<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                 FORM 10-KSB/A

     (MarkOne)
     [X]  ANNUAL REPORT PURSUANT SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
          ACT OF 1934.  For the fiscal year ended May 31, 2001.

     [_]  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 0-27063

                     AQUATIC CELLULOSE INTERNATIONAL CORP.
            -------------------------------------------------------
                (Name of small business issuer in its charter)

           Nevada                                         82-0381904
-------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

3704 32/nd/ Street, Suite 301 Vernon, BC                  VIT  5N6
(Address of principal executive offices)                 (Zip Code)

Registrant's Telephone number, including area code: (800) 565-6544
                                                    --------------

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes   X   No
     ---     ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  ___

The issuer had revenues of $280,042 for the fiscal year ended May 31, 2001.

The aggregate market value of the voting stock held by non-affiliates on May 31,
2001 was approximately $2,350,966 based on the average of the bid and asked
prices of the issuer's common stock in the over-the-counter market on such date
as reported by the OTC Bulletin Board.  As of May 31, 2001, 47,019,315 shares of
the issuer's common stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

1. General Registration on Form 10-SB12G filed on November 02, 1999;
2. Registration on Form SB-2 filed on August 21, 2000.  File NO: 333-44184
3. Registration on Form SB-2 filed on  June 12, 2001 File No. 333-62824

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                                     PART I

ITEM 1.   Description of Business

AQUATIC CELLULOSE INTERNATIONAL CORP.

     Aquatic Cellulose International Corp. (" the "Company") is a Nevada
Corporation originally organized as Aquatic Cellulose Ltd. ("ACL") and was
incorporated in March of 1997.

  Located in Vernon, British Columbia, Canada, Aquatic Cellulose International
("Aquatic") is a forest-based company focusing on what was once considered a
lost resource.   That resource is submerged timber.  AQCI has in place the
processes and equipment necessary to access and recover this valuable resource.
Generally, submerged timber is of excellent quality and can be used for plywood,
sawn lumber, and a wide variety of wood fiber processes.   Aquatic's principal
activity is the procurement of contracts for the salvage and harvest of
submerged timber and the sale of lumber derived from such timber.

  Aquatic harvests trees with a surface mounted robotic arm, called the ATH-60,
that has the ability to reach under water, extract a targeted submerged tree and
bring it to the surface.  This submerged timber is preserved by the water and is
typically of excellent quality making it attractive to be used for plywood, sawn
lumber (i.e. lumber used for constructing buildings), special cuts for fine
furniture building plus a wide variety of other wood fiber processes such as
chipping to create OSB plywood (chip board) or processed for the pulp and paper
industry.

  Aquatic uses a simple but effective way to obtain timber and the rights to
harvest timber in Canada.  First, Aquatic researches a potential site to ensure
sufficient timber resources exist.  If the reserve is adequate, Aquatic meets
with the local government officials to determine the ownership of the wood
reserve.  In cases where the wood has sunk to the bottom of the water location,
the local government takes ownership of the wood to ensure that all local
environmental concerns are addressed.  Once ownership is determined, Aquatic
applies for an appropriate salvage permit.  To date Aquatic has acquired only
one salvage permit in Canada, on July 20/th/, 1998, allowing the salvaging of
timber at Monty Lake, in Central British Columbia, Canada.     Aquatic harvested
timber, pursuant to the salvage permit, within a designated area from July 21,
1998 to October 31, 1998.

  Obtaining timber and the rights to harvest in foreign countries is approached
slightly differently.  In this case, Aquatic meets with all appropriate
government officials to receive approval from the host country to evaluate its
inundated (flooded) forests.  Once approval is received, Aquatic evaluates the
target site to ensure sufficient volumes of timber exist.  Finally, Aquatic
forms a strategic alliance in the applicable country with a partner chosen for
their ability to implement the project, operate the project on an on going basis
and put in place the down stream infrastructure to process the timber.

  Aquatic uses a unique method of harvesting timber.  Presently, submerged
forests are harvested by divers using hand-operated equipment.  This method of
harvesting has a slow wood recovery rate of approximately eight to ten trees per
day. The ATH60 is capable of harvesting approximately thirty to forty trees per
day.

  This industry consists of two primary sources of underwater timber.  The first
source is standing timber that has been inundated as a result of a dam
construction (hydroelectric or otherwise).   These standing trees are submerged
as the water level behind a dam rises, preserving them and preventing
degradation of the

                                      -2-
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wood quality. The second source is salvage timber. This source consists of those
trees that have already been cut and have sunk to the bottom of a waterway en
route to a mill or load out area.

  Inundated and salvage timber is viable for all types of finished product
production, including paper.  Furthermore, logs in deep fresh water are not
subject to rot as bacteria requiring oxygen are not present. Thus, though there
may be some slight discoloration, the structural integrity of sunken wood is
sound.  In our travels to South America, we observed that submerged hardwoods in
the Amazon are currently being used in the production of both plywood and sawn
lumber.

  Aquatic has done an on-sight evaluation of the Tucurui reservoir in Brazil,
South America.  The Tucurui reservoir, created in 1984, is located in the
northern interior of Brazil.  When the reservoir was filled, it covered an
estimated 100,000 hectares (one hectare equals approximately 2.6 acres) of old
growth rain forest. In 1997, Aquatic formed an alliance with Sulpam Madeira
Ltda., a Brazilian Company that has the rights to harvest the timber in the
Tucurui reservoir.  Pursuant to the terms of the alliance, Sulpam was to provide
all surface support craft and provide all "downstream" support and milling
services for timber harvested from the Tucurui reservoir by the ATH60.

  During 2001, it became evident that Sulpam was no longer able to meet their
commitment to provide all "downstream" support and milling services.  Therefore,
the Company was required to establish its own milling facilities and contract
surface support craft.  Aquatic continues to operate the Brazil operation under
the harvesting rights held by Sulpam.  The agreement covering the use Sulpam's
timber harvesting rights does not specify an expiration date.

  Aquatic has also investigated underwater forests and salvage timber in Canada,
the United States and Central America.  In Canada, Aquatic completed a physical
examination of standing timber in reservoirs such as Ootsa Lake in B.C. and
salvage timber in waterways such as Lake Superior.  The wood examined in these
locations was in excellent condition and suitable for harvest and processing.
Aquatic is presently concentrating all its efforts in Brazil.

  Aquatic's timber harvesting system utilizes three technological innovations.
The first innovation is a digital camera system that has the ability to capture
visual images in low light conditions and provide lighting allowing for real
time continuous surveillance of all underwater operations, even in turbid water
conditions.  This camera is readily available from Sony dealers throughout the
world.

  The second innovation is the robotically controlled arms and heads and related
software.  Aquatic uses the software to produce an image of the robot's arm and
head joint position.  This software is operated on a system of two Intel Pentium
based computers that are networked together (the software is copyrighted by Gary
Ackles.).  There is a patent for the use of the robotic system and software.
The patent number is 6,024,145, effective date of 2/15/00, and belongs to
Aquatic's president, Mr. Gary Ackles.

  The third innovation is sonar imaging.  This system is used for scanning the
bottom of the reservoir to target trees for harvesting

  All three technologies were incorporated in the development and construction
of the ATH-60.  Aquatic is currently financing the construction and acquisition
of a second unit referred to as the ATH-120, which is specially designed for the
deeper harvest of large diameter submerged timber.  Construction of ATH-120 is
in process, with the arm component complete.  An additional $650,000 of
Aquatic's funds will be required to complete the construction of the ATH-120.

                                      -3-
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Competition

     Aquatic competes for customers with other established timber companies,
many of which have substantially greater assets and resources than those of our
Company.   Large organizations presently dominate the timber industry and have
long-standing distribution and marketing relationships, which may work to the
disadvantage of Aquatic.  However, because Aquatic accesses and supplies a
unique alternate hardwood source, we presently have minimal competition in our
niche market.

Marketing and distribution Process

     Upon receiving a purchase order for its goods, Aquatic manages the product
from the initial wood harvesting through manufacturing to the final point of
sale.   The steps involved are as follows:

          .  The product is first marketed through wood distributors, which
             provide Aquatic with purchase orders;
          .  Wood is then harvested and transported to a primary milling
             facility where the wood is cut to rough sawn lumber;
          .  The rough sawn lumber is then shipped to a secondary milling
             factory where the wood is milled into pre-finished wood products
             specified by the purchase order;
          .  The pre-finished wood is then bundled, wrapped and trucked to a
             ship-loading yard. Where it is placed aboard a cargo ship - freight
             on board ("FOB");
          .  Once the product is aboard the cargo ship the customer assumes
             liability for the product.

     There is no requirement for government approval for the marketing or use of
Aquatic's principal products or services.

     There are no known environmental laws that currently control or prohibit
the present and forecasted activities of Aquatic.

Important Event

     Aquatic entered into a relationship with Cecco Trading Inc., located in
Milwaukee Wisconsin, on March 28, 2001, upon which Cecco Trading initially
issued Aquatic twenty four purchase orders for lumber to be delivered over a
twelve month period. Cecco Trading reserves the right to cancel any orders that
are not filled within the specified delivery time indicated on the purchase
orders.

Short Term Objectives

     In the short term, Aquatic intends to continue operations in Brazil and to
finance the construction of an additional harvester to phase it into the Tucurui
project.  Pursuant to a manufacturing agreement with a company which is
controlled by the Company's CEO and largest shareholder, Aquatic has begun to
finance the construction of this additional harvester and will continue to do so
as revenue and or funding becomes available.

Long Term Objectives

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     Aquatic's long-term objectives are to secure additional harvesting rights
of inundated and salvage timber to ensure future stability and long-term growth.

Going Concern

     The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.  As discussed in
note 1a) to the consolidated financial statements, the Company has a working
capital deficiency of $467,287 as at May 31, 2001 and has suffered recurring
losses from operations which raise substantial doubt about it's ability to
continue as a going concern.  Management's plans in regard to these matters are
also discussed in note 1a).  The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

Employees

Our Company employs a total of four full time employees in the corporate office
and twelve full time employees in Brazil.  None of the employees are covered by
a union and there is presently no indication of union activity.

ITEM 2.  Description of Property

     The Company's offices are located at 3704 32nd Street, Suite 301, Vernon,
British Columbia, V1T5N6.     The Company is committed through the year 2001
with annual lease payments under operating leases for office premises and
equipment of $12,165 per year.

ITEM 3.  Legal Proceedings

     Our Company is not a party to any material pending legal proceedings and,
to the best of its knowledge, no such action by or against the Company has been
threatened.

ITEM 4.  Submission of Matters to a Vote of Securities Holders

          On March 5, 2001 at a "Special Meeting" of Aquatics' shareholders, an
amendment to Aquatic's Certificate of Incorporation to increase the authorized
number of shares of common stock from 50,000,000 to 100,000,000 was approved.

                                      -5-
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                                    PART II

ITEM 5.  Market for Common Equity and Related Shareholder Matters

     Our common stock trades on the Over-the Counter Bulletin Board, also called
the OTCBB, under the trading symbol "AQCI".  The following table set forth the
quarterly high and low bid prices per share for our common stock.  The bid
prices reflect inter-dealer prices, without retail markup, markdown, or
commission and may not represent actual transactions.

                                 High Bid  Low Bid

Fiscal 1999:                     -------   ------
------------
First Quarter 1998                    .34      .10
Second Quarter 1998                   .36      .09
Third Quarter 1999                    .36     .025
Fourth Quarter 1999 (5/31/99)        .235     .017

Fiscal 2000:
------------
First Quarter 1999                    .72      .14
Second Quarter 1999                   .93      .25
Third Quarter 2000                    .90      .45
Fourth Quarter 2000 (5/31/00)        1.25      .50

Fiscal 2001
-----------
First Quarter 2001                    .75      .38
Second Quarter 2001                   .53      .15
Third Quarter 2001                   .175      .08
Fourth Quarter 2001 (5/31/01)        .099      .04

     To date, the Company has not declared or paid dividends on its common
stock.

     As of May 31, 2001, there were approximately 295 shareholders of record
(that are not in street name) of the company's Common Stock.

Recent Sales of Unregistered Securities

     A total  29,762,336 shares of common stock, par value $0.001 (the
"Shares"), have been issued by Aquatic since July 31, 1998 for cash or services
rendered to Aquatic, absent registration under the Securities Act of 1933, as
amended (the "Securities Act").     The Shares issued are as follows.

     In August, 1998, Aquatic issued 1,000,000 restricted Shares to Big Rock
Marketing Group for cash at $0.027 per share or $27,000.  Additionally, 420,000
restricted Shares were issued to Chelsey Technology Corp. for services valued at
$0.027 per share (a 55% discount to market) which amounted to $11,340 as payment
for public relations services rendered to the Company and represented fair value
for services rendered.  The above shares were issued pursuant to the exemption
provided for under Section 4(2) of the

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Securities Act of 1933, as amended, as a "transaction not involving a public
offering." The investors of the stock were accredited investors.

     In October, 1998, Aquatic issued 1,000,000 restricted Shares to Big Rock
Marketing Group for cash at $.027 per share.  500,000 restricted Shares were
issued to P. Daoust valued at $0.027 per Share (approximately 50% of market
value) as compensation for public relations services rendered to the Company and
represented fair value for services rendered.  The above shares were issued
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933, as amended, as a "transaction not involving a public offering."   The
investors of the stock were accredited investors.

     In November, 1998, Aquatic issued 500,000 restricted Shares to NIKA
Resources Ltd. for cash at $0.10 per share (a negotiated settlement amount).
Aquatic issued 500,000 restricted Shares to Big Rock Marketing Inc. for cash at
$.027 per share and 28,000 restricted shares to Phoenix Media Group, Ltd. at
$.027 per share for services rendered to the Company ($0.027 was approximately
market value and these shares represented fair value for services rendered).
The shares were issued pursuant to the exemption provided for under Section 4(2)
of the Securities Act of 1933, as amended, as a "transaction not involving a
public offering."  The investors of the stock were accredited investors.

     In December, 1998, Aquatic issued 3,000,000 restricted shares to various
consultants for public relations services rendered valued at $0.027 share per
share, 240,000 restricted Shares to Sean Ackles for cash at $0.10 per share and
250,000 restricted shares to Big Rock Marketing Inc. for cash at $0.053 per
share.  The issuance price represented approximately market value of the shares
at the time of issuance.  These shares were issued pursuant to the exemption
provided for under Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering."  The investors of the stock were
accredited investors.

     In January 1999, Aquatic issued 1,350,000 restricted shares to various
consultants and vendors for services and product rendered.  These shares were
valued at $0.027 per share (approximately market value and represented fair
value for services rendered). These shares were issued pursuant to the exemption
provided for under Section 4(2) of the Securities Act of 1933, as amended, as a
"transaction not involving a public offering." The investors of the stock at
this time were accredited investors.

     In February 1999, Aquatic issued 10,523,336 shares to various investors
pursuant to the exemption to registration provided under Rule 504 of Regulation
D of the Securities Act of 1933, as amended.   These shares were sold for cash
at $0.024 per share (sale price was set at approximately a 30% discount to
market at the time of filing).  The investors of the stock were accredited
investors.

     In April 1999, Aquatic issued 6,515,000 shares of restricted stock pursuant
to the exemption provided for under Section 4(2) of the Securities Act of 1933,
as amended, as a "transaction not involving a public offering." as follows: 1)
the Company issued 3,515,000 restricted shares to various Officers of the
Company who exercised options granted in February, 1999 for services rendered in
their positions. These shares were valued at $.03 per share, which was market
value on the date the options were granted; 2) the Company issued 1,000,000
restricted shares valued at $0.03 per share to Consultants for public relations
services rendered to the Company; 3) 1,500,000 and 500,000 restricted shares
were issued to Big Rock Marketing Group for cash at $0.10 and $0.20 per share.
The investors of the stock were accredited investors.

     In May, 1999, Aquatic issued 500,000 restricted shares to Big Rock
Marketing Group valued at $0.03 per share (price reflected market price) for
public relations services rendered to the Company and these

                                      -7-
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shares represented fair value for services rendered. These shares were issued
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933, as amended, as a "transaction not involving a public offering." The
investors of the stock at this time were accredited investors.

     In May, 2000, we issued 100,000 restricted Shares valued at $0.50 per share
(price reflected market value) for cash to Matt Lothian pursuant to the
exemption provided for under Section 4(2) of the Securities Act of 1933 as
amended, as a "transaction not involving a public offering."   The investor of
the stock was an accredited investor.

     In December 1999 through May, 2000, the Aquatic issued 722,000 restricted
shares valued at an average of $0.642 per share (price reflected market price)
for services, pursuant to the exemption provided for under Section 4(2) of the
Securities Act of 1933 as amended, as a "transaction not involving a public
offering."     The investors of the stock at this time were accredited
investors.

     In March, 2001, we issued 1,700,000 shares of restricted stock at $0.068
per share, of which 850,000 shares were issued to Creative Advertising
consultants (Ted Klar) and, 850,000 shares were issued to B&H (Ted Klar)
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933 as amended, as a "transaction not involving a public offering."   These
shares were issued for services rendered. The investor of the stock was an
accredited investor.

     At various times in 2001, Aquatic issued an aggregate of 587,000 shares of
restricted stock at an average price of $0.14 per share (price reflected market
price) for services pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933 as amended, as a "transaction not involving a public
offering."   These shares were issued for services rendered. The investor of the
stock was an accredited investor.

     At various times in 2001, Aquatic issued an aggregate of 227,000 shares of
restricted stock at an average price of $0.58 per share for the settlement of
accounts payable and accrued liabilities (settlement determined stock price)
pursuant to the exemption provided for under Section 4(2) of the Securities Act
of 1933 as amended, as a "transaction not involving a public offering."   These
shares were issued for services rendered. The investor of the stock was an
accredited investor.

     In, 2001, Aquatic issued 100,000 shares of restricted stock to Mathew
Lothian at no cost pursuant to the exemption provided for under Section 4(2) of
the Securities Act of 1933 as amended, as a "transaction not involving a public
offering."   These shares were issued for cash subscriptions for 200,000 common
shares received during fiscal 2000.  100,000 of the common shares were issued
during fiscal 2000.   The investor of the stock was an accredited investor.

Shares issued subsequent to May 31, 2001

     In June, 2001 Aquatic issued 2,500,000 shares of restricted stock at $0.06
per share for the purchase of equipment, pursuant to the exemption provided for
under Section 4(2) of the Securities Act of 1933 as amended, as a "transaction
not involving a public offering."  The investor of the stock was an accredited
investor.

     In July, 2001 Aquatic issued 400,000 shares of restricted stock at $.04 per
share for services, (price reflected market price), pursuant to the exemption
provided for under Section 4(2) of the Securities Act of

                                      -8-
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1933 as amended, as a "transaction not involving a public offering." The
investor of the stock was an accredited investor.

Convertible Notes issued (The investors of the securities were accredited
investors).

     On May 5, 2,000, Aquatic issued two convertible debentures of $250,000 each
for a aggregate of $500,000 in accordance with (S) 4(2) and Rule 506 under the
Securities Act of 1933, as amended (the "Securities Act")

     On September 29, 2000, Aquatic issued two convertible debentures of
$250,000 each for a aggregate of $500,000 in accordance with (S) 4(2) and Rule
506 under the Securities Act of 1933, as amended (the "Securities Act").

     On January 25, 2001, Aquatic issued two convertible debentures of $75,000
each for an aggregate of $150,000 in accordance with (S) 4(2) and Rule 506 under
the Securities Act of 1933, as amended (the "Securities Act").

     On March 14, 2001, Aquatic issued two convertible debentures of $50,000
each for an aggregate of $100,000 in accordance with (S) 4(2) and Rule 506 under
the Securities Act of 1933, as amended (the "Securities Act").

Warrants and options issued (The investors of the securities were accredited
investors).

     On May 5, 2000, Aquatic issued a total of 250,000 warrants.  Each warrant
allows the holder to purchase 1 share of our common stock at an exercise price
equal to $0.69 per share, and expire May 4, 2003. These warrants were issued in
accordance with (S) 4(2) and Rule 506 under the Securities Act of 1933, as
amended (the "Securities Act").


     As of July 31, 2000, there were a total of 1,425,250 options outstanding to
purchase Aquatic's common stock at an exercise price of $0.52 per share, which
was the market price of the options on the granting date of February 22, 2000.
These options expire on February 22, 2005. These options were issued pursuant to
the exemption provided for under Section 4(2) of the Securities Act of 1933 as
amended, as a "transaction not involving a public offering."

     On September 29, 2000, Aquatic issued a total of 250,000 warrants.  Each
warrant allows the holder to purchase 1 share of our common stock at an exercise
price equal to $0.69 per share and expire September 29, 2003.  These warrants
were issued in accordance with (S) 4(2) and Rule 506 under the Securities Act of
1933, as amended (the "Securities Act").

     On January 25, 2001, Aquatic issued common stock purchase warrants for the
right to purchase 75,000 shares of Common Stock of AQCI at $0.35 per share and
expire January 25, 2004.  These warrants were issued in accordance with (S) 4(2)
and Rule 506 under the Securities Act of 1933, as amended (the "Securities
Act").

                                      -9-
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     On March 14, 2001, Aquatic issued common stock purchase warrants for the
right to purchase 50,000 shares of Common Stock of AQCI at $0.35 per share and
expire March 14, 2004.  These warrants were issued in accordance with (S) 4(2)
and Rule 506 under the Securities Act of 1933, as amended (the "Securities
Act").

Transfer Agent and Registrar

The Company's transfer agent is Oxford Transfer & Registrar located at 317
Southwest Alder, Suite 1120, Portland, Oregon, 92704.


ITEM 6.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Plan of Operation

     The short-term objectives of Aquatic are the following:

     1.   Continue expansion of the Brazilian harvesting project.  This
          expansion will require additional equipment and labor plus training
          and support. Implementation of these items have already started.
     2.   Seek out and develop key alliances, acquisitions and joint ventures.
     3.   Establish new lumber markets, especially with respect to rare and
          exotic species.
     4.   Expand international operations to a third continent.
     5.   Purchase additional harvesting equipment to be placed into its current
          operations.

     Aquatic's long-term objectives are as follows:

     1.   To increase lumber reserves to a level that will provide for future
          revenues and long-term growth.
     2.   To continue upgrades of the robotic technology and develop its global
          awareness.

     Over the next twelve months, Management is of the opinion that sufficient
working capital will be obtained from operations and external financing to meet
the Company's liabilities and commitments as they become payable.  The Company
has in the past successfully relied on private placements of common stock
securities, bank debt, loans from private investors and the exercise of common
stock warrants in order to sustain operations.

     There is no expected or planned sale of significant equipment by the
Company.  The Company's work force is expected to double from the current level
over the next twelve months.

                             Results of Operations

Year Ended May 31, 2001 Compared to Year Ended May 31, 2000

     The company earned revenue of $280,042 for the year ended May 31, 2001,
compared with $127,650 for fiscal 2000.  Revenue increased during 2001 from 2000
by $152,392 or 119% due to only a few sales during 2000 as harvesting commenced
part way through 2000. The Company has harvested Tender for (Timber for) the
majority of 2001.

                                      -10-
<PAGE>

     Subsequent to May 31, 2001, the Company has hired a project manager based
in Brazil, purchased a fleet of surface support craft and has identified several
mills to process the harvested timber on a reliable and timely basis.

     Cost of sales for the year ended May 31, 2001 was $750,926 compared to
$125,735 for the year ended May 31, 2000, for an increase of $625,191 or 497.2%.
The increase in cost of sales reflects the inefficiencies experienced by the
Company when Sulpam was unable to provide the required "downstream"
infrastructure necessary to process the timber harvested from Tucurui. As a
result, during 2001 the Company was faced with the challenge of securing surface
support craft and milling facilities for the harvested timber (see page twenty
"Our Business"). Difficulties in securing reliable staff and milling facilities
resulted in the Company's inability to produce sufficient quantities of
processed lumber causing the increase in cost of sales. Cost of sales is
comprised of the costs of harvesting, transporting and processing the timber,
consisting primarily of wages, fuel, supplies and contract milling costs.

     Financing fees and interest of $769,423 in fiscal 2001 (2000 -$375,160)
consists of fees and interest incurred in connection with the Company's Secured
Convertible Debenture Purchase Agreement financing including the issuance of
related Investor Warrants. Specifically, in 2001 financing fees included
amortization of a beneficial conversion feature of $362,258 (2000 -$367,800),
amortization of the fair value the warrants granted of $152,728 (2000- $4,531)
and amortization of deferred financing fees and interest on debentures of
$254,437 (2000 - $2,829). The beneficial conversion feature was due to the
conversion prices of the debentures being lower than the Company's trading price
at the commitment date.

     Engineering design expense for the year ending May 31, 2001 was $nil as
compared to $60,693 in 2000. Aquatic focused its efforts on production using the
harvester in 2001 and therefore no time was spent on research and development.
Engineering and construction of the ATH-120 is being conducted by a company
controlled by the Aquatic's CEO and largest shareholder.

     Selling, general and administration expenses decreased to $727,275 in 2000
from $851,749 in 2001. These expenses consist primarily of advertising and
promotion, professional fees, travel, administrative salaries, office expenses
and investor relations expenses. The reduction in administrative costs of
$124,474, or 14.6%, is the result of more accurate tracking of costs
attributable to the Brazil operation. As a result, costs directly related to the
Brazil project were classified as cost of sales or inventory. These expenses
were paid for in part, by the issuance of $750,000 in convertible debentures.

     Aquatic did not incur any research and development costs during the fiscal
year ending May 31, 2001 or in the fiscal period ending May 31, 2000. There are
no anticipated research and development expeditures to be incurred over the next
twelve month period.

     The Company incurred a loss in fiscal 2001 of $1,970,229 compared with a
loss of $1,287,791 in fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operating activities in fiscal 2001 amounted to $738,172
compared to $561,098 in fiscal 2000.  The increased use of cash is mainly
attributable to the costs incurred in setting up downstream operations in Brazil
and increases in selling, general and administrative expenses.

                                      -11-
<PAGE>

     Financing activities generated net cash of $602,947 in fiscal 2001 compared
with $723,500 in fiscal 2000.  The cash from financing activities for fiscal
year 2001 was generated from the issuance of $750,000 in convertible debentures,
less related fees of $122,500 and share issue costs of $24,553, compared to
proceeds from the issuance of convertible debentures of $500,000, less financing
fees related thereto of $76,500, issuance of common shares for cash of $50,000
and cash subscriptions for common shares of $250,000 in fiscal 2000.

     At May 31, 2001 the Company had cash of $19,892, accounts receivable of
$54,963, inventory of $199,892 and deferred financing costs of $19,364 for total
current assets of $294,111. Accounts receivable increased from $43,338 in 2000
to $54,963 in 2001 as a result of to the Company making more sales to an
increased number of customers in 2001 compared to 2000. Accounts payable and
accrued liabilities at May 31, 2001 amounted to $186,581 compared to $167,685 in
2000. Inventory decreased from $ 222,092 in 2000 to $ 199,892 in 2001 due to
sales volumes reducing inventory on hand at May 31, 2001 compared to May 31,
2000.

     It is anticipated that the $750,000 convertible debentures payable issued
during 2001 will be converted into common shares in accordance with the terms of
these debentures.

Recent Financing:

Two days subsequent to the effectiveness of the registration statement filed by
the Aquatic on June 12, 2001, the Company will issue two convertible debentures
for an aggregate amount of $250,000, with simple interest accruing at the annual
rate of 12%.  These debentures will be due three years after the date of
issuance.   The Holder shall have the right to convert the principal amount and
interest due under the debentures into shares of the AQCI's common stock. The
conversion price in effect on any Conversion Date shall be the lesser of (1)
$0.083, and (2) 67.67% of the average of the lowest three inter-day sales prices
of the Common Stock during the twenty Trading Days immediately preceding the
applicable Conversion Date.  AQCI will also issue additional common stock
purchase warrants for the right to purchase 125,000 shares of Common Stock of
AQCI at $0.35 per share.   The shares that will be issued upon conversion of
these debentures are being registered for resale purposes by this registration
statement.

     Certain terms and conditions must be met at the time of the closing of the
$250,000 in convertible debentures that are to be to be issued within two
trading days after the effective date of this registration statement.  These
terms and conditions are summarized as follows:

          .  The representations and warranties given by the company are still
             valid at the time of funding i.e.,

               i)   Aquatic is in good standing under the laws of the state of
                    Nevada,
               ii)  the financing transaction is property authorized by the
                    Aquatic Board of Directors and that the debentures are
                    issued free of encumbrances,
               iii) that there are adequate authorized shares available to
                    convert the debentures as provided by the financing
                    agreement,
               iv)  all disclosures provided by Aquatic regarding Aquatic, its
                    business and the current financing are true and Aquatic did
                    not omit any statement that an investor may find
                    significant.
          .  The registration statement shall be declared effective within
             ninety days of filing,

                                      -12-
<PAGE>

     .  Aquatic has not broken any laws or incurred any other event which would
        prevent this registration statement from becoming effective,
     .  The trading of Aquatic's stock on the OTC Bulletin Board has not been
        suspended,
     .  Aquatic has not had in excess of 33% of its voting securities acquired.

Registration Statement on Form SB2 filed June 12, 2001

     Aquatic is registering with the Form SB2, 57,170,096 shares of common stock
(of which 4,200,000 have been previously issued as restricted stock) all of
which will be freely tradable without restriction or further registration under
the Securities Act.  This includes:

     .  26,866,437 shares representing an adjustment to the number of shares
        held on reserve registered on the Form SB2, filed August 21, 2000, file
        number 333-44184. These reserve shares that may be needed to account for
        market fluctuations in the price of the common stock prior to the
        conversion of the debentures
     .  25,853,659 shares representing the conversion of the aggregate of
        $500,000 of 12% debentures plus estimated interest at a price of $.041
        per share
     .  250,000 shares underlying warrants to be registered in connection with
        the secured convertible debenture purchase agreement
     .  4,200,000 shares of other selling shareholders.



ITEM 7.   Financial Statements


     Please refer to pages beginning with F-1.

ITEM 8.   Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     None.

                                      -13-
<PAGE>

                                   PART III

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

Executive Officers and Directors

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

Gary J. Ackles          46  President & Director
Shane Kerpan            30  Secretary & Treasurer
Claus Wagner-Bartak     62  Director

     The officers and Directors of Aquatic will devote only such time as they
deem appropriate in the business affairs of our Company.   It is, however,
expected that the officers will devote the time deemed necessary to perform
their duties for the business of our Company.  The amount devoted by each
director is discussed below.

     The directors of Aquatic are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified.

Biographies Of Our Executive Officers And Directors

     Gary J. Ackles:  Mr. Ackles was appointed to the Board of Directors on July
1,1997, to fill a vacancy.  Mr. Ackles was President and founder of Aquatic
Cellulose Ltd., and creator of the Aquatic Timber Harvester System.  Mr. Ackles
has over 25 years expertise in industries that manufacture and sell equipment,
with extensive international and domestic experience.  Mr. Ackles is an
internationally recognized creator of aquatic technologies, and has been
involved with numerous equipment-based industries including oil and mineral
exploration, logging, heavy construction, and aquatic environmental management.
Mr. Ackles has introduced and sold equipment in Canada, USA, Middle East,
Africa, and South America. Mr. Ackles does not sit on the Board of any other
public company. Mr. Ackles dedicates approximately 90% of his time to Aquatic.

     Shane Kerpan: Mr. Kerpan earned a degree in Business Administration from
Simon Fraser University and has worked in a variety of staff management
positions in both the private and non-profit sectors. Mr. Kerpan also possesses
experience in project management and evaluation plus has provided the Company
with assistance in project research, development of multi-media presentations
and public relations. Mr. Kerpan does not sit on the Board of any other public
company. Mr. Kerpan dedicates approximately 5% of his time to Aquatic.

     Claus Wagner-Bartak--Dr. Claus Wagner-Bartak was appointed to the Board of
Directors in July, 1997, to fill a vacancy.  Dr. Wagner-Bartak was the founder
of Spar-Aerospace, the corporation contracted to develop and build the robotic
arm that is presently used on the NASA Space Shuttle, that arm being named the
"Canada-arm".  Mr. Wagner-Bartak does not sit on the Board of any other public
company.  Mr. Wagner-Bartak dedicates approximately 5% of his time to Aquatic.

                                      -14-
<PAGE>

Compliance with Section 16(a) of the Securities Exchange Act of 1934

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.

      To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the company and written representations that no other
reports were required during the fiscal year ended May 31, 2001, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.


ITEM 10.  Executive Compensation

     The following table sets forth certain summary information regarding
compensation paid by the Company for services rendered during the fiscal year
ended May 31, 2000 to the Company's Chief Executive Officer, Secretary and
Director during such period.

                            Executive Compensation

<TABLE>
<CAPTION>

                               Annual Compensation                Long Term Compensation Awards
Payouts                          ----------------------------                 --------------------------------------
<S>                    <C>       <C>       <C>      <C>           <C>         <C>            <C>          <C>
(a)                    (b)       (c)       (d)      (e)           (f)         (g)            (h)          (I)
Name                                                Other (1)                 Securities                  All
and                                                 Annual      Restricted    Underlying                  Other
Principal                                           Compen        Stock       Options/      LTIP          Compen
Position               Year     Salary      Bonus   sation($)    Award($)     Sar (#)       Payouts($)    sation ($)
Gary Ackles
President/CEO          2001     $84,000       0        0           0          1,202,500         0            0
Shane Kerpan
Secretary              2001           0       0        0           0            117,500         0            0
Claus Wagner-Bartak
Director               2001           0       0        0           0            105,250         0            0
Key Personnel:         2001           0       0        0           0                  0         0            0
Total:                 2001     $84,000       0        0           0          1,425,250         0            0
Directors as a
Group                  2001     $84,000       0        0           0          1,425,250         0            0
</TABLE>

Chief Executive Officer Compensation:

     As of the filing date of this registration statement, Mr. Ackles'
employment agreement has been approved by the Board of Directors but has not
been formalized into a written document.  Mr. Ackles has been granted an annual
salary of $84,000.

                                      -15-
<PAGE>

(1)  Long Term Incentive Plans (Options)

     There are no long- term incentive plans currently in effect. However, the
Board of Directors has granted the directors and officers of the Company stock
options that are intended to place each director and officer in an equity
position in our Company that roughly equates to their original percentage of
shares owned in our Company. These options were issued on February 22, 2000 and
are exercisable in whole or in part for five years from the date of issue at an
exercise price of $0.52. Closing market price of Aquatic's common stock as
quoted on the OTC:BB on February 22, 2000 was $.5156. The number of above
options issued were 1,425,250 and are as follows:

                       1.  Gary Ackles -             1,202,500
                       2.  Clause Wagner-Bartak -      117,500
                       3.  Shane Kerpan -              105,250

To date none of these options have been exercised.

Compensation of Directors

     Directors receive no remuneration for their services as directors at this
time.


ITEM 11.  Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth information as of the date of this
Registration Statement regarding certain Ownership of our Company's outstanding
Common Stock by all officers and directors individually, all officers and
directors as a group, and all beneficial owners of more than five percent of the
common stock.

Name and Address               Shares Owned Beneficially (1)    Percent of Class
----------------               -----------------------------    ----------------
Gary J. Ackles
3498 Salmon River Bench Rd                6,855,000                    14.1%
Vernon, B.C. V1T 8Z7

Claus Wagner-Bartak
4092 Lee Highway                            435,000                     0.9%
Arlington, VA 22207

Shane Kerpan
816 George Ann Street                       325,500                     0.7%
Kamloops, B.C. V2C 1L5

Officer/Director as a Group               7,615,500                    15.7%

(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of the registration
statement upon the exercise of options or warrants. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants that are
held by such person and which are exercisable within 60 days of the date of this
registration statement have been exercised. Unless otherwise indicated, the
company believes that all persons named in the table have voting and investment
power with respect to all shares of common stock beneficially owned by them.

                                      -16-
<PAGE>

ITEM 12.  Certain Relationships and Related Transaction

     On February 22, 1999, the Board of Directors authorized the issuance of
stock options to certain officers and directors of our Company. The options were
vested immediately and would have expired on February 22, 2004. The exercise
price was pegged at market price on the date the options were granted. These
options were exercised April 13, 1999 at $0.03 per share as follows: 1)
3,250,000 shares of common stock to Gary Ackles, 2) 115,000 shares of common
stock to Shane Kerpan, and 3)150,000 shares of common stock to Claus Wagner -
Bartak.

     On February 22, 2000, the Board of Directors authorized and granted the
issuance of stock options to certain officers and directors of our Company. The
options were vested immediately and will be exercisable in whole or in part for
five years from the date of issue. The exercise price was pegged at market price
on the date the options were granted. The options granted on February 22, 2000
(at $0.52 per share) are as follows: 1) 1,202,500 shares of common stock to Gary
Ackles, 2) 105,250 shares of common stock to Shane Kerpan, and 3) 117,500 shares
of common stock to Claus Wagner- Bartak.


ITEM 13.  Exhibits, List and Reports in Form 8-K

     (a) Exhibits

     Exhibit

Number       Description
------       -----------

3.1  Articles of Incorporation of the Company filed February 28, 1997. (1)
3.2  Certificate Amending Articles of Incorporation filed November 19, 1997. (1)
3.3  Bylaws of the Company. (1)
4.1  Form of Common Stock Certificate. (2)
4.2  Form of Warrant Agreement with Form of Warrant Election to Purchase. (2)
6.1  Lease for the Premises dated November 1, 1996. (1)
10.1  Form of Secured Convertible Debenture Purchase Agreement. (2)
10.2  Form of Registration Rights Agreement. (2)
10.3  Form of 12% Convertible Debenture. (2)
10.4  Form of Security Agreement. (2)

(1)   Previously filed with the Commission on August 16, 1999 as part of Aquatic
      Cellulose International Corp.'s Registration Statement (File N0.000-27063)
      on Form 10SB12G and incorporated by reference herein.
(2)   Previously filed with the Commission on August 21, 2000 as part of Aquatic
      Cellulose International Corp.'s Registration (File NO: 333-44184) on Form
      SB-2 filed on August 21, 2000 and incorporated by reference herein.

                                      -17-
<PAGE>

SIGNATURES

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

                      Aquatic Cellulose International Corp.
                      By:  /s/ Gary Ackles
                           ---------------
                           Gary Ackles
                           Director, Chief Executive Officer,
                           President and Chief Accounting Officer

                           Date November 30, 2001


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

<TABLE>
<S>                           <C>                                        <C>
/s/ Gary Ackles               Director, Chief Executive Officer,         November 30, 2001
    -----------
    Gary Ackles               President and Chief Accounting Officer

/s/ Claus Wagner-Bartak       Director                                   November 30, 2001
    -------------------
    Claus Wagner-Bartak
</TABLE>

                                      -18-
<PAGE>

                     Consolidated Financial Statements of

                               AQUATIC CELLULOSE
                              INTERNATIONAL CORP.

                             May 31, 2001 and 2000


<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
                     Index To Audited Financial Statements
<S>                                                                                                      <C>
Independent Auditor's Report                                                                              F-2

Consolidated Balance Sheets as of May 31, 2001 and 2000                                                   F-3

Consolidated Statements of Loss for the years ended May 31, 2001 and 2000                                 F-4

Consolidated Statement of Stockholders' (Deficiency) Equity and Comprehensive Loss
for the years ended May 31, 2001 and 2000                                                                 F-5

Consolidated Statements of Cash Flows for the years ended May 31, 2001 and 2000                           F-6

Notes to Consolidated financial Statements                                                                F-7
</TABLE>

                                      F-1
<PAGE>

AUDITOR'S REPORT TO THE STOCKHOLDERS


We have audited the consolidated balance sheets of Aquatic Cellulose
International Corp. as at May 31, 2001 and 2000 and the consolidated statements
of loss, stockholders' (deficiency) equity and comprehensive loss and cash flows
for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the financial position of the Company as at
May 31, 2001 and 2000 and the results of its operations and its cash flows for
the years then ended in accordance with accounting principles generally accepted
in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1(a) to
the consolidated financial statements, the Company has a working capital
deficiency of $467,287 as at May 31, 2001 and has suffered recurring losses from
operations that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
note 1(a). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

The consolidated financial statements for the years ended May 31, 2001 and May
------------------------------------------------------------------------------
31, 2000 have been restated from those previously presented as explained in note
--------------------------------------------------------------------------------
1(o)
----


"signed KPMG LLP"

Chartered Accountants



Kelowna, Canada
August 3, 2001

                                      F-2
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Consolidated Balance Sheets
$ United States

May 31, 2001 and 2000

<TABLE>
<CAPTION>
===================================================================================================
                                                                         2001                2000
---------------------------------------------------------------------------------------------------
                                                                         (Restated        (Restated
                                                                         note1(o))        note 1(o))
                                                                         --------         ---------
<S>                                                                      <C>            <C>
Assets

Current assets
    Cash                                                                  $    19,892   $   271,864
    Accounts receivable, net of allowance for doubtful accounts
      of $nil (2000 - $nil)                                                    54,963        43,338
                                                                                             ------
    Inventory (note 2)                                                        199,892       222,092
                                                                                            -------
    Deferred financing costs                                                   19,364        73,671
    -----------------------------------------------------------------------------------------------
                                                                              294,111       610,965
                                                                                            -------

Advance on equipment purchase (note 6(a))                                     100,000

Fixed assets (note 3)                                                          10,357         4,228

---------------------------------------------------------------------------------------------------
                                                                          $   404,468   $   615,193
                                                                                            -------
===================================================================================================

Liabilities and Stockholders' (Deficiency) Equity

Current liabilities
    Accounts payable and accrued liabilities                              $   186,581   $   167,685
    Convertible debentures payable (note 4)                                   574,817       382,031
    -----------------------------------------------------------------------------------------------
                                                                              761,398       549,716
Stockholders' (deficiency) equity
    Capital stock
     10,000,000   preferred shares, issuable in series, with
                  a par value of $0.001 per share authorized
     100,000,000  common shares with a par value of $0.001
                  per share authorized, 47,019,315 shares issued
                  (May 31, 2000 - 37,425,985 shares issued)                    47,019        37,426
    Additional paid-in capital                                              4,073,808     2,527,608
    Deficit                                                                (4,512,813)   (2,542,584)
                                                                                          ---------
    Accumulated other comprehensive income
       Foreign currency translation adjustment                                 35,056        43,027
    -----------------------------------------------------------------------------------------------
                                                                             (356,930)       65,447
                                                                                             ------
Commitments (note 6)
Subsequent events (note 8)
---------------------------------------------------------------------------------------------------
                                                                          $   404,468   $   615,193
                                                                                            -------
===================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements

On behalf of the Board:

_____________________  Director

_____________________  Director

                                      F-3
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Consolidated Statements of Loss
$ United States

Years ended May 31, 2001 and 2000

<TABLE>
<CAPTION>
  ==============================================================================================
                                                                        2001             2000
  ----------------------------------------------------------------------------------------------
                                                                     (Restated         (Restated
                                                                      --------
                                                                     note 1(o))         note 1(o))
                                                                     ---------          --------
  <S>                                                             <C>                <C>
  Sales                                                           $   280,042        $   127,650
  Cost of sales                                                       750,926            125,735
  ----------------------------------------------------------------------------------------------
                                                                     (470,884)             1,915
                                                                      -------              -----

  Expenses
    Amortization                                                        2,647              1,904
    Financing fees and interest                                       769,423            375,160
    Engineering design                                                                    60,693
    Selling, general and administrative                               727,275            851,949
    --------------------------------------------------------------------------------------------
                                                                    1,499,345          1,289,706
                                                                    ---------
  ----------------------------------------------------------------------------------------------
  Loss for the year                                               $(1,970,229)       $(1,287,791)
                                                                    ---------          ---------
  ==============================================================================================

  Weighted average number of shares                                40,762,532         36,842,267

  Loss per share - basic and diluted                              $     (0.05)       $     (0.03)
  ==============================================================================================
</TABLE>

See accompanying notes to consolidated financial statements

                                      F-4
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Consolidated Statement of Stockholders' (Deficiency) Equity and Comprehensive
Loss
$ United States

Years ended May 31, 2001 and 2000

<TABLE>
<CAPTION>
=====================================================================================================================
                                                                                       Accumulated            Total
                                                           Additional                        Other    Stockholders'
                                          Number  Capital     Paid-in                Comprehensive           Equity
                                      of Shares     Stock     Capital      Deficit          Income     (Deficiency)
---------------------------------------------------------------------------------------------------------------------
<S>                                  <C>         <C>      <C>          <C>           <C>             <C>
Balance, May 31, 1999                36,603,985  $36,604  $1,524,430   $(1,254,793)        $34,565     $   340,806

Issued for cash (note 6(b))             100,000      100      49,900             -               -          50,000
Issued for services (note 5(a))         722,000      722     462,978             -               -         463,700
Financing cost of warrants
  granted in conjunction with
  convertible debentures
  (note 4)                                    -        -     122,500             -               -         122,500
Beneficial conversion
  feature of convertible
  debentures payable
  (note 4)                                    -              367,800             -               -         367,800
---------------------------------------------------------------------------------------------------------------------
                                     37,425,985   37,426   2,527,608    (1,254,793)         34,565       1,344,806
Comprehensive income:
  Loss                                        -        -           -    (1,287,791)              -      (1,287,791)
                                                                       -----------                     -----------
  Foreign currency
    translation adjustment                    -        -           -             -           8,462           8,462
---------------------------------------------------------------------------------------------------------------------
Comprehensive income
  (loss)                                                                                                (1,279,329)
                                                                                                       -----------
---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2000                37,425,985   37,426   2,527,608    (2,542,584)         43,027          65,477
                                                                       -----------                     -----------

Issued for services (note 5(a))       2,287,000    2,287     309,242             -               -         311,529
Issued for settlement of
  accounts payable and
  accrued liabilities (note 5(a))       227,000      227     133,273             -               -         133,500
Issued upon conversion
  of debentures                       6,117,422    6,117     563,083             -               -         569,200
Issued for share subscriptions
  received in 2000 (note 6(b))          100,000      100        (100)            -               -               -
Issued in lieu of cash
  payment of interest on
  convertible debentures
  payable                               861,908      862      62,255             -               -          63,117
Share issue costs                             -              (24,553)            -               -         (24,553)
Financing cost of warrants
  granted in conjunction with
  convertible debentures
  (note 4)                                    -               55,000             -               -          55,000
Beneficial conversion
  feature of convertible
  debentures payable
  (note 4)                                    -              448,000             -               -         448,000
---------------------------------------------------------------------------------------------------------------------
                                     47,019,315   47,019   4,073,808    (2,542,584)         43,027       1,621,270
                                                                       -----------                     -----------
Comprehensive loss:
  Loss                                        -        -           -    (1,970,229)              -      (1,970,229)
                                                                       -----------                     -----------
  Foreign currency
    translation adjustment                    -        -           -             -           (7,971)         (7,971)
---------------------------------------------------------------------------------------------------------------------
Comprehensive loss                                                                                      (1,978,200)
                                                                                                       -----------
---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2001                47,019,315  $47,019  $4,073,808   $(4,512,813)        $35,056     $  (356,930)
=====================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Consolidated Statements of Cash Flows
$ United States

Years ended May 31, 2001 and 2000

<TABLE>
<CAPTION>
===========================================================================================
                                                                      2001             2000
-------------------------------------------------------------------------------------------
                                                                 (Restated        (Restated
                                                                 ---------
                                                                    note 1(o))    note 1(o))
                                                                    ----------
<S>                                                            <C>              <C>
Operating activities
 Loss for the year                                             $(1,970,229)     $(1,287,791)
                                                               -----------      -----------
 Non-cash items
  Amortization                                                       2,647            1,904
  Amortization of deferred financing costs                         176,807            2,829
  Common stock issued for services                                 311,529          463,700
  Amortization of beneficial conversion feature of
   convertible debentures                                          362,258          367,800
  Common stock issued in lieu of cash payment
   of interest on convertible debentures                            63,117
  Amortization of financing cost of warrants                       152,728            4,531
 Increase in accounts receivable                                   (11,625)         (35,604)
                                                                                -----------
 Decrease (Increase) in inventory                                   22,200         (222,092)
 --------------------------------                               ----------      -----------
 Increase in accounts payable and accrued liabilities              152,396          143,625
 ------------------------------------------------------------------------------------------
                                                                  (738,172)        (561,098)
Financing activities
 Issuance of capital stock                                               -           50,000
 Receipt of share subscriptions receivable                               -          250,000
 Share issue costs                                                 (24,553)
 Issuance of debentures                                            750,000          500,000
 Financing costs                                                  (122,500)         (76,500)
 ------------------------------------------------------------------------------------------
                                                                   602,947          723,500
Investing activities
 Purchase of fixed assets                                           (8,776)               -
 Advance on equipment purchase                                    (100,000)               -
 ------------------------------------------------------------------------------------------
                                                                                   (108,776)

Effect of exchange rate changes on cash balances                    (7,971)           8,556

-------------------------------------------------------------------------------------------
(Decrease) increase in cash                                       (251,972)         170,958

Cash, beginning of year                                            271,864          100,906

-------------------------------------------------------------------------------------------
Cash, end of year                                              $    19,892      $   271,864
===========================================================================================

Interest paid                                                            -                -
Income taxes paid                                                        -                -

Non-cash financing activities
 Common shares issued for services                             $   311,529      $   463,700
 Common shares issued for settlement of accounts payable
  and accrued liabilities                                          133,500                -
 Common shares issued upon conversion of debentures                569,200                -
 Common shares issued in lieu of cash payment of interest
  on convertible debentures payable                                 63,117                -
 Fair value assigned to warrants issued in conjunction with
  convertible debentures                                            55,000          122,500
 ==========================================================================================
</TABLE>

See accompanying notes to consolidated financial statements

                                      F-6
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements
$ United States

Years ended May 31, 2001 and 2000

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

Aquatic Cellulose International Corp. (the "Company") was incorporated under the
laws of the State of Nevada.  The Company's principal activity is the
procurement of contracts for the harvest and salvage of submerged timber and the
sale of lumber produced from such timber.  During 2001, the Company had sales to
United States customers of $192,357 (2000 - $37,025) and Brazil customers
                                             ------
aggregating $87,685 (2000 - $90,625).

1.  Significant accounting policies:

    a)  Going concern

        These financial statements have been prepared on the going concern
        basis, which assumes the realization of assets and liquidation of
        liabilities and commitments in the normal course of business. As at May
        31, 2001, the Company had a working capital deficiency of $467,287, a
        deficit of $4,512,813 and has suffered recurring losses from operations.
        The application of the going concern concept is dependent on the
        Company's ability to generate future profitable operations and receive
        continued financial support from its shareholders and other investors.
        These consolidated financial statements do not give effect to any
        adjustments should the Company be unable to continue as a going concern
        and, therefore, be required to realize its assets and discharge its
        liabilities in other than the normal course of business and at amounts
        differing from those reflected in the consolidated financial statements.
        Management plans to obtain sufficient working capital from operations
        and external financing to meet the Company's liabilities and commitments
        as they become payable over the next twelve months. There can be no
        assurance that management's plans will be successful. Failure to obtain
        sufficient working capital from operations and external financing will
        cause the Company to curtail operations.

    b)  Basis of presentation

        The consolidated financial statements include the accounts of the
        Company and its wholly-owned subsidiary, Aquatic Cellulose Ltd. All
        significant intercompany balances and transactions have been eliminated.

    c)  Translation of financial statements

        The Company's functional currency is the United States dollar. The
        Company's subsidiary, Aquatic Cellulose Ltd., operates in Canada and its
        operations are conducted in Canadian currency. However, its functional
        currency has been determined to be the United States dollar. The method
        of translation applied is as follows:

        i)    Monetary assets and liabilities are translated at the rate of
              exchange in effect at the balance sheet date, being US $1.00 per
              Cdn $1.5361 (May 31, 2000 - $1.4965).

        ii)   Non-monetary assets and liabilities are translated at the rate of
              exchange in effect at the date the transaction occurred.

        iii)  Revenues and expenses are translated at the rate of exchange in
              effect at the transaction date.

        iv)   The net adjustment arising from the translation is included in the
              consolidated statement of loss.

                                      F-7
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 2
$ United States

Years ended May 31, 2001 and 2000

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

1.  Significant accounting policies (continued):

    c)  Translation of financial statements (continued)

        To November 30, 2000, the functional currency of Aquatic Cellulose Ltd.
        was the Canadian dollar. Accordingly, the net adjustment to November 30,
        2000 arising from the translation of Canadian dollar operations into
        United States dollars has been recorded as a translation adjustment
        which is included in accumulated other comprehensive income.

    d)  Inventory

        Inventory is recorded at the lower of cost, determined on a first in,
        first out basis, and net realizable value. Cost includes costs of
        materials, labour and manufacturing overhead.

    e)  Fixed assets

        Fixed assets are recorded at cost. The carrying values of fixed assets
        are reviewed on a regular basis for the existence of facts and
        circumstances, both internally and externally, that may suggest
        impairment. To date, no such impairment has been indicated. Amortization
        is provided using the following methods and annual rates which are
        intended to amortize the cost of assets over their estimated useful
        life:

<TABLE>
<CAPTION>
        =============================================================================================
        Asset                                                          Method                    Rate
        ---------------------------------------------------------------------------------------------
        <S>                                                 <C>                                  <C>
        Computer equipment                                  Declining balance                     30%
        Furniture and equipment                             Declining balance                     20%
        Leasehold improvements                                  Straight-line                     20%
        ---------------------------------------------------------------------------------------------
</TABLE>

    f)  Warrants issued in conjunction with convertible debt

        The Company allocates the proceeds received from convertible debt
        between the liability and the warrants issued in conjunction with the
        debt, based on their relative fair values, at the time of issuance. The
        amount allocated to the warrants is recorded as additional paid in
        capital and as a discount to the related convertible debt. The discount
        is amortized to interest expense on a yield basis over the term of the
        related convertible debt.

    g)  Revenue recognition

        The Company recognizes sales when goods are shipped and the title and
        the risks and rewards of ownership have been transferred from the
        Company to the customer.

    h)  Management estimates

        The preparation of financial statements in conformity with generally
        accepted accounting principles 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
        amount of revenues and expenses during the period. Actual results could
        differ from those estimates.

                                      F-8
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 3
$ United States

Years ended May 31, 2001 and 2000

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

1.  Significant accounting policies (continued):

    h)  Management estimates (continued)

        The collectibility of accounts receivable and the determination of the
        lower of cost and net realizable value of inventory are based on
        management estimates. Management reviews its estimates on a quarterly
        basis and, where necessary, makes adjustments prospectively.

    i)  Financial instruments

        The fair values of the Company's cash, accounts receivable and accounts
        payable and accrued liabilities approximate their carrying values due to
        the relatively short periods to maturity of the instruments. The fair
        value of the convertible debentures payable approximates their carrying
        amount due to the fixed interest rate of the debentures closely
        approximating floating rates at the financial statement date.

    j)  Loss per share

        Basic loss per share has been calculated using the weighted average
        number of shares outstanding during the period. The dilutive effect of
        outstanding warrants (note 4) and stock options (note 5(b)) has not been
        calculated as their effect on basic loss per share would be
        antidilutive. As the Company has a loss in each period presented, basic
        and diluted loss per share are the same.

    k)  Stock option plan

        The Company applies APB Opinion No. 25 in accounting for stock options
        granted to employees whereby compensation cost is recorded only to the
        extent that the market price exceeds the exercise price at the date of
        grant. Options granted to non-employees are accounted for at their fair
        value at the date the related services are provided.

    l)  Income taxes

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

        Although the Company has consolidated loss carryforwards of
        approximately $2,600,000, no amount has been reflected on the balance
        sheet for deferred income taxes as the deferred income tax asset has
        been fully offset by a valuation allowance.

                                      F-9
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 4
$ United States

Years ended May 31, 2001 and 2000

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

1.  Significant accounting policies (continued):

    m)  Commitments and contingencies

        Liabilities for loss contingencies, including environmental remediation
        costs, arising from claims, assessments, litigation, fines and penalties
        and other sources are recorded when it is probable that a liability has
        been incurred and the amount of the assessment and/or remediation can be
        reasonably estimated. Recoveries from third parties which are probable
        of realization are separately recorded, and are not offset against the
        related environmental liability, in accordance with Financial Accounting
        Standards Board Interpretation No. 39, "Offsetting of Amounts Related to
        Certain Contracts."

    n)  New accounting pronouncement

        In June, 1998, the Financial Accounting Standards Board issued SFAS No.
        133, "Accounting for Derivative Instruments and Hedging Activities."
        Adoption of this standard is not expected to materially impact the
        Company's results of operations or financial position as, to date, the
        Company has not entered into any derivative instruments.

    o)  Restatement of comparative figures

        The May 31, 2000 comparative figures have been restated to account for a
        beneficial conversion feature on the convertible debentures issued
        during 2000 (note 4), and the deferral and amortization of financing
        costs related to the debentures. Accordingly, the 2000 financial
        statements have been adjusted as follows:

<TABLE>
<CAPTION>
        =============================================================================================
        Consolidated balance sheet
        ---------------------------------------------------------------------------------------------
        <S>                                                            <C>
        Increase in deferred financing costs                           $  73,671
        Decrease in convertible debentures payable                       117,969
        Increase in additional paid in capital                          (490,300)
        Decrease in Accounts Receivable                                 (225,475)
        ---------------------------------------------------------------------------------------------
        Increase in Inventory                                            222,092
        ---------------------------------------------------------------------------------------------
        ---------------------------------------------------------------------------------------------
        Increase in deficit                                            $(302,043)
        =============================================================================================
</TABLE>

        The loss for 2000 increased by $302,043 due to an increase in financing
                                       ---------------
        fees and interest of $298,660, and reductions of sales of $225,475 and
                                       ---------------------------------------
        cost of sales of $222,092.
        -------------------------

        There was no change to 2000 basic and diluted loss per share.

        Due to the reversal of the previously recognized revenue, a bad debts
        ---------------------------------------------------------------------
        expense previously recorded in 2001, which related to the accounts
        ------------------------------------------------------------------
        receivable arising from the same planned sale of logs has also been
        -------------------------------------------------------------------
        reversed.  This adjustment has impacted cost of sales recognized
        -----------------------------------------------------------------
        related to revenue in fiscal 2001
        ---------------------------------

        There was no change to 2001or 2000 net cash flows from operations,
                               ------      ---
        financing or investing activities.

    p)  Significant customers

                                     F-10
<PAGE>

        The Company earned revenues from customers representing 10% or more of
        the Company's consolidated revenue as follows:


        ======================================================================
                                            2001           2000
        ----------------------------------------------------------------------
        Customer A                      $156,063       $      -
        Customer B                        36,294              -
        Customer C                        28,319              -

                                     F-11
<PAGE>

Aquatic Cellulose International corp.
--------------------------------------------------------------------------------

Notes to Consolidated Financial Statements, page 5
$ United States

Years ended May 31, 2001 and 2000

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

2.  Inventory:

    ------------------------------------------------------------------
                                                2001              2000
    ------------------------------------------------------------------
                                           (Restated         (Restated
                                           ----------        ---------
                                           note 1(o))       note 1(o))
                                           ----------       ----------

    Logs                                   $  91,982       $   222,092
                                                           -----------
    Rough cut lumber                         107,910                 -
    ------------------------------------------------------------------
                                           $ 199,892       $   222,092
                                                           -----------
    ==================================================================

3.  Fixed assets:

    ==================================================================
                                                                  2001

    ------------------------------------------------------------------
                                              Accumulated     Net book
                                     Cost    amortization        value
    ------------------------------------------------------------------
                                                             (Restated
                                                            note 1(o))

    Computer equipment           $  3,931        $  2,067     $  1,864
    Furniture and equipment        11,701           3,208        8,493
    Leasehold improvements          4,853           4,853            -
    ------------------------------------------------------------------
                                 $ 20,485        $ 10,128     $ 10,357
    ==================================================================


    ==================================================================
                                                                  2000
    ------------------------------------------------------------------
                                              Accumulated     Net book
                                     Cost    amortization        value
    ------------------------------------------------------------------

                                                             (Restated
                                                            note 1(o))

    Computer equipment           $  2,287        $  1,620     $    667
    Furniture and equipment         4,569           1,977        2,592
    Leasehold improvements          4,853           3,884          969
    ------------------------------------------------------------------
                                 $ 11,709        $  7,481     $  4,228
    ==================================================================


4.  Convertible debentures payable:

    Convertible debentures payable bear interest at 12%, due on a quarterly
    basis, and are secured by a first priority interest in the Company's
    accounts receivable, inventory, fixed assets and general intangibles. The
    debentures due on May 4, 2002 and September 29, 2001, aggregating $525,800
    at May 31, 2001, are convertible into the Company's common shares at the
    lesser of $0.60 per share and 70% of the average of the lowest three inter-
    day sales prices during the twenty trading days immediately preceding the
    conversion date. The remaining $155,000 of the debentures at May 31, 2001
    are convertible into common shares at the lesser of $0.083 per share and
    67.67% of the average of the lowest three inter-day sales prices during the
    twenty days immediately preceding the conversion date. If unpaid when due,
    $525,800 of the debentures will automatically convert to common shares. The
    remaining $155,000 of the debentures do not automatically convert to common
    shares on their due dates.

                                     F-12
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 6
$ United States

Years ended May 31, 2001 and 2000

----------------------------------------------------------------------------
4. Convertible debentures payable (continued):

   The debentures are due as follows:

<TABLE>
<CAPTION>
   -------------------------------------------------------------------------------
                            Outstanding                                Outstanding
   Due Date                May 31, 2000       Issued      Converted   May 31, 2001
   -------------------------------------------------------------------------------
   <S>                     <C>               <C>          <C>         <C>

   May 4, 2002             $   500,000       $        -   $(474,200)    $  25,800
   September 29, 2001                -          500,000           -       500,000
   January 25, 2002                  -          150,000     (95,000)       55,000
   March 14, 2002                    -          100,000           -       100,000
   ------------------------------------------------------------------------------
                           $   500,000       $  750,000   $(569,200)      680,800
   ================================================================

   Unamortized discount related to warrants granted in conjunction with
    the issuance of the convertible debentures payable                    (20,241)
   Unamortized discount related to beneficial conversion option on
    the convertible debentures payable                                    (85,742)
                                                                        ---------
                                                                        $ 574,817
                                                                        =========
<CAPTION>
   ==============================================================================
                           Outstanding                                Outstanding
   Due Date               May 31, 1999           Issued   Converted  May 31, 2000
   ------------------------------------------------------------------------------
   <S>                     <C>               <C>          <C>         <C>
   May 4, 2002             $         -       $  500,000   $       -     $ 500,000
   =================================================================

   Unamortized discount related to warrants granted in conjunction with
    the issuance of the convertible debentures payable                   (117,969)
                                                                        ---------
                                                                        $ 382,031
                                                                        =========
</TABLE>

  In conjunction with the above debentures, the Company granted the following
  common share purchase warrants to the debenture holders:

<TABLE>
<CAPTION>
   =====================================================================================
                       Price per      Outstanding                             Outstanding
   Expiry Date          share        May 31, 2000      Issued   Exercised    May 31, 2001
   --------------------------------------------------------------------------------------
   <S>                 <C>           <C>               <C>      <C>          <C>
   May 4, 2003            $0.69          250,000           -           -          250,000
   September 29, 2003     $0.69                -     250,000           -          250,000
   January 25, 2004       $0.35                -      75,000           -           75,000
   March 14, 2004         $0.35                -      50,000           -           50,000
   --------------------------------------------------------------------------------------
                                         250,000     375,000           -          625,000
   ======================================================================================
<CAPTION>
   ======================================================================================
                       Price per     Outstanding                              Outstanding
   Expiry Date          share       May 31, 1999     Issued     Converted    May 31, 2000
   --------------------------------------------------------------------------------------
   <S>                 <C>          <C>              <C>        <C>          <C>
   May 4, 2003            $0.69                -    250,000             -         250,000
   ======================================================================================
</TABLE>

                                     F-13
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 7
$ United States

Years ended May 31, 2001 and 2000

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

4. Convertible debentures payable (continued):

   The convertible debentures contain a beneficial conversion feature as the
   debenture holders were granted common share purchase warrants and the
   debentures are convertible into common shares at prices that are less than
   the market price at the date of issuance, both of which result in the
   convertible debentures initially being recorded at a carrying amount which is
   less than their face value. The debenture proceeds attributable to the
   warrants was estimated to be $55,000 (2000 - $122,500). The fair value of the
   debenture proceeds attributable to the warrants was determined using the
   Black Scholes method using the following assumptions: the three year life of
   the warrants, volatility factor of 115%, risk free rate of 5.5% and no
   expected dividend yield. The intrinsic value of the beneficial conversion
   option has been calculated as $448,000 (2000 - $367,800) which is recognized
   in accordance with EITF 98-5, as modified, where applicable, by EITF 00-27.
   The beneficial conversion option on convertible debt instruments issued prior
   to November 15, 2000 is being accreted over the period to the first possible
   conversion date in accordance with EITF 98-5. The beneficial conversion
   option on other convertible debt is being accreted over the term of the debt
   in accordance with EITF 00-27. As a result, interest expense of $362,258
   (2000 - $367,800), discount on the convertible debentures of $85,742 (2000 -
   $nil) and a corresponding increase in additional paid-in capital of $448,000
   (2000 -$367,800) have been recorded in the consolidated balance sheet and
   consolidated statements of loss and stockholders' (deficiency) equity and
   comprehensive loss.

5. Capital stock:

   a)  During 2001, the Company issued 2,287,000 (2000 - 722,000) common shares
       for services, and 227,000 (2000 - nil) common shares for settlement of
       accounts payable and accrued liabilities which are restricted under rule
       144a.

  b)   Stock options:

       The Company's stock options vested on the date of issue.

<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------
                           Price per  Outstanding                          Outstanding
       Expiry Date           share    May 31, 2000    Issued   Exercised   May 31, 2001
       -------------------------------------------------------------------------------
<S>                        <C>        <C>             <C>      <C>         <C>
       February 22, 2005   $  0.52      1,425,250         -          -       1,425,250
       -------------------------------------------------------------------------------

<CAPTION>
       -------------------------------------------------------------------------------
                           Price per  Outstanding                         Outstanding
       Expiry Date           share    May 31, 2000    Issued   Exercised  May 31, 2001
       -------------------------------------------------------------------------------
<S>                        <C>        <C>             <C>      <C>         <C>
       February 22, 2005   $  0.52               -   1,425,250         -     1,425,250
       -------------------------------------------------------------------------------
</TABLE>


                                      F-14
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 8
$ United States

Years ended May 31, 2001 and 2000

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

5. Capital stock (continued):

   b)  Stock options:

       The Company applies APB Opinion No. 25 in accounting for its Stock Option
       Plan and, accordingly, because options have been granted at the current
       market price on the issue date, no compensation cost has been recognized
       for its stock options in the financial statements. Had the Company
       determined compensation costs based on the fair value at the grant date
       for its stock options under SFAS No. 123, the Company's loss for the year
       would have been increased to the proforma amounts below:

       -------------------------------------------------------------------------
                                                 2001                      2000
       -------------------------------------------------------------------------
                                                     (Restated        (Restated
                                                     --------
                                                     note 1(o))      note 1(o))
                                                     ----------
       Loss for the year
        As reported                              $       -         $(1,287,791)
                                                                   -----------
        Proforma                                 $       -         $(1,726,998)
                                                                   -----------
       Loss per share
        As reported                              $       -         $     (0.03)
        Proforma                                 $       -         $     (0.05)
       -------------------------------------------------------------------------

       The fair value of the options granted during 2000 has been determined
       using the Black Scholes Method using the expected one year life of the
       options, a volatility factor of 161%, a risk-free rate of 6.22% and no
       assumed dividends. No stock options were granted during 2001.

6.  Commitments:

    a)  Pursuant to a manufacturing agreement with a company that is controlled
        by the Company's CEO and largest shareholder, the Company is committed
        to providing the financing for the construction and acquisition of an
        Aquatic Timber Harvesting Machine at a cost of $750,000.

        During the year ended May 31, 2001, the Company advanced $100,000 to
        finance the commencement of the construction of the new aquatic timber
        harvester.

    b)  During the year ended May 31, 2000, the Company received $50,000 for
        subscriptions for 200,000 common shares, which are restricted under rule
        144a, of which 100,000 of the shares were issued during fiscal 2000. The
        remaining 100,000 shares were issued during fiscal 2001.


7.  Notes receivable:

    During the year ended May 31, 1999, the Company loaned $105,450 to three
    Directors for the exercise of Company stock options. These loans are
    unsecured, do not bear interest and are due on July 24, 2002. The notes
    receivable were recorded as a reduction of additional paid in capital in
    fiscal 1999.

                                      F-15
<PAGE>

AQUATIC CELLULOSE INTERNATIONAL CORP.

Notes to Consolidated Financial Statements, page 9
$ United States

Years ended May 31, 2001 and 2000

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

8.  Subsequent events:

    Subsequent to May 31, 2001, the Company issued the following common shares:

    a)  400,000 shares, restricted under rule 144a, for services with a value
        equivalent to the fair market value of the shares issued of $16,000;

    b)  2,500,000 shares, restricted under rule 144a, with a fair market value
        of $100,000 to acquire a fleet of boats to be used in the Company's
        Brazilian operation;

    c)  736,236 shares in lieu of cash payment for interest of $20,615 on the
        convertible debentures; and

    d)  508,130 shares upon conversion of $12,500 of convertible debentures.


9.  Comparative figures:

    Certain of the 2000 figures have been reclassified to conform with the
    financial statement presentation adopted in 2001.

                                      F-16