<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

                                  FORM 10-KSB
[X]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

     For the fiscal year ended December 31, 2001
                              or
[_]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934

     For the transition period from __________ to __________

                        Commission file number:  0-16217

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
                    ---------------------------------------
              (Exact Name of Small Business Issuer in Its Charter)


          DELAWARE                                       33-0041789
          --------                                       ----------
  (State or Other Jurisdiction              (I.R.S. Employer Identification No.)
of Incorporation or Organization)


                             14315 West Hardy Road
                              Houston, Texas 77060
                              --------------------
              (Address of principal executive offices)  (Zip Code)

                 Registrant's telephone number:  (281) 847-0029

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

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

                    Common Stock, par value $.001 per share
                    ---------------------------------------
                                (Title of Class)

          Check whether the registrant (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.
[X] YES  [_] NO

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

    State registrant's revenues for its most recent fiscal year: $1,609,888

          The aggregate market value of the voting common stock held by non-
affiliates computed by reference to the price at which the stock was sold as of
March 6, 2002 was $6,386,184.  The information provided shall in no way be
construed as an admission that any person whose holdings are excluded from the
figure is an affiliate or that any person whose holdings are included is not an
affiliate, and any such admission is hereby disclaimed.  The information
provided is solely for record keeping purposes of the Securities and Exchange
Commission.

                    Applicable Only to Corporate Registrants

          As of March 6, 2002, there were 36,527,778 Shares of Common Stock, par
value $.001 per share, outstanding.

        Transitional Small Business Disclosure Format (check one)
[_] YES   [X] NO
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                         PRIVATE SECURITIES LITIGATION

                        REFORM ACT SAFE HARBOR STATEMENT

     This Annual Report on Form 10-KSB and other public statements by the
Company includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.  We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions that may cause our 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 the use of the words "expect", "estimate", "project", "intend",
"plan," "will," "should," "could," "would," "anticipate," "believe," or the
negative of such words and similar expressions.  Factors that might cause our
actual results, levels of activity, performance or achievements to differ from
those expressed or implied in the forward-looking statements include, among
others, the risk factors described under the caption "Risk Factors" in Item 1 in
this Annual Report.  Additional factors are described in the Company's other
public reports filed with the Securities and Exchange Commission.  Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date made.  The Company undertakes no obligation to
publicly release the result of any revision of these forward-looking statements
to reflect events or circumstances after the date they are made or to reflect
the occurrence of unanticipated events.

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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

     As used in this report, "the Company" refers to North American Technologies
Group, Inc. ("NATK"), its wholly owned subsidiary, TieTek, Inc. ("TieTek") and
other subsidiaries.  NATK was incorporated in Delaware on December 24, 1986.

GENERAL DESCRIPTION OF BUSINESS

     The Company's principal business is the manufacture and marketing of
TieTek(TM) products through its TieTek subsidiary. The initial product is a
composite railroad crosstie that was conceived as a direct substitute for wood
crossties, but with a longer life and with several environmental advantages. The
TieTek crosstie has been successfully tested by a number of U.S. railroads and
independent laboratories. Since the first track installation in March 1996,
several thousand TieTek(TM) crossties have been installed under track in a
variety of load and environmental conditions where they continue to meet
performance expectations. TieTek began manufacturing and shipping its crosstie
from its facilities during the third quarter of 2000. In January 2000, the
Company entered into a contract to produce up to 250,000 crossties for Union
Pacific Railroad (UPR). As of March 1, 2002, the Company has sold over 20,000
crossties under the UPR contract.

     DESCRIPTION OF THE MARKET.     A railroad track is a total system
consisting of two steel rails which are held in place at a fixed distance apart
by steel plates which, in turn, are fastened to crossties.  The crossties are
supported by ballast on an improved roadbed.  Each component of the track
contributes to maintaining the rail "gauge" or spacing and to supporting and
distributing the forces of the loaded train.  Although different types of
"crossties" or "ties" have been used throughout the history of railroad
construction, the wooden crosstie has been the dominant product.  Hardwood ties
are relatively strong in tension (to hold the rails the correct distance apart
or "in gauge"), in bending (to uniformly distribute the load to the ballast),
and in compression (to support the rail) while providing enough flexibility to
cushion the impact of the wheels on the rail.  In addition, the "nailability" of
wood allows the rail and plate to be attached to the tie with simple and cost
effective steel spikes.

     The demand for new ties comes from two sectors: construction of new rail
lines and replacement of worn out or decayed ties under existing track.  The
construction of new track is dictated by the stage of industrialization and
corresponding economic growth in any particular region.  As is the case in most
industrialized nations, the demand for ties in new construction in the United
States has been minimal in recent years given the lack of expansion of the
current track system.  Thus, most of the demand for new ties in the U.S. is for
the replacement of old ties.  Current demand for new ties in North America is
estimated by the Company, based on industry reference materials, to exceed 16
million ties per year while demand in the rest of the world is estimated to be
more than 60 million ties per year.

     The worldwide supply of crossties falls into four primary categories: wood,
concrete, steel, and other alternatives.  According to industry statistics,
wooden ties dominate the market, providing about 86% of U.S. demand and about
75 - 80% in the rest of the world. In the U.S., concrete holds approximately a
10% market share, with steel and other alternate materials representing
approximately 1-3% of the market. In Western Europe, concrete and steel are more
widely used, each exceeding a 10% market share.

     While there are no absolute standards for railroad ties, the performance
for all ties is usually established relative to wooden ties.  Generally, the
technical requirements of a railroad crosstie are described as follows:

.. The tie must be able to support the weight and dynamic forces of the rail
  and train without damage to the tie or the rail.

.. The tie must be able to interact with the ballast and distribute the weight
  of the train to the underlying roadbed.

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.. The tie must be able to maintain the gauge of the track on straight runs and
  curves and prevent the rail from "rolling over" on curves.

.. The rail should be able to be fastened to the tie cheaply and efficiently. If
  spikes are used, the tie must be able to hold the spike for the life of the
  tie.

.. The tie must be stiff enough to support the load, but be flexible enough to
  absorb the impact and vibration of passing trains with minimal damage to the
  track, the train and the tie.

.. The tie should resist decay with minimal degradation of original properties
  over time.

.. The tie must not conduct electrical impulses between the rails.

     Over the years, these requirements have been evaluated by laboratory tests
and measurements, with hardwood ties setting the relative standard.  Alternate
crossties can be compared to wooden ties in these critical areas, but the
ultimate test is performance under load on actual track.  The Company's
crossties continue to perform successfully against these standards.

     TECHNOLOGY DEVELOPMENT.   The specific TieTek(TM) technology is based on
the Company's know-how to combine rubber and plastic to create products with
unique capabilities. TieTek determined that rubber and plastic alone could not
meet all the required performance criteria for railroad crossties, and after
years of product development, The Company has discovered a combination of
several different components that produce a composite crosstie with the desired
properties.

     The TieTek(TM) crosstie formula is a proprietary mixture of rubber from
recycled tires, plastics, other waste materials, additives, fillers and
reinforcement agents.  The current formulation was developed after extensive
theoretical, laboratory, pilot plant and full-scale production testing to
achieve a balance of flexibility, strength, hardness, weight, density,
nailability and other properties of wood.  The product development effort
recognized the need to be competitive with the price of wood by using lower cost
raw materials.  The Company believes the current formulation meets these
objectives.  While the primary focus of the Company is clearly to produce ties
based on the established technology, research will continue to further optimize
the performance and cost characteristics of the TieTek(TM) crosstie and to
evaluate other applications of the technology. The exact formulation of
TieTek(TM) crossties is proprietary and is covered under a current patent.

     The Company believes the TieTek(TM) crosstie meets the product
characteristic objectives that were initially established by market
requirements. The current crossties have consistent shape and dimensions and are
tough and durable in use under load. Unlike wooden ties, every TieTek(TM)
crosstie is essentially the same, and has consistent quality and properties. The
physical properties are comparable to wooden ties that have been in service just
a few years and tests have shown that the TieTek(TM) crosstie should maintain
its properties far longer than most wood ties. The TieTek(TM) crosstie can be
installed either manually or with automated equipment and can be fastened with
cut spikes or other systems. They contain no toxic preservatives and are
resistant to decay and bug infestation.

     INDEPENDENT PRODUCT TESTING.     The TieTek(TM) crosstie has undergone a
range of tests conducted at several independent testing facilities. The
TieTek(TM) crosstie was evaluated for compression strength, hardness, stiffness,
and three measures of spike performance in the tie (measuring resistance to
spike drive, spike pull and lateral movement) at The Wood Science Laboratory at
the University of Illinois under the direction of Dr. Poo Chow. The Laboratory
is partially funded by the American Association of Railroads ("AAR"), and is
highly credible with the railroad industry. In this series of tests, the
TieTek(TM) crosstie's performance was comparable to that of wooden ties in
service only a few years. The laboratory also conducted accelerated aging tests
which showed the TieTek(TM) crosstie had a slower rate of degradation of its
properties than is common with wooden ties. These tests indicate that the
TieTek(TM) crosstie can be used interchangeably with wood and will last longer
than most creosote-treated wooden ties.

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     The Company has also tested its crosstie at the Transportation Technology
Center (TTCI) testing facility in Pueblo, Colorado.  As a subsidiary of the AAR,
this independent industry facility tests new technologies concerning track,
ties, rails, fasteners, locomotives, and cars used in the U.S. railroad
industry.  TieTek's crossties at Pueblo have experienced over 500 million gross
tons of load (this test is ongoing), as well as 2 million vibrations in an
accelerated wear test with no problems of any kind.  The TTCI tests confirm that
the TieTek(TM) tie has met the requirements of the industry.

     These installations provide a wide range of operating conditions with
extremes of temperature and moisture, on soft track beds, with very heavy loads,
and in both curved and straight track.  The TieTek(TM) crossties installed to
date have experienced no performance problems.

     MANUFACTURING.  There are four basic functions in the TieTek manufacturing
process:

..  Raw Material Selection and Handling - There are several components in the
   crosstie formula. The process requires specifying, blending and mixing raw
   materials into a consistent feed to the downstream units. The know-how to
   achieve this consistent supply of low cost raw materials combines known
   industry equipment and practice with proprietary trade secrets that are
   critical to the technology.

..  Compounding and Mixing - Mixing, melting, and compounding the raw material
   components into consistent and homogeneous intermediate materials is required
   to achieve a final product with the desired performance characteristics. The
   raw materials have very different physical properties including weight,
   density, melting, and flow characteristics as well as several components that
   do not melt (non-melts). The process to mix all raw materials in optimal
   sequence to achieve target weight, consistent internal structure and
   specified physical properties required significant development work. The
   formula and sequence of the mixing process is integral to the TieTek(TM)
   technology and includes patented and other proprietary techniques that the
   Company believes are unique to the TieTek(TM) crosstie.

..  Shaping, Forming and Cooling - The tie forming process needs to be feedstock
   tolerant and easily operated and controlled to produce a product that is both
   dimensionally consistent and structurally sound. The TieTek(TM) technology
   produces a crosstie that closely resembles a wooden tie, with dimensions of
   7" x 9" x 9' (which can be modified to special order), and without unwanted
   twisting or warping. The process forms and cools the molten raw material
   formula into essentially identical, ready-to-ship crossties. The Company
   textures the exterior of the crosstie to improve interaction with the
   ballast.

..  Quality Assurance - TieTek has established a series of quality control steps
   to verify the structural integrity of each crosstie produced. The testing is
   non-destructive and provides a record of each crosstie for complete quality
   control of the manufacturing system, as well as improved customer confidence.
   The data provides process information for improved operation and continued
   product development.

     PRODUCTION. Approximately 45,000 TieTek(TM) crossties have been
manufactured to date. Currently, the Company is producing approximately 3,000
ties per month, most of which are being sold to UPR under contract. In its
current form, the initial production line is capable of producing up to
approximately 8,000 ties per month. Assuming certain improvements to the
production line are financed and completed, the Company plans to ramp-up its
production to approximately 8,000 ties per month by the end of the second
quarter of 2002, the maximum amount of production for its initial production
line. In addition, if financing is secured, the Company plans to place a second
production line in service during the third quarter of 2002 and a third
production line during the fourth quarter.

     RAW MATERIAL. The raw materials used in the Company's product have been
readily available from multiple suppliers. Avangard Industries, Inc. of Houston,
Texas, principally a supplier of recycled plastics, supplied 44% of all raw
material purchases to NATK during 2001. The availability, and more specifically
the price, of key raw materials will be critical to the cost of the TieTek(TM)
crosstie. Recycled plastic is a major raw material component whose price and
availability can fluctuate significantly. High prices and tight supply could
seriously affect the economics of manufacturing TieTek's(TM) crossties,
particularly during product introduction when it would be

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difficult to pass raw material price increases through to final product sales
price. Similarly, lower prices would lead to higher margins. Recognizing this
sensitivity, TieTek has focused on using a variety of low-grade sources of
recycled plastic that will be readily available and priced below other
materials. The TieTek(TM) technology and process design has been specifically
configured to readily accept recycled plastic that could not be processed into
solid parts or film using more conventional equipment. The flexibility of the
manufacturing process can therefore mitigate the impact of the recycled plastics
market to some extent. The Company will continue development efforts to broaden
the raw material slate without impacting the performance properties of the
finished crossties. Raw material supply and pricing will obviously have a direct
effect on the cost structure of this product line and the ultimate market price
of the crosstie and profitability.

     MARKETING. TieTek believes there are significant trends in the worldwide
market for crossties that are leading the railroad companies to actively search
for a functional composite tie that can economically serve as a replacement for
wooden creosote-treated ties. Factors affecting these trends are:

..  The railroad infrastructure in North America is mature and requires constant
   maintenance. The great majority of the more than 16 million ties purchased
   each year are replacements for aged wooden ties.

..  The ongoing trend to heavier loads and higher speeds will exacerbate the rate
   of failure of wooden ties.

..  There is a strong economic motivation to use longer life ties because the
   replacement and disposal of an old tie actually costs several times the cost
   of the new tie alone. In addition, the maintenance process can impact the
   freight carrying (and revenue producing) capacity of the track.

..  Quality hardwoods are in tight supply with declining areas of mature forests
   and environmental pressure to protect trees.

..  Wood ties must be protected with preservatives to achieve even a tolerable
   economic life. Creosote and other preservatives are toxic and potentially
   carcinogenic chemicals that pose a potential liability for the railroads.
   Environmentally sensitive areas have already questioned the ongoing impact of
   creosote treated wood crossties.

..  Wood ties are inconsistent with physical properties and quality varying from
   sawmill to sawmill.

     The TieTek(TM) crosstie is consistent, interchangeable with wood ties,
resists water and insect damage without preservatives and is produced from
recycled raw materials. Because of these advantages, the TieTek(TM) crosstie has
been successfully marketed as a premium alternative and replacement for wood
ties. Management believes that treated wooden ties cost between $25 and $40 in
the United States and substantially more in many parts of the world. The
TieTek(TM) tie has been sold at a significant premium over wood because it can
be installed as a direct replacement for wood with the same equipment, the same
fasteners, the same procedures and has superior life-of-the-tie economics.
TieTek(TM) ties have been sold to Class I, Short Line, Municipal and Transit
railroads. As a result of the UPR contract, the ties to be produced by the first
production line of the Houston plant are basically sold through early 2003,
including production increases and improvements projected in the Company's
business plan. Production from a second line and third line, if constructed,
would be sold to a wide spectrum of railroad customers, including the UPR.

     TieTek anticipates that, in addition to its current direct sales by Company
employees, it will employ a combination of marketing representatives, licensees,
joint venture partners, and other business combinations to manufacture, market
and distribute the product in both the United Sates and throughout the world.
The Company has also advertised in trade journals and has presented several
papers to railroad industry groups.  In addition, the TieTek(TM) crosstie has
been discussed in many articles appearing in the railroad industry trade press.

     LICENSING. In March 2001, the Company entered into agreements with partners
in India. TieTek executed a Memorandum of Understanding with ISCO Track Sleepers
Ltd. ("ISCO"), the largest manufacturer of concrete ties in India. Under the
terms of the agreement, ISCO made a minor up-front payment to TieTek and agreed
to work with TieTek on an exclusive basis to obtain government approval of the
TieTek(TM) tie in India.

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TieTek also executed a letter of intent with Owens Corning of India to jointly
market the TieTek(TM) technology in that country. During 2001, TieTek sold a
minor number of ties under this agreement, mainly for product testing purposes.

     In May 2001, the Company entered into an exclusive licensing agreement with
Oz-Tex Solutions Pty Ltd. for the market areas Australia/New Zealand.  The
agreement requires a base level license fee with agreed milestones and
percentage royalties based on production.  The licensee is proceeding on
schedule and all required payments to date have been paid.  During 2001, the
Company sold equipment to licensee for $140,000.  In February 2002, the licensee
paid the first required $100,000 installment to secure the license.

     MAJOR CUSTOMERS. For the years ended December 31, 2001, the Company had
sales to Union Pacific Railroad that represented 93% of total revenues. For the
year ended December 31, 2000, the Company had sales to two customers that
represented 76%, and 16% of total revenues.

     COMPETITION. The Company views the producers of hardwood ties as its
primary market competition. The treated wood tie industry in the U.S. is very
mature and entrenched with such large and well capitalized suppliers as Allied
Signal, Kerr McGee, Mellott Wood Preserving Company, Western Tar Products
Corporation and many others. The Company believes that the wood tie will
continue to be the dominant factor in the market for many years. The TieTek(TM)
tie is well positioned as an alternative tie that can be used as a direct
maintenance replacement for wood. Neither concrete nor steel can be used in a
mixed maintenance program with wood because the physical properties are
drastically different from wood. The Company believes that the primary market
niche for the TieTek(TM) crosstie is a share of the wood tie replacement market.

     Concrete and steel ties require special fasteners as well as dedicated
installation equipment and procedures.  The Company believes that concrete and
steel ties will continue to be used for new track (where incompatibility with
wood is not a problem) and other special situations, but that they will not
replace the wooden crosstie as the dominant technology.  The TieTek crosstie may
compete well with steel and concrete, particularly because the TieTek tie has a
cost advantage, but the largest and most logical market target for the Company
is to earn a share of the dominant wood tie segment.

     There have been many technical approaches to commercialize alternate ties
over the years.  For example, Cedrite, Inc. attempted to produce a crosstie made
from epoxy resin and wood chips, but the ties failed for technical reasons.
Several companies are currently attempting to create crossties made from plastic
(Polywood), plastic and glass fiber (U.S. Plastic Lumber), gypsum rock and
plastic (Polysum), and steel/concrete/rubber/plastic (Primix).  The Company
believes that it has a more salable, more proven and more accepted product and
technology than any competitor.  While there can be no assurance that a new and
competing technology cannot be developed to produce a crosstie that will be
successful in the marketplace, the Company intends to extend its unique position
by producing and marketing large volumes of TieTek(TM) crossties, by achieving
strategic partnerships with licensees, suppliers and customers, by ongoing
testing and reporting, by product and process improvements, and by being a
strategic supplier to the railroad industry.  The Company realizes the
advantages and obligations of being the sole supplier of a new product to a
mature industry and is moving quickly to consolidate its business position.

     PATENTS AND PROPRIETARY PROTECTION. The Company received a patent
protecting the formula and range of compositions of the TieTek(TM) technology
(U.S. Patent #5,886,078, dated March 23, 1999). The patent has been filed for
extensive international registration under the procedures of the International
Patent Treaty.

     In addition, the Company has applied for additional patent coverage
regarding the product and manufacturing process technology.  The new patent
being applied for would, if granted, significantly extend the protection
provided by U.S. Patent # 5,886,078.

     In addition to these current patents, the Company owns patents relating to
its Riserclad technology (which has been licensed) and its Biocatalytic
Hydrocarbon Upgrade Process ("BioKatT(TM)") that is based on enzyme
technologies and its porous pipe technology. The Company does not currently
generate revenues from the commercial exploitation of these patented
technologies. There is currently no patent protection for any other of the

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Company's products or technologies. A substantial number of patents have been
issued in the markets in which the Company competes and competitors may have
filed applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to, products or processes which are
competitive with those of the Company. The Company can make no assurance that
any future patent applications will result in issued patents or that any patents
issued will be held valid and enforceable if challenged. There can be no
assurance that the Company will have the financial resources available to
enforce and defend the intellectual property rights of the Company should they
be challenged. As used in this context and throughout this Report, "proprietary
information" refers to technology, mechanical configurations, chemical
information or formulations, processes, applications techniques and/or other
know-how developed by the Company and its employees or consultants.

     HUMAN RESOURCES. The Company currently employs 15 employees. None of its
employees are covered by collective bargaining agreements. The Company believes
that its relations with its employees are good.

RISK FACTORS

      The following factors, along with the other matters discussed or
incorporated by reference into this Annual Report on Form 10-KSB, could have a
material effect on the future operations, financial results and financial
condition of the Company and should be carefully reviewed and considered in
connection with the other matters discussed herein.

     LACK OF OPERATING REVENUE AND PROFITS. The Company has incurred an
accumulated deficit from its inception to December 31, 2001 of approximately
$53,324,010. Until the Company is able to generate significant revenues from the
manufacturing of its TieTek(TM) crosstie, profitable operations will not be
attained. Should losses continue at their historic rate, there is no assurance
that the Company can remain viable as a going concern.

     CAPITAL NEEDS.  For the year ended December 31, 2001, the Company incurred
a net loss of $4,393,837.  This loss principally reflected the ramping up
operations of the TieTek composite railroad crosstie business and corporate
overhead.  As of December 31, 2001, the Company had net working capital of
$1,365,384, including a cash balance of $72,243.  During 2001, the Company
incurred a cash flow deficit averaging approximately $150,000 per month.  The
deficit will likely decrease as production volumes increase in 2002.

     During 2001 and 2000, the Company made significant progress towards
commercial production of the TieTek(TM) crosstie. Progress includes the
production of approximately 35,000 crossties in 2001 and approximately 1,600 in
2000, and the signing of a two year supply contract with Union Pacific Railroad
for up to 250,000 ties. Currently, the Company is producing approximately 3,000
crossties per month. The Company estimates that production of 8,000 crossties
per month would result in plant profit, 13,000 crossties per month would result
in positive EBITDA and 18,000 crossties per month would result in pretax income.
There is no assurance that these estimates are achievable.

     The Company has historically met its working capital requirements through
financing transactions involving the private placement of equity securities or
equity equivalents, the issuance of convertible notes, and the proceeds from the
sale or license of its technologies.  While management believes the current
level of working capital is adequate for current operating levels through
December 31, 2002, it is seeking additional capital for the expansion needed to
achieve operating profits.  No assurance can be given that additional financing
will be available or, if available, will be on terms acceptable to the Company.
If such additional financing is not obtained, the Company may be required to
curtail operations after its current working capital is depleted. A substantial
portion of the Company's working capital has been obtained as a result of the
investment made by Avalanche Resources, Ltd. ("Avalanche") under the terms of a
Seucrities Purchase Agreement dated October 2, 2001.

     DEPENDENCE ON KEY CUSTOMER.  Over 90% of the Company's sales during
calendar year 2001 were to one customer - Union Pacific Railroad.  The loss of
this customer would have a material adverse affect on the Company's financial
condition and results of operations.

     SUBSTANTIAL DILUTION FROM CONVERTIBLE SECURITIES. The Company is presently
authorized to issue 75,000,000 shares of Common Stock, of which 36,527,778
shares were outstanding as of March 6, 2002 and up to

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20,000,000 shares of "blank check" preferred stock which could be convertible
into Common Stock. The Company may in the future be caused to issue up to
approximately 17,278,736 additional shares of its Common Stock upon the
conversion of its outstanding Preferred Stock and convertible notes and upon the
exercise of its outstanding vested options and warrants. This could conceivably
result in an increase in the Company's outstanding shares of Common Stock to
approximately 53,806,514 shares or more. Issuance of this many shares will have
a dilutive effect upon the existing stockholders. Furthermore, sales of
substantial amounts of the Company's Common Stock in the public market could
have an adverse effect upon the market price of the Company's Common Stock and
make it more difficult for the Company to sell its equity securities in the
future and at prices it deems appropriate.

     VOLATILITY OF SHARE PRICE. The market prices of securities of technology
companies, including those of the Company, have been historically volatile.
Future announcements concerning the Company or its competitors, including the
results of testing, technological innovations or commercial products, government
regulations, developments concerning proprietary rights, litigation and public
concern as to the safety of the Company's products may have a significant impact
on the market price of the shares of the Company's Common Stock. In addition,
the Company's share price may be affected by sales by existing stockholders.
Because of these factors, the market price of the Company's Common Stock may be
highly volatile.

     EFFECT OF OUTSTANDING PREFERRED STOCK, OPTIONS AND WARRANTS. The holders of
the Company's outstanding Preferred Stock, convertible notes, and outstanding
options and warrants are given an opportunity to profit from a rise in the
trading price of the Company's Common Stock, with a resulting dilution in the
interest of the other stockholders. The holders of such preferred stock and
convertible notes may choose to exercise their rights of conversion and the
holders of such options and warrants may choose to exercise these instruments,
each at prices below the current trading price of the Company's Common Stock and
at a time when the Company might be able to obtain additional capital through a
new offering of securities at prevailing market prices. The terms on which the
Company may obtain additional financing during this period may be adversely
affected by the existence of such below market convertible securities.

     COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE. The industries in which
the Company participates are highly competitive and subject to rapid and
significant technological change. Others may independently develop technologies
similar or superior to those of the Company, which may result in the Company's
processes or systems becoming less competitive or obsolete. Competition from
other companies, as well as universities, research institutions and others may
increase as advances in technology are made. Most of the Company's competitors
have substantially greater financial and marketing resources and capabilities
than the Company.

     TECHNOLOGY RIGHTS. Although the Company owns patents on several of its
technologies, the Company also relies on secrecy and confidentiality agreements
to maintain the proprietary nature of a substantial portion of its technology.
In addition, the Company may also seek patent protection in certain situations
in the future, but the Company does not believe that patents are uniquely
critical to the successful development of commercially viable processes. In
general, the application of the patent laws to the Company's potential products
is a developing and evolving process, and due to the difficulty and expense of
enforcing patents, the Company may not be able to protect those patents which
have been issued. If the Company is unable to maintain the proprietary nature of
its technologies, the Company's financial condition and results of operations
could be materially and adversely affected.

     In addition, the Company may seek licenses to other parties' technology in
order to develop, manufacture and market certain technologies in the future.
However, the Company may not be able to obtain necessary licenses or such
licenses may not be available on commercially acceptable terms. Even if such
licenses are available, the patents or proprietary rights underlying the
licenses may prove to be invalid or unenforceable.

     SALES AND MARKETING. The Company intends to market the TieTek(TM) crosstie
and other related products in the United States as well as other parts of the
world. To do so, the Company must either develop a sales force with technical
expertise or license distribution rights to third parties with such expertise.
There can be no assurance that the Company will be able to build such a sales
force or find appropriate licensees or that sales and

                                       9
<PAGE>

marketing efforts will be successful.

     DEPENDENCE ON KEY PERSONNEL. To a material extent, the Company's future
success is dependent upon the continued efforts of its President and Chief
Executive Officer, Dr. Henry W. Sullivan. The Company does not have an
employment agreement with Dr. Sullivan. The loss of the services of Dr. Sullivan
would likely have a material adverse effect on the Company's business. The
Company maintains keyman life insurance in the amount of $3,000,000 naming the
Company as the beneficiary on Dr. Sullivan.

     DIVIDEND POLICY: To date, the Company has paid no dividends on its shares
of common stock and does contemplate paying cash dividends in the foreseeable
future.

     CLASSIFIED BOARD; DELAWARE ANTI-TAKEOVER LAW. The Company has classified
the Board of Directors into three classes, with the members of one class (or
approximately one-third of the Board) elected each year to serve a three-year
term. A director may be removed only for cause by a vote of the holders of two-
thirds of the voting power of the Company's outstanding securities. The
classified Board of Directors makes it more difficult to change majority control
of the Board, which may discourage attempts by third parties to make a tender
offer or otherwise obtain control of the Company, even if such attempts would be
beneficial to the Company and its stockholders.

     The Company is governed by the provisions of Section 203 of the General
Corporation Law of the State of Delaware (the "GCL"), an anti-takeover law. In
general, the law prohibits a public Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the stockholder. An "interested stockholder"
is a person who, together with its affiliates and associates, owns (or, within
three years, did own) 15% or more of the corporation's voting stock. The
supermajority voting provisions in the Company's bylaws and the provisions
regarding certain business combinations under the GCL could have the effect of
delaying, deferring or preventing a change in control of the Company or the
removal of existing management. A takeover transaction frequently affords
stockholders the opportunity to sell their shares at a premium over current
market prices.

     AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of up to an aggregate of
20,000,000 shares of "blank check" preferred stock with such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without the
approval of the holders of the Company's Common Stock, to issue preferred stock
with dividend, liquidation, conversion, voting or other rights which would
adversely affect the voting power or other rights of the holders of the
Company's Common Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company, which could have the effect of
discouraging bids for the Company and thereby prevent stockholders from
receiving the maximum value for their shares. There is no assurance that
additional shares of preferred stock of the Company will not be issued at some
time in the future.

     NEED TO MANAGE GROWTH. The growth necessary to attain profitability is
expected to place a significant strain on the Company's managerial, operational
and financial resources. Any inability to manage growth effectively could have a
material adverse effect on the Company's business, results of operations and
financial condition.

     PRINCIPAL STOCKHOLDERS OWN A CONTROLLING INTEREST IN THE COMPANY. Franklin
A. Mathias, Chairman of the Board of the Company, and Kevin C. Maddox, the
Company's Chief Financial Officer, own all of the outstanding capital stock of
Avalanche Resources, Ltd ("Avalanche"). Avalanche owns over 55% of the
outstanding capital stock of the Company, on a fully diluted basis.

                                       10
<PAGE>

     As a result, the principal stockholders have the ability to control all
matters submitted to the stockholders for approval, including the election and
removal of directors and the approval of any merger, consolidation or sale of
all or substantially all of the assets of the Company.

     NO PROTECTION AGAINST FURTHER DILUTION. In the event the Company chooses or
needs to raise additional capital, there is no assurance that the Company will
not raise such capital on terms that result in dilution of an investor's
ownership and voting interest in the Company.

ITEM 2.  DESCRIPTION OF PROPERTY

     In November 1998, the Company entered into a lease agreement for a 23,000
square foot manufacturing facility on three acres of land in Houston, Texas to
be used for the production of the TieTek crossties. The lease is renewable at
the Company's option for ten consecutive periods of five years each. The monthly
rental is $14,819. The lease provides for a CPI adjustment to the monthly rental
after 2-1/2 years of the initial term and at the beginning of every renewal
period. In December 2001, the Company exercised its option to lease an
additional 2-1/2 acres and 50,000 square feet of additional building space. The
lessor has the obligation to construct a facility within six months of the
Company's notice to exercise the option.

     In the opinion of management, the Company's facilities are in good,
serviceable condition, adequate for their intended use and are adequately
insured.

ITEM 3.  LEGAL PROCEEDINGS

     None.

     From time to time the Company may be involved in various legal actions
arising in the normal course of business relating to product liability issues
for which the Company maintains insurance.

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

     The Company held a Special Meeting of its Stockholders on December 27,
2001, at which the following two proposals were approved:

     Proposal No. 1:

     Increase authorized Common Stock from 50,000,000 to 75,000,000 shares and
authorized Preferred Stock from 10,000,000 to 20,000,000 shares.

     Proposal No. 2:

     Recapitalization and share issuances as part of financing transaction with
Avalanche Resources Ltd.

     Proposal No. 1 was approved by a vote of 10,272,075 for and 178,451
against, with 5,547 shares abstaining, and

     Proposal No. 2 was approved by a vote of 10, 278,889 for and 171,674
against, with 5,529 shares abstaining.

                                       11
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

     The Company's Common Stock is traded on the NASDAQ SmallCap Market under
the symbol "NATK."  The following table sets forth, for the periods indicated,
the range of high and low bid prices of the Common Stock as reported by NASDAQ.

                                                   High Bid   Low Bid
                                                   --------   -------
          2001
          ----
       First Quarter.........................       $1.9844   $  0.75
       Second Quarter......................         $1.4375   $0.9375
       Third Quarter........................        $  1.11   $  0.52
       Fourth Quarter...........................    $  1.40   $  0.61


          2000
          ----
       First Quarter.........................       $  4.13   $  1.94
       Second Quarter......................         $  2.38   $  1.25
       Third Quarter........................        $  3.38   $  1.56
       Fourth Quarter...........................    $  2.22   $   .69
_________________________

     The high and low bid prices for the Company's Common Stock are inter-
dealer prices without retail mark-ups or commissions and may not represent
actual transactions.

HOLDERS
-------

     Records of the Company's stock transfer agent indicate that as of December
31, 2001 the Company had approximately 400 record holders of its Common Stock.
Over 80% of the common shares are held by Avalanche Resources, Ltd. The majority
of the remaining 20% of the common shares are held in "street name". Management
believes that this indicates that this Company has a significant number of
beneficial holders.

DIVIDENDS

     The Company has not paid any cash dividends on its Common Stock to date and
does not contemplate paying cash dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for expansion of
production capacity and working capital of the Company. The Company is precluded
from paying dividends on the common stock unless dividends are paid on the
outstanding shares of 5% Convertible Preferred. Dividends on the 5% Convertible
Preferred are non-cumulative.

RECENT SALES OF UNREGISTERED SECURITIES

     During 2001, the Company sold securities that were exempt from registration
under the Securities Act. These transactions are described under Item 6,
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources, which is incorporated herein by
reference. The following provides a description of the exemptions from
registration for the issuances of securities in 2001:

                                       12
<PAGE>

     .  In February and March 2001, the Company issued 130,433 shares of the
        Company's Common Stock at its then current market price for accrued
        compensation. These securities were issued to accredited investors in
        reliance upon Section 4(2) of the Securities Act of 1933, as amended
        (the "Securities Act") and/or Regulation D thereunder.

     .  In December 2001, in accordance with the recapitalization of the
        Company, the Company issued 28,635,700 shares of the Company's Common
        Stock for marketable equity securities and a warrant with a market value
        of approximately $1,807,000 and for $500,000 in cash. These securities
        were issued to an accredited investor in reliance upon Section 4(2) of
        the Securities Act of 1933, as amended (the "Securities Act") and/or
        Regulation D thereunder.

     .  In October and December 2001, the Company issued 770,064 shares of
        Common Stock and 770,064 Common Stock purchase warrants for $.85 per
        unit in a private transaction. The warrants vest immediately and are
        exercisable for five years at $1.00 per share. These securities were
        issued to accredited investors in reliance upon Section 4(2) of the
        Securities Act of 1933, as amended (the "Securities Act") and/or
        Regulation D thereunder.

     .  During 2001, the Company issued 157,977 shares of common stock and
        127,977 common stock purchase warrants for costs associated with capital
        fund raising activities. The common stock was issued at a range of $.85
        to $1.00 per share. The warrants vest immediately and are exercisable
        for a range of four to five years at a range of $1.00 to $1.10 per
        share. These securities were issued to accredited investors in reliance
        upon Section 4(2) of the Securities Act of 1933, as amended (the
        "Securities Act") and/or Regulation D thereunder.

     .  In December 2001, the Company issued 23,529 shares of common stock for
        reimbursable expenses of $20,000. These securities were issued to
        accredited investors in reliance upon Section 4(2) of the Securities Act
        of 1933, as amended (the "Securities Act") and/or Regulation D
        thereunder.

     5% Convertible Preferred Stock.  The Company has authorized for issuance
(1) 7,752,029 shares of its 5% Convertible Preferred Stock in exchange for the
outstanding Preferred Stock Series F, G-I, G-II, G-III, H and I; (2) 3,118,340
shares of its 5% Convertible Preferred Stock for accrued dividends and dividends
in arrears totaling $118,659 and $5,359,684, respectively and (3) 2,562,149
shares of its 5% Convertible Preferred Stock for the conversion of convertible
notes payable and accrued interest totaling $1,599,750 and $168,632,
respectively. The exchange of the Series F, G-I, G-II, G-III, H and I and
payment of accrued dividends and dividends in arrears will be accomplished at
the current conversion rates in effect by means of the completion of certain
exchange agreements which have been provided to the holders of Preferred Stock
in connection with the recapitalization. The conversion of the notes payable and
accrued interest has been accomplished at a reduced conversion rate in the same
manner. See Note 5 to the Consolidated Financial Statements for discussions of
the interest charge in 2001 for this inducement to convert.

     On April 9, 2002 Avalanche repurchased for cash the marketable equity
securities and warrant at estimated fair market value of $2,000,000.

     The 5% Convertible Preferred Stock has a stated value of $1.00 per share
and bears a non-cumulative dividend of 5% of the stated value as and when such
dividends are declared by the Board of Directors. Each share of 5% Convertible
Preferred Stock is convertible at the holder's option into one share of Common
Stock. The 5% Convertible Preferred Stock has the same voting rights as common,
but ranks senior to the Common Stock as to any declared and unpaid dividends and
has a $1.00 per share liquidation preference.

     CONVERTIBLE NOTES. In 2001, the Company borrowed $950,000 from investors in
six separate transactions and issued five unsecured and one secured convertible
notes bearing interest at 10% and maturing in one year from date of issuance.
These securities were issued to accredited investors in reliance upon section
4(2) of the Securities Act and/or Regulation D thereunder. Two of the notes
issued in 2001 totalling $250,000 were borrowings from the Company's Chairman of
the Board. Two of these notes totaling $200,000 are outstanding at December 31,
2001.

                                       13
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

BACKGROUND AND BASIS OF PRESENTATION

        The Company was incorporated on December 24, 1986 in the State of
Delaware. The accompanying consolidated financial statements include the
accounts of NATK and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

LIQUIDITY AND CAPITAL RESOURCES

       For the year ended December 31, 2001, the Company incurred a net loss of
$4,393,837. This loss principally reflected the ramping up operations of the
TieTek composite railroad crosstie business and corporate overhead. As of
December 31, 2001, the Company had net working capital of $1,365,384, including
a cash balance of $72,243. During 2001, the Company incurred a cash flow deficit
averaging approximately $150,000 per month. The deficit will likely decrease as
production volumes increase in 2002. Management believes the current level of
working capital to be adequate for current operating levels through December 31,
2002, but will seek additional capital for expansion to achieve operating
profits.

       During 2001 and 2000, the Company made significant progress towards
commercial production of the TieTek(TM) crosstie. Progress includes the
production of approximately 35,000 crossties in 2001 and approximately 1,600 in
2000, and the signing of a two year supply contract with Union Pacific Railroad
for up to 250,000 ties. Currently, the Company is producing approximately 3,000
crossties per month. The Company estimates that production of 8,000 crossties
per month would result in plant profit, 13,000 crossties per month would result
in positive EBITDA and 18,000 crossties per month would result in pretax income.

       Over the past five years, the Company's principal source of capital has
been through the issuance of Preferred Stock and Common Stock as follows:

       .  In March 1997, the Company issued shares of Series G Shares, Subseries
          I (the "Series G-I Shares") for net cash proceeds of $1,640,000.

       .  From May through November 1998, the Company issued shares of Series G
          Shares, Subseries II (the "Series G-II Shares") for net cash proceeds
          of $1,975,000 and professional services of $25,000.

       .  In March and May 1999, the Company issued shares of Series G Shares,
          Subseries III (the "Series G-III Shares") for net cash proceeds of
          $879,000.

       .  In March and May 2000, the Company issued shares of Series H Shares
          for $810,200 in proceeds.

       .  In May and June 2000, the Company issued 1,000,000 shares of Common
          Stock for $1,000,000 in proceeds.

       .  In September 2000, the Company issued shares of Series I Shares for
          $534,000 in proceeds.

       .  In February and March 2001, the Company issued 130,433 shares of the
          Company's common stock at the current market price for accrued
          compensation.

       .  In connection with the recapitalization of the Company, the Company
          issued 28,635,700 shares of the Company's Common Stock for marketable
          equity securities and a warrant with a market value of approximately
          $1,807,000 and for $500,000 in cash.

                                       14
<PAGE>

       .  In October and December 2001, the Company issued 770,064 shares of
          common stock and 770,064 common stock purchase warrants for $.85 per
          unit in a private transaction. The warrants vest immediately and are
          exercisable for five years at $1.00 per share.

       .  During 2001, the Company issued 157,977 shares of common stock and
          127,977 common stock purchase warrants for costs associated with
          capital fund raising activities. The common stock was issued at a
          range of $.85 to $1.00 per share. The warrants vest immediately and
          are exercisable for a range of four to five years at a range of $1.00
          to $1.10 per share.

       .  In December 2001, the Company issued 23,529 shares of common stock for
          reimbursable expense of $20,000.

       The Company anticipates that approximately $500,000 is needed for
improvements to its initial production line, approximately $3,500,000 is needed
to install its second production line and additional working capital of between
$500,000 and $1,000,000 is required to achieve positive cash flow. After fully
funding these needs, the Company plans to seek an additional $3,500,000 to
$5,000,000 to install a third production line, resulting in what management
believes to be optimum total production capacity of 30,000 ties per month. As of
the date of this Report, the Company has no commitments for additional financing
and there can be no assurance that the Company will be able to obtain financing
on terms acceptable to the Company, if at all.

     During 2001, the Company used $1,856,526 in cash for its operating
activities, reflecting primarily the net loss for the year of $4,393,837
adjusted for net non-cash expenses which were approximately $1,226,000 and
increase of accounts payable of approximately $1,142,000.

     During 2000, the Company used $1,986,801 in cash for its operating
activities, reflecting primarily the net loss for the year of $2,414,861
adjusted for net non-cash expenses which were approximately $596,000.

     Financing activities provided net cash to the Company of $1,780,782 during
2001. These funds were generated primarily by the sale of 7,020,064 shares of
Common Stock and 770,064 Common Stock purchase warrants for net proceeds of
$980,782 and the issuance of six notes totaling $950,000.

     Financing activities provided net cash to the Company of $2,626,566 during
2000. These funds were generated primarily by the sale of 13,442 shares of
Series H and I Shares for cash proceeds of $1,326,000, services rendered of
$18,210, sale of 1,000,000 shares of Common Stock for cash proceeds of
$1,000,000 and short term convertible notes of $415,000. During 2000, the
Company used $779,034 of the proceeds from its financing activities primarily
for the purchase of equipment.

RESULTS OF OPERATIONS - ANALYSIS OF YEARS ENDED DECEMBER 31, 2001 ("2001") AND
DECEMBER 31, 2000 ("2000")

     The net loss of $2,414,861 for 2000 reflects a decrease of $634,739 from
the net loss of $3,049,600 in 1999. This decrease is primarily a result of (1)
the provision of a $682,000 reserve in 1999 for the uncertainty of collection of
a note receivable; (2) reduced interest expense of approximately $216,000; and
(3) the provision for impairment of certain long-lived assets in 1999 of
$163,210; offset by an increase in 2000 of approximately $267,000 and $175,000
in loss on sales and selling, general and administrative expenses, respectively.

     The net loss of $4,393,837 for 2001 reflects an increase of $1,978,976 from
the net loss of $2,414,861 in 2000. This increase is primarily a result of (1)
recognition of deemed interest of $795,426 in 2001 of which $67,351 was due to
issuance of convertible notes convertible at a beneficial conversion rate and
$778,075 for an inducement charge upon conversion of certain debt (see Note 5 of
the Notes to Consolidated Financial Statements), and (2) an increase in the
gross loss on sales of $1,742,000; offset by a decrease of selling, general and
administrative expenses of $689,665.

                                       15
<PAGE>

     REVENUES. The Company focused its resources in 2001 and 2000 on the
commercialization of the TieTek(TM) composite railroad crossties. Substantially
all of the Company's revenues in 2001 and 2000 of $1,609,888 and $94,558,
respectively, resulted from the sale of the TieTek(TM) crossties.

     COSTS AND GROSS MARGIN. The 2001 and 2000 gross loss consists of the loss
incurred from the sales of the TieTek(TM) crossties. This loss reflects the
costs associated with the production of approximately 35,000 TieTek(TM)
crossties in 2001 and approximately 1,600 in 2000. The negative margins reflect
the ramp-up costs, the small scale of the manufacturing runs, and the inability
to make volume purchases of raw materials. The Company's ability to improve its
gross margin depends upon its ability to increase production volumes and
production efficiencies and manage raw material purchases.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $689,665 to $1,241,411 in 2001 from $1,931,076
in 2001. This decrease reflects primarily the reduction of $494,000 in salary
and other employee related costs as the Company focused its resources solely on
the commercialization of the TieTek(TM) crosstie and by eliminating all royalty
expenses in 2001 by a settlement with royalty owners in 2000 which eliminated
minimum royalty payments. Royalty expense in 2000 totaled $284,954. The Company
anticipates that selling, general and administrative expense will increase in
the future as warranted to coincide with increased production of the TieTek
crossties.

     Selling, general and administrative expenses increased $174,898 to
$1,931,076 in 2000 from $1,756,178 in 1999. This increase reflects primarily the
addition of $74,549 in salaries and wages and $196,448 in consulting fees as the
Company began production of the TieTek(TM) crosstie. A decrease of $162,281 was
experienced in depreciation and amortization in 2000.

     OTHER INCOME (EXPENSE). Other expense increased $926,641 to a net other
expense of $995,404 in 2001 from a net other expense of $68,763 in 2000. This
increase is a result of recognition of deemed interest of $795,426 in 2001 of
which $67,351 was due to issuance of convertible debt convertible at a
beneficial conversion rate and $728,075 for an inducement charge upon conversion
of certain debt (see Note 5 of the Notes to Consolidated Financial Statements).

     Income Taxes. The Company adjusts the deferred tax asset valuation
allowance based on judgements as to the future realization of the deferred tax
benefits supported by demonstrated trends in the Company's operating results. At
December 31, 2001 and 2000, the Company provided a 100% valuation allowance for
the deferred tax asset because it could not determine whether it was more likely
than not that the deferred tax asset would be realized.

ITEM 7.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Financial statements and supplementary data are included in Items 13(a) and
(b) of this Report and are incorporated by reference thereto.

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

     None.

                                       16
<PAGE>

                                    PART III

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

DIRECTORS AND EXECUTIVE OFFICERS

     The Directors and Executive Officers of the Company are listed below.

Name                             Age        Position
----                             ---        --------

Franklin A. Mathias               76        Chairman of the Board; Director
                                            for term expiring 2004

Henry W. Sullivan                 62        President and Chief Executive
                                            Officer of the Company; Director
                                            for term expiring 2004

Kevin C. Maddox                   49        Chief Financial Officer of the
                                            Company; Director for term
                                            expiring 2002

Deborah Kay Allred                47        Director for term expiring 2002

Robert E. Chain                   50        Director for term expiring 2003

Edwin H. Knight                   49        Director for term expiring 2003

Dean L. Ledger                    52        Director for term expiring 2004

Tim R. Reeves                     37        Director for term expiring 2003

William C. Thompson               48        Director for term expiring 2002

Frank J. Vella                    59        Director for term expiring 2003

Douglas C. Williamson             50        Director for term expiring 2002


     All directors of the Company hold office for a term of three years or until
their successors are duly elected and qualified. Executive officers and
employees hold office at the pleasure of the Board of Directors. The Board of
Directors met five times during 2001. All directors attended in 2001 at least
75% of the meetings of the Board and committees of which they are members.

BOARD MEETINGS AND COMMITTEES

       The Board of Directors has established two committees to allow the Board
to focus specific attention on critical areas of the Board's management and
monitoring of the Company's business. From time to time, the committees will
make recommendations to the Board as necessary. The committees that were
established and the current directors assigned to each committee are as follows:

       Financial Audit:
        Douglas C. Williamson
        Robert E. Chain

                                       17
<PAGE>

       Compensation:
        Deborah Kay Allred
        Tim R. Reeves
        Frank J. Vella
        Douglas C. Williamson

       The purpose of the Financial Audit Committee is to oversee the financial
reporting procedures of the Company, insure adequate financial and internal
controls, review the scope of the Company's annual audit and recommend the
selection of independent auditors. The primary responsibilities of this
committee include: reviewing with the Company's Chief Financial Officer the
adequacy of quarterly and annual SEC filings; reviewing and consulting with the
Company's independent auditors regarding their reports of audit and accompanying
management letters; reviewing all financial statements, financial controls,
internal controls and accounting practices of the Company; evaluating the
performance and cost of the Company's independent auditors; recommending to the
Board of Directors the selection of the Company's auditors for the upcoming
year; and monitoring compliance by the Company's management and employees with
major Company policies and financial controls.

       The membership of the Financial Audit Committee is designed to include a
minimum of two directors. The Company's Chief Financial Officer serves as an ex-
officio member of the committee and attends all meetings except the annual
review of the Company's financial controls and accounting procedures with the
Company's independent auditors. The Financial Audit Committee met once during
2001.

       The purpose of the Compensation Committee is to recommend compensation
policies for the Company's senior management and to establish and administer the
Company's stock-based compensation plans. The primary responsibilities of this
committee include: reviewing all new employment agreements with senior
management and key employees of the Company; establishing criteria for annual
incentive bonus plans for the Company and senior management (in concert with the
recommendations of the Company's Chief Executive Officer) and recommending
amounts and payment of annual bonuses earned in accordance with those criteria;
recommending the issuance of incentive stock options to key management
personnel; assisting with and reviewing the establishment of an employee stock
option plan and director stock option plan when and if requested by the Board of
Directors; and monitoring and reviewing the Company's compensation policies for
all employees.

     The membership of the Compensation Committee is designed to include at
least two outside (non-employee) directors. The Compensation Committee met twice
during 2001.

     Additional information with respect to Item 9 is set forth in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission for its
2002 Annual Meeting with Stockholders (the "Proxy Statement") and is
incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     Information with respect to Item 10 is set forth in the Proxy Statement to
be filed with the Securities and Exchange Commission on or before April 30, 2002
and is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information with respect to Item 11 is set forth in the Proxy Statement to
be filed with the Securities and Exchange Commission on or before April 30, 2002
and is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information with respect to Item 12 is set forth in the Proxy Statement to
be filed with the Securities and Exchange Commission on or before April 30,
2002 and is incorporated herein by reference.

                                       18
<PAGE>

ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

4.   INDEX OF FINANCIAL STATEMENTS

     Provided at Page F-1 of this Report

4.   FINANCIAL STATEMENT SCHEDULES

     All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<TABLE>
<CAPTION>

C. EXHIBITS
EXHIBIT NO.                     Description of Exhibit                               MANNER OF FILING
<S>                     <C>                                          <C>
                        PLAN OF ACQUISITION, REORGANIZATION,
                        ARRANGEMENTS, LIQUIDATION OR SUCCESSION:

   2.1                  Asset Purchase Agreement between Gaia        Incorporated by reference to the Current Report on
                        Technologies, Inc., Gaia Holdings, Inc.,     Form 8-K filed January 12, 1996 ("January 12, 1996
                        Thor Ventures, L.C. and Thor Industries,     8-K")
                        Inc. and the Company dated December 29,
                        1995

   3.1                  Certificate of Amendment to the Restated     Incorporated by reference to the Company's Form
                        Certificate of Incorporation of the          10-QSB for the six months ended June 30, 1998
                        Company                                      ("June 30, 1998 10-QSB")
                        INSTRUMENTS DEFINING THE RIGHTS OF
                        SECURITY HOLDERS:

   4.1                  Restated Certificate of Incorporation        Incorporated by reference to the Company's Form
                                                                     10-QSB for the six months ended June 30, 1996.

   4.2                  Amended and Restated Bylaws                  Incorporated by reference to the Form S-4 of the
                                                                     Company, SEC File No. 33-82112, (the "Form S-4")

   4.3                  Master Certificate of Designation of         Incorporated by reference to the Form S-3 of the
                        Cumulative Preferred Stock Series G          Company, SEC File No. 333-26347,  (the "Form S-3")

   4.4                  Certificate of Designation of Cumulative     Incorporated by reference to the Form S-3
                        Convertible Preferred Stock, Series G -
                        Subseries I

   4.5                  Certificate of Designation of Cumulative     Incorporated by reference to the June 30, 1998 10-QSB
                        Convertible Preferred Stock, Series G -
                        Subseries II

</TABLE>

                                       19
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NO.                       DESCRIPTION OF EXHIBIT                               MANNER OF FILING
<C>                     <S>                                          <C>
   4.6                  Certificate of Designation of Cumulative     Incorporated by reference to the 1999 Form 10-KSB
                        Convertible Preferred Stock, Series G -
                        Subseries III

   4.7                  Certificate of Designation of Cumulative     Incorporated by reference to the 1999 Form 10-KSB
                        Convertible Preferred Stock, Series H

   4.8                  Certificate of Designation of Cumulative     Filed herewith
                        Convertible Preferred Stock, Series I

   4.9                  Certificate of Correction to Certificate     Filed herewith
                        of Designation of 5% Convertible
                        Preferred Stock

                        MATERIAL CONTRACTS:

  10.1                  Stock Option Agreement between Tim           Incorporated by reference to the Form S-4
                        B. Tarrillion and the Company dated
                        February 7, 1995

  10.2                  Stock Option Agreement between               Incorporated by reference to the Form S-4
                        David Daniels and the Company dated
                        February 7, 1995

  10.3                  Stock Option Agreement between               Incorporated by reference to the Form S-4
                        Judith Shields and the Company
                        dated February 23, 1995

  10.4                  Stock Option Agreement between the           Incorporated by reference to the Form S-4
                        Company and Donovan W. Boyd dated
                        February 23, 1995

  10.5                  EET 401(k) Plan                              Incorporated by reference to the Form S-4

  10.6                  Amendment to Stock Option Agreement          Incorporated by reference to the Company's
                        of Tim Tarrillion                            Annual Report on Form 10-K for the fiscal
                                                                     year ended December 31, 1995 (the "1995 Form
                                                                     10-K")

  10.7                  Amendment to Stock Option Agreement          Incorporated by reference to the 1995 Form
                        of Donovan W. Boyd                           10-K

  10.8                  Amendment to Stock Option Agreement          Incorporated by reference to the 1995 Form
                        of Judith Shields                            10-K

  10.9                  Employment Agreement of Tim                  Incorporated by reference to the March 22,
                        Tarrillion dated February 7, 1995            1995 8-K

  10.10                 Agreement between the Company and            Incorporated by reference to the 1997 Form
                        David M. Daniels dated as of                 10-KSB
                        December 31, 1997

</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.            DESCRIPTION OF EXHIBIT                 MANNER OF FILING
<C>                    <S>                                    <C>
  10.11                GAIA/Thor Royalty Agreement,           Incorporated by reference to January 12,
                       entered into as of December 29,        1996 8-K
                       1995, by and among GAIA
                       Technologies, Inc., GAIA Holding,
                       Inc., Thor Ventures, L.C. and the
                       Company

  10.12                GAIA-TieTek License Agreement,         Incorporated by reference to January 12,
                       entered into as of December 29,        1996 8-K
                       1995, by and between GAIA
                       Technologies, Inc. and TieTek, Inc.

  10.13                Employment Agreement, entered into     Incorporated by reference to January 12,
                       as of December 29, 1995, between       1996 8-K
                       GAIA Technologies, Inc. and Henry
                       W. Sullivan

  10.14                Stock Option Agreement between         Incorporated by reference to January 12,
                       Henry W. Sullivan and the Company      1996 8-K
                       dated December 29, 1995

  10.15                Crosstie Purchase Option and Loan      Incorporated by reference to January 12,
                       Agreement by and among the Company     1996 8-K
                       and TieTek, Inc., William T.
                       Aldrich, J. Denny Bartell and Henry
                       W. Sullivan dated December 29, 1995

  10.16                Stock and Warrant Purchase             Incorporated by reference to the 1995 Form
                       Agreement with respect to the          10-K
                       Series F Convertible Preferred Stock

  10.17                Stockholders' Agreement between the    Incorporated by reference to the 1995 Form
                       Company, certain members of its        10-K
                       management, and the Series F Holders

  10.18                Form of Warrant dated as of April      Incorporated by reference to the 1995 Form
                       5, 1996 issued to the Series F         10-K
                       Holders

  10.19                Stock Purchase Agreement dated         Incorporated by reference to the Form S-3
                       March 31, 1997 between the Company,
                       NationsBanc Capital Corporation and
                       Certain Investors

  10.20                Amendment to Stockholders' Agreement   Incorporated by reference to the Form S-3

  10.21                Form of Joinder to Stockholders'       Incorporated by reference to the June 30,
                       Agreement                              1998 10-QSB

</TABLE>

                                       21
<PAGE>

<TABLE>
<CAPTION>


EXHIBIT NO.            DESCRIPTION OF EXHIBIT                 MANNER OF FILING
<C>                    <S>                                    <C>
  10.22                Form of Stock Purchase Agreement       Incorporated by reference to the June 30,
                       for an Additional Closing dated as     1998 10-QSB
                       of May 21, 1998 by and among the
                       Company, its operating
                       subsidiaries, NationsBanc Capital
                       Corporation and certain other
                       Investors

  10.23                Agreement between the Company and      Incorporated by reference to the 1998 Form
                       Tim B. Tarrillion dated as of          10-KSB
                       December 23, 1998

  10.24                Amended and Restated Stock Option      Incorporated by reference to the 1998 Form
                       Agreement between Henry W. Sullivan    10-KSB
                       and the Company dated December 29,
                       1995

  10.25                Amended and Restated Stock Option      Incorporated by reference to the 1998 Form
                       Agreement between Judith Shields       10-KSB
                       and the Company dated February 23,
                       1995

  10.26                1999 Stock Incentive Plan              Incorporated by reference to the 1998 Form
                                                              10-KSB

  10.27                Incentive Stock Option Agreement       Incorporated by reference to the 1998 Form
                       between Henry W. Sullivan and the      10-KSB
                       Company dated February 22, 1999

  10.28                Professional Services Agreement        Incorporated by reference to the 1999 Form
                       between the Company and Russell L.     10-KSB
                       Allen dated as of July 12, 1999

  10.29                Purchase Contract between the          Incorporated by reference to the 1999 Form
                       Company and the Union Pacific          10-KSB
                       Railroad dated as of January 31,
                       2000

  10.30                Royalty Settlement Agreement           Incorporated by reference to Exhibit 10.41
                       Dated as of June 8, 2000               to the Company's Quarterly Report on Form
                                                              10-QSB for the six months ended June 30,
                                                              2000 (the "June 30, 2000 Form 10-QSB").

  10.31                Supply Agreement dated June 19, 2000   Incorporated by reference to Exhibit 10.42
                                                              to the June 30, 2000 Form 10-QSB

  10.32                Memorandum of Understanding dated      Incorporated by reference to the 2000
                       March 1, 2001 between the Company      Form 10-KSB
                       and ISCO Track Sleepers Ltd.
</TABLE>

                                       22
<PAGE>

<TABLE>
<CAPTION>

EXHIBIT NO.            DESCRIPTION OF EXHIBIT                 MANNER OF FILING
 <C>                   <S>                                    <C>
  10.33                Letter of Intent dated as of March     Incorporated by reference to the
                       1, 2001 between the Company and        2000 Form 10-KSB
                       Owens Corning

  10.34                Securities Purchase Agreement dated    Incorporated by reference to Form 8-K
                       October 2, 2001 by and between         filed October 17, 2001
                       North American Technologies Group,
                       Inc. and Avalanche Resources, Ltd.

  22                   Subsidiaries of Registrant             Incorporated by reference to the Form S-4

  23.1                 Consent of BDO Seidman LLP             Filed herewith

</TABLE>

D.  REPORTS ON FORM 8-K

     Avalanche financing arrangements          Filed October 17, 2001
     Avalanche arrangements approved           Filed March 1, 2002


                                       23
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                              NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Dated: March 28, 2002
                              By:/s/ Henry W. Sullivan
                              ------------------------
                                 Henry W. Sullivan
                                 Chief Executive Officer

                              By:/s/Kevin C. Maddox
                                 ------------------
                                 Kevin C. Maddox
                                 Principal Financial and Accounting Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-KSB has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

Signature                                    Title                      Date
---------                                    -----                      -----
<S>                                  <C>                            <C>

/s/  Franklin  A. Mathias            Chairman and Director         March 28, 2002
-----------------------------
Franklin A. Mathias

/s/ Henry W. Sullivan               Chief Executive Officer,       March 28, 2002
-----------------------------        President and Director
Henry W. Sullivan

/s/ Kevin C. Maddox                 Chief Financial Officer        March 28, 2002
-----------------------------
Kevin C. Maddox

/s/ Deborah Kay Allred                      Director               March 28, 2002
-----------------------------
Deborah Kay Allred

/s/ Robert E. Chain                         Director               March 28, 2002
-----------------------------
Robert E. Chain

Edwin H. Knight                             Director               March 28, 2002
-----------------------------
Edwin H. Knight

/s/ Dean L. Ledger                          Director               March 28, 2002
-----------------------------
Dean L. Ledger

/s/ Tim R. Reeves                           Director               March 28, 2002
-----------------------------
Tim R. Reeves

/s/ William C. Thompson                     Director               March 28, 2002
-----------------------------
William C. Thompson

/s/ Frank J. Vella                          Director               March 28, 2002
-----------------------------
Frank J. Vella

Douglas C. Williamson                       Director               March 28, 2002
-----------------------------
Douglas C. Williamson

</TABLE>

                                       24
<PAGE>

                         INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                               PAGE
                                                                               ----

NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS:
<S>                                                                             <C>
      Report of Independent Certified Public Accountants.....................   F-2
      Consolidated Balance Sheets as of December 31, 2001 and 2000...........   F-3

      Consolidated Statements of Loss and Comprehensive Loss for the Years
         Ended December 31, 2001 and 2000....................................   F-4
      Consolidated Statements of Stockholders' Equity
         for the Years Ended December 31, 2001 and 2000......................   F-5
      Consolidated Statements of Cash Flows for the
         Years Ended December 31, 2001 and 2000..............................   F-6
      Notes to Consolidated Financial Statements.............................   F-7
</TABLE>

                                      F-1
<PAGE>

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
              --------------------------------------------------


North American Technologies Group, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of loss and comprehensive loss, stockholders' equity and
cash flows for each of the years then ended. 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 consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
American Technologies Group, Inc. at December 31, 2001and 2000, and the results
of its operations and its cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.


                                                        BDO SEIDMAN, LLP


Houston, Texas
February 21, 2002, except note 2,
which is as of April 9, 2002

                                      F-2
<PAGE>

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS
                       AS OF DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                     2001          2000
                                                                                 ------------   -------------
                                     ASSETS
                                     ------
Current Assets:
<S>                                                                               <C>           <C>
    Cash.......................................................................  $     72,243   $     145,229
    Marketable Securities (Note 2).............................................     2,407,176               -
    Accounts Receivable (Note 12)..............................................        65,412          72,884
    Inventories (Note 3).......................................................       271,519         261,776
    Current Portion of Note Receivable.........................................        34,886           7,503
    Prepaid Expenses and Other.................................................             -          36,447
                                                                                 ------------   -------------
        Total Current Assets...................................................     2,851,236         523,839
Note Receivable................................................................        17,610          52,497
Property and Equipment, Less Accumulated
 Depreciation (Note 4 and 5)...................................................     1,644,404       1,834,199

Patents and Purchased Technologies, Less Accumulated
 Amortization of $545,839 and $456,171.........................................     1,224,202       1,301,582
Goodwill, Less Accumulated Amortization of $1,268,660 and $1,160,866...........     1,511,357       1,619,151
Other..........................................................................        23,834         166,184
                                                                                 ------------   -------------
                                                                                 $  7,272,643   $   5,497,452
                                                                                 ============   =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------
Current Liabilities:
    Accounts payable...........................................................  $  1,157,969   $     167,225
    Notes payable (Note 5).....................................................       130,000       1,029,250
    Accrued compensation.......................................................        81,674         250,440
    Other accrued expenses.....................................................       116,209         220,085
                                                                                 ------------   -------------

        Total Current Liabilities..............................................     1,485,852       1,667,000

Notes Payable (Note 5).........................................................       100,000               -

Deferred dividends payable on preferred stock (Note 7).........................             -         106,168
                                                                                 ------------   -------------
        Total Liabilities......................................................     1,585,852       1,773,168
                                                                                 ------------   -------------
Commitments and Contingencies (Note 10)

Stockholders' Equity (Note 7):
    Preferred stock, $.001 par value, 20,000,000 shares authorized;
        13,432,518 and 140,265 shares issued and outstanding, respectively.....    20,925,245      14,026,478
    Common stock, $.001 par value, 75,000,000 shares
        authorized; 36,494,778 and 6,393,054 shares issued
        and outstanding, respectively..........................................        36,495           6,393
    Additional paid-in capital.................................................    37,518,716      33,161,412
    Accumulated Comprehensive Income...........................................       600,000               -
    Deficit....................................................................   (53,324,050)    (43,469,999)
    Stockholders' Subscription Receivable......................................       (69,615)              -
                                                                                 ------------   -------------

    Total Stockholders' Equity.................................................     5,686,791       3,724,284
                                                                                 ------------   -------------
                                                                                 $  7,272,643   $   5,497,452
                                                                                 ============   =============
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-3
<PAGE>

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
             CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000



<TABLE>
<CAPTION>


<S>                                                                  <C>             <C>
                                                                             2001            2000
                                                                      -----------     -----------

Sales (Note 12)...................................................    $ 1,609,888     $    94,558

Cost of Goods Sold................................................      3,766,910         509,580
                                                                      -----------     -----------

   Gross Loss.....................................................     (2,157,022)       (415,022)

Selling, General and Administrative Expenses (Note 10)............      1,241,411       1,931,076
                                                                      -----------     -----------

   Operating  Loss................................................     (3,398,433)     (2,346,098)
                                                                      -----------     -----------

Other Income (Expense):
 Interest Income..................................................          1,353          48,391
 Interest Expense (Notes 5 and 6).................................       (953,949)       (126,973)
 Other ...........................................................        (42,808)          9,819
                                                                      -----------     -----------

Total Other Income (Expense) - Net................................       (995,404)        (68,763)
                                                                      -----------     -----------

 Net Loss.........................................................     (4,393,837)     (2,414,861)

Comprehensive Income - Unrealized Gain on Marketable Securities...        600,000               -
                                                                      -----------     -----------

Comprehensive Loss................................................    $(3,793,837)    $(2,414,861)
                                                                      ===========     ===========

Net Loss Per Share (Notes 1 and 7):
 Net Loss Per Common Share - Basic and Assuming Dilution..........    $      (.48)    $      (.85)
                                                                      ===========     ===========
 Weighted Average Number of Common
   Shares Outstanding.............................................     14,040,426       5,611,450
                                                                      ===========     ===========

</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
<TABLE>
<CAPTION>

                                                          PREFERRED STOCK                              COMMON STOCK
                                                     ------------------------------           ------------------------------
                                                      SHARES               AMOUNT                SHARES              AMOUNT
                                                     --------           -----------           ----------           ---------
<S>                                                  <C>                <C>                   <C>                  <C>
Balance, December 31, 1999.....................      148,585            $14,858,477            4,260,275             $ 4,261
Sale of preferred stock........................       13,442              1,344,210                    -                   -
Sale of common stock...........................            -                      -            1,229,000               1,229
Issuance of common stock upon conversion
 of preferred stock...........................       (21,762)            (2,176,209)             778,384                 778
Issuance of common stock upon conversion
 of dividends and accrued interest.............            -                      -              125,395                 125
Costs associated with equity transactions......            -                      -                    -                   -
Deemed dividends and interest..................            -                      -                    -                   -
Net loss for the period........................            -                      -                    -                   -
                                                  ----------            -----------            ---------             -------
     Balance, December 31, 2000................      140,265             14,026,478            6,393,054               6,393
Issuance of common stock upon conversion
 of preferred stock............................       (3,475)              (347,458)             291,216                 291
Issuance of common stock upon conversion
 of dividends in arrears and interest..........            -                      -               92,805                  93
Deemed interest on convertible notes
 payable.......................................            -                      -                    -                   -
Exchange of existing preferred stock for new
 preferred stock...............................     (136,790)                     -                    -                   -
Exchange of existing preferred stock for new
 preferred stock...............................    7,752,029                      -                    -                   -
Issuance  of  preferred stock for accrued
 dividends and dividends in arrears............    3,118,340              5,478,343                    -                   -
Conversion of notes payable to preferred
 stock.........................................    2,317,754              1,599,250                    -                   -
Issuance of preferred stock for accrued
 interest......................................      244,395                168,632                    -                   -
Issuance of common stock for marketable........
 securities and cash...........................            -                      -           28,635,700              28,636
Sales of common stock..........................            -                      -              770,064                 770
Issuance of common stock for services..........            -                      -              157,977                 158
Issuance of common stock for compensation......            -                      -              153,962                 154
Costs associated with equity transactions......            -                      -                    -                   -
Beneficial conversion of notes payable.........            -                      -                    -                   -
Unrealized gain on marketable securities.......            -                      -                    -                   -
Stock subscription receivable..................            -                      -                    -                   -
Net Loss.......................................            -                      -                    -                   -
                                                  ----------            -----------           ----------             -------
BALANCE, December 31, 2001                        13,432,518            $20,925,245           36,494,778             $36,495
                                                  ==========            ===========           ==========             =======

                                                    ADDITIONAL          ACCUMULATED                       STOCKHOLDERS'
                                                     PAID-IN           COMPREHENSIVE                      SUBSCRIPTION
                                                     CAPITAL              INCOME             DEFICIT       RECEIVABLE       TOTAL
                                                   -----------          -----------       ------------    -----------    -----------

Balance, December 31, 1999.....................    $29,471,037          $         -       $(40,744,631)   $         -    $ 3,589,144
Sale of preferred stock........................              -                    -                  -              -      1,344,210
Sale of common stock...........................      1,233,725                    -                  -              -      1,234,954
Issuance of common stock upon conversion
of preferred stock.............................      2,175,431                    -                  -             -              -
Issuance of common stock upon conversion
of dividends and accrued interest..............        352,433                    -           (269,589)            -         82,969
Costs associated with equity transactions......       (132,644)                   -                  -             -       (132,644)
Deemed dividends and interest..................         61,430                    -            (40,918)            -         20,512
Net loss for the period........................              -                    -         (2,414,861)            -     (2,414,861)
                                                    ----------          -----------       ------------    -----------    ----------
     Balance, December 31, 2000................     33,161,412                    -        (43,469,999)            -      3,724,284
Issuance of common stock upon conversion
 of preferred stock............................        347,167                    -                  -             -              -
Issuance of common stock upon conversion
 of dividends in arrears and interest..........        110,656                    -           (100,530)            -         10,219
Deemed interest on convertible notes
 payable.......................................         67,351                    -                  -             -         67,351
Exchange of existing preferred stock for new
 preferred stock...............................              -                    -                  -             -              -
Issuance of preferred stock for accrued
 dividends and dividends in arrears............              -                    -         (5,359,684)            -        118,659
Conversion of notes payable to preferred
 stock.........................................              -                    -                  -             -      1,599,250
Issuance of preferred stock for accrued
 interest......................................              -                    -                  -             -        168,632
Issuance of common stock for marketable........
securities and cash............................      2,278,540                    -                  -             -      2,307,176
Sales of common stock..........................        653,784                    -                  -             -        654,554
Issuance of common stock for services..........        141,893                    -                  -             -        142,051
Issuance of common stock for compensation......        276,046                    -                  -             -        276,200
Costs associated with equity transactions......       (246,208)                   -                  -             -       (246,208)
Beneficial conversion of notes payable.........        728,075                    -                  -             -        728,075
Unrealized gain on marketable securities.......              -              600,000                  -             -        600,000
Stock subscription receivable..................              -                    -                  -       (69,615)       (69,615)
Net Loss.......................................              -                    -         (4,393,837)            -     (4,393,837)
                                                   -----------             --------       ------------     ----------   -----------
BALANCE, December 31, 2001.....................    $37,518,716             $600,000       $(53,324,050)    $ (69,615)   $ 5,686,791
                                                   ===========             ========       ============     =========    ===========
</TABLE>

                                      F-5
<PAGE>

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
                          INCREASE (DECREASE) IN CASH


<TABLE>
<CAPTION>
                                                                          2001             2000
                                                                      -----------         --------
<S>                                                                   <C>              <C>
Cash flows from operating activities:
  Net loss..........................................................  $(4,393,837)     $(2,414,861)
  Adjustments to reconcile net loss to
   net cash used in operating activities:
     Depreciation and amortization..................................      374,308          266,018
     Royalty expense................................................            -          234,954
     (Gain) loss on disposition of equipment........................       15,563                -
     Provision for bad debts........................................            -          (20,000)
     Issuance of note payable for compensation......................            -           30,000
     Deemed interest, convertible notes payable.....................       67,351           20,512
     Accrued interest payable on deferred dividends.................       12,491           24,286
     Issuance of common stock for reimbursable expenses.............       20,000                -
     Interest expense recognized for beneficial conversion
      of notes payable..............................................      728,075                -
     Interest expense on dividends in arrears.......................       10,219                -
     Changes in assets and liabilities:
     Accounts receivable............................................        7,472          (72,752)
     Inventories....................................................       (9,743)        (220,617)
     Prepaid expenses and other current assets......................       36,447           13,285
     Other assets...................................................      132,194          (93,128)
     Accounts payable and accrued expenses..........................    1,142,934          245,502
                                                                      -----------      -----------
     Net cash used in operating activities..........................   (1,856,526)      (1,986,801)
                                                                      -----------      -----------

Cash flows from investing activities:
  Decrease in notes receivable......................................        7,504          100,000
  Payments relating to patents......................................      (12,288)               -
  Purchase of property and equipment................................     (132,458)        (879,034)
  Proceeds from sale of fixed assets................................      140,000                -
                                                                      -----------      -----------
    Net cash provided by (used in) investing activities                     2,758         (779,034)
                                                                      -----------      -----------
Cash flows from financing activities:
  Sale of preferred stock...........................................            -        1,326,000
  Sale of common stock..............................................    1,084,939        1,000,000
  Proceeds from notes payable.......................................      950,000          415,000
  Payment for costs and fees of equity issuances....................     (104,157)        (114,434)
  Payments on notes payable.........................................     (150,000)               -
                                                                      -----------      -----------

    Net cash provided by financing activities.......................    1,780,782        2,626,566
                                                                      -----------      -----------
Net decrease in cash................................................      (72,986)        (139,269)
Cash beginning of year..............................................      145,229          284,498
                                                                      -----------      -----------
Cash end of year....................................................  $    72,243      $   145,229
                                                                      ===========      ===========
</TABLE>

          See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>

                    NORTH AMERICAN TECHNOLOGIES GROUP, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

    The accompanying consolidated financial statements include the accounts of
North American Technologies Group, Inc. ("NATK") and its wholly-owned
subsidiaries.  All significant intercompany accounts and transactions have been
eliminated.  North American Technologies Group, Inc. and its subsidiaries are
referred to herein as the Company.  Its principal business is the manufacturing
and marketing of a composite railroad crosstie through its wholly-owned
subsidiary, TieTek, Inc.

    On December 27, 2001, the Company's shareholders authorized the issuance
of a new series of preferred stock to be exchanged for (1) the Company's Series
F, G-I, G-II, G-III, H and I preferred stock; (2) accrued dividends and
dividends in arrears on such preferred stock and (3) certain convertible notes
payable and accrued interest. In addition, an existing shareholder acquired
additional shares of common stock for cash and marketable equity securities
totaling approximately $2,307,000. See note 7 for a further discussion regarding
this recapitalization.

MARKETABLE EQUITY SECURITIES

    The Company accounts for its investment in marketable securities in
accordance with Statement of Financial Standard No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS No. 115), and has classified
its marketable equity securities as available-for-sale. Available-for-sale
securities are recorded at fair value with the resulting gain (or loss) credited
(or charged) as a separate component of stockholders' equity.

INVENTORIES

    Inventories consist of finished goods (composite railroad crossties) and raw
materials and are valued at the lower of cost (first-in, first-out) or market.
Cost of finished goods include raw material costs, direct labor, and applied
overhead.

PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost.  Fixed assets are depreciated by
the straight-line method for financial reporting purposes and for tax reporting
purposes over their estimated useful lives, ranging from three to fifteen years.

PATENTS, PURCHASED TECHNOLOGIES AND GOODWILL

    Patents and purchased technologies are stated at cost, less accumulated
amortization.  Patent costs and purchased technologies are amortized by the
straight-line method over their remaining lives, ranging from one to fifteen
years.

    Goodwill represents the excess of the purchase price over the fair market
value of net assets received in business combinations accounted for by the
purchase method.  Goodwill is amortized by the straight-line method over twenty
years.  The Company analyzes goodwill periodically to determine whether any
impairment has occurred in the carrying value.  Based upon the anticipated
future undiscounted cash flows from operations, there has been no impairment.

    Management reviews long-lived assets and intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be fully recoverable.

                                      F-7
<PAGE>

INCOME TAXES

    Deferred taxes result from temporary differences between the financial
statement and income tax bases of assets and liabilities.  The Company adjusts
the deferred tax asset valuation allowance based on judgments as to future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.

LOSS PER COMMON SHARE

    The Company provides basic and dilutive loss per common share information
for each year presented. The basic net loss per common share is computed by
dividing the net loss, plus the dividends on preferred stock, by the weighted
average number of common shares outstanding. Preferred stock dividends include:
(i) dividends stated in the respective certificate of designations; and (ii)
dividends deemed to have been issued by virtue of a conversion price that at the
date of issuance is less than the market price of the Company's common stock.
For the years ended December 31, 2001and 2000 net loss applicable to common
stockholders is as follows:
                                                      2001            2000
                                                 -----------     -----------

  Net loss.....................................  $(4,393,837)    $(2,414,861)
  Dividends on preferred stock.................     (118,659)       (269,589)
  Accumulated dividends in arrears.............   (2,289,547)     (2,028,165)
  Deemed dividends on preferred stock..........            -         (40,918)
                                                 -----------     -----------
     Net loss applicable to common stockholders  $(6,802,043)    $(4,753,533)
                                                 ===========     ===========

    Diluted net loss per common share is computed by dividing the net loss,
adjusted on an "as if converted" basis, by the weighted average number of common
shares outstanding plus potential dilutive securities.  For the years ended
December 31, 2001and 2000, potential dilutive securities had an anti-dilutive
effect and were not included in the calculation of diluted net loss per common
share.  For the year ended December 31, 2001, these securities included options
and warrants on 1,228,055 and 2,484,830 shares of common stock, respectively,
and convertible debt and preferred stock convertible into 133,333 and 13,432,518
shares of common stock, respectively.  For the year ended December 31, 2000,
these securities include options and warrants on 809,166 and 1,038,889 shares of
common stock, respectively, and convertible debt and preferred stock convertible
into 562,838 and 6,883,243 shares of common stock, respectively.

REVENUE RECOGNITION

    Product revenues are recognized when the products are shipped.  Royalty
revenues are recognized when earned.

STOCK OPTIONS AND WARRANTS

  The Company accounts for stock options and warrants issued to employees in
accordance with APB 25, "Accounting for Stock Issued to Employees."  For
financial statement disclosure purposes and issuance of options and warrants to
non-employees for services rendered, the Company follows SFAS Statement No. 123,
"Accounting for Stock-Based Compensation."

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

  The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 reported periods.  Actual results could materially differ
from those estimates.

                                      F-8
<PAGE>

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

  The Company's financial instruments include, marketable equity securities,
notes receivable and notes payable.  The carrying values of these instruments
approximate market values because the marketable equity securities are marked to
market and the rates of return and borrowing rates for notes receivable and
notes payable, respectively, are similar to other financial instruments with
similar credit risks and terms.

CONCENTRATION OF CREDIT RISK

  For the year ended December 31, 2001 and thereafter, the Company will extend
credit to its customers primarily in the railroad industry.  See Note 12 for
major customers.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

  In June 2001, the Financial Accounting Standards Board finalized FASB
Statement No. 141, Business Combinations (SFAS 141), and No. 142, Goodwill and
Other Intangible Assets ((SFAS 142).  SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001.  SFAS 141
also requires us to recognize acquired intangible assets apart from goodwill if
the acquired intangible assets meet certain criteria.  SFAS 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001.  It also requires, upon
adoption of SFAS 142, that we reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS 141.

  SFAS 142 requires, among other things, that we no longer amortize goodwill,
but instead test goodwill for impairment at least annually.  In addition, SFAS
142 requires us to identify reporting units for the purposes of assessing
potential future impairment of goodwill, reassess the useful lives of other
existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life.  An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS 142.   SFAS 142 is required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially recognized.  SFAS 142
requires us to complete a transitional goodwill impairment test six months from
the date of adoption.  We are also required to reassess the useful lives of
other intangible assets within the first interim quarter after adoption of SFAS
142.  As of the date of this filing, we are still assessing the requirements of
SFAS No. 141 and 142 and have not determined the impact the adoption will have
on our financial condition or results of operations.

  In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, SFAS No. 143, which amends SFAS No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, is applicable to all companies.
SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002,
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs.  It applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development and/or
the normal operation of a long-lived asset, except for certain obligations of
lessees.  As used in SFAS No. 143, a legal obligation is an obligation that a
party is required to settle as a result of an existing or enacted law, statute,
ordinance, or written or oral contract or by legal construction of a contract
under the doctrine of promissory estoppel.  While we are not yet required to
adopt SFAS No. 143, we do not believe the adoption will have a material effect
on our financial condition or results of operations.

  In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment of
Disposal of Long-lived Assets.  SFAS No. 144, which supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets for Long-lived Assets to be
Disposed Of and amends ARB No. 51, Consolidated Financial Statements, addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets.  SFAS No. 144 is effective for fiscal years beginning after December 15,
2001, and interim financials within those fiscal years, with early adoption
encouraged.  The provisions of SFAS No. 144 are generally to be applied
prospectively.  As of the date of this filing, we are still assessing the
requirements of SFAS No. 144 and have not determined the impact the adoption
will have on our financial condition or results of operations.

                                      F-9
<PAGE>

NOTE 2 - MARKETABLE EQUITY SECURITIES

     The Company's investments in marketable equity securities consist of common
stock and a common stock purchase warrant of a publicly traded company and are
classified as available-for-sale.  Available-for-sale securities are recorded at
fair value with the change in fair value during the year excluded from the
statement of loss and recorded as a component of other comprehensive loss.  The
market value of these securities are determined by the most recently traded
price at the balance sheet date.  At December 31, 2001, the cost and fair market
value of these securities was $1,807,176 and $2,407,176 respectively, resulting
in an unrealized holding gain of $600,000 as of and for the year ended December
31, 2001.

   On April 9, 2002 Avalanche repurchased for cash the marketable equity
securities and warrant at estimated fair market value of approximately
$2,000,000.

NOTE 3 - INVENTORIES

     At December 31, inventories consisted of the following:

                                               2001             2000
                                         ----------      -----------
     Raw materials....................   $   48,337      $   177,860
     Finished goods...................      223,182           83,916
                                         ----------      -----------
                                         $  271,519      $   261,776
                                         ==========      ===========

NOTE 4 - PROPERTY AND EQUIPMENT

     At December 31, major classes of property and equipment consisted of:

                                               2001             2000
                                            ----------      -----------
     Machinery and equipment.............   $1,819,666      $ 1,965,463
     Furniture, fixtures and other.......       65,629          122,398
                                            ----------      -----------
                                             1,885,295        2,087,861
     Less accumulated depreciation.......      240,891          253,662
                                            ----------      -----------
                                            $1,644,404      $ 1,834,199
                                            ==========      ===========

     For the years ended December 31, 2001 and 2000 depreciation expense totaled
$166,690 and $69,241, respectively.

NOTE 5- NOTES PAYABLE AND LONG-TERM DEBT

     At December 31, 2001 notes payable and long-term debt consisted of the
 following:

<TABLE>
<CAPTION>
                                                                                               2001             2000
                                                                                            ----------      -----------
<S>                                                                                        <C>              <C>
     Unsecured convertible notes payable bearing interest at 10% (a)...................    $  100,000      $   999,250
     Note payable (b)..................................................................       100,000                -
     Note payable -related party (Note 6)..............................................        30,000           30,000
                                                                                           ----------      -----------
                                                                                              230,000        1,029,250
     Less current maturities...........................................................      (130,000)      (1,029,250)
                                                                                           ----------      -----------
                                                                                           $  100,000                -
                                                                                           ==========      ===========
</TABLE>

          (a)   In October 2001, the Company borrowed $100,000 from an unrelated
     individual.  The note is convertible into common stock at $.75, the market
     value of the Company's common stock at the date of the transaction, and is
     due October 2004.

          During the year ended December 31, 2001, the Company borrowed $150,000
     from the Chairman of the Board.  The notes bore interest at 10% and were
     due September 15, 2001.  Interest expense for the year ended December 31,
     2001 totaled $2,274.

                                      F-10
<PAGE>

          In addition to the above borrowings, during 2001 the Company borrowed
     $600,000 under convertible note agreements with three individuals, of which
     $100,000 was borrowed from the Chairman of the Board.  Certain of these
     notes contained conversion rates at the time of issuance at rates below the
     market price of the Company's common stock.  Accordingly, the Company
     recorded deemed interest in the amount of $67,351, which was recognized
     over the term of the notes.  These notes were converted to preferred stock
     effective October 2, 2001.  See discussions below.

          At December 31, 2000, the Company had convertible notes payable to
     various individuals and an entity totaling $999,250, of which $150,000 was
     due from the Chairman of the Board.  Effective October 2, 2001, in
     accordance with the recapitalization transaction, these convertible notes,
     along with the $600,000 issued in 2001, were converted into preferred stock
     at $.69, which represented a reduction in the conversion rate at that date.
     Accordingly, the Company recorded interest expense for the year ended
     December 31, 2001 of $728,075 for the inducement to convert these notes.

          During the year ended December 31, 2000, the Company recorded deemed
     interest totaling $20,572 for a convertible note issued which had a
     conversion rate below the market price of the Company's common stock.

          (b)    In June 2001, the Company borrowed $100,000 from an unrelated
     entity.  The note is past due and is collateralized by fifty percent of the
     Company's manufacturing facility.


NOTE 6 - RELATED PARTY TRANSACTIONS

     In July 2001, the Company borrowed a total of $250,000 from the Chairman of
the Board of the Company (see Note 5).   Interest expense for the year ended
December 31, 2001 totaled $2,274.

     In December 2000, the Company borrowed $150,000 from the Chairman of the
Board of the Company (see Note 5).  Interest expense for the years ended
December 31, 2001 and 2000, totaled $11,301 and $0, respectively.

     During 2000, the Company issued a $30,000 note payable to the President of
the Company bearing interest at 5%.  Interest expense for the years ended
December 31, 2001 and 2000 totaled $1,500 and $1,375, respectively.


NOTE 7- STOCKHOLDERS' EQUITY

  In December 2001, the Company amended its Certificate of Incorporation to
increase the authorized common stock of the Company from 50,000,000 shares to
75,000,000 shares and the authorized preferred stock from 10,000,000 shares to
20,000,000 shares.

5% Convertible Preferred Stock

  The Company has authorized for issuance (1) 7,752,029 shares of its 5%
Convertible Preferred Stock in exchange for the outstanding preferred stock
Series F, G-I, G-II, G-III, H and I; (2) 3,118,340 shares of its 5% Convertible
Preferred Stock for accrued dividends and dividends in arrears totaling $118,659
and $5,359,684, respectively and (3) 2,562,149 shares of its 5% Convertible
Preferred Stock for the conversion of convertible notes payable and accrued
interest totaling $1,599,750 and $168,632, respectively. The exchange of the
Series F, G-I, G-II, G-III, H and I and payment of accrued dividends and
dividends in arrears will be accomplished at the current exchange rates in
effect by means of the completion of certain exchange agreements which have been
provided to the holders of Preferred Stock in connection with the
recapitalization. The conversion of the notes payable and accrued interest will
be accomplished at a reduced conversion rate in the same manner. See Note 5 for
discussions of the interest charge in 2001 for this inducement to convert.

  The 5% preferred stock is non-cumulative, has a stated value of $1.00 per
share and bears dividends at 5% of the stated value as and when such dividends
are declared by the Board of Directors, as defined by the agreement.  Each share
of the preferred stock is convertible at the holder's option into one share of
common stock.  The preferred shares

                                      F-11
<PAGE>

have the same voting rights as common, rank senior to the common share,
including any declared and unpaid dividends and have a $1.00 per share
liquidation preference.

Series F and G Cumulative Convertible Preferred Stock

  During 2001 and 2000, certain holders of Series F and G preferred stock
possessing the right to receive $100,530 and$269,589, respectively, of dividends
in arrears elected, in conjunction with their conversion of preferred stock to
common stock, to receive common stock of the Company in lieu of such dividends.

  During 2001, holders of 3,475 Series G shares with a face amount of $347,458
converted their holdings into 291,216 shares of the Company's common stock.  In
2000, holders of 17,405 Series F shares with a face amount of $1,740,520
converted their holdings into 442,425 shares of the Company's common stock and
holders of 4,357 Series G shares with a face amount of $435,689 converted their
holdings into 335,959 shares of the Company's common stock.

Series H and I Cumulative Convertible Preferred Stock

     In March 2000, the Company issued 7,752 shares of its Series H Convertible
Preferred Stock (Series H) for cash proceeds of $757,000 and $18,210 in services
of a financial advisor; and in May 2000, issued an additional 350 shares for
cash proceeds of $35,000.  In connection with the sale of the Series H shares,
the Company recognized deemed dividends of $40,918.  In September 2000, the
Company issued 5,340 shares of its Series I Convertible Preferred Stock (Series
I) for cash proceeds of $534,000.

Preferred Stock and Debt Convertible at a Discount to Market

  The Company has issued preferred stock and debt which is convertible into
shares of the Company's common stock at a price less than market price on the
date of issuance.  As a result the Company has recorded, at the time of
issuance, "deemed dividends" and "deemed interest" equal to the amount of the
discount.  The deemed dividends and interest are computed by taking the
difference between the conversion rate, as defined, and the per share market
value of the Company's common stock on the date of the issuance.  The Company
recognized deemed dividends totaling $0 and $40,918 during the year ended
December 31, 2001 and 2000, respectively and $67,351 and $20,512 of deemed
interest during the years ended December 31, 2001 and 2000, respectively.

Common Stock

  Effective October 2, 2001, the Company amended its Certificate of
Incorporation to increase the authorized common stock of the Company from
50,000,000 shares to 75,000,000 shares and the authorized preferred stock from
10,000,000 shares to 20,000,000 shares.

  Effective October 2, 2001, in accordance with the recapitalization of the
Company, the Company issued 28,635,700 shares of the Company's common stock for
marketable equity securities and a warrant with a market value of approximately
$1,807,000 and $500,000 cash.

  In October and December 2001, the Company issued 770,064 shares of common
stock and 770,064 common stock purchase warrants for $.85 per unit in a private
transaction.  The warrants vest immediately and are exercisable for five years
at $1.00 per share.

  During 2001, the Company issued 157,977 shares of common stock and 127,977
common stock purchase warrants for costs associated with capital fund raising
activities.  The common stock was issued at a range of $.85 to $1.00 per share.
The warrants vest immediately and are exercisable for a range of four to five
years at a range of $1.00 to $1.10 per share.

  In February and March 2001, the Company issued 130,433 shares of the Company's
common stock at the then current market price for accrued compensation.

  In December 2001, the Company issued 23,529 shares of common stock for
reimbursable expense of $20,000.

                                      F-12
<PAGE>

  In May and June 2000, the Company issued 1,000,000 shares of common stock in a
private transaction. The issue price was $1.00 per share.

  In September 2000, the Company issued 229,000 shares of common stock to owners
of the TieTek Royalty (see Note 10).

  At December 31, 2001 the Company had common stock reserved for future issuance
as follows:

                                           Shares
                                         ----------

     Conversion of preferred stock....   13,432,518
     Stock warrants outstanding.......    2,484,830
     Stock options outstanding........    1,228,055
     Conversion of convertible debt...      133,333
                                         ----------
                                         17,278,736
                                         ==========

NOTE 8- STOCK OPTIONS AND WARRANTS

     In May 1999 shareholders approved the adoption of the 1999 Stock Incentive
Plan.  This plan authorizes the Compensation Committee to grant options to
attract, retain and reward persons providing services to the Company.  The
Company may issue up to a maximum of 10% of the total issued and outstanding and
reserved common shares of which a maximum of 1,000,000 may be incentive stock
options.  The Company granted 430,000 options during 2001 under the 1999 Plan,
of which 430,000 remained outstanding at December 31, 2001.  Also outstanding at
December 31, 2001 were 798,055 options previously granted by the Board of
Directors.

     The Company accounts for stock options issued to employees and independent
directors in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees".

     SFAS Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") requires the Company to provide pro forma information regarding net loss
applicable to common stockholders and loss per share as if compensation cost for
the Company's stock options granted had been determined in accordance with the
fair value based method prescribed in SFAS 123.  The Company estimates the fair
value of each stock option at the grant date using the Black-Scholes option-
pricing model with the following weighted-average assumptions used for grants in
2001 and 2000 as follows:

                                 2001       2000
                                 ----       ----

     Dividend yield........         0%         0%
     Expected volatility...       110%        51%
     Risk free interest....         4%         6%
     Expected lives........   4 years    4 years

     Under the accounting provisions of SFAS 123, the Company's net loss
applicable to common stockholders and loss per share would have been increased
to the pro forma amounts indicated below:


                                                           2001            2000
                                                    -----------     -----------
    Net loss applicable to common stockholders
      As reported (Note 1).......................   $(6,802,043)    $(4,753,533)
                                                    ===========     ===========
      Pro forma..................................   $(6,910,689)    $(4,932,302)
                                                    ===========     ===========
    Loss per share...............................
      As reported................................   $      (.48)    $      (.85)
                                                    ===========     ===========
      Pro forma..................................   $      (.49)    $      (.88)
                                                    ===========     ===========


                                      F-13
<PAGE>

     A summary of the status of the Company's stock options to employees and
directors as of December 31, 2001 and 2000, and changes during the years
ending on those dates is presented below:

<TABLE>
<CAPTION>

                                                          2001                     2000
                                                 ------------------------  ---------------------
                                                                Weighted-              Weighted-
                                                                 Average                Average
                                                                 Exercise               Exercise
                                                     Shares        Price    Shares        Price
                                                 ----------       ------   -------       ------
<S>                                              <C>           <C>         <C>        <C>
     Outstanding at beginning of year.........      809,166       $ 3.96   469,999       $ 6.23
     Granted..................................      430,000         1.10   402,500         1.83
     Expired or forfeited.....................      (11,111)       11.25   (63,333)       (7.26)
                                                 ----------       ------   -------       ------
     Outstanding at end of year...............    1,228,055       $ 2.89   809,166       $ 3.96
                                                 ==========       ======   =======       ======
     Options exercisable at year-end..........      558,882       $ 4.16   502,161       $ 5.11
                                                 ==========       ======   =======       ======
     Weighted-average fair value of options
      granted during the year.................                      $.82                 $  .84
                                                                  ======                 ======

</TABLE>

     The following table summarizes information about fixed stock options
outstanding to current or former employees and directors at December 31, 2001:
<TABLE>
<CAPTION>

                                                Weighted
                                                Average
                                               Remaining       Weighted       Weighted
                                  Number      Contractual       Average        Number          Average
                 Exercise       Outstanding       Life         Exercise      Exercisable      Exercise
                  Price         at 12/31/01     (Years)          Price       at 12/31/01        Price
               ------------     -----------   ------------   -------------   -----------   ---------------
<S>            <C>              <C>           <C>            <C>             <C>           <C>
                      $ 1.10       430,000        9.42           $ 1.10             0            $ 1.10
                      $ 1.13        10,000        8.94           $ 1.13         6,000            $ 1.13
                      $ 1.25       210,000        8.94           $ 1.25       126,000            $ 1.25
                      $ 1.44        12,500        8.40           $ 1.44         7,500            $ 1.44
                      $ 1.63        20,000        8.28           $ 1.63        12,000            $ 1.63
                      $ 2.75       130,000        8.09           $ 2.75        78,000            $ 2.75
                      $ 3.00       122,500        7.27           $ 3.00        63,327            $ 3.00
                      $ 4.50       122,221        4.94           $ 4.50       122,221            $ 4.50
                      $ 6.75        33,333        1.00           $ 6.75        33,333            $ 6.75
                      $ 9.00       136,112        4.50           $ 9.00       136,112            $ 9.00
                      $22.50         1,389        3.00           $22.50         1,389            $22.50
               -------------     ---------        ----           ------       -------            ------
               $1.10 - 22.50     1,228,055        7.72           $ 2.89       585,882            $ 4.16
               =============     =========        ====           ======       =======            ======
</TABLE>

     In connection with the stock warrants issued primarily in connection with
financing transactions, the Company had 2,484,830 stock warrants outstanding at
December 31, 2001, of which all are currently exercisable. These warrants have
an exercise price of between $.75 and $3.76 or as adjusted, and expire between
2004 and 2006.

                                      F-14
<PAGE>

NOTE 9 - INCOME TAXES

     Deferred taxes are determined based on the temporary differences between
the financial statement and income tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse.

  The components of deferred income tax assets at December 31, were as follows:

                                               2001           2000
                                          ------------    ------------

Deferred tax assets
 Net operating loss carryforwards......   $ 11,712,000    $ 10,130,000
 Capital loss carryforwards............        227,000         227,000
 Patents and purchased technologies....              -          85,000
 Other.................................         91,000          95,000
                                          ------------    ------------
Gross deferred tax assets..............     12,030,000      10,537,000
                                          ------------    ------------
Deferred tax liabilities
  Property and equipment...............        (96,000)        (73,000)
  Goodwill.............................        (74,000)        (61,000)
  Patents and purchased technologies...        (24,000)              -
                                          ------------    ------------
Gross deferred tax liabilities.........       (194,000)       (134,000)
                                          ------------    ------------
Net deferred tax asset.................     11,836,000      10,403,000
Valuation allowance....................    (11,836,000)    (10,403,000)
                                          ------------    ------------
   Net deferred tax assets.............   $          -    $          -
                                          ============    ============

         At December 31, 2001 and 2000, the Company provided a 100% valuation
allowance for the deferred tax asset because it could not determine whether it
was more likely than not that the deferred tax asset would be realized.

         At December 31, 2001, the Company has net operating loss carryforwards
for federal income tax purposes totaling approximately $34,448,000 which, if not
utilized, will expire as follows:


      YEAR ENDED
     December 31,              AMOUNT
----------------------       -----------

   2002...................   $   391,000
   2003...................       376,000
   2004...................       455,000
   2005...................       113,000
   2006...................       298,000
   2007...................       295,000
   2008...................     1,669,000
   2009...................     3,138,000
   2010...................     3,799,000
   2011...................     4,774,000
   2012...................     6,135,000
   2018...................     2,171,000
   2019...................     2,521,000
   2020...................     3,556,000
   2021...................     4,757,000
                             -----------
                             $34,448,000
                             ===========

     The figures above are stated on a consolidated basis.  Federal tax laws
only permit the use of net operating loss

                                      F-15
<PAGE>

carryforwards by the individual entities that originally sustained the losses,
utilization of the net operating loss carryforwards discussed above may be
limited in the future due to the change in ownership during the year ended
December 31, 2001.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

  The Company rents equipment and facilities under operating leases on both long
and short-term basis.  Rent expense for the years ended December 31, 2001 and
2000 total approximately $254,000 and $234,000, respectively.

  During November 1998, the Company entered into a lease agreement for a 23,000
square foot manufacturing and office facility in Houston, Texas to be used for
the production of the TieTek crossties.  The lease is renewable at the Company's
option for ten consecutive periods of five years each. The monthly rental is
currently $14,819.  The lease provides for a CPI adjustment to the monthly
rental after 2-1/2 years of the initial term and at the beginning of every
renewal period.  On December 31, 2001, the Company leased an additional 2-1/2
acres and 50,000 square feet of additional building space adjacent to the
original property.  Monthly rental on this addition when construction is
complete will be $5,050.

Minimum annual rentals under non-cancelable operating leases of more than one
year in duration are as follows:
                                    Amount
                                  ---------

2002...........................    $236,090
2003...........................     271,440
2004...........................     227,500
2005...........................     186,400
2006...........................     176,400
                                 ----------
                                 $1,097,830
                                 ==========

     In December 1999, in association with the acquisition of TieTek, Inc., the
Company entered into a fifteen-year royalty agreement (TieTek Royalty Agreement)
providing for royalty payments calculated on gross profits of TieTek payable to
the former owners of TieTek.  One of the former owners is a Director and Officer
of the Company and another is a former Director of the Company.  The TieTek
Royalty Agreement provides for the payment of an alternate minimum royalty
beginning March 1999 in the event the Company does not expeditiously proceed
with the construction of a plant as defined in the Royalty Agreement.  In
October 1999, the Company was informed by certain royalty holders that they
disagree with the Company's interpretation of the Royalty Agreement and believe
that an alternate minimum royalty is due and have requested that it be paid.
During 2000, the Company paid $50,000 and issued 229,000 shares of its common
stock valued at $234,954 to the royalty owners in exchange for satisfaction of
all alternative minimum royalty payments contemplated in the original agreement.

     From time to time the Company may be involved in various legal actions
arising in the normal course of business relating to product liability issued
for which the Company maintains insurance.


NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION

     During the years ended December 31, 2001 and 2000, the Company paid
interest totaling approximately $24,646 and $4,000, respectively.  The increase
in 2001 was due to interest expense incurred in factoring accounts receivable.

During the year ended December 31, 2001, the Company had the following non-cash
transactions:

(a)  The holders of Series G shares totaling 3,475 shares, with face value of
     $347,458, converted their holdings into 291,216 shares of the Company's
     common stock.

(b)  The Company issued 92,805 shares of common stock in lieu of the payment of
     deferred dividends totaling $100,530 and interest on those deferred
     dividends of $10,219.

                                      F-16
<PAGE>

(c)  The Company issued 2,317,754 shares of the new series of preferred stock to
     noteholders for conversion of $1,599,250 of outstanding debt and recorded a
     beneficial conversion charge of $728,075.

(d)  The Company issued 3,118,340 shares of the new series of preferred stock in
     lieu of payment of deferred dividends of $5,359,684 and accrued dividends
     of $118,659.

(e)  The Company issued 244,395 shares of the new series of preferred stock in
     lieu of payment of $168,632 of accrued interest.

(f)  The Company issued 81,900 shares of common stock for a subscription
     receivable of $69,615.

(g)  The Company issued 157,977 shares of common stock for $142,051 of
     professional services rendered.

(h)  The Company issued 106,433 shares of common stock for $226,200 of
     compensation due to its former CFO.

(i)  The Company issued 24,000 shares of common stock to its President to settle
     $30,000 of compensation due him.

(j)  The Company issued 22,385,700 shares of common stock for marketable
     securities and a warrant valued at $1,807,176.  In addition, the Company
     recorded an unrealized gain on marketable securities of $600,000 for the
     year ended 2001.

(k)  The Company recognized deemed interest of $67,351 on its convertible notes
     payable.

(l)  The Company issued 23,529 shares of common stock for reimbursable expenses
     of $20,000.

During the year ended December 31, 2000, the Company had the following non-cash
transactions:

(a)  The holders of Series F shares totaling 17,405 shares, with face value of
     $1,740,520, converted their holdings into 442,425 shares of the Company's
     common stock.
(b)  The holders of Series G shares totaling 4,357 shares with face value of
     $435,689 converted their holdings into 335,959 shares of the Company's
     common stock.
(c)  The Company issued 18,429 shares of common stock in lieu of the payment of
     deferred dividends totaling $72,709.
(d)  The Company issued 4,483 shares of common stock in lieu of the payment of
     interest on deferred dividends totaling $10,260.
(e)  The Company recognized deemed dividends of $40,918 on its Series H
     preferred stock.
(f)  Certain holders of preferred stock possessing the right to receive
     dividends in arrears totaling $269,589 were issued 102,483 shares of the
     Company's common stock in lieu of receiving such dividends.
(g)  The company issued 182 Series H preferred stock for $18,210 of professional
     services rendered.
(h)  The Company recognized deemed interest of $20,512 on its convertible notes
     payable.
(i)  The Company issued 229,000 shares of its common stock valued at $234,954 to
     certain royalty owners.
(j)  On entering into a new note payable agreement with a lender, the Company
     included $16,750 of previously accrued interest in the new note balance.
(k)  The Company issued a $30,000 note payable to its President for
     compensation.

                                      F-17
<PAGE>

NOTE 12 - MAJOR CUSTOMERS

     For the year ended December 31, 2001, the Company had sales to one customer
that represented 93% of total revenues.

     For the year ended December 31, 2000, the Company had sales to two
customers that represented 76% and 16% of total revenues, respectively.

     At December 31, 2001 and 2000 substantially all accounts receivable were
due from the customer that represented 93% and 76% of the Company's sales for
2001 and 2000, respectively.

     If the Company ever ceased conducting business with the customer that
represented 93% and 76% of total revenues for 2001 and 2000, respectively, and
was not able to replace the customer, it would have a material adverse impact on
the operating results of the Company.


NOTE 13 - LIQUIDITY AND CAPITAL RESOURCES

     For the year ended December 31, 2001, the Company incurred a net loss of
$4,393,837. This loss principally reflected the ramping up operations of the
TieTek composite railroad crosstie business and corporate overhead. As of
December 31, 2001, the Company had net working capital of $1,365,384, including
a cash balance of $72,243. During 2001, the Company incurred a cash flow deficit
averaging approximately $150,000 per month. The deficit will likely decrease as
production volumes increase in 2002. Management believes the current level of
working capital to be adequate for current operating levels through December 31,
2002, but will seek additional capital for expansion to achieve operating
profits.

                                      F-18