**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 10-QSB**

 

**(Mark one)**
| **x**                                                                                                                                                                                                                                               | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                          | ** **                                                                                        |
| **For the  quarterly period ended**                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                | ** **                                                                                        |
| **May 31, 2008**                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                |                                                                                              |
| **o**                                                                                                                                                                                                                                               | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                |                                                                                              |
| **For the transition period from                  to                  .** |

 

**Commission file number  1-11038**

 

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION**

(Name of small business issuer in its charter)

 

| **Delaware**                                                    | ** ** | **41-0857886**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **4201 Woodland Rd**

**Circle Pines, Minnesota**               |       | **55014**                            |
| (Address of principal executive offices)                        |       | (Zip Code)                           |

 

**(763) 225-6600**

(Issuer’s telephone number, including area code)

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the past 12 months (or for such shorter period thatthe issuer was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days.

Yes  x  No  o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2) of the Exchange Act).

Yes  o  No  x

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date.

 

| **Class**                     | ** ** | **Outstanding  as of July 11, 2008** |
|-------------------------------|------------|-------------------------------------------|
|                          |       |                                      |
| Common Stock, $0.02 par value |       | 3,723,166                                 |

 

Transitional Small Business Disclosure Format (check one):  Yes  o No  x

 

 

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**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**FORM 10-QSB**

**May 31, 2008**

 

**TABLE OF CONTENTS**

 
| **Description**                         |   | **Page**                                                                                                                        |
|-----------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------|
|                                    |   |                                                                                                                            |   |
| **PART I.  FINANCIAL INFORMATION** |   |
|                                    |   |                                                                                                                            |   |
| Item 1.                                 |   | Financial Statements                                                                                                            |   |
|                                    |   |                                                                                                                            |   |
|                                    |   | Consolidated  Balance Sheets as of May 31, 2008 (unaudited) and August 31, 2007 (audited)                             | 3 |
|                                    |   |                                                                                                                            |   |
|                                    |   | Consolidated  Statements of Operations (unaudited) for the Three and Nine Months Ended May 31, 2008 and May 31,  2007 | 4 |
|                                    |   |                                                                                                                            |   |
|                                    |   | Consolidated  Statements of Cash Flows (unaudited) for the Nine Months Ended May 31,  2008 and May 31, 2007           | 5 |
|                                    |   |                                                                                                                            |   |
|                                    |   | Notes to Consolidated Financial Statements (unaudited)                                                                          | 6-12 |
|                                    |   |                                                                                                                            |   |
| Item 2.                                 |   | Management’s  Discussion and Analysis or Plan of Operation                                                                 | 12-29 |
|                                    |   |                                                                                                                            |   |
| Item 3.                                 |   | Controls and  Procedures                                                                                                        | 30 |
|                                    |   |                                                                                                                            |   |
| **PART II.  OTHER INFORMATION**    |   |
|                                    |   |                                                                                                                            |   |
| Item 1.                                 |   | Legal Proceedings                                                                                                               | 31 |
|                                    |   |                                                                                                                            |   |
| Item 2.                                 |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    | 31 |
|                                    |   |                                                                                                                            |   |
| Item 5.                                 |   | Other Information                                                                                                               | 32 |
|                                    |   |                                                                                                                            |   |
| Item 6.                                 |   | Exhibits                                                                                                                        | 32 |
|                                    |   |                                                                                                                            |   |
| **SIGNATURE PAGE**                      | 33     |
|                                    |   |                                                                                                                            |   |
| **EXHIBIT INDEX**                       | 34     |
|                                         |        |                                                                                                                                 |  |  |

 

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*This Quarterly Report on Form 10-QSB contains certainforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, and are subject to the safe harbor created bythose sections. For more information, see “Part I. Financial Information –Item 2.  Management’s Discussion and Analysis or Plan of Operation  – Forward-Looking Statements.”*

 

*As used in this report, references to “NTIC,” the “Company,”“we,” “our” or “us,” unless the context otherwise requires, refer to NorthernTechnologies International Corporation, its wholly owned subsidiaries – NTIFacilities, Inc. and Northern Technologies Holding Company, LLC, and itsmajority-owned subsidiary – React-NTI, LLC, all of which are consolidated onNTIC’s financial statements.*

 

*All trademarks, trade names or service marks referred to inthis report are the property of their respective owners.*

 

i

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.****                            ****FINANCIALSTATEMENTS**

** **

**NORTHERN TECHNOLOGIESINTERNATIONAL CORPORATION**

**AND SUBSIDIARIES –**CONSOLIDATED BALANCESHEETS as of

**May 31, 2008 (Unaudited) and August 31,2007 (Audited)**

 
| ** **                                                                                                                                            | ** ** | **May 31****,********2008** | ** ** | **August 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------|------------|
| **ASSETS**                                                                                                                                            |       |                             |       |                      |       |
| CURRENT ASSETS:                                                                                                                                       |       |                             |       |                      |       |
| Cash and cash equivalents                                                                                                                             |       | $                                | 418,994    |                      | $          | 244,499 |   |
| Receivables:                                                                                                                                          |       |                             |       |                      |       |
| Trade excluding corporate joint ventures,  less allowance for doubtful accounts of $20,000 and $30,000 at May 31,  2008 and August 31, 2007 |       | 2,065,498                        |       | 1,622,420                 |       |
| Trade corporate joint ventures                                                                                                                        |       | 521,456                          |       | 642,518                   |       |
| Technical and other services, corporate  joint ventures                                                                                               |       | 2,620,223                        |       | 1,514,139                 |       |
| Income taxes                                                                                                                                          |       | —                           |       | 29,755                    |       |
| Inventories                                                                                                                                           |       | 1,863,782                        |       | 1,636,073                 |       |
| Prepaid expenses                                                                                                                                      |       | 269,426                          |       | 184,407                   |       |
| Deferred income taxes                                                                                                                                 |       | 562,000                          |       | 562,000                   |       |
| Total current assets                                                                                                                                  |       | 8,321,379                        |       | 6,435,811                 |       |
|                                                                                                                                                  |       |                             |       |                      |       |
| PROPERTY AND EQUIPMENT, net                                                                                                                           |       | 3,795,173                        |       | 3,792,461                 |       |
|                                                                                                                                                  |       |                             |       |                      |       |
| OTHER ASSETS:                                                                                                                                         |       |                             |       |                      |       |
| Investments in corporate joint ventures:                                                                                                              |       |                             |       |                      |       |
| Industrial chemical                                                                                                                                   |       | 15,819,169                       |       | 13,180,576                |       |
| Industrial non-chemical                                                                                                                               |       | 373,972                          |       | 422,266                   |       |
| Deferred income taxes                                                                                                                                 |       | 366,500                          |       | 779,500                   |       |
| Notes receivable                                                                                                                                      |       | 158,836                          |       | 32,187                    |       |
| Industrial patents and trademarks, net                                                                                                                |       | 1,021,466                        |       | 983,206                   |       |
| Goodwill                                                                                                                                              |       | 304,000                          |       | 304,000                   |       |
| Other                                                                                                                                                 |       | 375,352                          |       | 366,749                   |       |
|                                                                                                                                                  |       | 18,419,295                       |       | 16,068,484                |       |
|                                                                                                                                                  |       | $                                | 30,535,847 |                      | $          | 26,296,756 |   |
|                                                                                                                                                  |       |                             |       |                      |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                         |       |                             |       |                      |       |
| CURRENT LIABILITIES:                                                                                                                                  |       |                             |       |                      |       |
| Bank overdrafts                                                                                                                                       |       | $                                | 236,480    |                      | $          | — |   |
| Current portion of note payable                                                                                                                       |       | 31,431                           |       | 29,319                    |       |
| Accounts payable                                                                                                                                      |       | 854,167                          |       | 1,337,443                 |       |
| Accrued liabilities:                                                                                                                                  |       |                             |       |                      |       |
| Payroll and related benefits                                                                                                                          |       | 1,135,315                        |       | 1,025,858                 |       |
| Income taxes payable                                                                                                                                  |       | 168,145                          |       | —                    |       |
| Deferred joint venture royalties                                                                                                                      |       | 264,000                          |       | 192,000                   |       |
| Other                                                                                                                                                 |       | 233,659                          |       | 62,414                    |       |
| Total current liabilities                                                                                                                             |       | 2,923,197                        |       | 2,647,034                 |       |
|                                                                                                                                                  |       |                             |       |                      |       |
| NOTE PAYABLE, NET OF CURRENT PORTION                                                                                                                  |       | 1,187,521                        |       | 1,211,528                 |       |
| MINORITY INTEREST                                                                                                                                     |       | 3,864                            |       | 36,133                    |       |
|                                                                                                                                                  |       |                             |       |                      |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                            |       |                             |       |                      |       |
| Preferred stock, no par value; authorized  10,000 shares; none issued and outstanding                                                                 |       | —                           |       | —                    |       |
| Common stock, $0.02 par value per share;  authorized 10,000,000 shares; issued and outstanding 3,723,166 and 3,683,016,  respectively                 |       | 74,463                           |       | 73,660                    |       |
| Additional paid-in capital                                                                                                                            |       | 5,205,516                        |       | 4,755,146                 |       |
| Retained earnings                                                                                                                                     |       | 18,225,016                       |       | 16,118,982                |       |
| Accumulated other comprehensive income                                                                                                                |       | 2,916,270                        |       | 1,454,273                 |       |
| Total stockholders’ equity                                                                                                                       |       | 26,421,265                       |       | 22,402,061                |       |
|                                                                                                                                                  |       | $                                | 30,535,847 |                      | $          | 26,296,756 |   |

 
| See notes to consolidated financial  statements. |   |   |   |   |   |
|--------------------------------------------------|--------|--------|--------|--------|--------|

 

3

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND SUBSIDIARIES -****CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**

**THREE AND NINEMONTHS ENDED MAY 31, 2008 AND 2007**

 
| ** **                                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                         | ** ** | **May 31, 2008**       | ** ** | **May 31, 2007**      | ** ** | **May 31, 2008** | ** ** | **May 31, 2007** | ** ** |
| NORTH AMERICAN OPERATIONS:                                                                         |       |                             |       |                            |       |   |   |   |   |
| Sales                                                                                              |       | $                                | 3,269,721  |                            | $          | 4,407,798 |   | $ | 9,518,162 |   | $ | 12,910,067 |   |
| Cost of goods sold                                                                                 |       | 2,059,855                        |       | 2,876,012                       |       | 5,763,500 |   | 8,280,131 |   |
| Gross profit                                                                                       |       | 1,209,866                        |       | 1,531,786                       |       | 3,754,662 |   | 4,629,936 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| Operating expenses:                                                                                |       |                             |       |                            |       |   |   |   |   |
| Selling                                                                                            |       | 799,949                          |       | 887,014                         |       | 2,413,895 |   | 2,466,218 |   |
| General and administrative                                                                         |       | 702,592                          |       | 608,104                         |       | 2,545,414 |   | 2,235,276 |   |
| Lab and technical support                                                                          |       | 32,631                           |       | 46,941                          |       | 143,375 |   | 177,316 |   |
|                                                                                               |       | 1,535,172                        |       | 1,542,059                       |       | 5,102,684 |   | 4,878,810 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| NORTH AMERICAN OPERATING LOSS                                                                      |       | (325,306                         | )          | (10,273                         | )          | (1,348,022 | ) | (248,874 | ) |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| CORPORATE JOINT VENTURES AND HOLDING  COMPANIES:                                                   |       |                             |       |                            |       |   |   |   |   |
| Equity in income of industrial chemical  corporate joint ventures and holding companies            |       | 1,155,282                        |       | 722,075                         |       | 3,109,093 |   | 2,318,009 |   |
| Equity in (loss) income of industrial  non-chemical corporate joint ventures and holding companies |       | (16,142                          | )          | 32,211                          |       | (102,097 | ) | 66,011 |   |
| Gain on sale of industrial chemical  corporate joint venture                                       |       | —                           |       | —                          |       | 172,767 |   | — |   |
| Fees for technical support and other  services provided to corporate joint ventures                |       | 1,517,428                        |       | 1,162,974                       |       | 4,537,855 |   | 3,508,977 |   |
| Expenses incurred in support of corporate  joint ventures                                          |       | (1,412,582                       | )          | (1,161,702                      | )          | (3,837,266 | ) | (3,819,003 | ) |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| INCOME FROM ALL CORPORATE JOINT VENTURES  AND HOLDING COMPANIES                                    |       | 1,243,986                        |       | 755,558                         |       | 3,880,352 |   | 2,073,994 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| INTEREST INCOME                                                                                    |       | 22,277                           |       | 667                             |       | 23,196 |   | 2,368 |   |
| INTEREST EXPENSE                                                                                   |       | (21,757                          | )          | (41,139                         | )          | (93,872 | ) | (131,503 | ) |
| OTHER INCOME                                                                                       |       | 6,825                            |       | 6,281                           |       | 21,582 |   | 14,655 |   |
| GAIN ON SALE OF ASSETS                                                                             |       | —                           |       | 100                             |       | 5,529 |   | 726,295 |   |
| MINORITY INTEREST                                                                                  |       | 10,123                           |       | 7,606                           |       | 32,269 |   | 292 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| INCOME BEFORE INCOME TAX EXPENSE                                                                   |       | 936,148                          |       | 718,800                         |       | 2,521,034 |   | 2,437,227 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| INCOME TAX EXPENSE                                                                                 |       | 148,000                          |       | 91,000                          |       | 415,000 |   | 371,000 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| NET INCOME                                                                                         |       | $                                | 788,148    |                            | $          | 627,800 |   | $ | 2,106,034 |   | $ | 2,066,227 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| NET INCOME PER COMMON SHARE:                                                                       |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                              |       | $                                | 0.21       |                            | $          | 0.17 |   | $ | 0.57 |   | $ | 0.56 |   |
| Diluted                                                                                            |       | $                                | 0.21       |                            | $          | 0.17 |   | $ | 0.56 |   | $ | 0.56 |   |
|                                                                                               |       |                             |       |                            |       |   |   |   |   |
| WEIGHTED AVERAGE COMMON SHARES ASSUMED  OUTSTANDING:                                               |       |                             |       |                            |       |   |   |   |   |
| Basic                                                                                              |       | 3,723,166                        |       | 3,679,016                       |       | 3,704,673 |   | 3,674,635 |   |
| Diluted                                                                                            |       | 3,758,646                        |       | 3,708,626                       |       | 3,741,558 |   | 3,707,772 |   |

 

Seenotes to consolidated financial statements.

 

4

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND**

**SUBSIDIARIES - CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)**

**NINE MONTHS ENDEDMAY 31, 2008 and 2007**

** **
| ** **                                                                                   | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **May 31, 2008**      | ** ** | **May 31, 2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                            |       |   |   |
| Net income                                                                                   |       | $                               | 2,106,034  |   | $ | 2,066,227 |   |
| Adjustments to reconcile net income to net  cash (used in) provided by operating activities: |       |                            |       |   |   |
| Expensing of fair value of stock options  vested                                             |       | 71,403                          |       | 60,786 |   |
| Depreciation expense                                                                         |       | 262,808                         |       | 232,520 |   |
| Amortization expense                                                                         |       | 116,196                         |       | 132,188 |   |
| Gain on sale of assets                                                                       |       | (5,529                          | )          | (726,295 | ) |
| Minority interest expense                                                                    |       | (32,269                         | )          | (292 | ) |
| Equity in income from corporate joint  ventures:                                             |       |                            |       |   |   |
| Industrial chemical                                                                          |       | (3,109,093                      | )          | (2,318,009 | ) |
| Industrial non-chemical                                                                      |       | 102,097                         |       | (66,011 | ) |
| Deferred income taxes                                                                        |       | 413,000                         |       | — |   |
| Gain on sale of industrial chemical  corporate joint venture                                 |       | (172,767                        | )          | — |   |
| Deferred joint venture royalties                                                             |       | 72,000                          |       | 72,000 |   |
| Change in current assets and liabilities:                                                    |       |                            |       |   |   |
| Receivables:                                                                                 |       |                            |       |   |   |
| Trade excluding corporate joint ventures                                                     |       | (443,078                        | )          | 353,841 |   |
| Trade corporate joint ventures                                                               |       | 121,062                         |       | (52,615 | ) |
| Technical and other services receivables,  corporate joint ventures                          |       | (1,106,084                      | )          | (67,461 | ) |
| Income taxes                                                                                 |       | 29,755                          |       | (6,596 | ) |
| Inventories                                                                                  |       | (227,709                        | )          | (275,315 | ) |
| Prepaid expenses and other                                                                   |       | (85,019                         | )          | 33,093 |   |
| Income taxes payable                                                                         |       | 168,145                         |       | — |   |
| Accounts payable                                                                             |       | (483,276                        | )          | (807,064 | ) |
| Accrued liabilities                                                                          |       | 614,972                         |       | 133,952 |   |
| Net cash used in operating activities                                                        |       | (1,587,352                      | )          | (1,235,051 | ) |
|                                                                                         |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                            |       |   |   |
| Proceeds from the sale of assets                                                             |       | 6,201                           |       | 850,367 |   |
| Investment in corporate joint ventures                                                       |       | (117,950                        | )          | (538,104 | ) |
| Dividends received from corporate joint  ventures                                            |       | 1,805,411                       |       | 1,395,740 |   |
| Proceeds from sale of industrial chemical  corporate joint ventures                          |       | 364,000                         |       | — |   |
| Loans made                                                                                   |       | (140,000                        | )          | — |   |
| Cash received from notes receivable                                                          |       | —                          |       | 445,469 |   |
| Additions to property and equipment                                                          |       | (266,192                        | )          | (748,161 | ) |
| Increase in other assets                                                                     |       | (8,603                          | )          | (41,171 | ) |
| Additions to industrial patents                                                              |       | (141,105                        | )          | (94,549 | ) |
| Net cash provided by investing activities                                                    |       | 1,501,762                       |       | 1,269,591 |   |
|                                                                                         |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                            |       |   |   |
| Net borrowings made on line of credit                                                        |       | —                          |       | 274,000 |   |
| Repayment of note payable                                                                    |       | (21,895                         | )          | (20,479 | ) |
| Proceeds from exercise of stock options                                                      |       | —                          |       | 104,772 |   |
| Proceeds from employee stock purchase plan                                                   |       | 45,500                          |       | — |   |
| Bank overdrafts                                                                              |       | 236,480                         |       | (155,704 | ) |
| Net cash provided by financing activities                                                    |       | 260,085                         |       | 202,589 |   |
|                                                                                         |       |                            |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                                    |       | 174,495                         |       | 237,129 |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                            |       | 244,499                         |       | 299,117 |   |
|                                                                                         |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   |       | $                               | 418,994    |   | $ | 536,246 |   |

 

Seenotes to consolidated financial statements.

 

5

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**NORTHERN TECHNOLOGIES INTERNATIONALCORPORATION AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

 

**1.****                                     ****INTERIM FINANCIALINFORMATION**

 

In the opinion of management,the accompanying unaudited consolidated financial statements contain allnecessary adjustments, which are of a normal recurring nature, and presentfairly the consolidated financial position of Northern TechnologiesInternational Corporation and its subsidiaries (the Company) as of May 31,2008 and the results of their operations for the three and nine months ended May 31,2008 and May 31, 2007 and their cash flows for the nine months ended May 31,2008 and May 31, 2007, in conformity with accounting principles generallyaccepted in the United States of America.

 

These consolidated financialstatements should be read in conjunction with the consolidated financialstatements and related notes contained in the Company’s annual report on Form 10-KSBfor the fiscal year ended August 31, 2007 and with the Management’sDiscussion and Analysis or Plan of Operation section appearing in thisquarterly report.  Operating results forthe three and nine months ended May 31, 2008 are not necessarilyindicative of the results that may be expected for the full fiscal year ending August 31,2008.

** **

**2.             RECENTLYISSUED ACCOUNTING PRONOUNCEMENTS**

 

Effective September 1,2007, the Company adopted the provisions of the FASB Interpretation 48, “*Accounting for Uncertainty in Income Taxes – an interpretation of FASBStatement 109*” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109and prescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken in a taxreturn.  Under FIN 48, the impact of anuncertain tax position on the income tax return must be recognized at thelargest amount that is more-likely-than-not to be sustained upon audit by therelevant taxing authority.  An uncertainincome tax position will not be recognized if it has less than a 50% likelihoodof being sustained.  Additionally, FIN 48provides guidance on subsequent derecognition of tax positions, financialstatement classification, recognition of interest and penalties, accounting ininterim periods and disclosure and transition rules.  The adoption of FIN 48 did not have amaterial impact on the Company’s financial condition, results of operations orcash flows.

 

As of August 31, 2007,the Company had $75,000 of unrecognized tax benefits.  If recognized, $75,000 would have an impacton the Company’s effective tax rate. During the nine months ended May 31, 2008, the unrecognized taxbenefits have not increased or decreased materially.  It is expected that the amount ofunrecognized tax benefits will change in the next 12 months; however, theCompany cannot reasonably estimate that change.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits as a component ofits income tax provision.  This policydid not change as a result of the adoption of FIN 48.  As of September 1, 2007, the Companyrecorded a liability of $11,300 for interest and penalties.  The liability for the payment of interest andpenalties did not materially change during the nine months ended May 31,2008.

 

The Company operates inmultiple tax jurisdictions, both within the United States and outside theUnited States.  With certain exceptions,the Company is no longer subject to examination for tax years prior to 2004.  The Company’s tax filings for the fiscalyears August 31, 2004 and August 31, 2005 were examined by the U.S.Internal Revenue Service.  Theexamination has been concluded with the exception of the payroll tax issuediscussed within Note 9 to these consolidated financial statements entitled “Commitmentsand Contingencies.”

 

6

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In March 2008, theFinancial Accounting Standards Board (FASB) issued Statement No. 161, *Disclosures about Derivative Instruments and Hedging Activities*.  SFAS 161 requires additional disclosuresrelated to the use of derivative instruments, the accounting for derivativesand how derivatives impact financial statements.  SFAS No. 161 is effective for fiscalyears and interim periods beginning after November 15, 2008. The Companydoes not expect the adoption of SFAS 161 to have a material effect on theconsolidated financial statements.

 

During December 2007, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards (SFAS) No. 141, (Revised 2007), “Business Combinations” (SFAS141 (Revised 2007)”).  While this statement retains the fundamentalrequirement of SFAS 141 that the acquisition method of accounting (which SFAS141 called the purchase method) be used for all business combinations, SFAS 141(Revised 2007) now establishes the principles and requirements for how anacquirer in a business combination:  recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interests in the acquired; recognizes and measures thegoodwill acquired in the business combination or the gain from a bargainpurchase; and determines what information should be disclosed in the financialstatements to enable users of the financial statements to evaluate the natureand financial effects of the business combination.  SFAS 141 (Revised2007) is effective for fiscal years beginning on or after December 15,2008.  We do not believe the adoption of SFAS 141 will have a materialeffect on our results of operations or financial position.

 

**3.             INVENTORIES**

 

Inventories consisted of the following:

 
| ** **           | ** ** | **May 31,  2008** | ** ** | **August 31,  2007** | ** ** |
|----------------------|------------|------------------------|------------|---------------------------|------------|
| Production materials |       | $                      | 532,210    |                      | $          | 183,658 |   |
| Finished goods       |       | 1,331,572              |       | 1,452,415                 |       |
|                 |       | $                      | 1,863,782  |                      | $          | 1,636,073 |   |

 

**4.             INVESTMENTSIN CORPORATE JOINT VENTURES**

 

Composite financial information from the audited and unauditedfinancial statements of the Company’s joint ventures carried on the equitybasis is summarized as follows:

 
| ** **                                                                                             | ** ** | **May 31,  2008** | ** ** | **August 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| Current assets                                                                                         |       | $                      | 52,535,155 |                      | $          | 42,767,569 |   |
| Total assets                                                                                           |       | 60,071,889             |       | 49,312,491                |       |
| Current liabilities                                                                                    |       | 20,807,784             |       | 14,939,496                |       |
| Noncurrent liabilities                                                                                 |       | 5,088,937              |       | 4,971,199                 |       |
| Joint ventures’ equity                                                                            |       | 34,175,168             |       | 29,401,796                |       |
| Northern Technologies International  Corporation’s share of Corporate Joint Ventures’ equity |       | $                      | 16,193,141 |                      | $          | 13,602,842 |   |

 

7

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| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **May 31,  2008**           | ** ** | **May 31,  2007**          | ** ** | **May 31,  2008** | ** ** | **May 31,  2007** | ** ** |
| Net Sales                                                          |       | $                                | 30,802,632 |                            | $          | 19,992,979 |   | $ | 79,893,753 |   | $ | 59,265,028 |   |
| Gross Profit                                                       |       | 13,840,622                       |       | 9,780,323                       |       | 36,383,556 |   | 28,705,348 |   |
| Net Income                                                         |       | 2,174,841                        |       | $                               | 1,769,563  |   | 5,434,476 |   | 4,903,342 |   |
| NTIC’s share of equity in income of  Corporate Joint Ventures |       | $                                | 1,139,140  |                            | $          | 754,286 |   | $ | 3,006,996 |   | $ | 2,384,020 |   |

 

The financial statements of the Company’s foreignjoint ventures were prepared using accounting principles accepted in the jointventures’ country of domicile.   Amountsrelated to foreign joint ventures reported in the above tables and theaccompanying financial statements have been adjusted to approximate US GAAP inall material respects.

 

Duringthe nine months ended May 31, 2008, the Company invested $87,950 in anon-industrial chemical joint venture in Thailand in addition to $143,000previously invested in December 2006. The Company has a 50% ownershipinterest in the Thailand joint venture entity. The Thailand joint venture entity had no operations prior to the Company’sinvestment in December 2006.   Thetotal contributions made by both owners of the Thailand joint venture were$461,900 as of May 31, 2008.

 

Duringthe nine months ended May 31, 2008, the Company invested $30,000 in to itsconsumer products joint venture to be used for working capital. The Company hasa 50% ownership interest in its consumer products joint venture entity.  The total contributions made by both ownersof the consumer products joint venture were $60,000 as of May 31, 2008.

 

Duringthe nine months ended May 31, 2008, the Company sold its 50% interest inits industrial chemical joint venture in Austria for $364,000.  The Company’s industrial chemical jointventure in Germany purchased the Company’s 50% joint venture interest and hasconsolidated the Austrian joint venture entity into its existing business.  The Company recorded a gain on the sale of$172,767, as the Company has determined its interest in the entity wasnon-controlling under EITF 02-05 “Definition of Common Control in relation toFASB Statement 141”.

 

**5.****                                     ****STOCKHOLDERS’ EQUITY**

 

During the nine months ended May 31,2008, the Company did not purchase or retire any shares of its common stock andno stock options to purchase shares of the Company’s common stock were exercised.The Company granted stock bonuses under the Northern Technologies InternationalCorporation 2007 Stock Incentive Plan for an aggregate of 33,595 shares of itscommon stock to various employees during the nine months ended May 31,2008.  The fair value of the shares ofthe Company’s common stock as of the date of grant of the stock bonuses was$334,270, based on the closing sale price of a share of the Company’s commonstock on the date of grant.

 

During the nine months ended May 31,2007, the Company did not purchase or retire any shares of its common stock andno stock options were exercised.  TheCompany granted stock bonuses under the Northern Technologies InternationalCorporation 2000 Stock Incentive Plan for an aggregate of 37,245 shares of itscommon stock to various employees during the nine months ended May 31,2007.  The fair value of the shares ofthe Company’s common stock as of the date of grant of the stock bonuses was$298,330, based on the closing sale price of a share of the Company’s commonstock on the date of grant.

 

8

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**6.****                                     ****TOTAL COMPREHENSIVEINCOME**

 

The Company’s total comprehensive income was asfollows:

 
| ** **                                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **May 31,  2008**           | ** ** | **May 31,  2007**          | ** ** | **May 31,  2008** | ** ** | **May 31,  2007** | ** ** |
| Net income                                                                 |       | $                                | 788,148    |                            | $          | 627,800 |   | $ | 2,106,034 |   | $ | 2,066,227 |   |
| Other comprehensive income – foreign  currency translation adjustment |       | 149,198                          |       | 202,075                         |       | 1,461,997 |   | 505,880 |   |
| Total comprehensive income                                                 |       | $                                | 937,346    |                            | $          | 829,875 |   | $ | 3,568,031 |   | $ | 2,572,107 |   |

 

**7.****                                     ****NET INCOME PER COMMONSHARE**

 

Basic net income per commonshare is computed by dividing net income by the weighted average number ofcommon shares outstanding.  Diluted netincome per share assumes the exercise of stock options using the treasury stockmethod, if dilutive.

 

For the nine month periodending May 31, 2008, options to purchase an aggregate of 35,140 shareswere excluded from common share equivalents due to the exercise prices of suchoptions exceeding average market prices. No options to purchase shares of common stock were excluded from thecomputation of common share equivalents as of May 31, 2007, as all stockoption exercise prices were less than the average market price of a share ofcommon stock.

 

**8. ****                               ****STOCK-BASED COMPENSATION**

 

The Company accounts forstock-based compensation awards in accordance with the provisions of Statementof Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “*Share-Based Payment*.” During the nine months ended May 31,2008, options were granted with an exercise price equal to the market price ofthe Company’s common stock on the date of grant.  The options vest equally over a three-yearperiod and have a five-year term. Compensation expense equal to the grant datefair value is recognized for these awards over the vesting period. Totalcompensation expense for options was $71,403 and $60,786 for the nine monthsended May 31, 2008 and May 31, 2007, respectively.

 

The fair value of eachshare-based option is estimated on the date of grant using a Black-Scholesvaluation method that uses the assumptions noted in the table below. Theexpected life is a significant assumption as it determines the period for whichthe risk-free interest rate, volatility and dividend yield must be applied. Theexpected life is the average length of time over which the employee is expectedto exercise his or her options. Expected volatilities are based on the movementof the Company’s common stock over the most recent historical period equivalentto the expected life of the option. The risk-free interest rate for periodswithin the contractual life of the option is based on the U.S. Treasury rateover the expected life at the time of grant. Dividend yield is estimated overthe expected life based on the Company’s dividend policy, historical dividendspaid, expected increase in future cash dividends and expected increase in theCompany’s stock price. The following table illustrates the assumptions foroptions granted in the following fiscal periods.

 
| ** **                      | ** ** | **May 31, 2008** | ** ** | **May 31, 2007** | ** ** |
|---------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Dividend yield                  |       | 2.00                       | %          | 2.00                       | %          |
| Expected volatility             |       | 42.2                       | %          | 42.9                       | %          |
| Expected life of option         |       | 5 years                    |       | 5 years                    |       |
| Average risk-free interest rate |       | 3.62                       | %          | 4.67                       | %          |

 

The weighted-average fairvalue of options granted during the quarters ended May 31, 2008 and May 31,2007 was $3.84 per share and $2.95 per share, respectively.

 

9

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**9.             COMMITMENTSAND CONTINGENCIES**

 

In April 2007, REACT-NTI,LLC (“React LLC”), a company that is 75% owned by the Company, was served witha summons and complaint that was filed by Shamrock Technologies, Inc. (“Shamrock”)in state court in New York.  This casehas been removed to the Federal District Court for the Southern District of NewYork.  The lawsuit seeks payment fromReact LLC of commissions in the approximate amount of $314,500 owed by ReactLLC under a license agreement between React LLC and Shamrock.  The complaint alleges breach of the licenseagreement by React LLC and seeks damages in an unspecified amount for suchbreach as well as damages of approximately $300,000 for the alleged failure ofReact LLC to purchase from Shamrock certain inventory manufactured for sale toa customer.  React LLC acknowledges thatReact LLC has not made payment for product in the approximate amount of$300,000 to Shamrock as the invoice for this was only received after Shamrockhad already filed its complaint, but denies all of the claims of breach of thelicense agreement by it and believes that damages caused by Shamrock’s breachof the license agreement and tortious conduct exceed any amounts owing toShamrock.  React LLC formally responded to the complaint after removal bymoving to dismiss or stay because of Shamrock’s failure to comply withalternative dispute resolution procedures contained in the licenseagreement.  By court order, the matter is presently stayed so that theparties can attempt mediation.  The parties mediated for one day and wereunsuccessful in resolving the matter. Negotiations following the mediation have also been unproductive, and itappears that the stay will be lifted. Accordingly, React LLC will both defend against Shamrock’sallegations and pursue counterclaims against Shamrock for breach ofthe license agreement and for tortious interference.  Because this matter is in the early stage,the Company cannot estimate the possible loss or range of loss, if any,associated with its resolution.  However,there can be no assurancethat the ultimate resolution of the matter will not result in a material adverseeffect on the Company’s business, financial condition or results of operations.

 

The Company is involved in a legal action in Finlandwhereby the Company sued a Finnish company for trademark infringement.  Upon initiation of legal action, the courtsseized the inventory of the Finnish company as contraband. The Company won theinitial case, but subsequently lost on appeal. The Company is currently appealing the latest court decision.  The outcome of the appeal is unknown and anypotential loss cannot be estimated at this time; however, the potentialjudgment or any settlement resulting from the case could have a material impacton the financial position or results of operations of the Company due to claimsagainst the Company related to expiration of inventory seized from the Finnishcompany.  The Company has obtained a$600,000 stand-by letter of credit to potentially fund the Company’sobligations related to the courts in Finland against the defendant’s productsthat were seized as contraband.  Advancesmade under the demand letter of credit will be made at the sole discretion ofNational City Bank and will be due and payable on demand.  Any outstanding unpaid principal balanceunder the demand letter of credit bears interest at an annual rate based onLIBOR plus 2.25%.  Interest is payable inarrears beginning on January 15, 2007 and on the 15th day of each monththereafter and on demand.  Because theCompany believes that it has valid legal grounds for appeal, it has determinedthat a loss is not probable at this time as defined by SFAS 5, “*Accounting for Contingencies*.”  However,there can be no assurance that the ultimate resolution of the matterwill not result in a material adverse effect on the Company’s business,financial condition or results of operations.

 

On June 11,2008, the Company entered into an agreement to settle a lawsuit brought byEvelyna Cantwell and Jack Cantwell, individually, and also doing business asthe principals of Byrd-Walsh International, LLC, against the Company and itsformer Chairman of the Board and Chief Executive Officer and current ChairmanEmeritus, Philip M. Lynch.  The lawsuitsought unspecified injunctive relief as well as compensatory and punitivedamages in an unspecified amount which, based on the allegations of thecomplaint, may have been claimed by plaintiffs to be in an amount in excess of$45 million.  Under the terms of thesettlement agreement, the plaintiffs agreed to dismiss their claims withprejudice and to release the Company and Mr. Philip M. Lynch from any andall claims, in exchange for a cash payment from the Company of $41,340.

 

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TheCompany is involved in various other legal actions arising in the normal courseof business.  Management is of theopinion that any judgment or settlement resulting from these pending orthreatened actions would not have a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

In June 2007,the U.S. Internal Revenue Service concluded its audit of the Company’s U.S.federal income tax returns for fiscal 2004 and 2005.  As a result of suchaudit, the Company paid the IRS approximately $25,000 inadditional payroll taxes.  The Company also agreedin principle with the IRS to adjustments that will result in theadditional payment of approximately $60,000 in income tax and interest. As a result of the audit, the IRS has also taken the position that theCompany failed to withhold andhas assessed against the Company approximately $505,000 of payroll taxesand individual income taxes on travel and other expense reimbursementsmade to Philip M. Lynch, the Company’s former Chairman of the Board and ChiefExecutive Officer and current Chairman Emeritus, and commissions payments madeto Inter Alia Holding Co. under that certain former Manufacturer’sRepresentative Agreement dated as of October 1, 1976 and as subsequentlyamended thereafter between the Company and Inter Alia, which agreement hassince been terminated.  Inter Alia beneficially owns approximately 24.9% of the Company’s outstanding common stockand Philip M. Lynch, the Company’s former Chairman of the Board and ChiefExecutive Officer and current Chairman Emeritus, and G. Patrick Lynch, theCompany’s current President and Chief Executive Officer, are shareholders ofInter Alia.   G. Patrick Lynch is also the son of Philip M.Lynch.  The Company disagrees with theIRS’ position on withholding and is in the process of appealing thematter.  Because the Company believes that it has valid legal grounds forappeal, it has determined that a loss is not probable at this time as definedby SFAS 5, “*Accounting for Contingencies*.” However,there can be no assurance that the ultimate resolution of the matter will notresult in a material adverse effect on the Company’s business, financialcondition or results of operations.

 

On November 16, 2007, the Company’s Board ofDirectors, upon recommendation of the Compensation Committee, approved thematerial terms of an annual bonus plan for executive officers and certainemployees of the Company for fiscal year ending August 31, 2008, thepurpose of which is to align the interests of the Company and its subsidiaries,executive officers and stockholders by providing an incentive for the achievementof key corporate and individual performance measures that are critical to thesuccess of the Company and linking a significant portion of each executiveofficer’s annual compensation to the achievement of such measures.  The following is a brief summary of thematerial terms approved by the Board:

 

·                  The totalamount available under the bonus plan will be up to 25% of the Company’searnings before interest, taxes and other income (EBITOI) for the fiscal yearending August 31, 2008;

 

·                  The totalamount available under the bonus plan will be $0 if EBITOI, as adjusted to takeinto account amounts to be paid under the bonus plan, fall below 70% of targetEBITOI; and

 

·                  The payment ofbonuses under the plan will be made in both cash and shares of the Company’scommon stock, the exact amount and percentages of which will be determined bythe Board, upon recommendation of the Compensation Committee, within areasonable period of time after the completion of the Company’s financialstatements for the fiscal year ending August 31, 2008.

 

**10.          STATEMENTSOF CASH FLOWS**

 

TheCompany did not declare or pay any cash dividends during fiscal 2007 and as of July 11,2008, had not declared or paid any cash dividends during fiscal 2008.

 

11

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The Company issued 33,595 and37,245 shares of common stock as stock bonuses under its stock incentive plansto various employees to satisfy $334,270 and $298,330 of accrued payrollliability during the nine months ended May 31, 2008 and May 31, 2007,respectively.

 

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**ITEM 2.          MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

This Management’s Discussion andAnalysis provides material historical and prospective disclosures intended toenable investors and other users to assess NTIC’s financial condition and resultsof operations.  Statements that are nothistorical are forward-looking and involve risks and uncertainties discussedunder the headings “Forward-Looking Statements” and “Risk Factors” appearingelsewhere in this report.  The followingdiscussion of the results of the operations and financial condition of NTICshould be read in conjunction with NTIC’s consolidated financial statements andthe related notes thereto included under Part I, Item 1 entitled “FinancialStatements” of thisreport.

 

**Business Overview**

 

NTIC focuses on developing,marketing and selling proprietary environmentally responsible materials sciencebased products and technical services directly and via a network of independentdistributors, manufacturers’ representatives and joint ventures in over 50countries.  NTIC manufactures, marketsand sells primarily rust and corrosion inhibiting products and services forautomotive, electronics, electrical, mechanical and military applications, soldunder the brand names Zerust® and EXCOR®. NTIC also offers direct, worldwide on-site technical support on rust andcorrosion issues.  In North America, NTICmarkets its technical services and Zerust® products principally to industrialusers by a direct sales force and through a network of independent distributorsand sales representatives.  NTIC’stechnical service representatives work directly with the end users of NTIC’sproducts to analyze their specific needs and develop systems to meet theirtechnical requirements.

 

In addition to Zerust® productsand services, NTIC’s consolidated net sales in North America for the ninemonths ended May 31, 2008 included $204,998 in sales of NTIC’s Natur-TecTMproducts, which are part of NTIC’s new biodegradable and compostable plasticsline. Beginning in fiscal 2008, NTIC began manufacturing, test marketing andselling a broad range of bio-based and biodegradable (compostable) polymerresin compounds and products under the Natur-TecTM brand. In recent years, acombination of market drivers, such as higher petroleum prices, a desire toreduce dependence on foreign oil, increased environmental awareness at theconsumer level and favorable regulations banning the use of regular plastics,have led to widespread interest in sustainable, renewable resource-based andcompostable alternatives to traditional plastics.  Natur-TecTM bio-based and biodegradableplastics are manufactured using NTIC’s patented and/or proprietary technologiesand are intended to replace conventional petroleum-based plastics. TheNatur-TecTM bioplastics portfolio spans flexible film, foam, rigid injectionmolded materials and engineered plastics. Natur-TecTM biodegradable andcompostable finished products include shopping and grocery bags, lawn and leafbags, can liners, pet waste collection bags, cutlery, packaging foam and coatedpaper products and are engineered to be fully biodegradable in a compostingenvironment. Unlike competing plastic products claiming to be “degradable” or “oxo-degradable”that only break down into smaller plastic fragments, Natur-TecTM products aredesigned to completely biodegrade within 180 days in accordance with the ASTMD6400 standard for compostable plastics and are certified 100 percentbiodegradable and compostable by the Biodegradable Products Institute.

 

NTIC participates, either directlyor indirectly through holding companies, in 29 corporate joint venturearrangements in North America, South America, Europe, Asia and the MiddleEast.  Each of these joint venturesgenerally manufactures, markets and sells finished products in the geographicterritory that it is assigned.  NTIC’sjoint venture partners are knowledgeable in the applicable environmental,labor, tax and other requisite regulations and laws of the respective foreigncountries in which they operate, as well as the local customs and businesspractices.  While most of NTIC’s jointventures currently sell rust and corrosion inhibiting products and custompackaging systems, NTIC also has joint ventures that manufacture, market andsell or intend to manufacture, market or sell bio-based additives with bothindustrial and personal care applications, machinery that converts wasteplastics into diesel, gasoline and mid-distillates, and electronic sensinginstruments. NTIC categorizes its joint ventures into two principal areas:industrial chemical and non-industrial chemical.

 

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In an effort to increase net sales, NTIC is in theprocess of expanding its product line to include biodegradable and compostableplastics and machinery that converts waste plastics into diesel, gasoline andmid-distillates and the application of its corrosion inhibiting technology intothe oil and gas industry.  During fiscal 2008, NTIC expects to invest anaggregate of $2,800,000 to $3,100,000 in additional research and developmentand marketing efforts and resources into these emerging businesses, productlines and markets.   During the first nine months of fiscal 2008,NTIC invested $2,258,931 in additional research and development and marketing effortsand resources into these emerging businesses, product lines and markets.  These costs are included in expenses incurredin support of joint ventures.  Although NTIC recognized $204,998 in sales ofNatur-TecTM for the nine months ended May 31, 2008, no assurance can beprovided that such new businesses will be successful or that NTIC will besuccessful in obtaining additional revenue.

 

**Financial Overview**

 

NTIC’s consolidated net sales in NorthAmerica decreased 26.3% during the nine months ended May 31, 2008 comparedto the nine months ended May 31, 2007, primarily as a result of theanticipated loss of its React-NTI, LLC subsidiary’s most significant customer,partially offset by an increase in demand for NTIC’s Zerust® products and salesof its new Natur-TecTM products.  Aspreviously disclosed by NTIC, the sales of React-NTI included in NTIC’sconsolidated net sales historically have consisted almost entirely of sales byReact Inc., a 100% owned subsidiary of React-NTI, of proprietary ink additivesto one customer.  During fourth quarterof fiscal 2007, this single customer notified React Inc. of the customer’sintent to purchase React’s remaining inventory of ink additives, but that aftersuch inventory was depleted, the customer would not place any future orderswith React Inc.  React-NTI hadconsolidated sales of $291,668 in the nine months ended May 31, 2008compared to sales of $4,076,784 in the nine months ended May 31,2007.   The vast majority of such salesby React-NTI were from React Inc., which had sales of $248,160 during the ninemonths ended May 31, 2008 compared to sales of $4,025,160 during the ninemonths ended May 31, 2007.  NTICanticipates React Inc. will have no additional sales after the nine monthsended May 31, 2008.  Accordingly,the loss of React’s sole customer has had and is expected to continue to have amaterial adverse impact on NTIC’s consolidated net sales.  However, since the profit on React’s sales ofthe ink additives to this customer was extremely small, the effect on NTIC’snet income during the nine months ended May 31, 2008 was not material andNTIC does not expect that the anticipated continued decrease in net sales byReact will have a material adverse effect on NTIC’s future consolidated netincome.

 

Despite the decrease in NTIC’sconsolidated net sales in North America, sales of NTIC’s rust and corrosioninhibiting products in North America increased slightly during the nine monthsended May 31, 2008 compared to the same period in fiscal 2007.  Net sales of NTIC’s Zerust® productsincreased 2.2% or $188,213 to $9,021,496 during the nine months ended May 31,2008 compared to $8,833,283 during the nine months ended May 31, 2007.Additionally, NTIC’s consolidated net sales in North America during the ninemonths ended May 31, 2008 included $204,998 from sales of NTIC’sNatur-TecTM products.

 

NTIC’s international business hasexpanded significantly during the past several fiscal years.  Total net sales of all of NTIC’s jointventures increased 34.8% to $79,893,753 during the nine months ended May 31,2008 compared to $59,265,028 during the nine months ended May 31,2007.  The profits of NTIC’s corporatejoint ventures are shared, however, by the respective corporate joint ventureowners in accordance with their respective ownership percentages.  In addition, NTIC’s receipt of funds as aresult of sales by its joint ventures is dependent upon NTIC’s receipt ofdividend distributions from the joint ventures and NTIC’s receipt of fees fortechnical and other support services that NTIC provides to its joint venturesbased on the revenues of the joint ventures. NTIC typically owns 50% or less of its joint venture entities and thusdoes not control the decisions of these entities regarding whether and how muchdividends should be paid in any given year. NTIC’s income from its corporatejoint ventures and holding companies increased 87.1% to $3,880,352 for the ninemonths ended May 31, 2008 compared to $2,073,994 for the nine months endedMay 31, 2007.

 

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NTIC sold its 50% ownershipinterest in its industrial chemical joint venture in Austria during the ninemonths ended May 31, 2008 for $364,000. NTIC’s industrial chemical joint venture in Germany purchased NTIC’s 50%Austrian joint venture interest and has consolidated the joint venture into itsexisting business.  NTIC’s German jointventure will service the territory and customers of the former Austrian venturein addition to its own territory and customers. NTIC recorded a gain on the sale of its Austrian joint venture ownershipinterest of $172,767, as NTIC determined that its interest in the Austrianjoint venture entity was non-controlling.

 

Cost of goods sold as a percentageof net sales decreased to 60.6% for the nine months ended May 31, 2008compared to 64.1% for the nine months ended May 31, 2007 primarily as aresult of the significant decrease of React Inc. sales during the nine monthsended May 31, 2008 compared to the same period during fiscal 2007, which sales were sold at lower margins than NTIC’s Zerust® and Natur-TecTMproducts.

 

Net income increased 1.9% to$2,106,034, or $0.56 per diluted common share, for the nine months ended May 31,2008 compared to $2,066,227, or $0.56 per diluted common share, for the ninemonths ended May 31, 2007.  Netincome for the nine months ended May 31, 2007 included the impact of aone-time gain on sale of assets of $724,495 and thus excluding the impact ofthe one-time gain, the percentage increase in net income for the nine monthsended May 31, 2008 compared to the same period in during fiscal 2007 wouldhave been significantly higher.

 

NTIC’s working capital was$5,398,182 at May 31, 2008, including $418,994 in cash and cashequivalents.  As of May 31, 2008,NTIC did not have any borrowings under its $2,300,000 demand line of credit.

 

NTIC elected not to pay a cashdividend to its stockholders in fiscal 2007 or thus far in fiscal 2008 in orderto preserve cash and make investments in future operations.  NTIC expects to meet its future liquidity requirementsduring at least the next 12 months by using its existing cash and cashequivalents, forecasted cash flows from future operations, anticipateddistributions of earnings and technical assistance fees to NTIC from its jointventure investments and funds available through existing or anticipatedfinancing arrangements.  In order to take advantage of new product andmarket opportunities to expand its business and increase its revenues, NTIC maydecide to finance such opportunities by borrowing under its line of credit orraising additional financing through the issuance of debt or equity securities.

 

**Results of Operations**

 

The following table sets forth NTIC’s resultsof operations for the three months ended May 31, 2008 and May 31, 2007.

 
| ** **                          | ** ** | **Three Months  Ended  May 31, 2008** | ** ** | **% of  Net Sales** | ** ** | **Three Months  Ended  May 31, 2007** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                                                    | 3,269,721  |                          | 100.0      | %                                                    | $          | 4,407,798                     |       | 100.0         | %          | $             | (1,138,077 | ) | (25.8 | )% |
| Cost of goods sold                  |       | 2,059,855                                            |       | 63.0                          | %          | 2,876,012                                            |       | 65.3                          | %          | (816,157      | )          | (28.4         | )%         |
| Selling expenses                    |       | 799,949                                              |       | 24.5                          | %          | 887,014                                              |       | 20.1                          | %          | (87,065       | )          | (9.8          | )%         |
| General and administrative expenses |       | 702,592                                              |       | 21.5                          | %          | 608,104                                              |       | 13.8                          | %          | 94,488        |       | 15.5          | %          |
| Lab and technical support expenses  |       | 32,631                                               |       | 1.0                           | %          | 46,941                                               |       | 1.1                           | %          | (14,310       | )          | (30.5         | )%         |
|                                     |            |                                                      |            |                               |            |                                                      |            |                               |            |               |            |               |            |  |  |  |

 

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The following table sets forth NTIC’s resultsof operations for the nine months ended May 31, 2008 and May 31, 2007.

 
| ** **                          | ** ** | **Nine Months  Ended  May 31, 2008** | ** ** | **% of  Net Sales** | ** ** | **Nine Months  Ended  May 31, 2007** | ** ** | **% of  Net Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|---------------|------------|---------------|------------|
| Net sales                           |       | $                                                   | 9,518,162  |                          | 100.0      | %                                                   | $          | 12,910,067                    |       | 100.0         | %          | $             | (3,391,905 | ) | (26.3 | )% |
| Cost of goods sold                  |       | 5,763,500                                           |       | 60.6                          | %          | 8,280,131                                           |       | 64.1                          | %          | (2,516,631    | )          | (30.4         | )%         |
| Selling expenses                    |       | 2,413,895                                           |       | 25.4                          | %          | 2,466,218                                           |       | 19.1                          | %          | (52,323       | )          | (2.1          | )%         |
| General and administrative expenses |       | 2,545,414                                           |       | 26.7                          | %          | 2,235,276                                           |       | 17.3                          | %          | 310,138       |       | 13.9          | %          |
| Lab and technical support expenses  |       | 143,375                                             |       | 1.5                           | %          | 177,316                                             |       | 1.4                           | %          | (33,941       | )          | (19.1         | )%         |
|                                     |            |                                                     |            |                               |            |                                                     |            |                               |            |               |            |               |            |  |  |  |

 

*Net Sales*.NTIC’s net sales originating in theUnited States decreased during the three and nine months ended May 31,2008 compared to the same respective periods in fiscal 2007 primarily as aresult of the loss of the principal customer of React Inc., partially offset by a slight increase indemand for Zerust® products sold to existing and new customers and sales of Natur-TecTM products in the fiscal 2008 periods.

 

The following table sets forth NTIC’s netsales for the three months ended May 31, 2008 and May 31, 2007.

 
| ** **                     | ** ** | **Three Months  Ended  May 31, 2008** | ** ** | **Three Months  Ended  May 31, 2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Zerust® sales             |       | $                                                    | 3,167,431  |                                                 | $          | 3,116,681     |       | $             | 50,750     |   | 1.7 | % |
| Natur-TecTM sales          |       | 102,290                                              |       | —                                               |       | 102,290       |       | —        |       |
| React-NTI sales                |       | —                                               |       | 1,291,117                                            |       | (1,291,117    | )          | (100.0        | )%         |
| Total North American net sales |       | $                                                    | 3,269,721  |                                                 | $          | 4,407,798     |       | $             | (1,138,077 | ) | (25.8 | )% |

 

The following table sets forth NTIC’s netsales for the nine months ended May 31,2008 and May 31, 2007.

 
| ** **                     | ** ** | **Nine Months  Ended  May 31, 2008** | ** ** | **Nine Months  Ended  May 31, 2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|---------------|------------|
| Zerust® sales             |       | $                                                   | 9,021,496  |                                                | $          | 8,833,283     |       | $             | 188,213    |   | 2.1 | % |
| Natur-TecTM sales          |       | 204,998                                             |       | —                                              |       | 204,998       |       | —        |       |
| React-NTI sales                |       | 291,668                                             |       | 4,076,784                                           |       | (3,785,116    | )          | (92.8         | )%         |
| Total North American net sales |       | $                                                   | 9,518,162  |                                                | $          | 12,910,067    |       | $             | (3,391,905 | ) | (26.3 | )% |

 

*Cost of Goods Sold*.  Cost of goods sold decreasedas a percentage of net sales for the three and nine months ended May 31, 2008, compared to the samerespective periods in fiscal 2007 primarily asa result of the significant decrease in React Inc. sales which were sold at significantly lower margins than NTIC’sZerust® products, combined with a slight reduction in the gross margin achievedon the core NTIC’s Zerust® products in North America.

 

*Selling Expenses*.  NTIC’sselling expenses decreased for the three months ended May 31, 2008compared to the same period in fiscal 2007 primarily as a result of decreasesin travel and related expenses associated with the discontinuation of sales byReact Inc as noted above. Selling expenses decreased for the nine months ended May 31, 2008 by a negligible amount comparedto the same period in fiscal 2007. Selling expenses as a percentage of net sales for the three and ninemonth periods increased significantly compared to same respective periods infiscal 2007 due to the decrease in React Inc. sales.

 

*General and Administrative Expenses*.  NTIC’sgeneral and administrative expenses increased for the three and nine monthsended May 31, 2008 compared to same respective periods in fiscal2007.  The increase for the nine-monthperiod was primarily a result of increases in (i) audit and tax expense of$141,000 and (ii) salary and benefits expenses of $60,000, partiallyoffset by a decrease in insurance expense of $40,000.  The increase for the three-monthperiod was primarily the result ofincreases in the same types of expenses associated with the nine-monthperiod. As a percentage of net sales,general and administrative expenses increased significantly compared to samerespective periods in fiscal 2007 due to the decrease in React Inc. net sales.

 

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NTIC includes expenses in general and administrativeexpenses that provide benefit to the various joint ventures in addition toproviding benefit to NTIC’s North American operations, including specifically,expenses associated with information technology, general insurance, salary andbenefits, building expenses, audit and tax and directors fees.

 

*Lab and Technical Support Expenses*.  NTIC’slab and technical support expenses decreased by a negligible amount for thethree months ended May 31, 2008 compared to the same period in fiscal 2007and decreased for the nine months ended May 31, 2008 compared to the sameperiod in fiscal 2007.  As a percentage of net sales, lab and technicalsupport expenses increased slightly during the three and nine monthsended May 31, 2008 compared to same periods in fiscal 2007.

 

*International Corporate JointVentures and Holding Companies*.  Net sales of NTIC’s corporatejoint ventures for the three and nine months ended May 31, 2008 and May 31,2007, excluding React-NTI LLC, were as follows:

 
| ** **                                                                | ** ** | **Three Months  Ended  May 31, 2008** | ** ** | **Three Months  Ended  May 31, 2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Industrial chemical                                                       |       | $                                                    | 30,419,909 |                                                 | $          | 19,457,194    |       | $             | 10,962,715 |   | 56.3 | % |
| Non-industrial chemical                                                   |       | 382,723                                              |       | 535,785                                              |       | (153,062      | )          | (28.6         | )          |
| Total International Corporate Joint  Ventures and Holding Companies sales |       | $                                                    | 30,802,632 |                                                 | $          | 19,992,979    |       | $             | 10,809,653 |   | 54.1 | % |

 
| ** **                                                                | ** ** | **Nine Months  Ended  May 31, 2008** | ** ** | **Nine Months  Ended  May 31, 2007** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|---------------|------------|
| Industrial chemical                                                       |       | $                                                   | 78,897,265 |                                                | $          | 57,860,080    |       | $             | 21,037,185 |   | 36.4 | % |
| Non-industrial chemical                                                   |       | 996,488                                             |       | 1,404,948                                           |       | (408,460      | )          | (29.1         | )%         |
| Total International Corporate Joint  Ventures and Holding Companies sales |       | $                                                   | 79,893,753 |                                                | $          | 59,265,028    |       | $             | 20,628,725 |   | 34.8 | % |

 

NTIC had equity in income of corporate jointventures and holding companies of $1,139,140 and $3,006,996 for the three andnine months ended May 31, 2008, respectively, and $754,286 and $2,384,020for the three and nine months ended May 31, 2007, respectively.  Theincrease in both of the three- and nine-month comparison was due to theincrease in revenue and profitability due to the growth of NTIC’s corporatejoint ventures as a whole.

 

NTIC receives fees for technical and other supportto NTIC’s corporate joint ventures based on the revenues of the individualcorporate joint ventures.  NTICrecognized fee income for such support in the amounts of $1,517,428 and$4,537,855 for the three and nine months ended May 31, 2008, respectively,and $1,162,974 and $3,508,977 for the three and nine months ended May 31,2007, respectively.  These increases in fees for technical andother support to its corporate joint ventures were due to the increase inrevenues and profitability from the corporate joint ventures as a whole, aswell as the foreign currency exchange rate of the U.S. dollar compared othercurrencies in which NTIC’s joint ventures conduct business.

 

NTIC sold its 50% ownershipinterest in its industrial chemical joint venture in Austria for $364,000.  NTIC’s industrial chemical joint venture inGermany purchased NTIC’s Austrian joint venture ownership interest and hasconsolidated the Austrian joint venture into its existing business.  NTIC’s German joint venture will service theterritory and customers of NTIC’s former Austrian joint venture.  NTIC recorded a gain on the sale of the jointventure interest of $172,767 as NTIC determined its interest in the entity wasnon-controlling.

 

NTIC sponsors a worldwide corporate joint ventureconference approximately every three to four years in which all of itscorporate joint ventures are invited to participate.  NTIC defers a portion of its technical andother support fees received from its corporate joint ventures in eachaccounting period leading up to the next 

 

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conference, reflecting that NTIC has not fullyearned the payments received during that period.  The next corporate joint venture conferenceis scheduled to be held in the summer of 2009 or 2010.  There was $264,000 of deferred incomerecorded within other accrued liabilities at May 31, 2008 related to this future conference.  The costs associated with these joint ventureconferences are offset against the deferral as incurred, generally in theperiod in which the conference is held and immediately before.

 

NTIC incurred direct expenses related to itscorporate joint ventures and the holding companies of $1,412,582 and $3,837,266for the three and nine months ended May 31, 2008 compared to $1,161,702and $3,819,003 for the three and nine months ended May 31, 2007.  These expenses include: product and business development, consulting,travel, technical and marketing services to existing joint ventures, legal feesregarding the establishment of new joint ventures, registration and promotionand legal defense of worldwide trademarks and legal fees incurred in the filingof patent applications for new technologies to which NTIC acquired certainrights.  The increase in direct expensesincurred relating to NTIC’s corporate joint ventures and holding companies forthe three months ended May 31, 2008 compared to the same period in fiscal2007 were attributable to an increase in (i) expenses related to employeewages of $105,000, (ii) travel and related expenses of $28,000, (iv) consultingexpense of $32,000 and (v) miscellaneous expenses of $60,000. Theseincreases were partially offset by a decrease in legal expense of $24,000.  The increase for the nine months endedMay 31, 2007 compared to the same period in fiscal 2007 was negligible. As a percentage of net sales, directexpenses incurred relating to NTIC’s corporate joint ventures and holdingcompanies increased significantly due to the decrease in React Inc. net salesfor the nine months ended May 31, 2008 compared to same period in fiscal 2007.

 

*Interest Income*.  NTIC’sinterest income increased to $22,277 for the three months ended May 31,2008 compared to $667 for the same period in fiscal 2007 and increased to$23,196 for the nine months ended May 31, 2008 compared to $2,368 for thesame period in fiscal 2007 due primarily to interest income received from theUnited Kingdom tax authorities related to interest earned on a tax refundreceived that covered the period from fiscal 2001 to 2007.

 

*Interest Expense*.  NTIC’sinterest expense decreased to $21,757 for the three months ended May 31,2008 compared to $41,139 for the same period in fiscal 2007 and decreased to$93,872 for the nine months ended May 31, 2008 compared to $131,503 forthe same period in fiscal 2007 due to lower average outstanding debt levels anddecreases in interest rates during the fiscal 2008 periods.

 

*Gain on Sale of Assets*.  NTICrecognized no gain on sale of assets for the three months ended May 31,2008 compared to a gain on sale of assets of $100 for the same period in fiscal2007.  NTIC recognized a gain on sale ofassets of $5,529 during the nine months ended May 31, 2008 compared to again on sale of assets of $726,295 for the same period in fiscal 2007, $724,495of which was due to the sale of land, building and equipment that previouslyserved as NTIC’s corporate headquarters.

 

*Income Before Income Tax Expense*. Income before income tax expense increased to $936,148 for the threemonths ended May 31, 2008 compared to $718,800 for the same period infiscal 2007.  Income before income taxexpense increased $83,807 to $2,521,034 for the nine months ended May 31,2008 compared to $2,437,227 for the same period in fiscal 2007.

 

*Income Tax Expense*. Income tax expense increased to $148,000 for the three months ended May 31,2008 compared to $91,000 for the same period in fiscal 2007.  Income tax expense increased to $415,000 forthe nine months ended May 31, 2008 compared to $371,000 for the sameperiod in fiscal 2007.  Income taxexpense for the three and nine months ended May 31, 2008 and May 31,2007, respectively, was calculated based on management’s estimate of NTIC’sannual effective income tax rate.  NTIC’sannual effective income tax rate during the nine months ended May 31, 2008and May 31, 2007 was lower than the statutory rate primarily due to NTIC’sequity in income of corporate joint ventures being recognized based onafter-tax earnings of these entities.  Tothe extent joint ventures’ undistributed earnings are distributed to NTIC, itis 

 

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notexpected to result in any material additional income tax liability after theapplication of foreign tax credits.

 

**Liquidityand Capital Resources**

 

*Sources of Cash and Working Capital*.  Asof May 31, 2008, NTIC’s working capitalwas $5,398,182, including $418,994 in cash and cash equivalents,compared to working capital of $3,788,777, including $244,499 in cash and cashequivalents, as of August 31, 2007.

 

On April 10, 2008, NTIC entered into a Promissory Note ModificationAgreement with National City Bank pursuant to which NTIC’s demand line ofcredit was increased to $2,300,000 and its $1,500,000 revolving credit facilitywas terminated.  Advances made under thedemand line of credit will be made at the sole discretion of National City Bankand will be due and payable on demand. Outstanding amounts under the demand line of credit bear interest at anannual rate based on LIBOR plus 2.25%. As of May 31, 2008, the interest rate was 4.75%.  Interest is payable in arrearson the 15th day of each month and on demand. There was no outstanding balance under this facility as of May 31,2008; however, $600,000 was committed from the demand line to cover a letter ofcredit.

 

NTIC believes that a combination of its existingcash and cash equivalents, forecasted cash flows from future operations,anticipated distributions of earnings and technical assistance fees to NTICfrom its joint venture investments and funds available through existing oranticipated financing arrangements, will continue to be adequate to fund itsexisting operations, capital expenditures, debt repayments and any stockrepurchases for at least the next 12 months. In an effort to increase net sales, NTIC is in the process of expandingits product line to include biodegradable and compostable plastics andmachinery that converts waste plastics into diesel, gasoline andmid-distillates and the application of its corrosion inhibiting technology intothe oil and gas industry.  During theremainder of fiscal 2008, NTIC expects to invest additional research anddevelopment and marketing efforts and resources into these emerging businesses,product lines and markets.  During thefirst nine months of fiscal 2008, NTIC invested $2,258,931 in additionalresearch and development and marketing efforts and resources into theseemerging businesses, product lines and markets. In order to take advantage of such new product and market opportunitiesto expand its business and increase its revenues, NTIC may decide to financesuch opportunities by borrowing under its line of credit or raising additionalfinancing through the issuance of debt or equity securities.  There is no assurance that any financingtransaction will be available on terms acceptable to NTIC or at all, or thatany financing transaction will not be dilutive to NTIC’s current stockholders.

 

*Uses of Cash and Cash Flows*.  Cashflows used in operations for the nine months ended May 31, 2008 was$1,587,352, which resulted principally from the equity income of corporate jointventures, increases in technical and other services receivables, inventoriesand prepaid expenses and decreases in accounts payable being offset by netincome, depreciation and amortization expense, decreases in trade receivablesand increases in accrued liabilities. Cash flows used in operations for the nine months ended May 31,2007 were $1,235,051, which resulted principally from equity in income fromcorporate joint ventures, gain on sale of assets, decreases in accounts payableand accrued liabilities and increases in inventories and prepaid expenses,offset by net income, depreciation and amortization expense, and decreases intrade and income tax receivables.

 

Net cash provided by investing activities for thenine months ended May 31, 2008 was $1,501,762 which was comprised ofdividends received from corporate joint ventures and the sale of a jointventure, offset by additions to property and equipment, loans made andinvestment in joint ventures.   Net cash providedby investing activities for the nine months ended May 31, 2007 was$1,269,591, which resulted from dividends received from corporate jointventures, proceeds from the sale of assets and cash received from loans anddeposits, offset by additions to property and equipment and investment in jointventures.

 

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Net cash provided by financing activities for thenine months ended May 31, 2008 was $260,085, which resulted primarily fromproceeds from NTIC’s employee stock purchase plan and bank overdrafts, offsetby principal payments on the bank loan for NTIC’s corporate headquartersbuilding.  Net cash provided by financingactivities for the nine months ended May 31, 2007 was $202,589, whichresulted primarily from borrowings on NTIC’s line of credit and proceeds fromthe exercise of stock options, offset by bank overdrafts.

 

*Capital Expenditures and Commitments*.  NTIChad no material lease commitments as of May 31, 2008, except a leaseagreement entered into by NTI Facilities, Inc., a subsidiary of NTIC, forapproximately 16,994 square feet of office, manufacturing, laboratory andwarehouse space in Beachwood, Ohio, requiring monthly payments of $17,500,which are adjusted annually according to the annual consumer price index,through November 2014.

 

NTIC moved its corporate headquarters in September 2006.  NTIC purchased the real estate and 40,000square feet building in which its new corporate headquarters is locatedpursuant to a like-kind exchange transaction within the meaning of Section 1031of the Internal Revenue Code of 1986, as amended, for a purchase price of$1,475,000. To finance the transaction, NTIC obtained a secured term loan inthe principal amount of $1,275,000.  Theterm loan matures on May 1, 2011, bears interest at a fixed rate of 8.01%and is payable in 59 monthly installments equal to approximately $10,776(inclusive of principal and interest) commencing June 1, 2006.  All of the remaining unpaid principal andaccrued interest is due and payable on the May 1, 2011 maturity date.  The loan is secured by a first lien on thereal estate and building.

 

NTIC sold the real property and building in whichNTIC’s former Lino Lakes corporate headquarters was located for a purchaseprice of $870,000 on September 8, 2006. The net book value of the building held for sale was $89,636 and theclosing costs and fees associated with the sale of the property was$46,571.  The gain on sale of theproperty was $724,495.

 

NTIC has no post-retirement benefit plan and doesnot anticipate establishing any post-retirement benefit program.

 

**Off-Balance Sheet Arrangements**

 

NTIC does not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, which would havebeen established for the purpose of facilitating off-balance sheet financialarrangements. As such, NTIC is not materially exposed to any financing,liquidity, market or credit risk that could arise if NTIC had engaged in sucharrangements.

 

In fiscal 1999, a subsidiary of NTIC, NTI Facilities, Inc.,acquired a one-third ownership of Omni-Northern Ltd., which owns and operates arental property located at 23205 Mercantile Road, Beachwood, Ohio.  The property has an approximate value of$2,205,000, based upon the cash-to-mortgage acquisition price of the propertypaid in fiscal 2000.  NTIC has guaranteed up to $329,082 of Omni-NorthernLtd.’s $1,903,571 mortgage obligation with National City Bank, Cleveland,Ohio.  The building is fully leased at present.

 

**Inflation andSeasonality**

 

Inflation in the U.S. and abroad historically hashad little effect on NTIC’s business, results of operations or financialcondition.  NTIC’s business has nothistorically been seasonal.

 

**Market Risk**

 

NTIC is exposed to some market risk stemming fromchanges in foreign currency exchange rates, commodity prices and interestrates.

 

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NTIC is exposed to foreign currency exchange raterisk arising from its investments in its foreign corporate joint ventures andholding companies since NTIC’s fees for technical support and other servicesand dividend distributions from these foreign entities are paid in foreigncurrencies.  NTIC’s principal exchange rate exposure is with the Euro, theJapanese yen, Korean won and the English pound against the U.S. dollar. NTIC does not hedge against its foreign currency exchange rate risk. Since NTIC’s investments in its corporate joint ventures and holding companiesare accounted for using the equity method, any changes in foreign currencyexchange rates would be reflected as a foreign currency translation adjustmentand would not change the equity in income of joint ventures and holdingcompanies reflected in NTIC’s consolidated statement of income.

 

Some raw materials used in NTIC’s products areexposed to commodity price changes.  The primary commodity price exposuresare with a variety of plastic resins.

 

NTIC’s demand line of credit bears interest at arate based on LIBOR and thus may subject NTIC to some market risk on interestrates.  There was no outstanding balanceunder this facility as of May 31, 2008; however, $600,000 was committedfrom the demand line to cover a letter of credit.

 

**CriticalAccounting Policies**

 

The preparation of NTIC’s consolidated financialstatements requires management to make estimates and judgments that affect thereported amount of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. The Securities and ExchangeCommission has defined a company’s most critical accounting policies as thosethat are most important to the portrayal of its financial condition and resultsof operations, and which require the company to make its most difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, NTIC hasidentified the following critical accounting policies. Although NTIC believesthat its estimates and assumptions are reasonable, they are based uponinformation available when they are made. Actual results may differsignificantly from these estimates under different assumptions or conditions.

 

***Investments inCorporate Joint Ventures***

 

NTIC’s investments in corporate joint ventures areaccounted for using the equity method, except for React-NTI LLC which has beenfully consolidated, due to the adoption of FIN 46R.  Periodically, NTIC evaluates the investmentsfor any impairment and assesses the future cash flow projections to determineif there are any going concern issues. If an investment were determined to be impaired, then a reserve would becreated to reflect the impairment on the financial results of NTIC.  NTIC’s evaluation of its investments incorporate joint ventures requires NTIC to make assumptions about future cashflows of its corporate joint ventures. These assumptions require significant judgment and actual results maydiffer from assumed or estimated amounts. NTIC’s investments in corporate joint ventures were $16,193,141 and$13,602,842 as of May 31, 2008 and August 31, 2007, respectively.

 

***Principles ofConsolidation***

 

NTIC’s consolidated financial statements include theaccounts of Northern Technologies International Corporation, its wholly ownedsubsidiaries, NTI Facilities, Inc. and Northern Technologies HoldingCompany, LLC, and its 75% owned subsidiary, React-NTI LLC.  All significant intercompany transactions andbalances have been eliminated in consolidation.

 

***Accounts andNotes Receivable***

 

NTIC values accounts and notes receivable, net of anallowance for doubtful accounts. Each quarter, NTIC prepares an analysis of itsability to collect outstanding receivables that provides a basis for anallowance estimate for doubtful accounts. In doing so, NTIC evaluates the age of its receivables, past collection 

 

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history, current financial conditions of keycustomers and economic conditions. Based on this evaluation, NTIC establishes areserve for specific accounts and notes receivable that it believes areuncollectible, as well as an estimate of uncollectible receivables notspecifically known.  Deterioration in thefinancial condition of any key customer or a significant slowdown in theeconomy could have a material negative impact on NTIC’s ability to collect aportion or all of the accounts and notes receivable. NTIC believes that ananalysis of historical trends and its current knowledge of potential collectionproblems provide NTIC with sufficient information to establish a reasonableestimate for an allowance for doubtful accounts. However, since NTIC cannotpredict with certainty future changes in the financial stability of itscustomers, NTIC’s actual future losses from uncollectible accounts may differfrom its estimates. In the event NTIC determined that a smaller or largeruncollectible accounts reserve is appropriate, NTIC would record a credit orcharge to selling expense in the period that it made such a determination. Accountsreceivable have been reduced by an allowance for uncollectible accounts of$20,000 and $30,000 at May 31, 2008 and August 31, 2007,respectively.

 

***Revenue Recognition***

 

In recognizing revenue, NTIC applies the provisions of the Securitiesand Exchange Commission Staff Accounting Bulletin No. 104, RevenueRecognition.  NTIC recognizes revenuefrom the sale of its products when persuasive evidence of an arrangementexists, the product has been delivered, the price is fixed and determinable andcollection of the resulting receivable is reasonably assured.  These criteria are met at the time ofshipment when risk of loss and title pass to the customer or distributor.

 

***Foreign CurrencyTranslation (Accumulated Other Comprehensive Income)***

 

The functional currency of each internationalcorporate joint venture is the applicable local currency.  The translation of the applicable foreigncurrencies into U.S. dollars is performed for balance sheet accounts usingcurrent exchange rates in effect at the balance sheet date and for revenue andexpense accounts using an average monthly exchange rate.  Translation gains or losses are reported asan element of accumulated other comprehensive income.

 

NTIC conducts all foreigntransactions based on the U.S. dollar, except for its investments in variousforeign corporate joint ventures and holding companies.  The exchange rate differential relating toinvestments in foreign corporate joint ventures and holding companies isaccounted for under the requirements of SFAS No. 52, “*ForeignCurrency Translation*.”  SinceNTIC’s investments in its corporate joint ventures and holding companies areaccounted for using the equity method, any changes in foreign currency exchangerates would be reflected as a foreign currency translation adjustment and wouldnot change the equity in income of joint ventures and holding companiesreflected in NTIC’s consolidated statement of income.

 

***Stock-BasedCompensation***

 

In December 2004, FASB published FASB StatementNo. 123 (revised 2004), “*Share-Based Payment*.” FAS 123(R) requires that the compensation cost relating to share-basedpayment transactions, including grants of employee stock options, be recognizedin financial statements.  That cost will be measured based on the fairvalue of the equity or liability instruments issued.  FAS 123(R) coversa wide range of share-based compensation arrangements including stock options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans.  FAS 123(R) is a replacement of FASBStatement No. 123, “*Accounting for Stock-BasedCompensation*,” and supersedes APB Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and its relatedinterpretive guidance.  The effect of FAS 123(R) is to requireentities to measure the cost of employee services received in exchange forstock options based on the grant-date fair value of the award, and to recognizethe cost over the period the employee is required to provide services for theaward.  FAS 123(R) permits entities to use any option-pricing modelthat meets the fair value objective in FAS 123(R).  NTIC implemented FAS123(R) on September 1, 2006, using the modified prospectivetransition method.

 

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**Forward-LookingStatements**

 

This report contains not only historicalinformation, but also forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, and are subject to the safe harborcreated by those sections.  In addition,NTIC or others on its behalf may make forward-looking statements from time totime in oral presentations, including telephone conferences and/or web castsopen to the public, in press releases or reports, on NTIC’s Internet web sitesor otherwise.  All statements other thanstatements of historical facts included in this report that address activities,events or developments that NTIC expects, believes or anticipates will or mayoccur in the future are forward-looking statements including, in particular,the statements about NTIC’s plans, objectives, strategies and prospectsregarding, among other things, its financial condition, results of operationsand business.  NTIC has identified someof these forward-looking statements with words like “believe,” “may,” “could,” “might,”“forecast,” “possible,” “potential,” “project,” “will,” “should,” “expect,” “intend,”“plan,” “predict,” “anticipate,” “estimate,” “approximate” or “continue” andother words and terms of similar meaning. These forward-looking statements may be contained in the notes to NTIC’sconsolidated financial statements and elsewhere in this report, including underthe heading “Part 1.  FinancialInformation.  Item 2.  Management’s Discussion and Analysis or Planof Operation.”

 

NTIC wishes to caution readers not to place unduereliance on any forward-looking statement that speaks only as of the date madeand to recognize that forward-looking statements are predictions of futureresults, which may not occur as anticipated. Actual results could differ materially from those anticipated in theforward-looking statements and from historical results, due to the risks anduncertainties described under the heading “Risk Factors” below, as well asothers that NTIC may consider immaterial or does not anticipate at this time.Although NTIC believes that the expectations reflected in its forward-lookingstatements are reasonable, NTIC does not know whether its expectations willprove correct.  NTIC’s expectationsreflected in its forward-looking statements can be affected by inaccurateassumptions NTIC might make or by known or unknown risks and uncertainties,including those described below under the heading “Risk Factors.”  The risks and uncertainties described underthe heading “Risk Factors” below are not exclusive and further informationconcerning NTIC and its business, including factors that potentially couldmaterially affect its financial results or condition, may emerge from time totime.  NTIC assumes no obligation toupdate forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements.  NTIC advises you, however, to consult anyfurther disclosures it may make on related subjects in its Annual Reports on Form 10-KSB,Quarterly Reports on Form 10-QSB and Current Reports on Form 8-K thatNTIC files with or furnishes to the Securities and Exchange Commission.

 

**Risk Factors**

 

The following are the most significant factors known to NTIC that couldmaterially adversely affect its business, financial condition or operatingresults.

 

***A significant portion of NTIC’s historical consolidated net sales weredependent upon a single React Inc. customer, which has indicated a desire notto purchase any future products from NTIC or its subsidiaries. As a result,NTIC’s fiscal 2008 have been materially harmed and NTIC’s future consolidatednet sales will continue to be materially harmed.***

 

A customer of NTIC’s React-NTI, LLC joint ventureaccounted for, in the aggregate, approximately 28.0% and 26.6% of NTIC’sconsolidated net sales for the fiscal year ended August 31, 2007 and2006.  As described in more detail underthe heading “Part I. Financial Information. Item 2.  Management’s Discussion and Analysis or Planof Operation—Financial Overview,” during fourth quarter of fiscal 2007, thiscustomer notified React that it would place future orders for React’s remaininginventory of ink additives, but that after such inventory was purchased, thecustomer would not place any future orders. The loss of this customer has had a material adverse impact on NTIC’sconsolidated net sales for fiscal 2008 and NTIC anticipates that the loss ofthis customer will continue to have a material adverse impact on NTIC’sconsolidated net sales 

 

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thereafter. However, since the margins on React’s sales of the ink additives to thiscustomer were extremely small, the loss of this customer did not have amaterial adverse effect on NTIC’s consolidated net income for the first andsecond quarters of fiscal 2008 and NTIC does not expect that the anticipatedcontinued decrease in net sales by React will have a material adverse effect onNTIC’s future consolidated net income.****No assurancecan be provided, however, that the loss of this customer will not have amaterial adverse effect on NTIC’s future consolidated net income.

 

***The automotive industry in theUnited States has experienced contraction in recent years thus resulting indecreased demand for NTIC’s Zerust***®***products in the United States, which has adverselyaffected and may continue to adversely affect NTIC’s net sales from NorthAmerican operations and net income.***

 

During the fiscal year ended August 31, 2007and during the nine months ended May 31, 2008, over 70% and 97.0%,respectively, of NTIC’s consolidated net sales were derived from the sales ofZerust® rust and corrosion inhibiting packaging products andservices.  Most of these products andservices were sold to customers in the automotive industry and to a lesserextent to customers in the electronics, electrical, mechanical, military andretail consumer markets.  The automotiveindustry in the United States has experienced contraction in recent years andis not expected to improve in the foreseeable future, which may result in acontinued adverse effect on NTIC’s net sales from North American operations andnet income.  While NTIC intends toincrease marketing efforts of its Zerust® products and services tocustomers in other target industries, no assurance can be provided that NTICwill be successful in doing so or will recognize increased sales from such newtarget markets.

 

***NTIC intends to investadditional research and development and marketing efforts and resources toexpand its existing product lines and the distribution of its products into newtarget markets, such as the oil and gas industry.  No assurance can be provided, however, thatNTIC’s investments in such new products and markets will be successful andresult in additional revenue.***

 

In an effort to increase net sales, NTIC isexpanding its corrosion solution products into new markets, such as the oil andgas industry, and expanding its product lines to include other products, suchas biodegradable and compostable plastics, plastic recycling technology andcorrosion solutions in the oil and gas industry.  During fiscal 2008, NTIC expects to makeadditional research and development and marketing efforts and invest additionalresources into these new product lines and markets.  During thefirst nine months of fiscal 2008, NTIC invested $2,258,931 in additionalresearch and development and marketing efforts and resources into theseemerging businesses, product lines and markets. Although NTIC recognized $204,998 in sales of Natur-TecTM for the ninemonths ended May 31, 2008, no assurance can be provided that such newbusinesses will be successful or that NTIC will be successful in obtainingadditional revenue.

 

***NTIC’s emerging newbusinesses are risky and may not prove to be successful, which could harm NTIC’soperating results and financial condition.***

 

NTIC is in the process of expanding its technologiesinto other applications and businesses. NTIC is undertaking these new businesses either directly or throughjoint ventures.  Such new businesses arerisky and subject to all of the risks inherent in the establishment of a newbusiness enterprise, including:

 

·      theabsence of an operating history;

·      the lackof commercialized products;

·      insufficientcapital and other resources;

·      expectedsubstantial and continual losses for such businesses for the foreseeablefuture;

·      the lackof manufacturing experience and limited marketing experience;

·      anexpected reliance on third parties for the commercialization of some of theproposed products;

·      acompetitive environment characterized by numerous, well-established andwell-capitalized competitors; and

 

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·      relianceon key personnel.

 

***A significant portion of NTIC’sconsolidated net sales, including corporate joint venture sales, are generatedoutside of the U.S. and NTIC intends to continue to expand its internationaloperations.  NTIC’s internationaloperations require management attention and financial resources and expose NTICto difficulties and risks presented by international economic, political,legal, accounting and business factors.***

* *

NTICoffers direct on-site technical support on rust and corrosion issues in over 50countries, and operates a marketing, distribution, and technical networkthrough joint ventures in North America, South America, Europe, Asia and theMiddle East.  One of NTIC’s strategicobjectives is the continued expansion of its international operations.  NTIC has recently entered into joint venturesin Indonesia, the Ukraine, Thailand and the United Arab Emirates.  The expansion of NTIC’s existinginternational operations and entry into additional international marketsrequires management attention and financial resources. Many of the countries inwhich NTIC sells its products directly or indirectly through its corporatejoint ventures, are, to some degree, subject to political, economic and/orsocial instability.  NTIC’s internationaloperations expose NTIC and its joint venture partners, representatives, agentsand distributors to risks inherent in operating in foreign jurisdictions.  These risks include:

 

·      difficultiesin managing and staffing international operations and the requiredinfrastructure costs including legal, tax, accounting, information technology;

·      theimposition of additional U.S. and foreign governmental controls or regulations,new trade restrictions and restrictions on the activities of foreign agents,representatives and distributors, the imposition of costly and lengthy exportlicensing requirements and changes in duties and tariffs, license obligationsand other non-tariff barriers to trade;

·      theimposition of U.S. and/or international sanctions against a country, company,person or entity with whom NTIC does business that would restrict or prohibitcontinued business with the sanctioned country, company, person or entity;

·      pricingpressure that NTIC or its corporate joint ventures may experienceinternationally;

·      laws andbusiness practices favoring local companies;

·      currencyexchange rate fluctuations;

·      longerpayment cycles and difficulties in enforcing agreements and collectingreceivables through certain foreign legal systems;

·      difficultiesin enforcing or defending intellectual property rights; and

·      multiple,changing and often inconsistent enforcement of laws and regulations.

 

NTICcannot assure you that one or more of the factors listed above will not harmits business.  Any material decrease inNTIC’s international sales could adversely affect NTIC’s operating results.

 

***NTIC’s liquidityand financial position rely on dividend distributions from its corporate jointventures, which if such dividends cease or are reduced could adversely affectNTIC’s liquidity and financial position.***

 

NTIC’s liquidity and financial position rely ondividend distributions from its corporate joint ventures.  During the nine months ended May 31,2008 and the fiscal year ended August 31, 2007, NTIC received $1,805,411and $1,643,091, respectively, in dividends from its corporate jointventures.  Because NTIC typically ownsonly 50% or less of its joint venture entities, NTIC does not control thedecisions of these entities regarding whether to pay dividends and how much individends should be paid in any given year. Thus, NTIC cannot guarantee that any of its joint ventures will paydividends in any given year.  The failureof NTIC’s joint ventures to declare dividends in amounts typically expected byNTIC could adversely affect NTIC’s liquidity and financial position.

 

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***Fluctuations inforeign currency exchange rates could result in declines in NTIC’s reportedconsolidated net sales and net income.***

 

Because the functionalcurrency of NTIC’s foreign operations and investments in its foreign corporatejoint ventures and holding companies is the applicable local currency, NTIC isexposed to foreign currency exchange rate risk arising from transactions in thenormal course of business since NTIC’s fees for technical support and otherservices and dividend distributions from these foreign entities are paid inforeign currencies.  NTIC’s reportedconsolidated net sales and net income are subject to fluctuations in foreignexchange rates.  NTIC’s principalexchange rate exposure is with the Euro, the Japanese yen, Korean won and theEnglish pound against the U.S. dollar.  NTIC does not hedge against itsforeign currency exchange rate risk.  Since NTIC’s investments in itscorporate joint ventures and holding companies are accounted for using theequity method, any changes in foreign currency exchange rates would bereflected as a foreign currency translation adjustment and would not change theequity in income of joint ventures and holding companies reflected in NTIC’sconsolidated statements of income.

 

***NTIC’s compliance with U.S. generallyaccepted accounting principles and any changes in such principles mightadversely affect NTIC’s operating results and financial condition.  Any requirement to consolidate NTIC’s corporatejoint ventures or subject them to compliance with the internal controlprovisions of the Sarbanes-Oxley Act of 2002 could adversely affect NTIC’soperating results and financial condition.***

 

NTICadopted accounting policy FASB Interpretation No. 46R (FIN 46R), “*Consolidation of Variable Interest Entities*,*a revision of FIN 46”* effectiveas of May 31, 2005.  As a result ofFIN 46R, NTIC consolidated React-NTI LLC, one of its corporate joint venturesthat is 75% owned by NTIC.  If the interpretation of FIN 46R were tochange and NTIC were required to fully consolidate the remaining 28 of itscorporate joint ventures or if NTIC’s corporate joint ventures otherwise wouldbe required to be in compliance with the internal control provisions of theSarbanes-Oxley Act of 2002, NTIC would incur significant additional costs. NTIC estimates that the costs for each of its corporate joint ventures tobecome Sarbanes-Oxley compliant would range between $150,000 to $500,000 andthat annual maintenance expenses would range from $50,000 to $100,000 per yearper corporate joint venture thereafter.  In addition, other accountingpronouncements issued in the future could have a material cost associated withNTIC’s implementation of such new accounting pronouncements.

 

***One of NTIC’sprincipal stockholders beneficially owns 24.5% of NTIC’s outstanding commonstock and is affiliated with NTIC’s President and Chief Executive Officer andthus may be able influence matters requiring stockholder approval, includingthe election of directors, and could discourage or otherwise impede atransaction in which a third party wishes to purchase NTIC’s outstanding sharesat a premium.***

 

As of July 11, 2008, Inter Alia Holding Companybeneficially owned approximately 24.5% of NTIC’s outstanding common stock.  Inter Alia is an entity owned by, amongothers, G. Patrick Lynch, NTIC’s President and Chief Executive Officer and adirector, and Philip M. Lynch, NTIC’s former Chairman of the Board and ChiefExecutive Officer and current Chairman Emeritus.  G. Patrick Lynch is the son of Philip M.Lynch.  Messrs. G.P. Lynch and P.M.Lynch share voting and dispositive power of shares of NTIC’s common stock heldby Inter Alia Holding Company.  As aresult of his share ownership through Inter Alia and his position as Presidentand Chief Executive Officer and a director of NTIC, Mr. G.P. Lynch may beable to influence the affairs and actions of NTIC, including matters requiringstockholder approval, such as the election of directors and approval of significantcorporate transactions.  The interests ofInter Alia may differ from the interests of NTIC’s other stockholders.  This concentration of ownership may have theeffect of delaying, preventing or deterring a change in control of NTIC, coulddeprive NTIC’s stockholders of an opportunity to receive a premium for theircommon stock as part of a sale or merger of NTIC and may negatively affect themarket price of NTIC’s common stock. Transactions that could be affected by this concentration of ownershipinclude proxy contests, tender offers, mergers or other purchases of common 

 

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stock that could give stockholders the opportunityto realize a premium over the then-prevailing market price for shares of NTIC’scommon stock.

 

***NTIC is currently involved inlitigation over its trademark on the use of the color Yellow in corrosioninhibiting packaging, the loss of which could adversely affect NTIC’s business.***

* *

One of NTIC’s important trademarks for its businessis the trademark for the color Yellow. NTIC is currently involved in litigation against a competitor over thistrademark.  NTIC has also in the pastsuccessfully prosecuted infringement claims against other competitors and thirdparties for their use of the color Yellow. If NTIC were to lose this current or any future litigation over itstrademark for the color Yellow, NTIC could be in a more difficult position toenforce its rights to this trademark in other countries and against other thirdparties.  NTIC believes that the loss ofits trademark for the color Yellow could have an adverse effect on NTIC’sbusiness.

 

***NTIC’s business, properties and products are subject to governmentalregulation and taxes with which compliance may require NTIC to incur expensesor modify its products or operations and may expose NTIC to penalties fornon-compliance. Governmental regulation may also adversely affect the demandfor some of NTIC’s products and NTIC’s operating results.***

 

NTIC’s business, propertiesand products are subject to a wide variety of international, federal, state andlocal laws, rules, taxes and regulations relating to the protection of theenvironment, natural resources, and worker health and safety and the use,management, storage, and disposal of hazardous substances, wastes and otherregulated materials. These laws, rules and regulations may affect the wayNTIC conducts its operations, and the failure to comply with these regulationscould lead to fines and other penalties. Because NTIC owns and operates realproperty, various environmental laws also may impose liability on NTIC for thecosts of cleaning up and responding to hazardous substances that may have beenreleased on NTIC’s property, including releases unknown to NTIC. Theseenvironmental laws and regulations also could require NTIC to pay forenvironmental remediation and response costs at third-party locations whereNTIC disposed of or recycled hazardous substances. NTIC’s future costs ofcomplying with the various environmental requirements, as they now exist or maybe altered in the future, could adversely affect NTIC’s financial condition andoperating results. NTIC is also subject to other international, federal andstate laws, rules and regulations, the future non-compliance of which mayharm NTIC’s business or may adversely affect the demand for some of itsproducts.  Changes in laws andregulations, including changes in accounting standards and taxation changes,including tax rate changes, new tax laws, revised tax law interpretations, alsomay adversely affect NTIC’s operating results.

 

***NTIC intends to grow itsbusiness through additional joint ventures, alliances and acquisitions, whichcould be risky and harm its business.***

* *

Oneof NTIC’s growth strategies is to expand its business by entering intoadditional joint ventures and alliances and acquiring businesses, technologiesand products that complement or augment NTIC’s existing products.  The benefits of a joint venture, alliance oracquisition may take more time than expected to develop, and NTIC cannotguarantee that any future joint ventures, alliances or acquisitions will infact produce the intended benefits. In addition, joint ventures, alliances andacquisitions involve a number of risks, including:

 

·      diversionof management’s attention;

·      difficultiesin assimilating the operations and products of an acquired business or inrealizing projected efficiencies, cost savings and revenue synergies;

·      potentialloss of key employees or customers of the acquired businesses or adverse effectson existing business relationships with suppliers and customers;

·      adverseimpact on overall profitability if acquired businesses do not achieve thefinancial results projected in NTIC’s valuation models;

 

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·      reallocationof amounts of capital from other operating initiatives and/or an increase inNTIC’s leverage and debt service requirements to pay the acquisition purchaseprices, which could in turn restrict NTIC’s ability to access additional capitalwhen needed or to pursue other important elements of NTIC’s business strategy;

·      inaccurateassessment of undisclosed, contingent or other liabilities or problems andunanticipated costs associated with the acquisition; and

·      incorrectestimates made in the accounting for acquisitions, incurrence of non-recurringcharges and write-off of significant amounts of goodwill that could adverselyaffect NTIC’s operating results.

 

NTIC’sability to grow through joint ventures, alliances and acquisitions will depend,in part, on the availability of suitable opportunities at an acceptable cost,NTIC’s ability to compete effectively for these opportunities and theavailability of capital to complete such transactions.

 

***NTIC relies onits independent distributors, manufacturer’s sales representatives andcorporate joint ventures to market and sell its products.***

 

In addition to its direct sales force, NTIC relieson its independent distributors, manufacturer’s sales representatives andcorporate joint ventures to market and sell its products in the United Statesand internationally.  NTIC’s independentdistributors, manufacturer’s sales representatives and joint venture partnersmight terminate their relationship with NTIC, or devote insufficient salesefforts to NTIC’s products.  NTIC doesnot control its independent distributors, manufacturer’s sales representativesand joint ventures and they may not be successful in implementing NTIC’smarketing plans. NTIC’s failure to maintain its existing relationships with itsindependent distributors, manufacturer’s sales representatives and jointventures, or its failure to recruit and retain additional skilled independentdistributors, manufacturer’s sales representatives and joint venture partnerscould have an adverse effect on NTIC’s operations.

 

***NTIC has very limited staffing andwill continue to be dependent upon key employees.***

 

NTIC’s success is dependent upon the efforts of asmall management team and staff.  NTIC’sfuture success will also depend in large part on its ability to retain theseindividuals and identify, attract and retain other highly qualified managerial,technical, sales and marketing and customer service personnel. Competition forthese individuals is intense, especially in the markets in which NTIC operates.  NTIC may not succeed in identifying,attracting and retaining these personnel. The current management, other than the President and Chief ExecutiveOfficer, do not have any material stock ownership in NTIC or any contractualobligation to maintain their employment with us.  The loss or interruption of services of anyof NTIC’s key personnel, the inability to identify, attract or retain qualifiedpersonnel in the future, delays in hiring qualified personnel, or any employeeslowdowns, strikes or similar actions could make it difficult for NTIC tomanage its business and meet key objectives, which could harm NTIC’s business,financial condition and operating results.

 

***NTIC relies on its managementinformation systems for inventory management, distribution and otherfunctions.  If these information systemsfail to adequately perform these functions or if NTIC experiences aninterruption in their operation, NTIC’s business and operating results could beadversely affected.***

 

The efficient operation of NTIC’s business isdependent on its management information systems.  NTIC relies on its management informationsystems to effectively manage accounting and financial functions; manage orderentry, order fulfillment and inventory replenishment processes; and to maintainits research and development data.  Thefailure of management information systems to perform as anticipated coulddisrupt NTIC’s business and product development and could result in decreasedsales, causing NTIC’s business and operating results to suffer.  In addition, NTIC’s management informationsystems are vulnerable to damage or interruption from natural or man-madedisasters, terrorist attacks and attacks by computer viruses or hackers, orpower loss or computer systems, Internet, telecommunications or data networkfailure.  Any such interruption couldadversely affect NTIC’s business and operating results.

 

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***NTIC’s relianceupon patents, trademark laws, trade secrets and contractual provisions toprotect its proprietary rights may not be sufficient to protect itsintellectual property from others who may sell similar products.***

 

NTIC holds patents relating to various aspects ofits products and believes that proprietary technical know-how is critical tomany of its products.  Proprietary rights relating to NTIC’s products areprotected from unauthorized use by third parties only to the extent that theyare covered by valid and enforceable patents or are maintained in confidence astrade secrets.  NTIC cannot be certain that it will be issued any patentsfrom any pending or future patent applications owned by or licensed to NTIC orthat the claims allowed under any issued patents will be sufficiently broad toprotect its technology.  In the absence of patent protection, NTIC may bevulnerable to competitors who attempt to copy NTIC’s products or gain access toits trade secrets and know-how.  NTIC’s competitors may initiatelitigation to challenge the validity of NTIC’s patents, or they may use theirresources to design comparable products that do not infringe NTIC’spatents.  NTIC may incur substantial costs if its competitors initiatelitigation to challenge the validity of its patents or if it initiates anyproceedings to protect its proprietary rights and if the outcome of any suchlitigation is unfavorable to NTIC, its business and operating results could bematerially adversely affected.

 

In addition, NTIC relies on trade secrets andproprietary know-how that it seeks to protect, in part, by confidentialityagreements with its employees, and consultants.  These agreements may bebreached and NTIC may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, NTIC’s trade secretsmay otherwise become known or be independently developed by competitors.

 

***If NTIC is unableto continue to enhance existing products and develop and market new productsthat respond to customer needs and achieve market acceptance, NTIC mayexperience a decrease in demand for its products, and its business couldsuffer.***

 

One of NTIC’s strategies is to enhance its existingproducts and develop and market new products that respond to customerneeds.  NTIC may not be able to competeeffectively with its competitors unless NTIC can keep up with existing or newproducts in the markets in which it competes. Product development requires significant financial and other resources.Although in the past NTIC has implemented lean manufacturing and otherproductivity improvement initiatives to provide investment funding for newproducts, NTIC cannot assure you that it will be able to continue to do so inthe future.  Product improvements and newproduct introductions also require significant planning, design, developmentand testing at the technological, product, and manufacturing process levels andNTIC may not be able to timely develop product improvements or newproducts.  NTIC’s competitors’ new products may beat NTIC’s products tomarket, may be more effective or less expensive than NTIC’s products or renderNTIC’s products obsolete.  Any newproducts that NTIC may develop may not receive market acceptance or otherwisegenerate any meaningful net sales or profits for NTIC relative to itsexpectations, based on, among other things, existing and anticipatedinvestments in manufacturing capacity and commitments to fund advertising,marketing, promotional programs, and research and development.

 

***NTIC facesintense competition in almost all of its product lines, including fromcompetitors that have substantially greater resources than NTIC does.  NTIC cannot assure you it will be able tocompete effectively, which would harm its business and operating results.***

 

NTIC’s products are sold inhighly competitive markets throughout the world.  The principal competitive factors in NTIC’smarkets are pricing, product innovation, quality and reliability, productsupport and customer service and reputation. NTIC often competes with numerous manufacturers, many of who havesubstantially greater financial, marketing, and other resources than NTIC does.As a result, they may be able to adapt more quickly to new or emergingtechnologies and changes in customer requirements, or to devote greaterresources to the promotion and sale of their products than NTIC can.  Inaddition, competition could increase if new companies enter the market or ifexisting competitors expand their product lines or intensify efforts withinexisting product lines.  NTIC’s current products, products underdevelopment and its ability to 

 

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develop new and improvedproducts may be insufficient to enable NTIC to compete effectively with itscompetitors. NTIC cannot assure you that it will be able to competeeffectively, which would harm its business and operating results.

 

***NTIC is currently involved inseveral litigation matters and an audit matter with the U.S. Internal RevenueService, which are costly to defend and the resolution of which could have amaterial adverse effect on NTIC’s operating results and financial position.***

* *

NTIC is party to several litigation matters and anaudit matter with the U.S. Internal Revenue Service as described in more detailin Note 9 to NTIC’s consolidated financial statements.  Such litigation and audit matter are costlyand may adversely affect NTIC’s operating results and financial condition.  In addition, the resolution of such mattersmay also have a material adverse effect on NTIC’s operating results andfinancial condition.

 

***NTIC is exposedto risks relating to its evaluation of its internal control over financialreporting as required by Section 404 of the Sarbanes-Oxley Act.***

 

Changing laws, regulationsand standards relating to corporate governance and public disclosure, includingthe Sarbanes-Oxley Act of 2002 and related and other recent regulationsimplemented by the SEC and The American Stock Exchange, are creatinguncertainty for public companies, increasing legal and financial compliancecosts and making some activities more time consuming.  NTIC will be evaluating its internal controlssystems to allow management to report on, and its independent registered publicaccounting firm to attest to, NTIC’s internal control over financialreporting.  NTIC will be performing thesystem and process evaluation and testing (and any necessary remediation)required to comply with the management certification and auditor attestationrequirements of Section 404 of the Sarbanes-Oxley Act.  NTIC cannot be certain as to the timing ofcompletion of its evaluation, testing and remediation actions or the impact ofthe same on its operations since there is presently no precedent available bywhich to measure compliance adequacy.  IfNTIC is not able to implement the requirements of Section 404 in a timelymanner or with adequate compliance, NTIC may be subject to sanctions orinvestigation by regulatory authorities, including the SEC or the NASDAQ StockMarket.  This type of action couldadversely affect NTIC’s financial results or investors’ confidence in NTIC, andcould cause NTIC’s stock price to decline. In addition, the controls and procedures that NTIC may implement may notcomply with all of the relevant rules and regulations of the SEC and theNASDAQ Stock Market.  If NTIC fails todevelop and maintain effective controls and procedures, it may be unable toprovide the required financial information in a timely and reliablemanner.  In addition, NTIC’s efforts tocomply with Section 404 of the Sarbanes-Oxley Act of 2002 and the relatedregulations regarding its assessment of its internal control over financialreporting and its independent registered public accounting firm’s report onthat assessment will require the commitment of significant financial andmanagerial resources.

 

**ITEM 3.****         ****CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

NTIC maintains disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended) that are designed toreasonably ensure that information required to be disclosed by NTIC in thereports it files or submits under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to NTIC’smanagement, including NTIC’s principal executive and principal financialofficers, or persons performing similar functions, as appropriate to allowtimely decisions regarding required disclosure. In designing and evaluating NTIC’s disclosure controls and procedures,NTIC recognizes that any controls and procedures, no matter how well designedand operated can provide only reasonable assurance of achieving the desiredcontrol objectives and NTIC necessarily is required to apply its judgment 

 

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in evaluating thecost-benefit relationship of possible controls and procedures.  NTIC’s management evaluated, with theparticipation of its Chief Executive Officer and its Chief Financial Officer,the effectiveness of the design and operation of NTIC’s disclosure controls andprocedures as of the end of the period covered in this report.  Based on that evaluation, NTIC’s ChiefExecutive Officer and Chief Financial Officer concluded that NTIC’s disclosurecontrols and procedures were effective as of the end of such period to providereasonable assurance that information required to be disclosed in NTIC’sExchange Act reports is recorded, processed, summarized, and reported withinthe time periods specified in the SEC’s rules and forms, and that materialinformation relating to NTIC and its consolidated subsidiaries is made known tomanagement, including NTIC’s Chief Executive Officer and Chief FinancialOfficer, particularly during the period when NTIC’s periodic reports are beingprepared.

 

NTIC’smanagement is aware, however, that there is a lack of segregation of duties dueto the small number of employees of NTIC dealing with general administrativeand financial matters. However, NTIC’s management has decided that consideringthe employees involved and the control procedures in place, risks associatedwith such lack of segregation are minimal and the potential benefits of addingemployees to clearly segregate duties do not at this time justify the expensesassociated with such increases.

 

**Changes inInternal Control over Financial Reporting**

 

Therewas no change in NTIC’s internal control over financial reporting that occurredduring the quarter ended May 31, 2008 that has materially affected, or isreasonably likely to materially affect NTIC’s internal control over financialreporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.****         ****LEGALPROCEEDINGS**

 

Adescription of NTIC’s legal proceedings in Note 9 of NTIC’s consolidatedfinancial statements included within this report is incorporated herein byreference.

 

On June 11,2008, Northern Technologies International Corporation entered into an agreementto settle a lawsuit brought by Evelyna Cantwell and Jack Cantwell,individually, and also doing business as the principals of Byrd-WalshInternational, LLC, against NTIC and its former Chairman of the Board and ChiefExecutive Officer and current Chairman Emeritus, Philip M. Lynch.  The lawsuit sought unspecified injunctiverelief as well as compensatory and punitive damages in an unspecified amountwhich, based on the allegations of the complaint, may have been claimed byplaintiffs to be in an amount in excess of $45 million.  Under the terms of the settlement agreement,the plaintiffs agreed to dismiss their claims with prejudice and to releaseNTIC and Mr. Philip M. Lynch from any and all claims, in exchange for acash payment from NTIC of $41,340.

 

**ITEM 2.****         ****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

**Recent Sales of Unregistered EquitySecurities**

 

During the three monthsended May 31, 2008, NTIC did not issue any shares of its common stock orother equity securities of NTIC that were not registered under the SecuritiesAct of 1933.

 

**Small Business Issuer Purchases ofEquity Securities**

 

Duringthe three months ended May 31, 2008, NTIC did not purchase any shares ofits common stock or other equity securities of NTIC.

 

OnNovember 13, 2003, the Board of Directors of NTIC authorized MatthewWolsfeld, Chief Financial Officer of NTIC, to repurchase on behalf of NTIC, upto 100,000 shares of NTIC’s common stock from time 

 

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totime in accordance with applicable rules governing issuer stockrepurchases.  Since being authorized,NTIC has repurchased and retired an aggregate of 44,200 shares of its commonstock.

 

**ITEM 5.****         ****OTHERINFORMATION**

 

NTICmoved its common stock listing from the American Stock Exchange to the NASDAQGlobal Market. The company’s common stock began trading on NASDAQ under thesymbol NTIC on June 30, 2008.

 

**ITEM 6.****         ****EXHIBITS**

 

The following exhibits arebeing filed or furnished with this quarterly report on Form 10-QSB:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                               |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Promissory Note  Modification Agreement dated April 10, 2008 between Northern  Technologies International Corporation and National City Bank             |
|                 |       |                                                                                                                                                          |
| 31.1                 |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                     |
|                 |       |                                                                                                                                                          |
| 31.2                 |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                     |
|                 |       |                                                                                                                                                          |
| 32.1                 |       | Certification of Chief  Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|                 |       |                                                                                                                                                          |
| 32.2                 |       | Certification of Chief Financial  Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities and Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 
| ** **                | **NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION**                                                   |
|---------------------------|-------------------------------------------------------------------------------------------------------|
|                      |                                                                                                  |
|                      |                                                                                                       |
| Date:  July 11, 2008 | Matthew  C. Wolsfeld, CPA                                                                             |
|                      | Chief Financial Officer                                                                               |
| ** **                | (Principal Financial and Accounting Officer and Duly  Authorized to Sign on Behalf of the Registrant) |
|                           |                                                                                                       |  |

 

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**NORTHERNTECHNOLOGIES INTERNATIONAL CORPORATIONQUARTERLY REPORT ON FORM 10-QSB**

**EXHIBITINDEX**

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                               | ** ** | **Method of Filing**                                                                                                                                                     |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1             |       | Promissory  Note Modification Agreement dated April 10, 2008 between Northern  Technologies International Corporation and National City Bank             |       | Incorporated by reference to Exhibit 10.3 to NTIC’s Quarterly  Report on Form 10-QSB for the fiscal quarter ended February 29,  2008 (File No. 001-11038) |
| 31.1             |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith                                                                                                                                                                     |
| 31.2             |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                     |       | Filed herewith                                                                                                                                                                     |
| 32.1             |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith                                                                                                                                                                 |
| 32.2             |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |       | Furnished herewith                                                                                                                                                                 |

 

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