied for a patent for a pallet constructed of wood or any composite material coated with the Company's polyurea coating.  This coating seals the pallet material allowing the pallet to be easily cleaned and/or sterilized.  In addition, tests confirm the coated pallet is stronger and therefore requires less frequent repairs.

(2)	The Company has applied for a patent for an exterior siding system that consists of polystyrene foam and/or oriented strand board coated with the Company's polyurea coating or any other polymer coating including polyurethane.  In addition, the polyurea or polymer coating may be itself coated with paint, stucco, synthetic stucco, or other materials.

(3)	The Company has applied for a patent for the process of waterproofing hardboard siding used in residential and commercial construction by applying the Company's polyurea coating during the manufacturing process.

(4)	The Company has applied for a patent for exterior and/or interior ornamental trim constructed of various materials, including polystyrene foam, coated with the Company's polyurea coating.

Environmental Laws

The Company does not require any special environmental permits or licenses to operate it business.  Company disposes of any chemical waste in liquid form through licensed hazardous waste haulers.  Polyurea polymers in solid form are environmentally safe and may be disposed of at any landfill handling municipal solid waste.  At times, the Company treats the liquid, chemical waste with a reactant that causes the chemicals to solidify so that they can be disposed of more economically through its municipal waste stream.

Employees

The Company currently has 8 full-time and 4 part-time employees.  Jerry Phillips has been the President, and founder since inception in September 1997.  Donald H. Sigler has been the Chairman of the Board since September 1997.  C. Wayne Bean has served as Vice President in charge Research and Development and Chemist since September 1997.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company does not own any property. The Company leases a facility that is 20,000 square feet, of which 6,000 square feet is used as office space and the remaining 14,000 square feet is used as warehouse/manufacturing space. The lease agreement expires on November 30, 2004. The current lease payments are $8,966 per month. The Company believes that it has sufficient space to meet its needs for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

On December 12, 2001, a lawsuit styled Innovative Coatings Corporation v. Coating Solutions Unlimited, LLC, David Brown, and Parties X, Y, and Z, Civil Action No. 1:01-CV-3383-BBM, was filed in the Northern District of Georgia, seeking damages and injunctive relief for violations of Innovative Coatings Corporation ("ICC")'s trade secrets and confidential and proprietary information, infringement of ICC's patented floatation device, deceptive trade practices, unfair competition, misappropriation of trade secrets, infringement of common law copyright, conversion, tortious interference with contractual and business relations, breach of contract and breach of fiduciary duty.  The case was brought in federal court because of its exclusive jurisdiction over patent claims; the remaining claims were based on violations of Georgia statutory or common law.  On December 19, 2001, a preliminary injunction was entered against the defendants.  On April 4, 2002, the Court found the patent claim insufficient and, therefore, dismissed the remaining state law claims for lack of subject matter jurisdiction.  The Company has not decided at this time if it will refile the case in state court to pursue the state law claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were voted upon by the stockholders during the fourth quarter of the fiscal year, as required to be reported upon by the Company in response to this Item 4.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is not registered with the United States Securities and Exchange Commission under 12(g) of the Securities Exchange Act of 1934.  From August 2, 2000 to November 30, 2001, the Company's common stock has been traded on the Pink Sheets, operated by Pink Sheets, LLC, under the symbol "IVGC."  On November 30, 2001, trading in the common stock was moved to the OTC Bulletin Board.  The following table summarizes the low and high prices for the Company's common stock for each of the calendar quarters prior to the filing of this registration statement.

|               | 2000  | 2001 
|-------------- | ----- | -----
|               | High  | Low  
|First Quarter  | --    | --   
|Second Quarter | --    | --   
|Third Quarter  | 4.00  | 1.063
|Fourth Quarter | 2.250 | 1.10 

There were 201 holders of record of the common stock as of April 10, 2002. This number does not include an indeterminate number of shareholders whose shares are held by brokers in "street name."   The above quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not represent actual transactions.  The Company has not declared any cash dividends on its Common Stock during its fiscal years ended on December 31, 2001 or 2000. The Board of Directors of the Company has made no determination to date to declare cash dividends during the foreseeable future.

During the quarter ended December 31, 2001, the Company issued the following securities in transactions that were not registered under the Securities Act of 1933:

In November, 2001, the Company sold 10,000 shares of common stock to an accredited individual for $10,000.  In December 2001, the Company sold an accredited investor 30,769 shares of common stock for $20,000, an accredited investor 7,692 shares of common stock for $5,000, an accredited investor 15,385 shares of common stock for $10,000, an accredited investor 7,692 shares of common stock for $5,000, an accredited investor 3,000 shares of common stock for $3,000 and an accredited investor 5,000 shares of common stock for $5,000.

On December 19, 2001, the Company issued 10,000 shares of common stock to an individual as compensation for consulting services.  The services are related to patent development work involving the manufactured housing industry. The shares were valued at $1.40 per share, based on the quoted market price at the time of $1.40 per share.

In December 2001, the Company issued a promissory note for $50,000 that is convertible into common stock at $0.65 per share to an existing accredited investor in the Company.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

Certain statements in this Annual Report on Form 10-KSB, particularly under this Item 6, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein.  The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date the statement was made.

Results of Operations for the Years ended December 31, 2001 and 2000

Revenues

For the fiscal year ended December 31, 2001, the Company had net sales of $918,703, as compared to net sales in the fiscal year ended December 31, 2000 of $671,151, an increase of $247,552, or 36.9%. The Company's increased sales were the result of increased purchases from existing architectural shapes and speaker manufacturers as well as additional new customers in these two areas.

Cost of Goods Sold

For the fiscal year ended December 31, 2001, cost of goods sold were $633,522, as compared to cost of goods sold in the fiscal year ended December 31, 2000 of $352,675, an increase of $280,847, or 79.7%.  As a percentage of net sales, cost of goods sold increased from 52.6% to 69% from 2000 to 2001.  Cost of goods sold increased as a percentage of net sales as the result of additional costs incurred from the Company's raw material suppliers primarily due to the Company's inability to purchase in bulk quantities.

Gross Profit

Gross profit for the fiscal year ended December 31, 2001 decreased to $285,181 from $318,476 in the fiscal year ended December 31, 2000. As a percentage of sales, gross profit decreased to 31% in 2001 from 47.5% in 2000.  The decrease in gross profit in 2001 was primarily attributable to the increase in raw material costs.

General and Administrative Expenses

For the fiscal year ended December 31, 2001, general and administrative expenses were $1,642,741 , as compared to $1,387,173 in the fiscal year ended December 31, 2000, an increase of $255,568 , or 18.4%.  As a percentage of net sales, general and administrative expenses decreased from 207% to 179% from 2000 to 2001.  The increase in general and administrative expenses was primarily the result of an increase in additional testing and research expenses related to the development of additional products related to the manufactured housing industry, and an increase in consulting expenses.

Other Income (Expense)

For the fiscal year ended December 31, 2001, the Company had net other income of $44,021), as compared to net other expense of ($189,973) in 2000.  Interest expense was positively affected by the conversion of debt into equity during 2001 and lower interest expense related to the beneficial conversion feature on convertible debt issued in the period due to less convertible debt being in issued at a discount to the market price of the common stock in 2001 as compared to 2000.   In addition, the Company realized $64,000 in consulting fee income arising out of consultation and testing of the Company's products for a potential customer in the manufactured housing industry. Income Taxes

In the fiscal years ended December 31, 2001 and 2000, the Company did not incur any income tax expense as the result of operating losses in both years.

Net Income (Loss)

In the fiscal year ended December 31, 2001, the Company had a net loss of ($1,313,539) compared to a net loss of ($1,258,670) in the fiscal year ended December 31, 2000, an increase of $54,869.  The Company's net loss increased in 2001 principally as the result of an increase in raw materials costs and consulting expenses associated with the issuance of common shares and stock warrants for consulting services.

Liquidity and Capital Resources

As of December 31, 2001, the Company had a net working capital deficit of ($360,173) as compared to a net working capital deficit of ($151,027) at December 31, 2000.  The reduction of the net working capital deficit from December 31, 2000 to December 31, 2001 was primarily attributable to increases in accounts payable and accrued expenses resulting from continued operating losses of the Company through 2001.

At December 31, 2001, the Company's accounts payable and payroll taxes payable were at higher than normal levels.  The increased payroll taxes payable and accounts payable were primarily the result of the deferral of payroll taxes and expenses in order to meet the liquidity needs of the Company's business, which primarily were attributable to operating losses incurred during the year.  The Company's operations to date have been concentrated on the development of its coatings and initial marketing expenses, as well as costs associated with the refinement of its business plan.  Through 2001, the Company funded its short-term working capital needs primarily through the issuance of convertible notes and common stock in private placements.

As a part of its growth strategy, however, the Company requires greater working capital to fund the costs of product approvals and marketing expenses.  If certain marketing initiatives result in orders, the Company projects that it will become profitable in the last half of fiscal 2002.  However, the Company is currently exploring other avenues for additional financing in order to enable the Company to expedite the implementation of its business plan and achieve profitability.

Going Concern Qualification

The Company's independent auditors have included an explanatory paragraph in their report on the December 31, 2001 financial statements discussing issues which raise substantial doubt about the Company's ability to continue as a "going concern."  The going concern qualification is attributable to the Company's historical operating losses, the Company's lack of cash reserves and capital, and the amount of capital that the Company projects it needs to achieve profitable operations.  For the year ended December 31, 2001 and during the first quarter of fiscal 2002, the Company continued to experience a negative cash flow from operations, and projects that it will need additional capital to enable it to continue operations at its current level past June 30, 2002.

Once the Company's brand and product is established, the Company expects to become profitable in a short time due to the Company's low operating costs.  However, the Company's business historically takes substantial working capital to fund research and development into specific chemical formulations, the cost of obtaining health and safety approvals for a given application, and sales and marketing costs to generate sales within a new industry.  The Company is looking at various options to raise additional capital from large private investors or strategic investors.

ITEM 7.  FINANCIAL STATEMENTS.

The financial statements required by Item 310 of Regulation S-B are attached hereto as Exhibit A.

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

During the two fiscal years ended December 31, 2001, the Company has not filed any Current Report on Form 8-K reporting any change in accountants in which there was a reported disagreement on any matter of accounting principles or practices, financial statement disclosures or auditing scope or procedure.

PART III

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

Listed below are the directors and executive officers of the Company.

|Name                  | Age | First Year as Director | Position                                                         
|--------------------- | --- | ---------------------- | -----------------------------------------------------------------
|Jerry Phillips        | 55  | 1997                   | President and Director                                           
|Donald H. Sigler, Jr. | 56  | 1997                   | Chairman of the Board                                            
|C. Wayne Bean         | 44  | 1997                   | Vice President of Research and Development, Chemist, and Director
|John C. Thomas, Jr.   | 48  | 1997                   | Director                                                         



The term of office of each director of the Company ends at the next annual meeting of the Company's stockholders or when such director's successor is elected and qualifies. No date for the next annual meeting of stockholders is specified in the Company's bylaws or has been fixed by the Board of Directors. The term of office of each officer of the Company ends at the next annual meeting of the Company's Board of Directors, expected to take place immediately after the next annual meeting of stockholders, or when such officer's successor is elected and qualifies. Except as otherwise indicated below, no organization by which any officer or director previously has been employed is an affiliate, parent, or subsidiary of the Company.

Directors are entitled to reimbursement for expenses in attending meetings but receive no other compensation for services as directors. Directors who are employees may receive compensation for services other than as director. No compensation was paid during the fiscal years ended December 31, 2001 and 2000 to directors for services in their capacity as director.

The following information sets forth the backgrounds and business experience of the directors and executive officers.

Jerry Phillips joined the Company at its inception in 1997. From 1983 to January 1993, Mr. Phillips was the founder and Chairman of North American E and S Brokers, Inc., a firm specializing in financial guarantees for asset backed lenders. From January 1993 to August 1997, Mr. Phillips were Senior Vice President of EPG, Inc., a firm specializing in financial guarantees and extended warranties through international insurers. Mr. Phillips is a cum laude graduate of the University of Memphis, with a Bachelor of Arts degree.

Donald H. Sigler, Jr. joined the Company at its inception in 1997. From 1986 to 1997, Mr. Sigler was the founder and Chairman of Credit Depot Corporation, (NASDAQ: "LEND"), a publicly traded company, which engaged in the subprime mortgage finance business. From 1980 to 1987, Mr. Sigler served as Vice President of Gulf States Mortgage Corporation, a national mortgage lender based in Atlanta, Georgia, until its sale to the Royal Bank of Scotland in 1987. Mr. Sigler is a graduate of the Georgia Institute of Technology with a Bachelor Science degree in Industrial Management.

C. Wayne Bean joined the Company at its inception in 1997. From 1989 to August 1997, Mr. Bean served as a Manager of the Polyurea Coatings Division and Senior Chemist for Flexible Products Company. From 1984 to 1989, Mr. Bean served as the Senior Chemist for Imperial Coatings, Inc. Mr. Bean has a Bachelor of Science degree in Chemistry from the University of Georgia, 1981.

John C. Thomas, Jr. joined the Company at its inception in 1997. Mr. Thomas serves as part-time Chief Financial Officer of several start-up entities including Surgi-Vision, Inc., a privately held development-stage company formed around magnetic resonance imaging technology developed at Johns Hopkins, and has been the Chief Financial Officer of Biomechanics, Inc. since 1992 and the various entities that have been formed utilizing biomechanics technology. Mr. Thomas has also served as Chief Financial Officer of several other companies, including EntreMed, Inc., a publicly held biopharmaceutical research and development company (September 1991 to January 1997), Credit Depot Corporation, a public company engaged in loan financing (August 1990 to March 1993, January 1995 to April 1996), Tapistron International, Inc., a public company engaged in the development of technology for the textile industry (August 1991 to July 1995), Medicis Pharmaceutical, a public company engaged in the pharmaceutical industry (July 1988 to March 1991), CytRx Corporation and its subsidiary CytRx Biopool, both publicly held companies in the pharmaceutical research and development industry (March 1986 to July 1990). Mr. Thomas is a certified public accountant.

The Company is actively searching for additional directors who have credentials, experience, and contacts, which will assist us in the fulfillment of our business plan. The Company currently does not have an audit or compensation committee, but anticipates forming such committees once it has appointed more outside directors.

ITEM 10. EXECUTIVE COMPENSATION.

The following table sets forth the compensation earned by the Company's Chief Executive Officers during the last three fiscal years and other officers who received compensation in excess of $100,000 during any of the last three fiscal years.

Summary Compensation Table

|Name                      | Position                                                          | Years          | Salary                  | Other Compensation (1)  | Option Grants
(# shares)
|------------------------- | ----------------------------------------------------------------- | -------------- | ----------------------- | ----------------------- | ------------------------
|Jerry Phillips            | President and Director                                            | 2001
2000
1999 | $80,000
$80,000
$80,000 | $20,000
$20,000
$20,000 | --
--
--                
|                          |                                                                   |                |                         |                         |                         
|Donald H. Sigler, Jr. (2) | Chairman of the Board                                             | 2001
2000
1999 | $70,000
$70,000
--      | $20,000
$20,000
--      | --
--
--                
|                          |                                                                   |                |                         |                         |                         
|C. Wayne Bean             | Vice President of Research and Development, Chemist, and Director | 2001
2000
1999 | $80,000
$80,000
$80,000 | --
--
--                | --
--
--                
|                          |                                                                   |                |                         |                         |                         
|David Brown (3)(4)        | Vice President of Engineering and Development and Director        | 2001
2000
1999 | $27,664
$80,000
$70,000 | $53,450
--
--           | --
--
--                
|                          |                                                                   |                |                         |                         |                         
|John C. Thomas, Jr.       | Director                                                          | 2001
2000
1999 | --
--
--                | --
--
--                | --
--
--                

(1) Messrs. Phillips and Sigler are each entitled to a non-accountable expense allowance of $20,000 per year.

(2) Mr. Sigler and the Company have entered into an employment agreement dated June 1, 1998, under which Mr. Sigler is entitled to compensation of $70,000 per year. By agreement between Mr. Sigler and Company, Mr. Sigler did not begin receiving his compensation until July 1, 2000.

(3)  Mr. Brown resigned effective April 30, 2001.  As part of his resignation, the Company and Mr. Brown terminated Mr. Brown's employment agreement with the Company.

(4) Effective April 30, 2001, the Company and Brown mutually agreed to terminate Brown's employment agreement.  As part of the termination, Brown sold his common stock in the Company, consisting of 1,250,000 shares, back to the Company for $24,000, and the Company forgave a loan from Mr. Brown in the amount of $28,750.

In accordance with Item 402 of Regulation S-B of the Securities and Exchange Commission, certain columns of the table required by Item 402(b) of Regulation S-B have been omitted where there has been no compensation paid or awarded to any of the named executives in any fiscal year covered by the table.

The Company did not grant any options or stock appreciation rights or make an award under any long-term incentive plan to any of its named executive officers during the last fiscal year.  The Company did not reprice any options or stock appreciation rights during the last fiscal year.  None of the Company's named executive officers exercised any options or stock appreciation rights during the last fiscal year.

Employment Agreements

On July 1, 1998, the Company entered into an Employment Agreement with Don H. Sigler, under which he is employed as Chairman of the Board and a Financial Consultant.  Mr. Sigler has since accepted the position of Chief Financial Officer.  Mr. Sigler's compensation is a salary of $70,000 per year, with a nonaccountable expense allowance of $20,000 per year.  The Employment Agreement is for a term of one year, but automatically renews for additional one year terms in the event it is not terminated by either party at least twelve months prior to the expiration thereof.   The Employment Agreement provides that Mr. Sigler is obligated to keep confidential any confidential information pertaining to the Company for two years following the termination thereof, and further provides that any inventions related to the Company's business shall be the property of the Company.  Finally, the Company has indemnified Mr. Sigler against any liability arising out of his activities on behalf of the Company.

On July 1, 1998, the Company entered into an Employment Agreement with Jerry Phillips, under which he is employed as President and Chief Executive Officer.  Mr. Phillips compensation is a salary of $80,000 per year, with a nonaccountable expense allowance of $20,000 per year.  The Employment Agreement is for a term of one year, but automatically renews for additional one year terms in the event it is not terminated by either party at least twelve months prior to the expiration thereof.   The Employment Agreement provides that Mr. Phillips is obligated to keep confidential any confidential information pertaining to the Company for two years following the termination thereof, and further provides that any inventions related to the Company's business shall be the property of the Company.  Finally, the Company has indemnified Mr. Phillips against any liability arising out of his activities on behalf of the Company.

On July 1, 1998, the Company entered into an Employment Agreement with C. Wayne Bean, under which he is employed as Senior Chemist and Vice President.  Mr. Bean's compensation is a salary of $80,000 per year.  The Employment Agreement is for a term of one year, but automatically renews for additional one year terms in the event it is not terminated by either party at least twelve months prior to the expiration thereof.   The Employment Agreement provides that Mr. Bean is obligated to keep confidential any confidential information pertaining to the Company for two years following the termination thereof, and further provides that any inventions related to the Company's business shall be the property of the Company.  Finally, the Company has indemnified Mr. Bean against any liability arising out of his activities on behalf of the Company.

Compensation of Directors

During 2001, the Company did not provide any compensation to its directors.  The Company is actively searching for additional directors who have credentials, experience, and contacts, which will assist us in the fulfillment of our business plan.  When outside directors are located who are willing to serve on the Company's board of directors, the Company anticipates adopting a board compensation policy consistent with compensation plans provided by other public companies to their outside directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information, as of April 10, 2002, with respect to the beneficial ownership of the Company's Common Stock by all officers and directors and by each person known to the Company to be the beneficial owner of more than five percent (5%) of any class of the Company's voting securities.

|Name and Address of Beneficial Owner                                        | Amount of Beneficial Ownership | Percent of Class (1)
|--------------------------------------------------------------------------- | ------------------------------ | --------------------
|Jerry S. Phillips (2)
1650 Airport Dr., Suite 110
Kennesaw, Georgia 30144   | 1,250,000                      | 15.8%               
|                                                                            |                                |                     
|Donald Sigler (3)
1650 Airport Dr., Suite 110
Kennesaw, Georgia 30144       | 1,250,000                      | 15.8%               
|                                                                            |                                |                     
|Wayne Bean (4)
1650 Airport Dr., Suite 110
Kennesaw, Georgia 30144          | 1,250,000                      | 15.8%               
|                                                                            |                                |                     
|John C. Thomas, Jr. (5)
1650 Airport Dr., Suite 110
Kennesaw, Georgia 30144 | 250,000                        | 3.2%                
|                                                                            |                                |                     
|All Officers and Directors as a group                                       | 4,000,000                      | 50.6%               

(1) Based on 7,912,147 shares of Common Stock issued and outstanding as of April 10, 2002.  In addition, the Company has 1,247,483 shares of Preferred Stock issued and outstanding, each of which is convertible at any time into one share of Common Stock.

(2) Includes 875,000 shares of Common Stock owned by Mr. Phillips and 375,000 shares of Common Stock owned by the Phillips Family Limited Liability Company.

(3) Includes 750,000 shares of Common Stock owned by Mr. Sigler and 500,000 shares of Common Stock owned by the Sigler Family Limited Company.

(4) Includes 937,500 shares of Common Stock owned by Mr. Bean and 312,500 shares owned by the Bean Family Limited Liability Company.  The share totals from Mr. Bean do not include 25,000 shares held by other relatives of Mr. Bean who acquired their shares as the result of conversion of notes issued by the Company in one or more private placements.

(5) Includes 125,000 shares of Common Stock owned by Mr. Thomas and 125,000 shares of Common Stock owned by John C. Thomas, Jr. IRA.

Messrs. Sigler, Phillips, Bean and Thomas are the founding shareholders of the Company.  Messrs. Sigler, Phillips, and Bean each acquired 625,000 shares of Common Stock in 1997 for $0.002 per share.  At the same time, Mr. Thomas acquired 275,000 shares of Common Stock for $0.002 per share.  Mr. Thomas subsequently transferred 25,000 shares to third parties.

In July 1998, the Company executed employment agreements with Messrs. Sigler, Phillips, and Bean also issued each person a warrant to purchase an additional 625,000 shares of Common Stock for $0.002 per share.  Messrs. Sigler, Phillips, and Bean each exercised his warrant in full in 1999.

Effective April 30, 2001, the Company and David Brown, a director and officer, mutually agreed to terminate his employment agreement.  As part of the termination, Brown sold his common stock in the Company, consisting of 1,250,000 shares, back to the Company for $24,000 and resigned as a director. Mr. Brown no longer has any affiliation with the Company.

On February 4, 2000, the Company effected a one for two reverse split of its Common Stock.  All share amounts herein are after giving effect to the reverse split.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None of the Company's officers, directors, key personnel or principal stockholders is related by blood or marriage.

During the year ended December 31, 2000, the Company loaned three officers a total of $60,000 pursuant to notes that bear interest at the rate of 10% per annum, and were due and payable on December 31, 2001.  One of the officers who received a loan was David Brown. The loan amount was $28,750.  On April 30, 2001, in connection with Mr. Brown's termination of employment with the Company, the Company executed a general release in favor of Mr. Brown in which the Company released Mr. Brown from any obligation on the loan.

The Company during the year ended December 31, 2001 loaned an additional $30,250 to two officers for a total of $60,441 including interest.  The Company subsequently agreed to extend the due date of the remaining notes to June 30, 2002 at an interest rate of 6% per annum.  As of December 31, 2001, the principle amount outstanding under the loans was:

|Employee          | Total Due 
|----------------- | ----------
|Jerry S. Phillips | $29,984.93
|C. Wayne Bean     | $23,823.30

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

1. Exhibits.

|Exhibit No. | Description                                        
|----------- | ---------------------------------------------------
|3.1         | Articles of Incorporation dated August 4, 1997 (1) 
|3.2         | Articles of Amendment dated June 1, 1998 (1)       
|3.3         | Articles of Amendment dated June 8, 1998 (1)       
|3.4         | Articles of Amendment dated August 31, 1998 (1)    
|3.5         | Stock Specimen (1)                                 
|3.6         | Bylaws (1)                                         
|10.1        | Employment Agreement for Don Sigler (2)            
|10.2        | Employment Agreement for Jerry Phillips (2)        
|10.3        | Employment Agreement for Wayne Bean (2)            
|11.1        | Statement re: computation of earnings per share (3)
|22          | Subsidiaries of the Registrant (4)                 
|24          | Consent of Tauber and Balser, P.C.                 

(1)	Incorporated by reference from the Form 10-SB/A filed on January 24, 2001.

(2)	Incorporated by reference form the Form 10-SB/A filed on April 3, 2001.

(3)	The information required by this Exhibit can be determined from the Financial Statements included in Part F/S.

(4)	The Registrant has no subsidiaries.

(b) Reports on Form 8-K. During the fourth quarter of 2001, the Company did not file any reports on Form 8-K.



SIGNATURES

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

|                      | INNOVATIVE COATINGS CORPORATION
|--------------------- | -------------------------------
|Dated: April 16, 2002 | /s/ Jerry Phillips             
|                      | President and Director         



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



|Dated: April 16, 2002 | /s/ Jerry Phillips       
|--------------------- | -------------------------
|                      | President and Director   
|                      |                          
|Dated: April 16, 2002 | /s/ Donald H. Sigler, Jr.
|                      | Chairman of the Board    
|                      |                          
|Dated: April 16, 2002 | /s/ C. Wayne Bean        
|                      | Director                 
|                      |                          
|Dated: April 16, 2002 | /s/ John C. Thomas, Jr.  
|                      | Director                 





INNOVATIVE COATINGS CORPORATION

FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000





INNOVATIVE COATINGS CORPORATION

TABLE OF CONTENTS

|                                             | Page
|-------------------------------------------- | ----
|Independent Auditors' Report                 | 1   
|Balance Sheet                                | 2   
|Statements of Operations                     | 3   
|Statements of Shareholders' Equity (Deficit) | 4   
|Statements of Cash Flows                     | 5   
|Notes to Financial Statements                | 7   









INDEPENDENT AUDITORS' REPORT

To the Shareholders

Innovative Coatings Corporation

Kennesaw, Georgia

We have audited the accompanying balance sheet of Innovative Coatings Corporation as of December 31, 2001, and the related statements of operations, shareholders' equity (deficit), and cash flows for the years ended December 31, 2001 and 2000.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Innovative Coatings Corporation as of December 31, 2001, and the results of its operations and its cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note G of the financial statements, the Company has had losses in operations since its inception, had a shareholder's' deficiency at December 31, 2001 and was not current in its operating liabilities, which raise substantial doubt about its ability to continue as a going concern.  Management's plans regarding those matters are also described in Note G.  The financial statements do not include any adjustment that might result from the outcome of this uncertainty.

/s/ Tauber and Balser, P.C.

Atlanta, Georgia

March 26, 2002



INNOVATIVE COATINGS CORPORATION

BALANCE SHEET

DECEMBER 31, 2001

|ASSETS                                           |              
|------------------------------------------------ | -------------
|Current Assets                                   |              
|Cash                                             | $       3,272
|Accounts receivable, net of allowance of $10,000 | 30,015       
|Employee loans                                   | 60,441       
|Inventories                                      | 48,595       
|Deposits                                         | 30,838       
|Employee advances                                | 10,718       
|Other                                            | 6,238        
|Total Current Assets                             | 190,117      
|Property and Equipment                           |              
|Equipment                                        | 98,141       
|Furniture and fixtures                           | 19,043       
|                                                 | 117,184      
|Less accumulated depreciation                    | 43,579       
|                                                 | 73,605       
|TOTAL ASSETS                                     | $    263,722 



|LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                          |                 
|----------------------------------------------------------------------- | ----------------
|                                                                        |                 
|Current Liabilities                                                     |                 
|Notes payable                                                           | $         50,000
|Capital lease, current portion                                          | 3,868           
|Accounts payable                                                        | 264,885         
|Accrued expenses                                                        | 82,898          
|Payroll taxes payable                                                   | 143,663         
|Interest payable                                                        | 4,976           
|TOTAL CURRENT LIABILITIES                                               | 550,290         
|                                                                        |                 
|Long-term portion of capital lease                                      | 10,993          
|                                                                        |                 
|Shareholders' Equity (Deficit)                                          |                 
|Preferred stock Series A, no par value; $12,475 liquidation preference, |                 
|5,000,000 shares authorized, 1,247,483 shares issued and outstanding    | -               
|Common stock, no par value; 15,000,000 shares authorized,               |                 
|7,884,637 shares issued and outstanding                                 |                 
|and 1,250,000 treasury shares                                           | -               
|Additional paid-in capital                                              | 5,742,783       
|Accumulated deficit                                                     | (6,040,344)     
|                                                                        | (297,561)       
|                                                                        |                 
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)                    | $       263,722 

The accompanying notes are an integral part of these financial statements.



INNOVATIVE COATINGS CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

|                                                                      | 2001             | 2000             
|--------------------------------------------------------------------- | ---------------- | -----------------
|Sales, net                                                            | $        918,703 | $        671,151 
|Cost of goods sold                                                    | 633,522          | 352,675          
|Gross profit                                                          | 285,181          | 318,476          
|Selling, general and administrative                                   | 1,642,741        | 1,387,173        
|Loss from operations                                                  | (1,357,560)      | (1,068,697)      
|Other income (expense)                                                |                  |                  
|Gain on sale of assets                                                | -                | 1,526            
|Consulting income                                                     | 64,000           | -                
|Interest expense related to beneficial conversion of convertible debt | (13,333)         | (181,500)        
|Other interest                                                        | (6,646)          | (9,999)          
|                                                                      | (44,021)         | (189,973)        
|Net loss                                                              | $ (1,313,539)    | $  (1,258,670)   
|                                                                      |                  |                  
|Net loss per common share, basic and diluted                          | $         (0.16) | $          (0.21)
|                                                                      |                  |                  
|Weighted average number of common shares outstanding                  | 8,043,858        | 6,044,564        

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 2001 AND 2000





|                                                  | Preferred Stock | Preferred Stock | Treasury Stock | Additional Paid-in | Accumulated      | Total Stockholders'
|------------------------------------------------- | --------------- | --------------- | -------------- | ------------------ | ---------------- | -------------------
|Shares                                            | Shares          | Shares          | Capital        | Deficit            | Equity (deficit)
|                                                  |                 |                 |                |                    |                  |                    
|Balance, December 31, 1999                        | 6,469,100       | 2,300,000       | -              | $2,403,756         | $(2,553,523)     | $ (149,767)        
|Common stock issued for:                          |                 |                 | -              |                    |                  |                    
|Conversion of convertible debt to equity          | 112,516         | -               | -              | 46,000             | -                | 46,000             
|Interest on convertible debt                      | 4,208           | -               | -              | 1,724              | -                | 1,724              
|Warrants issued for consulting services           | -               | -               | -              | 129,600            | -                | 129,600            
|Private placements                                | 493,400         | -               | -              | 971,800            | -                | 971,800            
|Increase for interest expense related to          |                 |                 |                |                    |                  |                    
|beneficial conversion feature of convertible debt | -               | -               | -              | 181,500            | -                | 181,500            
|Warrant dividends                                 | -               | -               | -              | 914,612            | (914,612)        | -                  
|Net loss                                          | -               | -               | -              | -                  | (1,258,670)      | (1,258,670)        
|Balance, December 31, 2000                        | 7,079,224       | 2,300,000       | -              | $    4,648,992     | ($   4,726,805)  | ($  77,813)        
|Common stock issued for:                          |                 |                 |                |                    |                  |                    
|Conversion of convertible debt to equity          | 187,500         | -               | -              | 75,000             | -                | 75,000             
|Services                                          | 172,000         | -               | -              | 283,025            | -                | 283,025            
|Warrants issued for consulting services           | -               | -               | -              | 130,575            | -                | 130,575            
|Private placements                                | 435,538         | -               | -              | 408,000            | -                | 408,000            
|Increase for interest expense related to          |                 |                 |                |                    |                  |                    
|beneficial conversion feature of convertible debt | -               | -               | -              | 13,333             | -                | 13,333             
|Conversion of preferred stock to common stock     | 1,052,517       | (1,052,517)     | -              | -                  | -                | -                  
|Exercise of warrants                              | 207,858         | -               | -              | 207,858            | -                | 207,858            
|Repurchase of common stock, at cost               | (1,250,000)     | -               | 1,250,000      | (24,000)           | -                | (24,000)           
|Net loss                                          | -               | -               | -              | -                  | (1,313,539)      | (1,313,539)        
|Balance, December 31, 2001                        | 7,884,637       | 1,247,483       | 1,250,000      | $   5,742,783      | $   (6,040,344)  | $      (297,561)   

The accompanying notes are an integral part of these financial statements.

INNOVATIVE COATINGS CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2001 AND 2000



|                                                                           | 2001           | 2000          
|-------------------------------------------------------------------------- | -------------- | --------------
|CASH FLOWS FROM OPERATING ACTIVITIES:                                      |                |               
|Net loss                                                                   | $  (1,313,539) | $  (1,258,670)
|Adjustments:                                                               |                |               
|Depreciation                                                               | 16,253         | 14,828        
|Warrants issued for consulting services                                    | 130,575        | -             
|Common Shares issued for consulting services                               | 283,025        | 129,600       
|Common stock issued in payment of interest                                 | -              | 1,724         
|Interest associated with beneficial conversion feature of convertible debt | 13,333         | 181,500       
|Gain on sale of asset                                                      | -              | (1,525)       
|Changes in:                                                                |                |               
|Accounts receivable                                                        | 20,201         | (21,490)      
|Inventories                                                                | 45,396         | (19,799)      
|Other assets                                                               | 850            | (3,406)       
|Deposits                                                                   | (1,025)        | (15,676)      
|Accounts payable                                                           | 55,023         | 67,814        
|Accrued expenses                                                           | 57,951         | (12,166)      
|Payroll taxes payable                                                      | 32,194         | 28,951        
|Interest payable                                                           | (37)           | (4,665)       
|Total Adjustments                                                          | 653,739        | 345,690       
|Net cash used by operating activities                                      | (659,800)      | (912,980      
|                                                                           |                |               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |                |               
|Capital expenditures                                                       | (1,784)        | (49,177)      
|Proceeds from sale of property and equipment                               | -              | 15,775        
|Employee loans                                                             | (441)          | (60,000)      
|Employee advances                                                          | (4,370)        | 9,925         
|Net cash used by investing activities                                      | 6,595)         | (83,477)      
|                                                                           |                |               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |                |               
|Principal repayments of short term notes payable                           | (35,000)       | (86,638)      
|Exercise of warrants                                                       | 207,858        | -             
|Repurchase of common stock                                                 | (24,000)       | -             
|Principle payments on capital lease                                        | (3,667)        | (1,472)       
|Proceeds from sale of common stock                                         | 408,000        | 971,800       
|Proceeds from issuance of short term notes payable                         | 35,000         | -             
|Proceeds from issuance of convertible debt                                 | 50,000         | 121,000       
|Net cash provided by financing activities                                  | 638,191        | 1,004,690     
|                                                                           |                |               
|NET (DECREASE) INCREASE IN CASH                                            | (28,204)       | 8,233         
|                                                                           |                |               
|CASH, BEGINNING OF YEAR                                                    | 31,476         | 23,243        
|                                                                           |                |               
|CASH, END OF YEAR                                                          | $  3,272       | 31,476        
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                           |                |               
|Cash paid for interest                                                     | $  1,223       | 24,690        



The accompanying notes are an integral part of these financial statements.



INNOVATIVE COATINGS CORPORATION

STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED DECEMBER 31, 2001 AND 2000

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES

During the year ended December 31, 2001, 1,052,517 shares of preferred stock were converted to 1,052,517 shares of common stock.

During the year ended December 31, 2001, $75,000 of notes payable converted to 187,500 shares of common stock.

During the year ended December 31, 2000, $46,000 of notes payable were converted to 112,516 shares of common stock.



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 AND 2000

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Innovative Coatings Corporation (the "Company") was established in 1997 and manufactures and distributes InstaCoat, a polyurea elastomeric coating used for protection and strengthening on a variety of substrates including extruded foams, wood, metal and concrete.  Its customers are located throughout the United States.  The accounting principles followed by the Company and the methods of applying those principles, which materially affect the determination of financial position, cash flows, or results of operations, are summarized below.

Inventories

Inventories, principally raw materials, are stated at the lower of cost (first-in, first-out basis) or market.

Income Taxes

Deferred income tax assets and liabilities are determined for the effects of net operating loss carryforwards and the differences between the financial statement and tax bases of assets and liabilities.

Property and Equipment

Equipment and furniture and fixtures are stated at cost.  Depreciation is provided on the straight-line method over the estimated lives of the various assets, generally 5 to 10 years.

Use of Estimates

The timely preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures.  Actual results could differ from those estimates.

Revenue Recognition

Revenue is recognized when persuasive evidence of an agreement exists, shipment of the product has occurred, the price to the buyer is fixed and determinable, and collection is probable.  The Company does not refund the purchase price of products accepted for return, but gives the customer a credit against future purchases.   The Company does not reserve any amount at the time of sale for anticipated credits for returns and warranty claims based on its experience that such amounts are minimal.



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Loss Per Share

Basic loss per share is computed as net loss available to common shareholders divided by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, stock warrants, and convertible debt and stock.  As the Company's stock options, stock warrants, and convertible debt and stock are antidilutive for all periods presented, dilutive loss per share is the same as basic loss per share.

At December 31, 2001 and 2000, outstanding stock options, stock warrants, and convertible debt and stock to purchase 1,808,906 and 3,754,662 shares, respectively, of the Company's common stock were not included in the computation of diluted loss per share as their effect would be antidilutive.

Research and Development

Research and development costs are expensed as incurred.

Stock-Based Expense

The Company records expense in conjunction with the issuance of its stock and stock warrants for various services and interest in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation."  Under SFAS No. 123, stock-based expense for non-employees is recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

NOTE B - FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments include cash and receivables for which the Company believes that the fair value approximates their carrying amounts.  It was impracticable to estimate the fair value of the other financial instruments.

NOTE C -LEASES

During 2000 the Company leased a forklift under a capital lease that was capitalized at $20,000.  Amortization of the capital lease included in depreciation expense for 2001 and 2000 amounted to $2,000 and $1,000, respectively.  Future minimum payments under the lease are:

|2002          | $ 4,563
|------------- | -------
|2003          | 4,563  
|2004          | 4,563  
|2005          | 2,662  
|Less interest | (1,490)
|              | $14,861



Included in operating lease expense is a building lease which covers a period of 60 months ending November 30, 2004.

INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

Future minimum rentals under the operating lease are as follows:

|2002 | $110,319
|---- | --------
|2003 | 110,319 
|2004 | 101,125 
|     | $321,763



Rent expense under the building lease was $109,460 and $98,595, respectively, for the years ended December 31, 2001 and 2000.

NOTE D - NOTES PAYABLE

During 2001 and 2000, $50,000 and $121,000, respectively, of convertible notes payable were issued.  These notes were convertible into common stock at a price of $.65 per share for the notes issued in 2001 and $.40 per share for the notes issued in 2000.  During 2001 and 2000, $75,000 and $46,000, respectively, of notes payable along with $0 and $1,724 of accrued interest, were converted into 187,500 and 116,724 shares of common stock of the Company.  As of December 31, 2001 and 2000, $50,000 and $75,000, along with accrued interest of $4,976 and $6,638, respectively, remained unpaid.

The issuance of the notes payable during 2001 included a beneficial conversion feature in the total amount of $20,000 which represents the aggregate fair value at the issue date of the common stock into which the notes are convertible over the proceeds received in the issuance of the notes.  This amount will be amortized over the period through the date of earliest conversion and has been included in additional paid-in capital and interest expense.  At December 31, 2001, $6,667 remains unamortized.

The issuance of the notes payable during 2000 included a beneficial conversion feature in the total amount of $181,500, which represents the aggregate fair value at the issue date of the common stock into which the notes are convertible over the proceeds received in the issuance of the notes.  This amount has been included in additional paid-in capital and interest expense.

NOTE E - INCOME TAXES

The effective tax rate varies from the federal statutory rate as a result of the following items:

|                                                           | 2001    | 2000   
|---------------------------------------------------------- | ------- | -------
|                                                           |         |        
|Tax benefit computed at the maximum federal statutory rate | (34.0)% | (34.0)%
|Decrease in tax benefit resulting from:                    |         |        
|Imputed interest                                           | 2.0     | 16.0   
|Other                                                      | 7.0     | 10.0   
|Loss to be carried forward                                 | 25.0    | 8.0    
|Income tax provision                                       | 0.0%    | 0.0%   



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

Deferred income tax assets and the related valuation allowances result principally from the potential tax benefits of net operating loss carryforwards.

The Company has recorded a valuation allowance to reflect the uncertainty of the ultimate utilization of the deferred tax assets as follows:

|                         | 2001                | 2000           
|------------------------ | ------------------- | ---------------
|                         |                     |                
|Deferred tax assets      | $  1,525,000        | $ 860,000      
|Less valuation allowance | (1,525,000)         | (860,000)      
|Net deferred tax assets  | $                 - | $             -



For financial statement purposes, no tax benefit has been reported in 2001 and 2000 as the Company has had significant losses in recent years and realization of the tax benefits is uncertain.  Accordingly, a valuation allowance has been established for the full amount of the deferred tax asset.

The net change in the deferred tax valuation allowance was an increase of $665,000 and $390,000 for the years ended December 31, 2001 and 2000, respectively.

At December 31, 2001, the Company's net operating loss carryforwards of approximately $3,810,000 expire between 2018 and 2021.  The utilization of the carryforwards is dependent upon the Company's ability to generate sufficient taxable income during the carryforward period.  The Company has not filed its 2000 federal and state income tax returns.

NOTE F - PAYROLL TAXES

The Company has not made certain required federal payroll tax payments in 2001 and has not made any of the required state payroll tax payments since its inception.  The penalties and interest related to the nonpayment of these items was approximately $81,000 at December 31, 2001 and is included in accrued expenses.

NOTE G - GOING CONCERN

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern.  However, the Company incurred a net loss of $1,313,539 and $1,258,670 for the years ended December 31, 2001 and 2000, respectively, and had a working capital deficiency of $360,173 and an equity deficiency of $297,561 at December 31, 2001.  The Company has sustained continuous losses from operations.  The Company has used, rather than provided, cash in its operating activities during the years ended December 31, 2001 and 2000 and has deferred payment of certain accounts payable and accrued expenses.  Given these results, additional capital and improved operations will be needed to sustain the Company's operations.

Management's plans in this regard include raising additional capital to satisfy the operating needs for its continued development of its product line and customer base.



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

In view of the matters described, there is substantial doubt about the Company's ability to continue as a going concern.  The recoverability of the recorded assets and satisfaction of the liabilities reflected in the accompanying balance sheet is dependent upon continued operation of the Company, which is in turn dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations.  There can be no assurance that management will be successful in implementing its plans.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE H - RESEARCH AND DEVELOPMENT COSTS

Research and development costs of $36,657 and $17,570, respectively, were charged to expense in 2001 and 2000.

NOTE I - OPTIONS AND WARRANTS

Stock options

In 2000, various employees were granted a total of 125,000 stock options with an exercise price of $1.00 per share and an expiration date of December 31, 2002.  All of these options were exercisable at December 31, 2001 and 2000.

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for options issued to its employees rather than Statement of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).  In accordance with APB 25, since the exercise price of the options equaled the fair market value on the date of grant, no compensation expense was recognized.

SFAS 123 requires the Company to provide pro forma information regarding net loss and loss per share as if compensation cost had been determined in accordance with the fair value based method prescribed in SFAS 123.  The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2000: no dividend yield for each year; expected volatility of 10%; weighted-average risk-free interest rates of 6.43%, and weighted-average expected option lives of three years.  The weighted-average fair value of options granted during 2000 was $.13.

|                                           | 2001           | 2000            
|------------------------------------------ | -------------- | ----------------
|Net loss available to common shareholders: |                |                 
|As reported                                | ($1,313,539)   | $(1,258,670)    
|Pro forma                                  | ($1,313,539)   | $(1,280,521)    
|                                           |                |                 
|Net loss per common share:                 |                |                 
|As reported                                | $       (0.16) | $         (0.21)
|Pro forma                                  | $       (0.16) | $         (0.22)



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

NOTE I - OPTIONS AND WARRANTS (CONTINUED)

Stock warrants

During 2001 the Company issued 259,500 stock warrants valued at $130,575 as compensation for consulting services which was included in selling, general and administrative expenses in the statement of operations.  The warrants were valued using the Black-Scholes option-pricing method under the following weighted average assumptions:  no dividend yield; expected volatility of 65%; risk-free interest rate of 4%; and expected warrant lives of one to three years.

During 2000 the Company issued 140,000 stock warrants valued at $129,600 as compensation for consulting services which was included in selling, general and administrative expenses in the statement of operations.  The warrants were valued using the Black-Scholes option-pricing method under the following weighted average assumptions: no dividend yield; expected volatility of 10%; risk- free interest rate of 6.51%; and expected warrant lives of two to five years.

In December 2000, the Company distributed to its shareholders by dividend one stock warrant for each two common shares outstanding.   Simultaneously, the Company officers and directors agreed to cancel any warrants distributable on shares held by them and their affiliates, which resulted in the net distribution of 914,662 warrants.  Each warrant entitled the holder to purchase one share of common stock for$1.00 per share until January 31, 2001, which date was subsequently extended to February 14, 2001.  A total of 207,858 warrants were exercised.

Activity related to stock warrants was as follows:

|                                 |           | Weighted Average
|-------------------------------- | --------- | ----------------
|                                 | Warrants  | Exercise Price  
|Outstanding at December 31, 1999 | -         | $      -        
|Granted                          | 1,054,662 | $ 1.06          
|Outstanding at December 31, 2000 | 1,054,662 | $ 1.06          
|Granted                          | 259,500   | $ 1.00          
|Exercised                        | (207,858) | $ 1.00          
|Expired                          | (746,804) | $ 1.06          
|Outstanding at December 31, 2001 | 359,500   | $ 1.00          

At December 31, 2001 and 2000, all of the outstanding warrants are exercisable.  The weighted-average fair value of warrants granted in 2001 and 2000 was $0.50 and $1.00, respectively.



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

NOTE I - OPTIONS AND WARRANTS (CONTINUED)

At December 31, 2001, the Company had stock warrants outstanding as follows:

|Common Shares | Exercise Price | Expiration 
|------------- | -------------- | -----------
|Under Warrant | Per Share      | Date       
|9,000         | $1.00          | March 2002 
|33,500        | $1.00          | May 2002   
|33,500        | $1.00          | May 2003   
|33,500        | $1.00          | May 2004   
|50,000        | $1.00          | August 2002
|50,000        | $1.00          | August 2003
|50,000        | $1.00          | August 2004
|100,000       | $1.00          | March 2005 
|359,500       |                |            

NOTE J - EMPLOYEE LOANS

Loans to officers and employees with unpaid principal and accrued interest balance of $60,441 bear interest at 6%, are unsecured, and are due June 30, 2002.

NOTE K - PREFERRED STOCK

The Series A preferred stock has no par value, its holders are not entitled to vote on any matter submitted to a vote of shareholders generally, are not entitled to dividends, but are entitled to a liquidation preference of $0.01 per share or $12,475.  Each share of Series A preferred stock is convertible into one share of the Company's common stock at the option of the holder.

In addition, the Company has the right to compel conversion of the Series A preferred stock at any time after December 31, 1999 or any time after a majority of the shares of Series A preferred stock have been converted.  The Series A preferred stock will automatically be converted upon closing of a public offering by the Company of at least $10,000,000.

NOTE L - SUBSEQUENT EVENTS

On January 3, 2002, the Company executed a note payable to a customer.  Under the note, the Company is to receive $32,000 per month for six months beginning on the date of the note.  The note bears interest at 6% and the entire balance of $192,000 of principal and related accrued interest is due on June 30, 2003.  The note is convertible into one share of the Company's common stock per dollar due under the note.

In 2002 the Company signed a note payable with its landlord for $53,259, representing three months of unpaid rent in 2001 and its unpaid rent to the date of the note in 2002.  The note bears interest at 8% and is payable in 12 monthly installments of principal and interest beginning in April 2002.  The unpaid rent related to 2001 is included in accounts payable in the Company's balance sheet at December 31, 2001.



INNOVATIVE COATINGS CORPORATION

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2001 and 2000

NOTE M - SIGNIFICANT FOURTH QUARTER ADJUSTMENTS

During the fourth quarter of 2001, the Company recorded the approximate $81,000 of expense associated with penalties related to unpaid payroll taxes which occurred throughout the year.

During the fourth quarter  of 2001, the Company recorded  the approximate $74,000 of additional interest expense associated with the issuance of stock warrants for consulting services occurring in the second and third quarters of 2001.  The additional expense resulted from the use of an increased volatility assumption to calculate the value of the issued warrants under the Black-Scholes option-pricing method.