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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                               ----------------

                                  FORM 10-KSB

                               ----------------

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                          For the fiscal year ended:
                                 June 30, 2001

                            Commission File Number
                                    0-21151

                               ----------------

                          PROFILE TECHNOLOGIES, INC.
                (Name of small business issuer in its charter)

              DELAWARE                                 91-1418002
   (State or other jurisdiction of                  (I.R.S. Employer
   incorporation or organization)                Identification Number)

         1077 NORTHERN BLVD.
             ROSLYN, NY                                  11576
   (Address of Principal Executive                     (Zip Code)
              Offices)

                               ----------------

                   Issuer's telephone number: (516) 365-1909

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

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

                         Common Stock, $.001 Par Value

                                Title of Class

                               ----------------

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

   Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]

   State issuer's revenues for the most recent fiscal year. $320,929.

   The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $2,036,830, based on the price of common stock sold
reported by the Over the Counter Bulletin Board on September 25, 2001.

   There were 4,702,259 shares of common stock, $.001 par value, outstanding
as of September 25, 2001.

                     DOCUMENTS INCORPORATED BY REFERENCE:

   Part III incorporates certain information by reference from the
Registrant's definitive proxy statement for its annual shareholder meeting to
be held November 13, 2001 to be filed pursuant to Regulation 14A.

   Transitional Small Business Format (check one): Yes [_] No [X]

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                                    PART I

Item 1. Description of Business.

Introduction

   Since its inception in 1988, Profile Technologies, Inc. (the "Company"), a
Delaware corporation, has been engaged in the business of researching and
developing a high speed scanning process, which is nondestructive and
noninvasive, to remotely test buried and insulated pipelines for corrosion.
The Company's electromagnetic wave inspection process, referred to as
Profile's "Inspection EMW(SM)" or "EMW," is a patented process of analyzing the
waveforms of electrical impulses in a way that extracts point-to-point
information along a segment of pipeline to illustrate the integrity of the
entire pipeline. This process involves sending an electrical pulse along the
pipe being tested from each of two locations toward a varying intersecting
location between the two locations. At least one of the modified pulses is
analyzed to determine whether an anomaly exists at the intersecting location.

   The EMW process is designed to detect corrosion of pipeline which occurs
under pipe insulation and in buried pipes, without the need for taking the
line out of service, physically removing the insulation or digging up the pipe
and then visually inspecting the outside of the pipe for corrosion. Often the
Company can inspect the pipelines by using various access points to the
pipeline that already exist for other reasons. Where such access is not
already available, the Company's technology permits inspection of pipelines
with only a very minimal amount of disturbance to the coating or insulation
that is present on the pipeline. Finally, the Company's technology permits an
inspection of the entire pipeline, as opposed to other technologies which only
conduct inspections at the points selected for the testing.

   The most common forms of pipeline corrosion under insulation are localized
corrosion of carbon steel and chloride stress corrosion cracking of stainless
steel. Refineries, chemical plants, utilities, natural gas transmission
companies and the petroleum industry have millions of miles of pipeline, and
much of this pipeline is exposed to harsh and severe environments. As a
result, there is an on-going effort by these industries to ensure that the
quality of the pipe meets standards set by regulatory bodies and the industry
to protect operating personnel and the environment.

   While the Company continues to develop and refine its EMW process, the
technology has evolved to the point where it is now being commercially used to
test natural gas pipelines and pipelines in the oil refinery and petrochemical
industry. In the summer of 1998, the Company completed its first commercial
contract on the North Slope of Alaska, testing approximately 100 road and
caribou crossings on British Petroleum pipelines under a contract with ASCG
Inspection, Inc. The contract was completed ahead of schedule and under
budget.

   In the summer of 1999, the Company followed up its initial North Slope work
with a larger contract with another large multi-national oil company to test
approximately 250 below grade pipes. During the summer of 2000, the Company
expanded its efforts on the North Slope yet again, testing a total of 372
below ground pipes. The Company's crews returned to Alaska in June 2001. By
the end of October, the Company estimates that it will have tested
approximately 500 lines.

   Having successfully employed the Company's technology in a commercial
setting, the Company intends to expand its marketing efforts to include 1)
natural gas distributors and transmission companies, 2) oil refineries and
petrochemical plants and 3) oil and gas producers, throughout the United
States. The Company has successfully demonstrated its technology in commercial
arrangements with seven refinery and chemical plant operators, two pipeline
companies, and two natural gas distributors. As the Company has addressed only
a fraction of the potential market for its services, efforts are underway to
expand the Company's customer base significantly.

   Negotiations are currently underway to perform work at numerous locations
for other refineries, chemical manufacturers, gas and oil transmission
companies and natural gas distributors in the United States. However,

                                       2
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there can be no assurance that any of these negotiations will lead to
additional commercial contracts. The Company has also considered seeking to
obtain contracts for its services outside of the United States. Any foreign
work depends upon the availability of funds necessary to successfully
demonstrate the technology abroad. Licensing agreements and value-added
reseller agreements are being considered as a low-cost way to extend Profile's
technology to countries other than the United States.

 Pipeline Corrosion

   Corrosion of pipelines can impose significant financial burdens on
companies as well as result in serious safety issues. A combination of
federal, state, local and industry jurisdictions combine to regulate corrosion
protection. The U.S. Department of Labor, operating through the Occupational
Safety and Health Administration has jurisdiction over numerous plants and
facilities containing corrosion protected pipeline that, if breached, could
cause serious bodily injury or death to on-site workers. In addition, the
American Petroleum Institute has promulgated a comprehensive Piping Inspection
Code which requires that extensive corrosion testing be done by all members
(which includes the vast majority of the petroleum and petrochemical
industries). As a result of extensive regulation and testing requirements, the
industry is faced with the requirement to engage in extensive testing for
corrosion. In 1993, the American Petroleum Institute imposed even stricter
test standards regarding the problem of corrosion under the insulation on
pipelines. When pipeline is uninsulated and above ground, external corrosion
can be identified visually. The petroleum and other related industries,
however, insulate much of their piping to conserve energy and to prevent
injury to personnel from high temperature levels on the pipelines. As soon as
piping is insulated, a very complex situation is created. Corrosion can occur
underneath the insulation due to moisture or corrosive products that find
their way through broken or poorly sealed insulation. This corrosion under
insulated pipelines is very difficult and costly to locate. In the past,
testing for this problem had been on a limited sample basis and relied upon
inspection processes that were very cumbersome and costly.

   Two prevalent testing methods used to detect corrosion under insulated
pipelines are X-ray and eddy current methods, which are methods of detecting
defects in pipe by analyzing visual image and decay. After physically
stripping away coating for visual inspection, depth gauges, ultrasonics and X-
ray are then used to determine the severity of corrosion on questionable pipe.
However, the stripping of insulation to determine corrosion is a costly
testing method for the industry because it often involves the assembly of
scaffolding for testing otherwise inaccessible above ground pipe (particularly
in refineries and petrochemical plants) or an actual dig-up on below ground
pipe. The Company's technology enables it to test pipe segments in a refinery
setting for a distance up to three hundred feet and to use "cherry pickers"
instead of costly scaffolding.

   Corrosion under insulated pipelines presents a very complicated testing
problem because corrosion cannot be easily identified by statistical sampling.
If, for example, a segment of pipe has a small insulation part removed every
ten feet and is visually inspected using eddy current or x-ray techniques,
there is no statistical basis to assume that the external condition of the
piping between the removed insulation parts is good or bad. The American
Petroleum Institute testing standard adopted in 1993, in essence, mandates
either stripping even larger amounts of coating or using an alternate system
that will identify corrosion under the insulation without stripping the
coating on suspected and unsuspected pipe. Because of the enormous cost
involved in using the stripping and visual testing process, the Company
believes that, the industry will be receptive to an alternate testing system
that is reliable and less costly. The Company believes that its EMW process
provides an alternate testing system that could be widely accepted by the
industry. However, while the Company has obtained some commercial contracts
and prospects for expanded commercial contracts in the future appear good,
there can be no assurance that such acceptance will continue to grow.

 Profile's EMW Inspection Technology

   The Company has developed two basic EMW inspection techniques, namely, Dual
Pulse or Pulse Propagation Analyzer and Single-Pulse or Calibration Mark Z.
For above-grade piping, we use both the Dual-Pulse and Single-Pulse to
determine the condition of a given pipe segment in the open field as well as
in a

                                       3
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refinery, chemical plant or power plant. For below-grade piping under streets
and road crossings, we use only the Dual Pulse technique. The single-pulse
technique is not designed for testing below-grade piping because it requires
access to the pipe. The results of our two basic techniques provide an
assessment of the overall integrity of the pipe in question and the location
and classification of electromagnetic anomalies which, in most instances, are
related to external corrosion.

   The EMW process was developed to evaluate the condition and integrity of
pipelines. Electro-magnetic pulses are applied at both ends of the pipe
segment being tested. Under computer control, the timing of the pulses is
controlled so that the intersection point of the two pulses moves sequentially
from one end of the pipe to the other end. A unique characteristic transfer
function ("CTF") is obtained for each intersection point of the pipeline
segment being tested on some predetermined interval; such as, in one foot
intervals. When this data is geophysically displayed, it provides a visual
display of data related to the physical condition of the pipe at each point of
intersection. Information can also be derived using the EMW process to
determine the condition of the coating and the effectiveness of the existing
corrosion protection system that is being used to protect each point of
intersection. Where there are indications of problems, closer interval
inspection can be performed and/or one of the other location specific
processes used in the industry may be utilized before the insulation is
removed to inspect the pipe condition.

The Dual-Pulse Technique

   The Dual Pulse process extracts corrosion related information from segments
of both accessible and inaccessible pipelines underneath the entire insulation
barrier by analyzing the intersection of two electrical current pulses
traveling in opposite directions along the pipeline. This corrosion related
information is extracted without the need for removing the insulation
protecting the pipeline. The Company established by laboratory and field
testing that the electrical response, called CTF, of two intersecting pulses
traveling along the pipeline is uniquely defined with location specific
information that relates to the integrity of the pipeline at the point of
intersection. Constructive interference occurs when the two current impulses
run into and interfere with each other at the point of intersection on a
pipeline. The CTF is determined, not only by the nature and characteristics of
the original pulses, but by the physical characteristics of the pipeline
segment in its environment at the point of intersection.

The Single-Pulse Technique

   The technique of Single-Pulse technique requires fixing the source location
in one end of the pipe segment in question and stepping the receiver generally
at an equal incremental distance from the source across the segment. From the
characteristics of the electromagnetic waves as a result of wave propagation,
attenuation, and dispersion, we determine whether electromagnetic anomalies
exist, as in the case of the Dual-Pulse techniques.

   As simple as the concept may appear, the EMW process is not intuitively
obvious. The petroleum industry has spent large sums trying to solve the
problem of finding corrosion under insulation. Correlating pipeline corrosion
information using the Company's technology requires a combination of state-of-
the-art instrumentation plus an understanding of the physical phenomena that
are being measured. Although the principles of the EMW process are simple to
explain, management believes that the measurement and analysis of the effect
are pushing the leading edge of technology.

   The Company believes that its technology has at least two significant
competitive advantages. First, its technology can inspect certain pipelines
that are inaccessible to other testing methods. Second, with respect to
insulated, coated, encased or buried facilities that are accessible to other
inspection technologies, because the Company's technology does not require the
removal of such insulation, coatings or encasements or pipeline excavation as
a prerequisite to testing, it has a much lower cost of site preparation and,
therefore, a significant cost advantage over other technologies. Research and
development efforts will continue in the development of new applications for
the Company's technology and to develop new products for the petroleum
industry and other industries.

                                       4
<PAGE>

Sales and Marketing

   The Company's sales and marketing strategy includes positioning the
Company's EMW inspection as the method of choice to detect pipeline corrosion
where the pipelines are either inaccessible to other inspection tools or much
more costly to inspect with tools other than Profile's EMW inspection. These
facilities are found commonly in refinery and chemical plants (such as
insulated, overhead pipes) natural gas distribution systems (such as pipes
buried in city streets) and natural gas transmission systems (such as road,
bridge and stream crossings and concrete-encased pipes). The Company intends
to emphasize the reliability of its testing method, the flexibility of the
method's application and its cost effectiveness.

   The Company relies upon several employees, including the Chief Executive
Officer, the Chief Operating Officer and the Vice President--Field Operations,
for the Company's sales functions. The Company had historically concentrated
its marketing efforts on the integrated oil company market in the North Slope
of Alaska. In fiscal 2001, more than 85 percent of the company's revenues were
attributable to the oil and gas production segments of the oil company market.

   After the completion of various tests of the Company's technology and the
introduction of that technology in the North Slope of Alaska, the Company
intends to increase its marketing efforts to include three specific industries
throughout the United States.

   The Company believes that the natural gas distribution and transmission
industry presents a significant opportunity for marketing the Company's
technology. There are millions of miles of metal pipelines, including older
pipe beneath paved city streets, that are difficult to inspect. The Company
believes that its technology can provide a commercially feasible solution to
testing these pipes, and is currently engaged in proving its technology to a
large gas distribution company.

   The Company has also begun focusing marketing efforts on pipeline testing
in oil refineries and petrochemical plants. The Company has completed
inspections and demonstrations in seven refineries and petrochemical plants
during the last two fiscal years, and believes that its technology could now
be successfully introduced to a much larger cross-section of this industry
segment. There are more than 170 refineries and even more petrochemical plants
in the United States. The Company believes that its technology has a distinct
competitive advantage in these industries because the EMW process can access
and inspect pipelines through access plugs initially installed in the
insulation on such pipelines and the Company has successfully inspected such
pipelines through three inches of insulation without removal.

   Finally, the Company intends to begin marketing its technology to certain
manufacturing plants which have steam and hot water pipes that are insulated.

Patents, Intellectual Property and Licensing

   The Company pursues a policy of generally obtaining patent protection both
in the United States and abroad for patentable subject matter in its
proprietary technology. As of June 30, 2001, the Company had eight issued U.S.
patents, seven issued foreign patents, nine U.S. patent applications pending,
six foreign patent applications pending and three patent applications filed
under the patent cooperation treaty which enables the Company to file
additional foreign patent applications in the future.

   The Company's success depends in large part upon its ability to protect its
process and technology under United States and international patent laws and
other intellectual property laws. U.S. patents have a term of 17 years from
date of issuance or, for more recently filed patent applications, 20 years
from the filing of such applications, and patents in most foreign countries
have a term of 20 years from the proprietary filing date of the patent
application. The first U.S. patent was issued in 1990, three patents were
issued in 1993, one patent was issued in 1998 and two patents were issued in
2000.

                                       5
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   The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its process under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be
similar to or competitive with the Company's products or processes. The
Company has no knowledge that it is infringing any existing patent such that
it would be prevented from marketing or licensing products or services
currently being developed by the Company.

   The Company may decide for business reasons to retain a patentable
invention as a trade secret. In such event or if patent protection is not
available, the Company must rely upon trade secrets, internal knowledge and
continuing technological innovation to develop and maintain its competitive
position. The Company's employees and consultants have access to the Company's
proprietary information and have signed confidentiality agreements. However,
even inadvertent disclosure of such a trade secret without a promise of
confidentiality could destroy trade secret protection. There can be no
assurance that inadvertent disclosures might not occur.

Competition

   Although a number of inspection technologies have been developed to aid in
ascertaining the condition of piping throughout industry, information needed
to determine the integrity of these critical systems is often difficult and
costly to acquire. The Company has numerous indirect competitors, but the
Company believes that its inspection services have significant competitive
advantages over other services provided by competitors.

   The Company's EMW inspection service is designed to help pipeline operators
quickly and less expensively screen buried, insulated, or hard to-access
piping for external corrosion. Although its technology does not provide
pipeline and plant operators with all the data they will require to manage and
remediate corrosion, when used as a "front-end" screening tool in combination
with one or more spot inspection tools, it can dramatically lower the cost of
acquiring all of the data necessary to manage corrosion risks to their piping
systems.

Employees

   The Company presently has thirteen employees, of which four are part time.
It is anticipated that if additional commercial contracts are secured,
additional field crews will be hired and trained. The number of crews employed
by the Company at any given time is dependent upon the Company's level of
business activity. In addition, the Company will continue to retain
independent consultants to render advice with respect to technical and
scientific matters.

Customers

   For the fiscal year ended June 30, 2001, the Company had seven customers
and more than 80 percent of the Company's revenues came from one customer on
the North Slope of Alaska. The loss of this customer or the Company's failure
to broaden the base of customers in fiscal year 2002, could have a material
adverse effect on the Company.

Supplier Relationships

   The Company relies upon several relationships for the supply of equipment
and services relating to the components of the company's EMW Inspection
Equipment. Criteria for choosing suppliers includes the quality and
performance of the product for the intended purpose and pricing. The Company
purchases pulse generator elements from a sole provider. There are alternative
suppliers for all of the elements required for the production of the EMW
Inspection Equipment.

Government Regulation

   Natural gas and hazardous liquids pipelines are extensively regulated. The
Department of Transportation's Office of Pipeline Safety, and state public
utility commissions applying federal regulations, monitor operator compliance
with corrosion monitoring and other pipeline safety-related regulatory
requirements. Recent pipeline safety incidents (a gasoline pipeline explosion
in Washington state and a natural gas transmission line explosion

                                       6
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in New Mexico) have prompted renewed interest in pipeline safety in Congress.
Major pipeline safety reauthorization legislation passed the Senate
unanimously and is pending in the House of Representatives. The legislation
would require much more active corrosion monitoring than is currently required
and could generate significant interest in the Company's technology by natural
gas transmission and hazardous liquids pipeline operators. In addition, there
may be opportunities to demonstrate the technology, in light of this
legislation, to industry and government pipeline safety advisory groups.
However, any such regulations could impose legal obligations and liabilities
on the Company or otherwise subject it to additional regulation. Any such
legislation could mandate testing methods other than that provided by the
Company's technology. Any such regulation could have a material adverse effect
on the Company.

Research and Development Expenditures

   During the last five years, the Company has developed and improved the
capability to detect pipeline corrosion under insulation or when the pipeline
is buried, and recently, the Company has been successful in the extension of
its single-setting detection range to 250 feet. The Company is currently
attempting to extend its corrosion detection range for both above-grade and
below-grade pipelines to distances greater than 250 feet. Moreover, the
Company has continued to improve the hardware and software in signal
processing, image reconstruction and fast visualization/graphic display.

   The Company has completed the initial research and development phase of its
technology, and commercialization of the technology is progressing pursuant to
the Company's plan. During the two most recent fiscal years ended June 30,
2001 and 2000, the Company spent $316,569 and $299,282 respectively on
research and development activities. The Company's field operation system for
commercialization consists of all of the hardware and software for data
acquisition, data processing, data analysis and interpretation.

   The Company's research and development efforts are focused on continuing to
improve the EMW system's efficiency, reliability and accuracy. During the next
fiscal year, it is estimated that the Company will continue to incur research
and development expenses. In addition, the Company is conducting testing and
proof of concept activities in order to achieve commercial acceptance of its
process for detecting pipeline corrosion.

Item 2. Description of Property.

   The Company's executive offices are located at 1077 Northern Blvd., Roslyn,
NY 11576. The Company leases on a month to month basis approximately 900 sq.
feet of office space from a non-affiliate. The rental payment is $1,000 per
month.

   The Company's research and development facility is located in Ferndale,
Washington. The Company leases 1,800 sq. feet of space on a month to month
basis from a non-affiliate at a monthly cost of approximately $1,920.

   The Company also leases approximately 1,650 sq. feet of office space from a
non-affiliate that it uses for data analysis and interpretation in Pearl
River, New York. The lease is for two years and the monthly rental payment is
approximately $3,300. The Company also reimburses its President for rent,
secretarial and office expenses incurred by him on behalf of the Company in
Laurinburg, North Carolina in the amount of $250 per month under an informal,
oral agreement.

   The Company also leases approximately 900 sq. feet of office space in
Sewickley, Pennsylvania. The lease is for one year, and the monthly rent is
approximately $865 per month.

   The Company does not own any real estate.

Item 3. Legal Proceedings.

   None.

Item 4. Submission of Matter to Vote of Security Holders.

   None.

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                                    PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Market Information

   The Company's Common Stock traded on the NASDAQ SmallCap market from when
it began public trading in February of 1997 until August 10, 2001, under the
symbol PRTK. On August 13, 2001, the Company's Common Stock was delisted from
the NASDAQ SmallCap market and began trading on the Over the Counter Bulletin
Board under the same symbol.

   The following table sets forth the high and low closing sale prices for the
Company's Common Stock for the past two fiscal years as reported by NASDAQ.
The quotations reflect inter-dealer prices, with retail mark-up, mark-down or
commissions, and may not represent actual transactions.

<TABLE>
<CAPTION>
                                                                      Range of
                                                                     Sale Prices
                                                                     -----------
                                                                     High   Low
                                                                     ----- -----
   <S>                                                               <C>   <C>
   Fiscal Year 2001
     First Quarter.................................................. $3.85 $2.13
     Second Quarter................................................. $3.00 $1.25
     Third Quarter.................................................. $2.50 $1.25
     Fourth Quarter................................................. $2.50 $1.25

   Fiscal Year 2000
     First Quarter.................................................. $8.19 $6.50
     Second Quarter................................................. $7.94 $5.75
     Third Quarter.................................................. $7.50 $5.50
     Fourth Quarter................................................. $6.00 $2.41
</TABLE>

Holders

   As of September 25, 2001, the Company had approximately 1,056 holders of
record of the Company's Common Stock.

Dividends

   The payment of dividends by the Company is within the discretion of its
Board of Directors and depends in part upon the Company's earnings, capital
requirements, debt covenants and financial condition. Since its inception, the
Company has not paid any dividends on its Common Stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.

Item 6. Management's Discussion and Analysis or Plan of Operation

Overview

 Sales

   We derive revenue solely from the sale of the EMW inspection service. The
Company relies upon several employees, including the Chief Executive Officer,
the Chief Operating Officer and the Vice President--Field Operations, for the
Company's sales functions. The Company relies solely upon the employees of the
Company to conduct its sales activities.

   In fiscal 2001, all of the Company's sales were attributable to seven
customers. Only one of the Company's customers accounted for more than 10% of
its net sales in fiscal 2001, and 82% of the Company's net sales were
attributable to that customer.

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 Marketing

   The Company's sales and marketing strategy includes positioning the
Company's EMW as the method of choice to detect pipeline corrosion where the
pipelines are either inaccessible to other inspection tools or much more
costly to inspect with tools other than Profile's EMW inspection. The Company
does not have a designated sales force, but currently relies upon several
employees, including the Chief Executive Officer, the Chief Operating Officer
and the Vice President--Field Operations, for the Company's sales functions.

Results of Operations

   Revenues for the year ended June 30, 2001 were $320,929, which represented
an increase of $96,150, or 43% as compared to revenues of $224,779 for the
year ended June 30, 2000. This increase was due to additional work performed
in the North Slope of Alaska. Revenues for the year ended June 30, 2001 were
derived predominantly from work performed on the North Slope. During the
period, work was also performed for a refiner and a natural gas utility.
Revenues also include research and development activities that have been
sponsored by large multi-national oil companies and large utilities, including
field demonstrations at such companies' facilities.

   Cost of revenue increased 266% to $402,985 for the year ended June 30, 2001
compared to $110,175 for the year ended June 30, 2000. The increase in the
cost of revenue for the year ended June 30, 2001 was a result of a higher
headcount of employees available to work on customer projects as compared to
the year ended June 30, 2000.

   Gross profit (loss) decreased to loss of $82,056 for the year ended June
30, 2001 from profit of $114,604 for the year ended June 30, 2000. The
decrease in gross profit for the year ended June 30, 2001 as compared to the
previous year resulted from higher costs of revenues offset partially by an
increase in revenues.

   Research and development expenses for the year ended June 30, 2001
increased 6% to $316,569 from $299,282 for the year ended June 30, 2000, an
increase of $17,287.

   General and administrative expenses decreased 19% to $1,085,474 for the
year ended June 30, 2001 from $1,334,227 for the year ended June 30, 2000. The
decrease is due to a reduction in discretionary expenditures and a higher
portion of the salaries of employees with administrative and service delivery
functions being allocated to cost of revenue.

   Loss from operations decreased 2% to $1,484,099 for the year ended June 30,
2001 compared to $1,518,905 for the year ended June 30, 2000.

   Interest income decreased to $59,096 for the year ended June 30, 2001 down
from $128,868 for the year ended June 30, 2000. This decrease was the result
of declining cash and cash equivalent balances during the year as the Company
used such resources to sustain its commercial operations and research and
development activities.

   Net Loss increased 3% to $1,425,003 for the year ended June 30, 2001
compared to $1,390,035 for the year ended June 30, 2000.

New Accounting Pronouncements

   In July 2001, the Financial Accounting Standards Board issued Statement No.
141 "Business Combinations" and Statement No. 142 "Goodwill and Other
Intangible Assets." Statement No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting, and specifies criteria for recognizing intangible assets acquired
in a business combination. Statement No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Intangible assets with
definite useful lives, such as the Company's patents

                                       9
<PAGE>

which have a net book value of $230,492 as of June 30, 2001, will continue to
be amortized over their respective estimated useful lives. The Company is
required to adopt the provisions of Statement No. 141 immediately and
Statement No. 142 effective July 1, 2002. The impact of adopting Statement No.
141 was not material. Because of the extensive effort needed to comply with
adopting Statement No. 142, it is not practicable to reasonably estimate the
impact of adopting this Statement on the Company's financial statements at
this time.

Liquidity and Capital Resources

   Net cash used in operating activities was $1,375,364 for the year ended
June 30, 2001 compared with $1,168,539 for the year ended June 30, 2000,
primarily as a result of the net loss offset by changes in certain assets and
liabilities.

   Net cash used in investing activities was $62,610 for the year ended June
30, 2001 compared with $239,326 for the year ended June 30, 2000, as the
Company decreased its purchases of equipment.

   The Company did not have cash flows from financing activities for the year
ended June 30, 2001 compared to $11,250 for the year ended June 30, 2000. All
of the cash flow from financing activities were the proceeds from the exercise
of common stock purchase warrants.

   The Company's cash and cash equivalents as of June 30, 2001 were $306,058.
At June 30, 2001, the Company had working capital of $310,709 and no material
long-term commitments or material commitments for capital expenditures.

   Management is currently directing the Company's activities towards
obtaining additional service contracts, which will necessitate the Company
attracting, hiring, training and outfitting qualified technicians. The
Company's intention is to purchase such equipment for its field crews for the
foreseeable future, until such time as the scope of operations may require
alternate sources of financing equipment. There can be no assurance that the
Company's process will gain widespread commercial acceptance within any
particular time frame, or at all. The Company will incur additional expenses
as it hires and trains field crews and support personnel related to the
successful receipt of commercial contracts. At the present time the Company
anticipates that it may need one additional crew to service future contracts,
but it cannot be certain until contract negotiations are complete.

   The Company anticipates that capital will be expended to develop
infrastructure to support anticipated future growth. As a result, it is
expected that cash will be used in operations and to meet capital expenditure
requirements. The Company expects that accounts receivable and contract work-
in-progress will continue to increase to the extent revenues rise. Any such
increase that occurs at the same time or a greater rate than increase in
revenue can be expected to reduce cash and cash equivalents. The Company has
incurred cumulative losses of $6,825,362 through June 30, 2001 and had working
capital of only $310,709 as of June 30, 2001. Management recognizes that in
order to meet the Company's capital requirements, additional financing, in
addition to $227,500 raised subsequent to June 30, 2001 will be necessary. The
Company is evaluating alternative sources of financing to improve its cash
position and is undertaking efforts to raise capital. If the Company is unable
to raise additional capital or secure additional revenue contracts and
generate positive cash flow, there can be no assurance that the Company will
be able to continue as a going concern.

Subsequent Events

   In August 2001, the Company was advised by NASDAQ staff that the Company
was delisted from the NASDAQ SmallCap Market. The Company began trading on the
Over the Counter Bulletin Board (OTCBB) on August 13, 2001 under the symbol
PRTK, which is the same symbol the Company traded under on the NASDAQ SmallCap
Market.

   Subsequent to June 30, 2001, the Board of Directors approved a financing
initiative to issue up to 1,250,000 shares of common stock at a price per
share of $0.60 and one warrant with an exercise price of $1.00 per share for
each share of stock subscribed. In connection with this financing, in August
2001, the Company raised

                                      10
<PAGE>

$227,500 through stock subscriptions for 379,167 shares of its common stock
and issued warrants to purchase approximately 379,167 shares of the Company's
common stock with an exercise price of $1.00 per share and a five-year term.

Forward Looking Statements

   Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and elsewhere in this Report
and in the Company's periodic filings with the Securities and Exchange
Commission constitute forward-looking statements. These statements involve
known and unknown risks, significant uncertainties and other factors that may
cause actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements.

   In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology.

   The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that the Company will obtain or have
access to adequate financing for each successive phase of its growth, that the
Company will market and provide products and services on a timely basis, that
there will be no material adverse competitive or technological change in
condition of the Company's business, that demand for the Company's products
and services will significantly increase, that the Company's executive
officers will remain employed as such by the Company, that the Company's
forecasts accurately anticipate market demand and that there will be no
material adverse change in the Company's operations, business or governmental
regulation affecting the Company or its customers. The foregoing assumptions
are based on judgments with respect to, among other things, future economic,
competitive and market conditions, and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the Company's control.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements.

Item 7. Financial Statements

                          PROFILE TECHNOLOGIES, INC.

                             Financial Statements

                            June 30, 2001 and 2000

                  (With Independent Auditors' Report Thereon)

                               Table of Contents

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Independent Auditors' Report............................................... F-1
Balance Sheet.............................................................. F-2
Statements of Operations................................................... F-3
Statements of Stockholders' Equity......................................... F-4
Statements of Cash Flows................................................... F-5
Notes to Financial Statements.............................................. F-6
</TABLE>

                                      11
<PAGE>

                         Independent Auditors' Report

The Board of Directors
Profile Technologies, Inc.:

   We have audited the accompanying balance sheet of Profile Technologies,
Inc. as of June 30, 2001, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the two-year
period ended June 30, 2001. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Profile Technologies, Inc.
as of June 30, 2001, and the results of its operations and its cash flows for
each of the years in the two-year period ended June 30, 2001, in conformity
with accounting principles generally accepted in the United States of America.

   The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 6 to the
financial statements, the Company has incurred net losses since inception and
has projected working capital requirements at June 30, 2001 that raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 6.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

                                                        /s/ KPMG LLP
                                          By: _________________________________
                                                          KPMG LLP

Seattle, Washington
September 14, 2001

                                      F-1
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                                 Balance Sheet

                                 June 30, 2001


<TABLE>
<CAPTION>
                              ASSETS
<S>                                                                <C>
Current assets:
  Cash and cash equivalents....................................... $   306,058
  Accounts receivable.............................................      32,129
  Contract work-in-progress.......................................      17,850
  Prepaid expenses and other current assets.......................      31,969
                                                                   -----------
    Total current assets..........................................     388,006
                                                                   -----------
Equipment, at cost................................................     528,171
  Less accumulated depreciation...................................    (315,627)
                                                                   -----------
    Net equipment.................................................     212,544
                                                                   -----------
Patents, net of accumulated amortization of $192,494..............     230,492
Other assets......................................................      11,008
                                                                   -----------
    Total assets.................................................. $   842,050
                                                                   ===========
<CAPTION>
               LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                                <C>
Current liabilities:
  Accounts payable--stockholder................................... $     3,262
  Other accounts payable..........................................      52,524
  Accrued liabilities.............................................      21,511
                                                                   -----------
    Total current liabilities.....................................      77,297
                                                                   -----------
Stockholders' equity (deficit):
  Common stock, $0.001 par value. Authorized 10,000,000 shares;
   issued and outstanding 4,285,092 shares........................       4,285
  Additional paid-in capital......................................   7,585,830
  Accumulated deficit.............................................  (6,825,362)
                                                                   -----------
    Total stockholders' equity....................................     764,753
                                                                   -----------
Commitments, contingencies and subsequent events..................
                                                                   -----------
    Total liabilities and stockholders' equity.................... $   842,050
                                                                   ===========
</TABLE>

                See accompanying notes to financial statements.

                                      F-2
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                            Statements of Operations

                       Years ended June 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                        2001         2000
                                                     -----------  -----------
<S>                                                  <C>          <C>
Revenues............................................ $   320,929  $   224,779
Cost of revenues....................................     402,985      110,175
                                                     -----------  -----------
    Gross profit (loss).............................     (82,056)     114,604
                                                     -----------  -----------
Costs and expenses:
  Research and development..........................     316,569      299,282
  General and administrative........................   1,085,474    1,334,227
                                                     -----------  -----------
    Total costs and expenses........................   1,402,043    1,633,509
                                                     -----------  -----------
    Loss from operations............................  (1,484,099)  (1,518,905)
Interest income.....................................      59,096      128,868
                                                     -----------  -----------
    Net loss........................................ $(1,425,003) $(1,390,037)
                                                     ===========  ===========
Basic and diluted net loss per share................ $      0.33  $      0.32
                                                     ===========  ===========
Shares used to calculate basic and diluted net loss
 per share..........................................   4,285,092    4,283,009
                                                     ===========  ===========
</TABLE>


                See accompanying notes to financial statements.

                                      F-3
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                       Statements of Stockholders' Equity

                       Years ended June 30, 2001 and 2000

<TABLE>
<CAPTION>
                            Common stock   Additional                  Total
                          ----------------  paid-in   Accumulated  stockholders'
                           Shares   Amount  capital     deficit       equity
                          --------- ------ ---------- -----------  -------------
<S>                       <C>       <C>    <C>        <C>          <C>
Balances at June 30,
 1999...................  4,275,092 $4,275 7,561,758  (4,010,322)    3,555,711
Exercise of common stock
 purchase warrants......     10,000     10    11,240          --        11,250
Net loss................         --     --        --  (1,390,037)   (1,390,037)
                          --------- ------ ---------  ----------    ----------
Balances at June 30,
 2000...................  4,285,092  4,285 7,572,998  (5,400,359)    2,176,924
Issuance of common stock
 purchase warrants for
 services...............         --     --    12,832          --        12,832
Net loss................         --     --        --  (1,425,003)   (1,425,003)
                          --------- ------ ---------  ----------    ----------
Balances at June 30,
 2001...................  4,285,092 $4,285 7,585,830  (6,825,362)      764,753
                          ========= ====== =========  ==========    ==========
</TABLE>



                See accompanying notes to financial statements.

                                      F-4
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                            Statements of Cash Flows

                       Years ended June 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                         2001         2000
                                                      -----------  -----------
<S>                                                   <C>          <C>
Cash flows from operating activities:
  Net loss..........................................  $(1,425,003) $(1,390,037)
  Adjustments to reconcile net loss to net cash used
   in operating activities:
    Depreciation and amortization...................      152,657      105,645
    Stock compensation..............................       12,832           --
    Accounts receivable.............................      (17,829)         806
    Contract work-in-progress.......................       51,929       17,971
    Prepaid expenses and other current assets.......       14,303      (21,710)
    Other assets....................................       (1,015)          --
    Accounts payable--stockholder...................        2,084       (6,245)
    Other accounts payable..........................      (21,136)      47,834
    Accrued liabilities.............................     (144,186)      77,197
                                                      -----------  -----------
    Net cash used in operating activities...........   (1,375,364)  (1,168,539)
                                                      -----------  -----------
Cash flows from investing activities:
  Patents...........................................      (15,000)     (99,718)
  Purchase of equipment.............................      (47,610)    (139,608)
                                                      -----------  -----------
    Net cash used in investing activities...........      (62,610)    (239,326)
                                                      -----------  -----------
Cash provided by financing activities--proceeds from
 exercise of common stock purchase warrants.........           --       11,250
                                                      -----------  -----------
    Decrease in cash and cash equivalents...........   (1,437,974)  (1,396,615)
Cash and cash equivalents at beginning of year......    1,744,032    3,140,647
                                                      -----------  -----------
Cash and cash equivalents at end of year............  $   306,058  $ 1,744,032
                                                      ===========  ===========
</TABLE>


                See accompanying notes to financial statements.

                                      F-5
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                         NOTES TO FINANCIAL STATEMENTS

                            June 30, 2001 and 2000

(1) Nature of Business and Summary of Significant Accounting Policies

 (a) Nature of Business

   Profile Technologies, Inc. (Company), was incorporated in 1986 and
commenced operations in fiscal year 1989. The Company is developing and
commercializing potential processes for the nondestructive, noninvasive
testing of both above ground and buried pipelines for the effectiveness of
pipeline cathodic protecting systems and coating integrity. The Company's
marketing and development efforts have primarily been focused towards large
multinational oil companies.

 (b) Contract Revenue Recognition

   Revenue from service contracts primarily relates to testing of industrial
pipeline integrity and is recognized using the percentage-of-completion method
of contract accounting. Contract revenues earned are measured using either the
percentage-of-contract costs incurred to date to total estimated contract
costs or, when the contract is based on measurable units of completion,
revenue is based on the completion of such units.

   Anticipated losses on contracts, if any, are charged to earnings as soon as
such losses can be estimated. Changes in estimated profits on contracts are
recognized during the period in which the change in estimate is known.
   The Company records claims for additional compensation on contracts upon
revision of the contract to include the amount to be received for the
additional work performed. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools and repairs, and depreciation costs. Selling,
general and administrative costs are charged to expense as incurred. Service
contracts generally extend no more than six months.

 (c) Research and Development

   Research and development costs are expensed when incurred.

 (d) Equipment

   Equipment is stated at cost and is depreciated using the straight-line
method over estimated useful lives of three to seven years.

 (e) Patents

   Patent and related application costs are amortized using the straight-line
method over their estimated useful lives of approximately four to six years.
The Company assesses the recoverability of this intangible asset by
determining whether the balance can be recovered through forecasted future
operations. The amount of impairment, if any, is measured based on projected
future results using a discount rate reflecting the Company's assumed average
cost of funds.

 (f) Income Taxes

   Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded for deferred tax assets when
it is more likely than not that such deferred tax assets will not be realized.

                                      F-6
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                            June 30, 2001 and 2000


 (g) Major Customers

   All of the Company's revenues were from seven and five customers for the
years ended June 30, 2001 and 2000, respectively.

   Information related to the Company's customers accounting for greater than
10% of revenues follows:

<TABLE>
<CAPTION>
                                                      Year              June 30,
                                                     ended    June 30,    2001
                                                    June 30,    2001    Contract
                                                      2001    Accounts  work-in-
                                                    Revenues receivable progress
                                                    -------- ---------- --------
      <S>                                           <C>      <C>        <C>
      Customer A...................................    82%        --    $17,850
      Customer B...................................    --         --         --
      Customer C...................................    --         --         --
<CAPTION>
                                                      Year              June 30,
                                                     ended    June 30,    2000
                                                    June 30,    2000    Contract
                                                      2000    Accounts  work-in-
                                                    Revenues receivable progress
                                                    -------- ---------- --------
      <S>                                           <C>      <C>        <C>
      Customer A...................................    --         --    $    --
      Customer B...................................    59%     6,800         --
      Customer C...................................    22%        --     48,450
</TABLE>

     The loss of Customer A or the Company's failure to broaden the base of
  customers in 2002, could have a material adverse effect on the Company.
  Accounts receivable at June 30, 2001 and 2000 was from three and two
  customers, respectively, and contract work-in-progress was with one and two
  customers, respectively.

 (h) Cash Equivalents

   The Company considers all short-term investments with a maturity date at
purchase of three months or less to be cash equivalents.

 (i) Net Loss Per Share

   Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. As the Company had a net loss
in each of the periods presented, basic and diluted net loss per share is the
same.

   Excluded from the computation of diluted loss per share for the year ended
June 30, 2001 are warrants and options to acquire 1,441,000 shares of common
stock with a weighted average exercise price of $4.23 because their effect
would be antidilutive. Excluded from the computation of diluted loss per share
for the year ended June 30, 2000 are warrants and options to acquire 1,296,000
shares of common stock with a weighted average exercise price of $4.12 because
their effect would be antidilutive.

 (j) Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                      F-7
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                            June 30, 2001 and 2000


 (k) Patents, Proprietary Technology and Other Intellectual Property

   The Company pursues a policy of generally obtaining patent protection both
in the United States of America and abroad for patentable subject matter in
its proprietary technology. The Company's success depends in a large part upon
its ability to protect its products and technology under United States of
America and international patent laws and other intellectual property laws.
U.S. patents have a term of 17 years from date of issuance and patents in most
foreign countries have a term of 20 years from the proprietary filing date of
the patent application.

   The Company believes that it owns and has the right to use or license all
proprietary technology necessary to license and market its products under
development. The Company is not aware of the issuance of any patents or the
filing of any patent applications which relate to processes or products which
utilize the Company's proprietary technology in a manner which could be
similar to or competitive with the Company's products or processes. The
Company has no knowledge that it is infringing on any existing patent such
that it would be prevented from marketing or licensing products or services
currently being developed by the Company.

 (l) Financial Instruments and Concentrations of Credit Risk

   Financial instruments which potentially subject the Company to
concentrations of credit risk include cash equivalents, accounts receivable,
and contract work-in-progress. The fair value of these instruments
approximates their financial statements carrying amount. Credit is extended to
customers based on an evaluation of their financial condition. The Company
does not require any collateral. The Company regularly invests funds in excess
of its immediate needs in money market mutual funds. These funds are generally
uninsured and subject to investment risk. Included with cash and cash
equivalents were amounts held in the funds totaling $302,760 at June 30, 2001.

 (m) Stock-Based Compensation

   The Company has elected to follow the measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for its employee stock options rather
than the alternative fair value accounting provided for by Statements of
Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock
Based Compensation. Compensation cost for stock options issued to employees is
measured as the excess, if any, of the fair market price of the Company's
stock at the date of grant over the amount an employee must pay to acquire the
stock. Pro forma results are presented as if compensation costs for stock
options issued to employees had been determined pursuant to SFAS No. 123.

   The Company recognizes compensation cost, if any, related to fixed employee
awards on an accelerated basis over the applicable vesting period using the
methodology described in FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans.

 (n) New Accounting Pronouncements

   Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). The adoption of SFAS 133 did not impact the
Company's consolidated financial statements as of July 1, 2000.

   SFAS 133, as amended, requires that all derivative instruments be recorded
on the balance sheet at fair value. Changes in the fair value of derivatives
are recorded each period in current results of operations or other
comprehensive income (loss) depending on whether a derivative is designated as
part of a hedge transaction, and if so, the type of risk being hedged.

                                      F-8
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                            June 30, 2001 and 2000


   For a derivative designated as a fair value hedge, the gain or loss of the
derivative in the period of change and the offsetting loss or gain of the
hedged item attributed to the hedged risk are recognized in results of
operations. For a derivative designated as a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component
of other comprehensive income (loss) and subsequently reclassified into
results of operations when the hedged exposure affects results of operations.
The ineffective portion of the gain or loss of a cash flow hedge is recognized
immediately in results of operations. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in results of operations in
the period of change.

   The Company had no derivative financial instruments outstanding at June 30,
2001.

   In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 was
effective July 1, 2000. This interpretation provides guidance for applying APB
Opinion No. 25, Accounting for Stock Issued to Employees. The adoption of FIN
44 did not have a material impact on its financial statements.

   In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 141
requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and specifies criteria for
recognizing intangible assets acquired in a business combination. Statement
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
annually. Intangible assets with definite useful lives, such as the Company's
patents which have a net book value of $230,492 as of June 30, 2001, will
continue to be amortized over their respective estimated useful lives. The
Company is required to adopt the provisions of Statement No. 141 immediately
and Statement No. 142 effective July 1, 2002. The impact of adopting Statement
No. 141 was not material. Because of the extensive effort needed to comply
with adopting Statement No. 142, it is not practicable to reasonably estimate
the impact of adopting this statement on the Company's financial statements at
this time.

 (o) Reclassifications

   Certain reclassifications have been made to the 2000 amounts to conform to
the 2001 presentation.

 (p) Segment Reporting

   The Company operates in one business segment. Revenues consist almost
entirely of fees generated from providing testing services. Expenses incurred
to date are reported according to their expense category. No further segment
segregation is considered meaningful at this time.

   The Company's customers are located in the United States and various
foreign countries, however, no revenue has been generated from contracts with
customers in foreign countries in 2001 or 2000.

(2) Related Parties

 (a) Accounts Payable--Stockholder

   At June 30, 2001, the Company owed $3,262 to a stockholder of the Company
for business expenses.

 (b) Consulting Services and Wages

   Consulting fees were paid to a stockholder of the Company, Dr. John Kuo,
totaling approximately $100,000 and $130,000 for the years ended June 30, 2001
and 2000, respectively.

                                      F-9
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                            June 30, 2001 and 2000


 (c) Royalty Arrangement

   In July 1988, the primary technology rights used by the Company were
contributed by Northwood Enterprises Inc. (NEI), a company wholly-owned by
certain Company stockholders. In exchange for contributing the technology, the
Company agreed to pay a royalty of 4% of the Company's net earnings before
taxes to certain Company stockholders. When the Company becomes profitable,
royalties will be due quarterly. In March 1996, an additional 1% royalty
arrangement was awarded to a director of the Company in exchange for his
expertise, technological know-how and proprietary information and trade
secrets. No amounts are payable under these arrangements.

(3) Income Taxes

   Federal income taxes reported by the Company differ from the amount
computed by applying the statutory rate due primarily to an increase in the
valuation allowance for deferred tax assets.

   The tax effect of temporary differences that give rise to significant
portions of federal deferred tax assets are comprised of the following at June
30, 2001:

<TABLE>
      <S>                                                            <C>
      Deferred tax assets:
        Net operating loss carryforwards............................ $2,017,000
        Stock compensation..........................................    296,000
        Research and experimentation credit carryforwards...........    121,000
                                                                     ----------
          Gross deferred tax assets.................................  2,434,000
      Less valuation allowance...................................... (2,434,000)
                                                                     ----------
          Net deferred tax assets................................... $       --
                                                                     ==========
</TABLE>

   The net increase in the valuation allowance for deferred tax assets was
$493,000 and $481,000 for 2001 and 2000, respectively. The increases were
primarily due to net operating loss carryforwards, the realization of which
was uncertain.

   For federal income tax purposes, the Company has net operating loss
carryforwards at June 30, 2001 available to offset future federal taxable
income, if any, of approximately $5,932,000 which begin to expire in 2003. In
addition, the Company has research and experimentation tax credit
carryforwards of approximately $121,000 at June 30, 2001 which are available
to offset federal income taxes and begin to expire in 2003.

   The utilization of the tax net operating loss carryforwards may be limited
due to ownership changes that have occurred as a result of sales of common
stock.

   The effects of state income taxes were insignificant for 2001 and 2000.

(4) Stock-Based Compensation

   The Company has granted stock options and warrants to compensate key
employees, consultants and board members for past and future services. During
1999, the Company adopted a stock option plan (Plan). The Plan provides for
both incentive and non-qualified stock options to be granted to employees,
officers, directors and consultants. The Company has reserved 500,000 shares
of common stock for option grants under the Plan.

                                     F-10
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                             June 30, 2001 and 2000


   A summary of warrant-related activity follows:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        average
                                                             Number of  exercise
                                                              shares     price
                                                             ---------  --------
<S>                                                          <C>        <C>
Outstanding at June 30, 1999................................ 1,210,000   $3.836
Grants......................................................        --       --
Exercises...................................................   (10,000)   1.125
Forfeitures.................................................        --       --
                                                             ---------
Outstanding at June 30, 2000................................ 1,200,000    3.860
Grants......................................................   100,000    6.000
Exercises...................................................        --       --
Forfeitures.................................................        --       --
                                                             ---------
Outstanding at June 30, 2001................................ 1,300,000   $4.023
                                                             =========   ======
</TABLE>

   The following is a summary of warrants outstanding, all of which are
exercisable at June 30, 2001:

<TABLE>
<CAPTION>
                                                       Weighted-
                                                        average
                                                       remaining                Weighted-
                                                      contractual                average
         Exercise             Number                     life                   exercise
          prices            outstanding                 (years)                   price
         --------           -----------               -----------               ---------
       <S>                  <C>                       <C>                       <C>
       $1.125-1.50             345,000                   6.33                     $1.17
         3.00-3.50             555,000                   6.33                      3.26
         7.20-7.50             190,000                   6.33                      7.33
           6.00                100,000                   2.33                      6.00
           8.40                 90,000                   6.33                      8.40
          13.50                 20,000                   6.33                     13.50
                             ---------
       $1.125-13.50          1,300,000                   6.02                     $4.02
       ============          =========                   ====                     =====
</TABLE>

   A summary of stock option-related activity follows:

<TABLE>
<CAPTION>
                                                                   Options
                                                                 outstanding
                                                               -----------------
                                                                        Weighted
                                                      Shares   Number   average
                                                     available   of     exercise
                                                     for grant shares    price
                                                     --------- -------  --------
      <S>                                            <C>       <C>      <C>
      Balance at June 30, 1999......................  454,000   46,000   $10.34
      Grants........................................  (65,000)  65,000     5.92
      Forfeitures...................................   15,000  (15,000)   10.00
                                                      -------  -------
      Balance at June 30, 2000......................  404,000   96,000     7.40
      Grants........................................  (45,000)  45,000     3.56
                                                      -------  -------   ------
      Balance at June 30, 2001......................  359,000  141,000   $ 6.17
                                                      =======  =======   ======
</TABLE>

                                      F-11
<PAGE>

                          PROFILE TECHNOLOGIES, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)

                            June 30, 2001 and 2000


   The following is a summary of stock options outstanding at June 30, 2001:

<TABLE>
<CAPTION>
                         Options outstanding              Options exercisable
                 --------------------------------------  ------------------------
                                Weighted-
                                 average
                                remaining    Weighted-                 Weighted-
                               contractual    average                   average
    Exercise       Number         life       exercise      Number      exercise
     prices      outstanding     (years)       price     exercisable     price
    --------     -----------   -----------   ---------   -----------   ---------
   <S>           <C>           <C>           <C>         <C>           <C>
   $   2.00         10,000        4.67        $ 2.00         5,000      $ 2.00
       4.00         35,000        4.38          4.00        35,000        4.00
       5.00         25,000        6.33          5.00        25,000        5.00
       6.50         40,000        6.33          6.50        40,000        6.50
      10.50         31,000        6.33         10.50        31,000       10.50
   -----------     -------        ----        ------       -------      ------
   $2.00-10.50     141,000        5.73        $ 6.17       136,000      $ 6.33
   ===========     =======        ====        ======       =======      ======
</TABLE>

   The Company applies APB Opinion No. 25 and related interpretations in
accounting for option and warrant grants to employees. Had compensation cost
for the Company's option and warrant awards been determined consistent with
SFAS No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:

<TABLE>
<CAPTION>
                                                            Years ended June 30,
                                                            --------------------
                                                               2001      2000
                                                            ---------- ---------
      <S>                                                   <C>        <C>
      Net loss:
        As reported........................................ $1,425,003 1,390,037
        Pro forma..........................................  1,501,203 1,582,970
      Net loss per share:
        As reported........................................ $      .33       .32
        Pro forma..........................................        .35       .37
</TABLE>

   During 2001, the Company recorded stock compensation expense totaling
$12,832 for the fair market value of 100,000 warrants granted to a third-party
in exchange for services. The warrants were valued using the Black-Scholes
option pricing model and the assumptions listed below.

   The weighted average fair value per share of the option grants made during
the year ended June 30, 2001, where the exercise price of the underlying stock
exceeded the fair value was $1.73. The weighted average fair value of the
option grants made during the year ended June 30, 2000, where the fair value
of the underlying stock equaled the exercise price was $2.17.

   The fair value of option and warrant grants is estimated using the Black-
Scholes option pricing model with the following weighted average assumptions
used for grants in 2001: expected volatility of 82%, risk-free interest rate
of 5.40%, expected lives of 3.6 years, and a 0% dividend yield. The weighted
average assumptions used for grants in 2000 are as follows: expected
volatility of 50%, risk-free interest rate of 6.2%, expected lives of 4.5
years, and a 0% dividend yield.

(5) Operating Leases

   The Company leases office facilities in various states under operating
lease agreements that expire during 2002 and 2003. Future minimum rental
payments on operating leases are $68,592 and $13,854 for 2002 and 2003,
respectively.

                                     F-12
<PAGE>

                           PROFILE TECHNOLOGIES, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)

                             June 30, 2001 and 2000


   Total rent expense under operating leases was $93,529 and $99,120 during
2001 and 2000, respectively.

(6) Liquidity

   The accompanying financial statements have been prepared assuming the
Company will continue as a going concern.

   The Company has incurred cumulative losses of $6,825,362 through June 30,
2001 and had working capital of only $310,709 as of June 30, 2001.
Additionally, the Company has expended a significant amount of cash in
developing its technology and patented processes. Management recognizes that in
order to meet the Company's capital requirements, additional financing, in
addition to that raised subsequent to June 30, 2001 as disclosed in note 7,
will be necessary. The Company is evaluating alternative sources of financing
to improve its cash position and is undertaking efforts to raise capital. If
the Company is unable to raise additional capital or secure additional revenue
contracts and generate positive cash flow, there can be no assurance that the
Company will be able to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

(7) Subsequent Events

 (a) Sale of Common Stock and Common Stock Purchase Warrants

   Subsequent to June 30, 2001, the Board of Directors approved a financing
initiative to issue up to 1,250,000 shares of common stock at a price per share
of $0.60 and one warrant with an exercise price of $1.00 per share for each
share of stock subscribed. In connection with this financing, in August 2001,
the Company raised $227,500 through stock subscriptions for 379,167 shares of
its common stock and issued warrants to purchase approximately 379,167 shares
of the Company's common stock with an exercise price of $1.00 per share and a
five year term.

 (b) NASDAQ Delisting

   On June 27, 2001, the Company announced that it received a Nasdaq Staff
Determination on June 20, 2001, indicating that the Company failed to comply
with the minimum bid price and net tangible asset/shareholder equity
requirements of the Nasdaq Marketplace Rules for continued listing set forth in
Marketplace Rule 4310(c)(4), and that its securities were, therefore, subject
to delisting from the Nasdaq SmallCap Market. On August 10, 2001, the Nasdaq
Stock Market suspended trading in the Company's common stock. Effective Monday,
August 13, the Company began trading on the Over the Counter Bulletin Board
under the symbol PRTK.

                                      F-13
<PAGE>

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

   Not Applicable.

                                    Part III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act

   Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held November 13, 2001.

Item 10. Executive Compensation

   Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held November 13, 2001.

Item 11. Security Ownership of Certain Beneficial Owners and Management

   Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held November 13, 2001.

Item 12. Certain Relationships and Related Transactions

   Information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with respect to its Annual
Meeting of Stockholders to be held November 13, 2001.

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

<TABLE>
 <C>          <S>
 Exhibit 3.1  Articles of Incorporation (incorporated by reference to Exhibit
              3.1 to the Company's Registration Statement on Form SB-2 filed
              with the Commission on May 10, 1996).
 Exhibit 3.2  Bylaws of the Company (incorporated by reference to Exhibit 3.3
              to the Company's Registration Statement on Form SB-2 filed with
              the Commission on May 10, 1996).
 Exhibit 10.1 Service Agreement dated as of August 16, 2001 between Profile
              Technologies, Inc. and BP Exploration (Alaska) Inc.
 Exhibit 23.1 Consent of the Independent Public Accountants.
</TABLE>

                                       12
<PAGE>

                                  SIGNATURES

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

                                          PROFILE TECHNOLOGIES, INC.


                                                    /s/ Henry Gemino
Date: September 28, 2001                  By: _________________________________
                                                        Henry Gemino
                                                  Chief Executive Officer
                                                and Chief Financial Officer

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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
         /s/ Henry Gemino              Director, Chief Executive  September 28, 2001
______________________________________  Officer, and Chief
             Henry Gemino               Financial Officer
                                        (Principal Executive
                                        Officer, Principal
                                        Financial Officer and
                                        Principal Accounting
                                        Officer)

         /s/ G. L. Scott               Director, Chairman of the  September 28, 2001
______________________________________  Board
             G. L. Scott

         /s/ Murphy Evans              Director, President        September 28, 2001
______________________________________
             Murphy Evans

      /s/ John Tsungfen Kuo            Director, Vice-Chairman    September 28, 2001
______________________________________  and Chief Technology
          John Tsungfen Kuo             Officer

     /s/ Charles Christenson           Director                   September 28, 2001
______________________________________
         Charles Christenson

      /s/ William A. Krivsky           Director                   September 28, 2001
______________________________________
          William A. Krivsky
</TABLE>

                                      13