NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/, ARS, 1996-05-23

NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/
ARS, 1996-05-23
INDUSTRIAL ORGANIC CHEMICALS

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<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
1995 ANNUAL REPORT

[LOGO OF NORTH AMERICAN APPEARS HERE]

[GRAPHIC OF EARTH APPEARS HERE]

<PAGE>

Dear Shareholders,

[GRAPHIC OF EARTH APPEARS HERE]

It has been just over one year since the new management group joined the
Company, and a lot has happened during the past year. The year of 1995 should
be remembered as the year of new beginnings for the company. When you review
the past year's accomplishments, you can start to appreciate just how much
progress we have made and how much more substantial the company is now as
compared to one year ago:

. The acquisition of EET, Inc., its patented TechXtract/TM/ technology, and its
proven management team which led to the company's restructuring, its new
strategy, and its focus on positive operating results.

. The acquisition of Industrial Pipe Fittings, Inc. which added a a growing
revenue base and entrance into the high growth High Density Polyethylene pipe
market.

. The acquisition of Gaia Technologies, Inc. which added an exciting new
technology for the combined use of recycled rubber and plastics in performance
products with high revenue and growth potential.

. The initiation of sound commercial development programs for the Oleofilter/TM/
and BioKatT/TM/ technologies which should lead to positive future revenue in
both businesses.

. The completion of a total management restructuring and change in strategy
which led to a significant reduction in overhead costs, major improvement in
the company's Balance Sheet, and much higher profit potential for the future.

. The realization of sustainable revenues from our acquisitions which led to
removal of the development stage status on our financial statements and a new
operations and marketing orientation for the company.

. The completion of a major equity infusion which not only gave the company a
much more secure financial structure but also eliminated the "going-concern"
qualification on the company's previous financial statements.

All in all, the steps that were taken by the company in 1995 moved the
company significantly closer to becoming a real, fundamentally sound business
enterprise. There is still much more that needs to be accomplished, but with
the progress that was made in the past year, your new management is confident
that our new strategy can and will be successfully implemented. The
accomplishments of 1995 all pave the road toward improved financial
performance, and we are confident that they will lead to growing revenues,
profitability, and improved performance in our stock price. Our whole
management team is committed to making that a reality. It is also important to
note that this confidence is shared by our new equity investors, including
NationsBanc Capital Corporation, a subsidiary of one of the largest and most
respected financial institutions in the United States. Our management team
intends to justify their confidence in our strategy which should ultimately
lead to rewards for all our shareholders. We thank all of you, our dedicated
shareholders, for your patience and past support, and look forward to sharing
the benefits of our future success.

Sincerely,

[Signature of Tim Tarrillion appears here]

Tim B. Tarrillion
President, Chief Executive Officer,
and Chairman of the Board

[LOGO OF NORTH AMERICAN APPEARS HERE]
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[INTENTIONALLY LEFT BLANK]

<PAGE>

The
Company

[GRAPHIC OF THE EARTH APPEARS HERE]

History

Prior to 1995, North American Technologies Group, Inc. (NATK) was primarily
involved in the development of various environmental technologies dealing with
the remediation of soils and sludges, and the biocatalytic upgrading of various
hydrocarbon streams. During 1995, the company changed its strategy and shifted
its focus from technology development to technology commercialization and from
environmental remediation technologies to technologies which address more
profitable areas in the environmental and related industries. As part of this
strategy change, the company completely revamped its senior and middle
management structure and brought in a new management team that has both direct
operating experience in the energy and environmental industry and a successful
track record in growing and running a publicly-traded company.

In executing this new strategy, the company made three separate
acquisitions of companies that expanded NATK's areas of focus, added businesses
with current and growing revenues, and added experienced management personnel
needed to make this transition. These acquisitions included EET, Inc. (EET)
which added the patented TechXtract/TM/ technology and an established waste
management business; Industrial Pipe Fitting, Inc. (IPF) which manufactures and
distributes transition and related fittings for the High Density Polyethylene
Pipe Industry; and Gaia Technology, Inc. (Gaia) which manufactures and
distributes products made from recycled rubber (from automobile tires) and
plastic. As such, the company now markets its products and services through
these three wholly-owned subsidiaries and under the NATK name directly.

Strategy

The Company's new strategy is based on acquiring and internally developing
businesses that are grounded on a proprietary core technology or preferred
market position. From this proprietary or preferred base, the company strives to
develop a family of products, services, and technology agreements that provide
high economic and performance-based value to customers in the natural resources,
energy, environmental, and related industries. The company has brought together
a group of managers that have the combined ability to understand and improve
novel technologies, and implement programs to identify and penetrate target
markets for these products. This ability to combine technical and marketing
expertise is essential in the successful execution of NATK's strategy.

In this regard, NATK has already identified several core technologies and
businesses that we believe will provide the company with an initial basis for
execution of this strategy. Our current set of core technologies include EET's
TechXtract/TM/ for decontamination of buildings, floors, and equipment; Gaia's
technologies for the manufacture of products from recycled rubber and plastic;
NATK's Oleofilter/TM/ for the removal of oil from water; and NATK's BioKatT/TM/
for the upgrading of crude oil. NATK's businesses that have preferred market
position include EET's Waste Management Services, and IPF's manufacturing and
distribution of transition and related fittings. The company believes that these
technologies and businesses will lead to rapid growth in revenues and
significantly improved future financial performance. In addition, the company
plans to continue to seek, and possibly acquire, other technologies and
businesses which could provide significant future opportunities for additional
revenue growth and profits.
<PAGE>

Technologies
and Businesses

[GRAPHIC OF EARTH APPEARS HERE]

The Company's core technologies and businesses are in varying stages of
development and commercialization. EET's TechXtract /TM/ and Waste Management
businesses, IPF's transition and relating fittings businesses, and Gaia's
porous pipe and air conditioner pad businesses are currently contributing to the
revenue growth of the Company. NATK's Oleofilter/TM/ business is in the active
marketing stage and revenues from this product line are anticipated very soon.
Gaia's railroad crosstie product line and NATK's BioKatT technology are still in
the development stage, but are expected to add to the Company's growth at some
time in the future if their commercialization continues as anticipated.
Following is a brief description for each of NATK's current core technologies
and businesses.

TechXtract/TM/
The TechXtract/TM/ contaminant extraction process has been proven as a highly
effective, non-destructive process for the removal of PCBs (chemical
contaminants), heavy metals, radionuclides (radioactive atoms), and other
hazardous substances from porous surfaces and their underlying substrates. The
true distinction of the TechXtract/TM/ technology is its ability to extract
subsurface contaminants without destroying the surfaces of the contaminated
structures. This performance puts the process in a unique niche where surface
cleaning is ineffective and physical (destructive) processes are unacceptable or
uneconomical. NATK has achieved unparalleled success with a variety of
contaminants in over 200 extraction projects, and the Company's continuing
research is making the process even more effective. Given the core capabilities
of this technology, NATK hopes to develop a series of products, services, and
licensing agreements for the application of the technology in real estate
rehabilitation and property transfer, radioactivity decontamination, commercial
and retail stain removal from concrete, and industrial scale removal. Each
market provides a strong growth potential based on expected customer acceptance
of TechXtract/TM/'s unique capabilities and patented formulations.

EET's Waste Management Services
EET's Waste Management Services (WMS) is a service group providing expertise and
project personnel in the identification, packaging, documentation,
transportation and disposal of hazardous and special wastes for government,
environmental consulting/engineering firms, and industry. These services
include, identification and characterization of unknown wastes, waste
consolidation, drum handling, lab packing, and remediation and decontamination
of sites and facilities. WMS provides 40-hour Occupational Safety and Health
Act (OSHA) certified project managers and environmental technicians who can
mobilize quickly and economically at the customer's location. The skills and
credentials of WMS field personnel are also complimentary to those of
TechXtract/TM/ field personnel and can provide surge capacity for peaks in the
TechXtract/TM/ business of EET. WMS has a preferred market position in waste
handling projects for light industrial customers and government agencies in the
Central Texas Market. Given the expanded resources of NATK, growth of WMS is
expected in other industrial customers and surrounding areas. Such expansion
should lead to revenue growth and continued profitability for this business
unit.

Industrial Pipe Fittings, Inc (IPF)
Industrial Pipe Fittings, Inc (IPF) is a manufacturer and distributor of
thermoplastic products that are used primarily in the High Density Polyethylene
(HDPE) pipe industry. IPF manufactures a full line of mechanical joints and
other specialized connectors for various HDPE pipe applications. The most
popular line of manufactured items are four types of quick connect fittings as
well as a comprehensive line of threaded, weld-end, and flanged adapter
fittings. The Company also stocks and distributes related products which
complement the use of its existing line of manufactured fittings. IPF also
provides customized engineering and specification work for many end-user
applications. IPF has recently expanded its plant capacity and has introduced a
new product line of internally fabricated large diameter elbows, tees, and wyes.
The company further expanded its product offerings with the inclusion of a high
quality line of tapping saddles obtained through an exclusive distribution
agreement with Alprene SAS of Bologna, Italy. IPF believes that the quality of
its products and enhanced service capabilities set it apart from its
competitors. IPF's competitive position is also enhanced because its range of
products allow the company to market its products to multiple segments of the
growing HDPE pipe industry which includes applications in the mining,
petrochemical, chemical, oilfield service, gas distribution, and waterworks
industries.

<PAGE>

Gaia Technologies
Gaia's core technologies provide the company with unique manufacturing
capabilities and product opportunities through the combination of new and
recycled thermoplastics mixed under pressure with crumbed rubber made from
discarded vehicle tires or virgin synthetic (vulcanized) rubber scraps.
Typically, the resulting capabilities provide a high-value product that can
outperform existing products and replace or significantly reduce the need for
virgin raw materials. Certain aspects of this technology, including formulations
and manufacturing techniques, are covered by six existing patents and the
company plans to pursue additional patents as improvements or new innovations
are made.
The Gaia technologies are currently being applied to produce three broad
categories of products for NATK: porous pipe, air conditioner support pads, and
synthetic railroad crossties. In addition, Gaia's technologies are being
targeted for application in various other products including marine lumber,
crates, oilfield mats, roofing, and other synthetic construction materials.
POROUS PIPE: This continuous cylindrical membrane of rubber-plastic polymeric
alloy, is used as an integral part of an underground, integrated, and engineered
distribution network for commercial irrigation. When used in underground
irrigation systems, porous pipe promotes increased crop yields, weed control,
and water conservation. Gaia's porous pipe is currently marketed worldwide
primarily in arid and semi-arid regions, although certain crops make underground
irrigation an attractive alternative regardless of weather conditions.
AIR CONDITIONER SUPPORT PADS: Gaia's technologies are also currently used to
make simple support pads for outside air conditioning condenser units -
effectively replacing heavier concrete pads. Gaia's proven mold designs and
compositions for this product have clear competitive advantages over the
traditional concrete pad and competing synthetics. Distribution agreements for
this product allow for current sales of this product throughout the southwestern
and southeastern United States.
COMPOSITE SYNTHETIC RAILROAD CROSSTIE: A key potential new product for the use
of Gaia's technologies is a composite railroad crosstie. As part of the purchase
of Gaia Technologies, Inc., NATK has the exclusive rights to acquire TieTek,
Inc., which currently is working to perfect a prototype synthetic crosstie. The
techniques used for these prototypes are based solely on the Gaia technologies,
and the prototypes have shown that they can function and perform with similar
characteristics to a wood tie with regard to toughness, density, elasticity, and
flexibility. It is anticipated that a current joint development project with a
major U.S. railroad will lead to a commercial synthetic crosstie that would gain
high acceptance and use in the worldwide railroad industry. When commercial
production becomes a reality, NATK anticipates manufacturing these synthetic
crossties for distribution both domestically and internationally.

Oleofilter/TM/
Oleofilter/TM/ is a water filtration unit, designed by and licensed from Exxon,
that utilizes an amine-coated ceramic granule to separate suspended and
emulsified hydrocarbons from aqueous solutions. The unit can be skid-mounted or
designed as distinct separator and filter components and can treat virtually any
oil/water mixture at rates up to two hundred and fifty gallons per minute.
Applications of the technology include: bulk terminal storm waters, oil and gas
produced water, landfill leachate recovery, marine bilge water discharge,
environmental remediation, vehicle/truck wash recycle, recovered industrial
plant waters, and separation of animal fats and lubricants. Moreover, NATK is
actively seeking market opportunities and market alliances for the use of the
Oleofilter/TM/ in combination with other state-of-the-art water treatment
technologies and equipment.

BioKatT/TM/
The BioKatT/TM/ process is based upon a proprietary fermentation process which
produces biochemical ingredients effective in altering physical properties of
certain crude oils. It is believed that proprietary enzymes catalyze certain
changes in the crude oils which ultimately affect both viscosity, molecular
structure, and sulfur/metal content. If fully commercialized, NATK's process
could be a particularly attractive solution since it operates at ambient
temperatures and pressures, utilizes non-hazardous biochemical formulations, and
would probably require only simple process equipment. The company has just
recently completed a series of reverification tests for this technology which
have given NATK that data it needs to approach several major oil companies
concerning a joint research and commercialization project for this technology.
If the technology does prove to have commercial applications, the long-term
financial effects on NATK could be very substantial. Since the potential
benefits of BioKatT/TM/ are so large and laboratory tests have continued to show
consistent positive results, the Company intends to continue to aggressively
pursue opportunities for the development of BioKatT/TM/ and its ultimate
commercialization.

<PAGE>

SELECTED FINANCIAL DATA

The following table sets forth historical financial information for the
Company and should be read in conjunction with the Financial Statements and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations which are contained elsewhere in this Report.

<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PRO FORMA
1991 1992(1) 1993 1994 1995 YEAR 1995(2)
<S> <C> <C> <C> <C> <C> <C>
REVENUE $-0- $-0- $269,073 $1,945,697 $2,642,735 $2,642,735
NET LOSS $(376,735) $(2,481,206) $(1,503,502) $(4,936,330) $(7,340,240) $(7,340,240)
NET LOSS PER SHARE $(.04)/(3)/ $(.37) $(.25) $(.35) $(.40) $(.40)
TOTAL ASSETS $987,447 $2,383,445 $6,515,883/(4)/ $8,190,677 $7,884,719 $13,453,469
STOCKHOLDERS' EQUITY $713,517 $1,648,155 $4,272,312 $5,007,443 $1,086,810 $10,505,560
LONG TERM DEBT $-0- $250,000 $462,500 $500,000 $3,535,461 $835,461
</TABLE>

1. Selected financial data of the Company for the periods after 1991 are after
recapitalization.
2. After giving effect to the issuance of the Series E and F Convertible
Preferred Stock issued in March and April 1996; reflects payment of debt
obligations of $1,050,000 from the net proceeds.
3. Figures based on one for fifteen reverse stock split.
4. Increase over prior period is principally due to the exercise of options
for NAT Common Stock.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

BACKGROUND AND BASIS OF PRESENTATION

Prior to the acquisitions in 1995 of EET, IPF and GAIA, the Company was a
development stage company engaged in the development, acquisition and
application of technologies in the environmental and energy industries. Until
such acquisitions, the Company had limited revenues, consisting primarily of
payments for demonstration projects.

The Company ended its development stage status by virtue of its
acquisitions on March 7, 1995 of EET, on June 30, 1995 of IPF, and on December
29, 1995 of GAIA. EET's TechXTract(TM) Process has been used in over 200
successful projects and has generated for EET revenues of approximately
$1,900,000 from its inception through December 31, 1995. In addition, EET
generated revenues of approximately $1,500,000 from environmental services in
the same period which were not related to the TechXTract(TM) Process. IPF
generated revenues of approximately $1,400,000 from its inception through
December 31, 1995. GAIA's patented process for manufacturing products from
recycled rubber began generating revenues for the Company in the first quarter
of 1996.

The acquisitions of EET and IPF were accomplished through mergers pursuant
to which an aggregate of 3,070,729 shares of the Company's Common Stock and
71,000 common stock purchase warrants were issued to former EET and IPF security
holders. The acquisition of substantially all the assets of GAIA was
accomplished for the following consideration: (a) issuance of 1,666,667 shares
of the Company's Common Stock, (b) payment of $305,500 in cash, (c) the issuance
of a 90-day promissory note by the Company in the principal amount of
$1,050,000, (d) forgiveness of certain debt obligations (together with all
interest owed thereon) owed by GAIA to the Company of approximately $1,881,400;
and (e) assumption of approximately $194,000 in account payable obligations.

The acquisitions of EET and IPF have been accounted for as poolings-of-
interests. Accordingly, the Company's consolidated financial statements have
been restated to include the accounts of EET and IPF from their respective dates
of inception, August 1993 and January 1994. The acquisition of GAIA has been
accounted for under the purchase method of accounting. Accordingly, the
consolidated results of operations of the Company do not include the operations
of GAIA, which will be included in future results of operations from the
effective date of the acquisition, December 29, 1995.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations primarily
through private placements of its equity securities and convertible debentures,
short-term loans and proceeds received from the exercise of its warrants and
options to acquire its securities. The Company continued to use the placement of
such securities during 1995 and through April 8, 1996 to generate the cash
needed to fund its operating losses and capital requirements, and to complete
the acquisition of GAIA. Specifically, during 1995 the Company used net cash of
$4,333,000 for operating activities and $3,440,000 for investing activities,
while the net cash proceeds from financing activities was $4,840,000. The debt
and equity transactions for 1995 and through April 8, 1996 are described below.

COMMON STOCK
- ------------

The Company received net proceeds of approximately $2,110,000 from the sale
of the Company Common Stock throughout 1995.

13 1/2% CONVERTIBLE SUBORDINATED NOTES
- --------------------------------------

In September 1995, the Company received cash proceeds of $2,700,000 from
the placement of its convertible subordinated notes (the "Notes") and warrants
to acquire 2,700,000 shares of the Company's Common Stock (the "Note Warrants").
The Notes bear interest at 13 1/2% per annum, which is payable semi-annually but
may be deferred during the first three years at the option of the Company. The
principal amount of the Note plus the deferred interest, if any, is convertible
at the option of the holders into shares of the Company's Common Stock at a
conversion price of $1.00 per share, subject to certain adjustments, at any time
after September 22, 1996 and prior to maturity on September 22, 2000. Repayment
of the unconverted portion of the principal amount is due in one balloon payment
on September 22, 2000. The indebtedness evidenced by the Notes is subordinated
to certain existing and future indebtedness of the Company.

On April 8, 1996, the Notes and the Note Warrants were converted into
27,000 shares of the Company's Series F Convertible Preferred Stock ("Series F
Shares") and new warrants to purchase 2,700,000 shares of the Company's Common
Stock. See discussion below. The Company elected to defer the interest payment
relating to the Notes that was due on March 22, 1996. However, interest of
approximately $198,000 (which includes the deferred interest) was paid to the
note holders on April 8, 1996 in conjunction with the conversion into the Series
F Shares.

Approximately $1,035,000 of the net proceeds received from the Notes was
used to fund a loan to GAIA prior to its acquisition on December 29, 1995. This
loan was forgiven as part of the purchase price consideration.

SERIES D CONVERTIBLE PREFERRED STOCK
- ------------------------------------

On December 28, 1995, the Company received net proceeds of $750,000 from
the issuance of 30 shares of Series D Convertible Preferred Stock ("Series D
Shares"). The holders of the Series D Shares are entitled to dividends, payable
quarterly at a per annum rate of $3,750 per Series D Share and certain
liquidation preferences. At the option of the holder, the Series D Shares may be
converted into the Company's Common Stock using a conversion rate computed as
the lesser of (a) a calculated value utilizing a discount to the market price,
as defined, of the Company's Common Stock, or (b) $.875 per share. One-third of
the Series D Shares were converted in mid-March 1996 into 414,800 shares of the
Company's Common Stock. Another one-third can be converted in mid-April 1996,
with all remaining Series D Shares available for conversion by the end of May
1996. At March 31, 1996, the Company owed dividends of approximately $28,000 to
the holders of the Series D Shares.

Approximately $305,500 of the proceeds received from the Series D Shares
was used to complete the acquisition of GAIA on December 29, 1995.

SERIES E CONVERTIBLE PREFERRED STOCK
- ------------------------------------

In February and March 1996, the Company received net proceeds of $1,218,750
from the issuance of 50 shares of Series E Convertible Preferred Stock ("Series
E Shares"). The holders of the Series E Shares have certain liquidation
preferences and are not entitled to any dividends. At the option of the holder,
the Series E Shares may be converted into the Company's Common Stock using a
conversion rate computed as the lesser of (a) a calculated value utilizing a
discount to the market price, as defined, of the Company's Common Stock, or (b)
$1.50 per share. One-fourth of the Series E Shares can be converted after August
1996, with another one-fourth available for conversion every three months
thereafter.

SERIES F CONVERTIBLE PREFERRED STOCK
- ------------------------------------

On April 8, 1996, the Company issued 82,000 share of Series F Convertible
Preferred Stock ("Series F Shares") and warrants to acquire 8,200,000 shares of
the Company's Common Stock (the "Series F Warrants"). Cash proceeds of
$5,500,000 was received for 55,000 Series F Shares and 5,500,000 Series F
Warrants. The remaining 27,000 Series F Shares and 2,700,000 Series F Warrants
were issued in exchange for the surrender of the Notes and the Note Warrants.
See discussion above. The Series F Warrants have an exercise price of $1.00 per
share, subject to certain adjustments, and expire on April 8, 2004.

<PAGE>

Dividends accrue on the Series F Shares at a per annum rate of $13.50 per
share and are payable semi-annually. The Company may elect to defer and accrue
dividend payments during the first three years, in which case, each holder may
elect to receive payment of the dividend in the form of additional Series F
Shares. The holders of the Series F Shares have certain liquidation preferences.
The Series F Shares may be converted into Company Common Stock at the option of
the holder using a conversion rate, subject to certain adjustments, of $1.00 per
share. On or after April 8, 2001, the Series F Shares can be converted at the
holder's option at the lower of (a) the then-current conversion price, or (b) a
calculated value utilizing a discount to the market price, as defined, of the
Company's Common Stock. The Company may redeem the Series F Shares at face value
on or after April 8, 2004.

Each Series F Share entitles the holder thereof to the number of votes
equal to the number of shares of Common Stock into which such Series F Share may
be converted from time to time. In addition, the Company has agreed to cause its
Board of Directors to be increased to nine positions, four of which may be
filled by nominees selected by the holders of the Series F Shares.

The preferred stock purchase agreement and the certificate of designation
for the Series F Shares contain covenants which, if breached by the Company,
provide for certain remedies. Certain of these covenants are considered outside
of the Company's control. These covenants include, among other things, that the
Company obtain a minimum net worth, as defined in the agreement, by December 31,
2000. For breach of these covenants that are outside of the Company's control
the remedy allows the Series F holders to convert their shares into the
Company's Common Stock using a conversion rate computed as the lesser of (a) the
conversion price, as adjusted; or (b) a calculated value utilizing a discount to
the market price, as defined. Also, the stock purchase agreement contains
certain covenants that are considered within the control of the Company. These
covenants, among other things, require the delivery of financial information and
restrict the Company from incurring additional debt if, immediately upon
incurrence of such debt, the Company's debt to equity ratio exceeds a certain
ratio, as defined by the agreement. For breach of these covenants that are
within the Company's control the remedies allow the Series F holders to elect a
majority of the Company's Board of Directors and to either (1) convert their
shares into the Company's Common Stock using a conversion rate computed as the
lesser of (a) the conversion price, as adjusted; or (b) a calculated value
utilizing a discount to the market price, as defined; or (2) request the Company
to redeem their shares. If the Series F holders elect redemption, the shares
will be redeemed at the greater of (a) the fair market value, as defined; or (b)
the initial purchase price, plus unpaid dividends and interest, if any. At the
Company's option, the shares may be redeemed with cash or a three year
promissory note.

Of the proceeds received from the Series F Shares, $1,050,000 was used to
repay the outstanding principal balance on the note issued on December 29, 1995
to GAIA Holdings, Inc. related to the acquisition of the assets of GAIA. The
Company has an additional 18,000 Series F Shares that are authorized and could
be issued for consideration of $1,800,000 under the same terms and conditions
through May 15, 1996.

As a result of the financing transactions described above, the Company
believes it has sufficient cash available to finance the Company's operations
during 1996. As shown in the pro forma balance sheet, as of December 31, 1995,
the Company had a pro forma cash balance of $5,902,000, pro forma working
capital of $5,337,000 and pro forma stockholders' equity of $10,505,000.
Depending upon the availability of traditional secured debt financing for both
working capital and capital expenditures, and the amount of cash needed to
consummate future acquisitions, if any, the cash received from these equity
placements could provide operating capital through 1997.

TRANSACTIONS RELATING TO EURO SCOTIA FUNDING LIMITED
- ----------------------------------------------------

In April 1993, the Company had invested $2,554,859 with Euro Scotia Funding
Limited (ESF) in exchange for a secured note receivable, which the Company could
call upon thirty days notice to ESF. Through April 1994, income from the note
was generated from the management, by ESF, of investments in various margin
transactions involving U.S. and other governmental debt securities, currency
forward exchange contracts and certain corporate debt and equity securities.
Under the terms of the note, the Company and ESF shared equally in trading
profits. For the years ended December 31, 1995, 1994 and 1993, the Company
recognized interest income totaling $283,966, $85,832 and $523,623,
respectively, and trading profits for the years ended December 31, 1994 and
1993, totaling $512,312 and $2,169,672, respectively.

Effective December 31, 1994, the Company renegotiated the terms of the note
receivable from ESF. Under the new agreement, ESF was to repay the note in ten
semi-annual installments of $327,885, plus interest at 10% per annum, commencing
July 1, 1995. ESF elected, as permitted under the agreement, to prepay as of
December 31, 1994 the earliest payments using the amounts owed to it by the
Company for borrowings under the line of credit agreement and for services
rendered. At December 31, 1994, the face value of the original note plus accrued
interest receivable totaled $3,278,857, borrowings under the line of credit plus
accrued interest payable totaled $356,473, and amounts owed to ESF for services
totaled $121,621. The net balance of $2,800,763 was reflected on the
consolidated balance sheet at December 31, 1994.

<PAGE>

The note was to be collateralized by $3,200,000 in U.S. Treasury
obligations held by a third-party brokerage firm for the benefit of the Company.
ESF had signed an irrevocable power of attorney to the Company giving it the
ability to seize the collateral in the event of a default, provided that such
default was not cured within thirty days after written notice. In addition,
there were irrevocable instructions provided to the brokerage firm stating that
ESF would be allowed to trade the securities constituting the collateral.
However, the securities had to be substituted with U.S. treasuries, and the
value of such securities could not fall below the lesser of $3,200,000 or 110%
of the outstanding principal balance on the note.

The semi-annual payment due January 1996, in accordance with the note
agreement was not paid by ESF. During the fourth quarter of 1995, the Company
learned that the brokerage firm that holds the collateral for the ESF note and
an affiliate of ESF were named as defendants in a lawsuit filed by the Florida
Department of Insurance in which it is alleged, among other things, that such
brokerage firm issued false account confirmations. The Company also learned that
such brokerage firm has applied for withdrawal as a registered broker/dealer in
a number of states, including the state in which such securities were to have
been held.

In early 1996, the Company also learned that the United States Securities
and Exchange Commission sought and was granted in late December 1995, a
temporary restraining order against certain affiliates of ESF in the United
States District court for the District of Colorado that, among other things,
froze investor funds of the defendants and certain of their affiliates, and
required each such party to prevent the disposition, transfer or other disposal
of any of their funds or other assets then held by them, under their control or
over which they exercise investment or other authority.

After learning of the lawsuit, the Company unsuccessfully attempted to gain
reliable information about the existence and value of the securities that were
to have been held for the Company's benefit in connection with the ESF note.
Accordingly, as of December 31, 1995, the Company decided to write-off the note
receivable of $2,800,763 and accrued interest recognized during 1995 of
$283,966, for a total loss of $3,084,729.

The Company has made demand for payment of the ESF note, in accordance with
the agreement and is exploring other legal remedies available against ESF and
the brokerage firm charged with holding the collateral for the note.

ACQUISITIONS
- ------------

During 1995 the Company completed three acquisitions: EET, IPF and GAIA.
The aggregate consideration paid for these acquisitions was (a) 4,737,396 shares
of the Company's Common Stock; (b) $305,500 cash; (c) forgiveness of amounts due
to the Company of $1,881,400; (d) issuance of a 90-day promissory note of
$1,050,000; (e) 71,000 warrants to purchase Company Common Stock; and (f)
assumption of approximately $194,000 in account payable obligations. In
addition, as a result of the acquisition of EET, the Company advanced cash to
EET for it to repay certain outstanding debt obligations totaling $612,500. The
Company also redeemed EET's outstanding preferred stock of $305,000.

Simultaneous with the acquisition of GAIA, the Company entered into a
Crosstie Purchase Option and Loan Agreement with TieTek, Inc. ("TieTek")., a
newly formed corporation owned by three individuals, two of whom are officers of
the Company's new subsidiary, GAIA Technologies, Inc. Pursuant to this
agreement, the Company is obligated to lend up to $1,500,000 (the "Crosstie
Loan") to TieTek for it to use in the development of an alternative railroad
crosstie manufactured from recycled rubber using GAIA's patented and proprietary
technologies. Amounts advanced to TieTek bear interest at 10%, and are due two
years after the earlier of (a) the date on which the Company provides notice to
TieTek that it will not exercise its option to purchase all the capital stock of
TieTek (the "Crosstie Purchase Option"), or (b) the expiration of the Crosstie
Purchase Option Period, which is a two year period unless extended by one year
upon the occurrence of certain events. The consideration for acquiring TieTek
utilizing the Crosstie Purchase Option would be the forgiveness of all the then-
outstanding indebtedness under the Crosstie Loan and payment of certain
royalties based on certain products sold by TieTek over a fifteen-year period.
As of December 31, 1995, the Company had advanced $220,000 under the Crosstie
Loan. The Crosstie Loan is collateralized by a pledge of, and a lien on, all of
TieTek's assets and capital stock, and 666,667 shares of the Company's Common
Stock.

OTHER
- -----

In January 1996, an officer and director of the Company loaned $250,000 to
IPF under the terms of a promissory note. The note bears interest at 13% per
annum, requires monthly payments of $5,700 and matures in January 1999. Proceeds
from the note were used by IPF to purchase a machine for fabricating wyes, tees
and els. The equipment purchased serves as collateral for the note.

The Company entered into an agreement with its former Chairman of the Board
in July 1995, as amended in December 1995, which provides for, among other
things, a payment of $250,000 in settlement of his five-year employment
contract, payable in bi-weekly installments of $11,538 beginning in January
1996.

The Company is a defendant in several legal actions which, if decided
against the Company, could have a material adverse effect on the financial
condition of the Company.
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS No. 121
requires, among other things, that impairment losses on assets to be held and
gains or losses from assets that are expected to be disposed of, be included as
a component of income from continuing operations. The Company will adopt SFAS
No. 121 in 1996 and its implementation is not expected to have a material effect
on the consolidated financial statements.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 encourages entities to adopt the fair
value method in place of the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
investments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. However, the
Company will be required to provide additional disclosures beginning in 1996
providing pro forma effects as if the Company had elected to adopt SFAS No. 123.

RESULTS OF OPERATIONS

ANALYSIS OF YEARS ENDED DECEMBER 31, 1995 ("1995") AND DECEMBER 31, 1994
("1994")

The total net loss for 1995 of $7,340,000 reflects an increase of
$2,404,000 from the 1994 net loss of $4,936,000. This increase in net loss
occurred despite an increase in revenues and gross profits due to an increase in
selling, general and administrative expenses and an increase in other expenses.
Specifically, revenues increased $697,000, generating an increase in gross
profits of $131,000; selling, general and administrative expenses increased
$1,313,000; research and development expenses decreased $910,000; and other
expenses increased $2,249,000, each as described in detail below.

REVENUES
- --------

The increase in revenues of $697,000 in 1995 reflects increased sales
volume by both IPF and EET. IPF's growth in monthly shipments is reflected in
its revenue increase of $400,000. EET contributed to the balance of the revenue
growth by increasing sales of its services $297,000 in 1995. Revenue increases
are attributable to increased marketing efforts undertaken in 1995 by each of
the Company's principal operating units. Prices for the Company's products and
services remained stable during 1995. The Company expects revenues to increase
significantly in 1996 due to the commencement in the first quarter of commercial
sales of GAIA's air conditioning condenser support pads and increased management
attention to marketing now that the Company's business restructuring is
substantially complete. While market acceptance of the support pad is
encouraging, such revenues may be limited by plant capacity. Furthermore, the
Company's revenues from its TechXTract(TM) Process remain subject to
uncertainties caused by the difficulties associated with the project nature of
its past business strategy and with marketing to governmental units such as the
Department of Energy. As a result, the Company is evaluating additional
opportunities for commercial revenues of the TechXTract(TM) Process.

GROSS PROFIT
- ------------

Although revenues increased 36%, the gross profit percentage decreased from
41% in 1994 to 35% in 1995. This decrease in gross profit was due primarily to
lower margins experienced earlier in 1995 by EET which resulted from higher than
anticipated out-of-town expenses and contract labor costs on certain projects
undertaken and completed by EET in 1995 as compared with 1994.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------

Selling, general and administrative expenses increased $1,313,000 during
1995 compared with 1994 primarily as a result of the effect of increased legal
fees, the expenses associated with the management restructuring completed in
1995, and the addition of new officers to the Company, each as described below.

Legal fees increased $550,000 in 1995, reflecting the effect of increased
outside counsel costs and other direct expenses associated with management's
decision to actively pursue the resolution of several outstanding lawsuits,
including the arbitration hearings that concluded in February 1996 relating to
Bio Trace International, Inc. and the activity early in 1995 relating to the
lawsuit against a former officer and director of the Company. Neither of these
lawsuits should contribute significantly to legal expenses in 1996. Another
factor for the increase in fees relates to the acquisition of EET and IPF. Since
each acquisition was accounted for as a pooling-of interest, all related costs
were expensed in the consolidated statement of loss for 1995.

<PAGE>

Restructuring costs attributed to an increase of $500,000 in 1995. This
consisted of the one-time accruals and or payments for the following: (a)
$250,000 for settlement of the five-year employment contract of the former
Chairman of the Company; (b) $100,000 in severance costs for seven employees no
longer with the Company; (c) $50,000 in facility closing costs or for the
termination of equipment rental contracts; and (d) $100,000 in consulting
contracts and related expenses that were terminated in 1995.

The Company also employed two new officers in late March and early April
1995. Including relocation costs and prorated salary amounts, the addition of
these employees accounted for an increase of approximately $250,000 in 1995.

RESEARCH AND DEVELOPMENT EXPENSES
- ---------------------------------

Research and development expenses decreased $910,000 in 1995 due primarily
as a result of decreased lab testing fees and the termination or completion of
various consulting arrangements. Research and development expenses should
continue to decrease in 1996 to reflect management's focus on the
commercialization of its existing products. However, the Company is expecting to
spend in excess of $350,000 a year on research and development to support the
Company's technologies.

OTHER INCOME AND EXPENSE
- ------------------------

Other income and expense increased from expense of $864,000 in 1994 to
expense of $3,112,000 in 1995. This was primarily due to the write-off of the
ESF note receivable and related accrued interest totaling $3,804,729 and the
related decrease in investment income from $512,000 to $0 for the same periods.
See Liquidity and Capital Resources for discussion relating to the ESF note
receivable.

DISCONTINUED OPERATIONS
- -----------------------

Discontinued operations for 1994 reflect the results of operations for the
analytical services division of EET which was discontinued in July 1994.
Accordingly, no loss from discontinued operation was incurred in 1995.

ANALYSIS OF YEARS ENDED DECEMBER 31, 1994 ("1994") AND DECEMBER 31, 1993
("1993")

The total net loss for 1994 of $4,936,000 reflects an increase of
$3,433,000 from the 1993 net loss of $1,503,000. This increase in loss occurred
despite increased revenues and gross profits and decreased expenses due to the
significant decrease in other income. Specifically, revenues increased
$1,677,000, generating an increase in gross profits of $700,000; expenses
decreased $15,000; other income decreased $4,025,000; and loss from discontinued
operations increased $124,000. These changes are addressed individually below.

REVENUES AND GROSS PROFIT
- -------------------------

The increase of $1,677,000 in 1994 reflects increased revenues from a full
year of operations of EET in 1994 compared with only four months in 1993, and
the operations of IPF which began its business in January 1994. The increase in
sales volume from 1993 to 1994 generated an increase in gross profit for 1994 of
$700,000. The gross profit percentage increased from 35% in 1993 to 41% in 1994,
reflecting improved margins from EET during its first full year of operations.

EXPENSES
- --------

Expenses decreased $15,000 in 1994, consisting of an increase in selling,
general and administrative expenses of $305,000 and a decrease in research and
development expenses of $320,000.

OTHER INCOME AND EXPENSE
- ------------------------

Other income and expense decreased $4,025,000 from income of $3,161,000 in
1993 to expense of $864,000. Of this decrease, (a) $2,068,000 can be attributed
to a reduction in investment income and interest income relating to the
Company's investment with ESF, as discussed under Liquidity and Capital
Resources; (b) $1,200,000 relates to the change from recognition of $600,000
income in 1993 from the sale of marketing rights to the recognition of $600,000
as write-off of investment in 1994 when the stock received in consideration for
the marketing rights was determined to be worthless; and (c) $751,000 relates to
the increase in loss from the abandonment of mining properties in 1994.

DISCONTINUED OPERATIONS
- -----------------------

In 1994, EET entered into a formal plan to dispose of its analytical
operations. These discontinued operations contributed to a loss of $116,000 in
1994, compared to a gain of $7,000 in 1993.

<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>

Report of Independent Certified Public Accountants.......................... 13
Consolidated Balance Sheets as of December 31, 1995 and 1994................ 14
Consolidated Statements of Loss for the Years
Ended December 31, 1995, 1994 and 1993................................... 15
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993..................... 16
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993............................. 18
Notes to Consolidated Financial Statements.................................. 19
</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
North American Technologies Group, Inc.

We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of loss, stockholders' equity and cash flows for the
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of North
American Technologies Group, Inc. at December 31, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.

/s/ BDO Seidman, LLP

BDO Seidman, LLP

Houston, Texas
March 14, 1996
(Except for Notes 7(a), 8(a)
and 20, which are as of
April 8, 1996)

<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
PRO FORMA
1995 1995 1994
------------- ------------- -------------
ASSETS (Note 20)
------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents.................................. $ 5,902,076 $ 333,326 $ 3,266,518
Certificates of deposit (Note 17).......................... 200,000 200,000 -
Accounts receivables, less allowance for
doubtful accounts of $34,000 and $30,000................. 626,146 626,146 501,328
Inventories (Note 3)....................................... 329,902 329,902 64,254
Prepaid expenses and other................................. 374,623 374,623 101,476
------------ ------------ ------------
Total Current Assets..................................... 7,432,747 1,863,997 3,933,576

Note Receivable (Note 4).................................... 248,967 248,967 2,800,763

Property and Equipment, Less Accumulated
Depreciation (Note 5)...................................... 1,401,634 1,401,634 592,858

Patents and Purchased Technologies, Less Accumulated
Amortization of $155,361 and $75,000....................... 1,224,777 1,224,777 175,000

Goodwill, Less Accumulated Amortization of $55,553
and $31,744................................................ 2,576,481 2,576,481 444,422

Other Intangible Assets, Less Accumulated
Amortization of $38,900 and $16,145........................ 144,872 144,872 62,627

Other (Note 6).............................................. 423,991 423,991 181,431
------------ ------------ ------------
$ 13,453,469 $ 7,884,719 $ 8,190,677
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term borrowings (Note 7)............................. $ 61,658 $ 1,111,658 $ 300,000
Current maturities of long-term debt (Note 8).............. 264,396 264,396 562,500
Notes payable to stockholders (Note 9)..................... - - 213,302
Accounts payable........................................... 974,400 974,400 692,998
Accrued expenses (Note 9).................................. 795,506 895,506 580,122
------------ ------------ ------------
Total Current Liabilities................................ 2,095,960 3,245,960 2,348,922

Long-term Debt, Less Current Maturities (Note 8)............ 835,461 3,535,461 500,000

Minority interest (Note 10)................................. 16,488 16,488 334,312
------------ ------------ ------------
Total Liabilities........................................ 2,947,909 6,797,909 3,183,234
------------ ------------ ------------
Commitments and Contingencies (Note 17)

Stockholders' Equity (Note 11):
Preferred stock, $.001 par value, 10,000,000
shares authorized; 30 and 80 shares issued............... 10,168,750 750,000 -
Common stock, $.001 par value, 50,000,000 shares
authorized; 23,927,285 and 18,692,489 shares issued...... 23,927 23,927 18,692
Additional paid-in capital................................. 20,270,015 20,270,015 17,613,667
Deficit.................................................... (19,794,812) (19,794,812) (12,454,572)
Treasury stock, at cost, 450,000 and 803,000 shares........ (16,488) (16,488) (32,312)
Less notes receivable for sale of stock.................... (145,832) (145,832) (138,032)
------------ ------------ ------------
Total Stockholders' Equity............................... 10,505,560 1,086,810 5,007,443
------------ ------------ ------------
$ 13,453,469 $ 7,884,719 $ 8,190,677
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $ 2,642,735 $ 1,945,697 $ 269,073
Cost of revenues..................................... 1,716,715 1,151,056 174,928
----------- ----------- -----------
Gross profit...................................... 926,020 794,641 94,145
----------- ----------- -----------
Expenses:
Research and development expenses................... 595,771 1,506,073 1,826,089
Selling, general and administrative expenses........ 4,557,949 3,244,858 2,940,041
----------- ----------- -----------

Total expenses....................................... 5,153,720 4,750,931 4,766,130
----------- ----------- -----------

Operating loss.................................... (4,227,700) (3,956,290) (4,671,985)
----------- ----------- -----------
Other Income (Expense):
Investment income (Note 4).......................... - 512,312 2,169,672
Interest income (Note 4)............................ 354,665 112,897 523,623
Interest expense.................................... (157,725) (121,986) (37,102)
Minority interest in net loss (income)
of subsidiary (Note 2)............................ (5,432) (22,532) 182,009
Equity in net (loss) income of affiliates (Note 6).. (231,712) 50,000 (233,846)
Sale of marketing rights (Note 12).................. - - 600,000
Loss on write-off of investments (Notes 4 and 12)... (3,084,729) (600,000) -
Loss on abandonment of mining property (Note 13).... - (794,314) (43,251)
Other............................................... 12,393 - -
----------- ----------- -----------

Total Other Income (Expense)......................... (3,112,540) (863,623) 3,161,105
----------- ----------- -----------
Loss From Continuing Operations...................... (7,340,240) (4,819,913) (1,510,880)
----------- ----------- -----------
Discontinued Operations (Note 14)
Revenues............................................ - 291,588 138,975
Costs of services rendered.......................... - 408,005 131,597
----------- ----------- -----------
Gain (Loss) from Operations of Discontinued Segment.. - (116,417) 7,378
----------- ----------- -----------
Net Loss............................................. $(7,340,240) $(4,936,330) $(1,503,502)
=========== =========== ===========
Net Loss Per Share................................... $(.40) $(.35) $(.25)
=========== =========== ===========
Weighted Average Number of Common
Shares Outstanding.................................. 18,199,474 13,994,515 5,986,711
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
Preferred Common Stock
-------------------- --------------------
Shares Amount Shares Amount
-------- -------- --------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992.................. - $ - 13,120,333 $13,120

Issuance of common stock in exchange
for all outstanding shares of EET, Inc..... - - 1,568,617 1,569

Sale of common stock........................ - - 111,143 111

Issuance of common stock of subsidiary
upon exercise of options................... - - - -

Issuance of common stock and treasury stock in
exchange for minority interest of subsidiary - - 1,034,626 1,035

Notes receivable from stockholders.......... - - - -

Net loss for the year....................... - - - -
------ -------- ---------- -------

BALANCE, December 31, 1993.................. - - 15,834,719 15,835

Issuance of common stock in exchange for all
outstanding shares of Industrial Pipe
Fittings, Inc.............................. - - 1,300,000 1,300

Sale of common stock........................ - - 1,943,019 1,942

Issuance of common stock in connection
with financing............................. - - 200,000 200

Issuance of Series A convertible
preferred stock............................ 220 - - -

Issuance of common stock upon conversion
of Series A preferred stock................ (170) - 1,219,751 1,220

Issuance of Series B convertible
preferred stock............................ 15 - - -

Issuance of Series C convertible
preferred stock............................ 15 - - -

Issuance of common stock for services....... - - 20,000 20

Issuance of common stock from treasury...... - - - -

Purchase of treasury stock.................. - - - -

Retirement of Series I Escrow shares........ - - (1,625,000) (1,625)

Cancellation of common stock................ - - (200,000) (200)

Notes receivable from stockholders.......... - - - -

Net loss for the year....................... - - - -
------ -------- ---------- -------

BALANCE, December 31, 1994.................. 80 - 18,692,489 18,692
</TABLE>

<TABLE>
<CAPTION>
Preferred Common Stock
------------------ -------------------------
Shares Amount Shares Amount
------- ------- ------------- -------
<S> <C> <C> <C> <C>
Interest on notes receivable from stockholders................. - $ - - $ -

Sale of EET shares (40lk) paln................................. - - 12,343 12

Sale of common stock........................................... - - 3,009,280 3,010

Issuance of common stock upon conversion
of series A, B and C convertible
preferred stock........................................... (80) - 424,506 424

Issuance of common stock from treasury......................... - - - -

Cancellation of treaasury stock................................ - - (3,000) (3)

Stock issued for compensation.................................. - - 125,000 125

Stock issued for purchase of GAIA.............................. - - 1,666,667 1,667

Issuance of Series D preferred stock........................... 30 750,000 - -

Net loss for the year.......................................... - - - -
------- ------- ------------- -------
BALANCE, December 31, 1995..................................... 30 750,000 23,927,285 23,927
======= ======= ============= =======
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Additional Notes
Paid-In Treasury Stock Receivable
-------------------------
Capital Deficit Shares Amount Stockholders Total
-------------- --------------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
$ 7,844,883 $ (6,014,740) 5,343,147 $ (195,108) $ - $ 1,648,155

1,078,240 - - - - 1,079,809
749,889 - - - - 750,000

1,629,833 - - - - 1,629,833

579,850 - (4,443,147) 162,132 - 743,017

- - - - (75,000) (75,000)

- (1,503,502) - - - (1,503,502)
----------- ----------- ----------- ----------- -------- -----------
11,882,695 (7,518,242) 900,000 (32,976) (75,000) 4,272,312

- - - - - 1,300

3,675,327 - - - - 3,677,269

649,800 - - - - 650,000

2,024,000 - - - - 2,024,000

(1,220) - - - - -

- - - - - -

31,240 - - - - 31,260

- - (100,000) 3,664 - 3,664

- - 3,000 (3,000) - (3,000)

1,625 - - - - -

(649,800) - - - - (650,000)

- - - - (63,032) (63,032)

- (4,936,330) - - - (4,936,330)
----------- ----------- ----------- ----------- -------- -----------
17,613,667 (12,454,572) 803,000 (32,312) (138,032) 5,007,443
</TABLE>

12,285 - - - - 12,297

2,094,276 - - - 2,097,286

(424) - - - - -

- - (350,000) 12,824 - 12,824

(2,997) - (3,000) 3,000 - -

54,875 - - - - 55,000

498,333 - - - - 500,000

- - - - - 750,000

- (7,340,240) - - - (7,340,240)
----------- ------------ -------- -------- --------- -----------
$20,270,015 $(19,794,812) 450,000 $(16,488) $(145,832) $1,086,810
=========== ============ ======== ======== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements

17
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(7,340,240) $(4,936,330) $(1,503,502)
Adjustments to reconcile net loss to
net cash used in operating activities:
Stock received in exchange for sale
of marketing rights................................ - - (600,000)
Equity in net loss of joint venture
and minority interest of subsidiary................ 231,712 - (182,009)
Depreciation and amortization....................... 283,884 238,609 79,416
Provision for bad debts............................. 78,002 30,000 -
Accrued interest on notes receivable, stockholders.. (7,800) (8,032) -
Stock issued for services........................... 55,000 31,260 -
Loss on abandonment of mining properties............ - 794,315 43,251
Loss on write-off of investment..................... - 600,000 -
Loss on write-off of note receivable................ 3,084,729 - -
Changes in assets and liabilities, net of
purchase of GAIA:
Accounts receivable................................ (199,820) 37,064 (16,847)
Inventories........................................ (248,401) - -
Prepaid expenses and other current assets.......... (187,876) 8,068 (52,491)
Other assets....................................... (201,304) (11,327) (6,670)
Accounts payable and accrued expenses.............. 119,235 362,099 376,430
----------- ----------- -----------
Net cash used in operating activities.......... (4,332,879) (2,854,274) (1,862,422)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of certificates of deposit.................... (200,000) - -
Increase in note receivable............................ (326,217) (130,817) (2,931,580)
Purchase of businesses................................. (2,297,914) - (923,827)
Investment in joint venture............................ (210,829) - -
Collection of notes receivable......................... 106,895 (12,467) 175,000
Purchase of technology and patents..................... (112,608) - (252,703)
Payment of organization costs.......................... - (29,957) (49,136)
Payment for non-compete agreement...................... (105,000) - -
Purchase of property and equipment..................... (294,936) (480,302) (75,331)
----------- ----------- -----------
Net cash used in investing activities............ (3,440,609) (653,543) (4,057,577)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to stockholder............. 6,698 40,000 350,000
Issuance of common stock............................... 2,109,583 3,623,569 1,754,809
Issuance of preferred stock............................ 750,000 2,024,000 -
Issuance of preferred stock of subsidiary.............. - 15,000 -
Issuance of common stock of subsidiaries............... - - 2,554,859
Purchase of treasury stock............................. - (3,000) -
Line of credit borrowings (repayments)................. (300,000) 634,000 -
Issuance of notes payable and long-term debt........... 3,035,166 724,508 729,782
Repayment of notes payable and long-term debt.......... (456,151) (570,646) (12,500)
Redemption of preferred stock.......................... (305,000) - -
----------- ----------- -----------
Net cash provided by financing activities...... 4,840,296 6,487,431 5,376,950
----------- ----------- -----------
Net increase (decrease) in cash......................... (2,933,192) 2,979,614 (543,049)
Cash and cash equivalents, beginning of year............ 3,266,518 286,904 829,953
----------- ----------- -----------
Cash and cash equivalents, end of year.................. $ 333,326 $ 3,266,518 $ 286,904
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
North American Technologies Group, Inc., (NATK) and the accounts of subsidiaries
in which the corporation directly or indirectly owns more than 50% of the voting
stock as of the end of each year. All significant intercompany accounts and
transactions have been eliminated. North American Technologies Group, Inc., its
subsidiaries and affiliates are referred to herein as the Company.

During March and June 1995, the Company acquired 100% of the outstanding
stock of EET, Inc. (EET) and Industrial Pipe Fittings, Inc. (IPF). In addition,
in December 1995, the Company acquired certain assets of GAIA Technologies, Inc.
and its affiliates (collectively GAIA) (see Note 2(a)). The acquisition of EET
and IPF were accounted for as pooling-of-interests, and accordingly, the
financial statements have been restated to include the historical financial
results of EET and IPF (see Note 2). In addition, as a result of the acquisition
of EET and IPF, the consolidated financial statements which had previously been
presented as a development stage enterprise have been restated and reclassified
to conform the prior years' data to the current presentation.

NATK was incorporated December 24, 1986, in the state of Delaware as Mail
Boxes Coast to Coast (MBCC). Prior to March 1992, MBCC was a franchisee for Mail
Boxes, Etc. USA, Inc. and from inception incurred significant operating losses.
As a result, between March and June 1992, MBCC undertook a series of
transactions that resulted in the disposition of all of the operating assets and
liabilities of MBCC, and the acquisition of 58.7% of the outstanding common
stock of North American Technologies, Inc. (NAT), a company engaged in
developing technologies related to the environmental clean-up industry and
reclamation of natural resources. For accounting purposes, NAT was considered
the continuing entity, and the transactions were accounted for as a
recapitalization of NAT followed by the issuance of new NAT shares of common
stock for the net assets of MBCC.

On January 29, 1993, MBCC changed its name to North American Technologies
Group, Inc. On November 5, 1993, North American Technologies Group, Inc.
acquired the remaining 41.3% minority interest of NAT (see Note 11). This
transaction was recorded at book value of MBCC.

THE COMPANY

The Company and its wholly-owned subsidiaries are engaged in the
development, acquisition and application of technologies which management
believes have applications in various industries. The Company through EET
provides on-site decontamination of buildings and equipment contaminated with
polycholorinated biphenyls, radioactive isotopes or other toxic materials
utilizing EET's patented TechXTract system. IPF manufactures and distributes
proprietary and standard transition products (custom pipe, pipe fittings and
valves). GAIA manufactures and distributes porous pipes used for irrigation
purposes and alternative building materials, such as air-conditioner base pads,
made from recycled rubber and thermoplastic. All other wholly-owned or majority
owned subsidiaries of the Company are not significant or are inactive.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or
market. Costs includes material costs, direct labor, and applied overhead.

PATENTS AND PURCHASED TECHNOLOGIES

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

INTANGIBLE ASSETS

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

Other intangible assets are comprised of non-compete agreements and
organization costs and are stated at cost, less accumulated amortization. The
non-compete agreements are being amortized by the straight-line method over the
life of the agreements, seven years. The organization costs are being amortized
by the straight-line method over five years.

INVESTMENT IN JOINT VENTURE

The Company's investment in its 50% owned joint venture is accounted for
using the equity method of accounting; whereby, the investment is carried at
cost and adjusted for the Company's proportionate share of undistributed
earnings or losses.

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

INCOME TAXES

Deferred taxes result from temporary differences between the financial
statement and income tax basis of assets and liabilities (see Note 15). The
Company adjusts the deferred tax asset valuation allowance based on judgments as
to future realization of the deferred tax benefits supported by demonstrated
trends in the Company's operating results.

RESEARCH AND DEVELOPMENT

Expenditures for research and development of products and processes and for
the operation of pilot projects are charged to expense as incurred.

LOSS PER COMMON SHARE

The loss per common share is computed by dividing the loss by the weighted
average number of common shares outstanding and common stock equivalents, if
dilutive.

<PAGE>

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

REVENUE RECOGNITION

Service revenues are recognized as services are performed. Such revenues
also include the cost of services subcontracted to third parties that are
reimbursed to the Company by its customers. Product revenues are recognized when
the products are shipped.

CASH EQUIVALENTS

The Company considers all highly liquid instruments purchased with an
initial maturity of three months or less to be cash equivalents.

MANAGEMENT'S ESTIMATES AND ASSUMPTIONS

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

NEW ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS No. 121,
requires, among other things, that impairment losses on assets to be held and
gains or losses from assets that are expected to be disposed of, be included as
a component of income from continuing operations. The Company will adopt SFAS
No. 121 in 1996 and its implementation is not expected to have a material effect
on the consolidated financial statements.

CONCENTRATION OF CREDIT RISK

At December 31, 1995, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $330,424. The Company extends
credit to its customers in various industries, including petrochemical,
construction, mining, waterworks and environmental, and there is no
concentration of credit risk.

NOTE 2 - ACQUISITIONS

(a) On December 29, 1995, the Company acquired certain tangible and
intangible assets of GAIA Technologies, Inc. and certain affiliates
(collectively GAIA), for a total purchase price of $4,041,500, pursuant to the
purchase agreement dated December 29, 1995. The purchase price was paid as
follows: (1) $2,186,903 in cash; (2) a note payable of $1,050,000; (3) 1,666,667
shares of the Company's common stock; (4) assumption of $194,000 of liabilities;
and (5) transactional costs totalling $111,011. Prior to the closing, the
Company had advanced GAIA $1,881,400 under debt agreements bearing interest at
10%. At closing, the outstanding advances and accrued interest were forgiven as
part of the cash portion of the purchase price. See Note 7 for terms of the note
payable portion of the purchase price. The agreement provides for royalty
payments on certain products sold by the Company for a period of up to 15 years.
The Company is not currently manufacturing any products subject to the royalty
provisions.

As part of the transaction, the Company granted to TieTek, Inc. (TieTek) an
exclusive license to develop the railroad crosstie business using certain
patents and technologies purchased from GAIA and currently owned by the Company.
TieTek is owned by three individuals, two of whom are officers of the Company's
subsidiary, GAIA. The Company has a two year exclusive right and option to
purchase TieTek if the Company satisfies certain funding obligations over the
next two years. The Company entered into a loan agreement to provide TieTek up
to $1,500,000 to be used exclusively for the development of the crosstie
technology. See Note 4 for the terms of the loan agreement.

The GAIA acquisition was accounted for as a purchase, and accordingly, the
purchase price has been allocated to the assets acquired based on their
estimated fair value at the date of acquisition. The excess of the purchase
price over the estimated fair value of the assets acquired has been recorded as
goodwill, which will be amortized over twenty years. The estimated fair value
of assets acquired are as follows:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Inventories.................................................. $ 17,249
Accounts receivable.......................................... 3,000
Equipment.................................................... 865,384
Patents and purchased technology............................. 1,000,000
Goodwill..................................................... 2,155,867
----------
$4,041,500
==========
</TABLE>

The operating results of GAIA are not included in the accompanying
statements of loss since the purchase occurred on December 29, 1995. The
following pro forma summary presents the effect on the statements of loss for
the year ended December 31, 1995 and the preceding year, as if the purchase had
occurred at the beginning of 1994, after giving effect to certain adjustments,
including depreciation, amaortization, interest expense and legal expense,
penalties and other expense associated wiht liabilities not assumed.

<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Revenues.............................. $ 2,869,000 $ 2,362,000
============ ============
Loss from continuing operations....... $(8,138,000) $(5,889,000)
============ ============
Net loss.............................. $(8,138,000) $(6,006,000)
============ ============
Net loss per share.................... $ (.45) $ (.43)
============ ============
</TABLE>

20
<PAGE>

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

These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of what would have occurred had the
acquisition been made as of these dates or of results which may occur in the
future.

(b) On March 7, 1995, the Company acquired EET, Inc. (EET), a Texas
corporation, pursuant to an Agreement and Plan of Merger dated February 7,
1995. On June 30, 1995, the Company acquired Industrial Pipe Fittings, Inc.
(IPF), a Texas corporation, pursuant to an Agreement and Plan of Merger dated
June 22, 1995. To effect these acquisitions, the Company issued an aggregate of
3,070,729 shares of the Company's common stock and warrants (issued to replace
EET's outstanding stock purchase warrants) to purchase up to 71,000 shares of
the Company's common stock.

The EET and IPF acquisitions were accounted for as a pooling-of-interest,
accordingly, the accompanying consolidated financial statements for the years
ended December 31, 1994 and 1993 have been restated to include the financial
position and operations of EET and IPF.

Operating results of the separate companies for the years prior to the
merger were:

<TABLE>
<CAPTION>
December 31, 1994 1993
----------- ---------------
<S> <C> <C>
Revenue as previously reported............. $ 13,542 $ -
Revenue of EET............................. 1,426,748 269,073
Revenue of IPF............................. 505,407 -
----------- ---------------

$ 1,945,697 $ 269,073
=========== ===============

Net loss as previously reported............ $(4,057,098) $ (1,377,679)
Net loss of EET............................ (880,822) (125,823)
Dividends on EET preferred stock........... (22,532) -
Net income of IPF.......................... 24,122 -
----------- ---------------

$(4,936,330) $ (1,503,502)
=========== ===============

Net loss per share as previously reported.. $ (.37) $(.25)
Effect of EET.............................. .02 -
Effect of IPF.............................. - -
----------- ---------------

$ (.35) $(.25)
=========== ===============
</TABLE>

The dividends on EET preferred stock are reflected as minority interest in
net loss (income) of subsidiary in the consolidated statement of operations for
the years ended December 31, 1995 and 1994.

(c) On August 31, 1993, EET acquired certain assets and assumed certain
liabilities from Enclean, Inc., at a total cost of $923,827. The acquisition
was accounted for as a purchase and, accordingly, the operations of the acquired
business are included in the Company's results of operations from August 31,
1993. The accounts of the acquired business are included in the Company's
balance sheet at the fair market value of the assets acquired net of liabilities
assumed as of the purchase date. The excess of cost over the fair market value
of the net assets acquired has been assigned to goodwill and is being amortized
over twenty years on a straight-line basis commencing with date of acquisition.

NOTE 3 - INVENTORIES

At December 31, 1995 and 1994, inventories consisted of the following:

<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Raw materials................................................................ $ 40,938 $ 25,219
Work-in-process.............................................................. 11,796 17,507
Finished goods............................................................... 277,168 21,528
-------- ----------

$329,902 $ 64,254
======== ==========
</TABLE>

NOTE 4 - NOTES RECEIVABLE

At December 31, 1995 and 1994, notes receivable consisted of the following:

<TABLE>
<CAPTION>
1995 1994
-------- ----------
<S> <C> <C>
Note receivable from Euro Scotia Funding Limited (a)......................... $ - $2,800,763
Note receivable from TieTek (b).............................................. 219,592 -
Other........................................................................ 29,375 -
-------- ----------

$ 248,967 $2,800,763
======== ==========
</TABLE>

(a) In April 1993, the Company had invested $2,554,859 with Euro Scotia
Funding Limited (ESF) in exchange for a secured note receivable, which the
Company could call upon thirty days notice to ESF. Through April 1994, income
from the note was generated from the management, by ESF, of investments in
various margin transactions involving U.S. and other governmental debt
securities, currency forward exchange contracts and certain corporate debt and
equity securities. Under the terms of the note, the Company and ESF shared
equally in trading profits. For the years ended December 31, 1995, 1994 and
1993, the Company recognized interest income totalling $283,966, $85,832 and
$523,623, respectively, and trading profits for the years ended December 31,
1994 and 1993, totalling $512,312 and $2,169,672, respectively.

<PAGE>

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

Effective December 31, 1994, the Company renegotiated the terms of the note
receivable from ESF. Under the new agreement, ESF was to repay the note in ten
semi-annual installments of $327,885, plus interest at 10% per annum, commencing
July 1, 1995. ESF elected, as permitted under the agreement, to prepay as of
December 31, 1994 the earliest payments using the amounts owed to it by the
Company for borrowings under the line of credit agreement (see Note 7(c)) and
for services rendered. At December 31, 1994, the face value of the original
note plus accrued interest receivable totalled $3,278,857, borrowings under the
line of credit plus accrued interest payable totalled $356,473, and amounts owed
to ESF for services totalled $121,621. The net balance of $2,800,763 was
reflected on the consolidated balance sheet at December 31, 1994.

The semi-annual payment due January 1996, in accordance with the note
agreement was not paid by ESF. During the fourth quarter of 1995, the Company
learned that the brokerage firm that holds the collateral for the ESF note and
an affiliate of ESF were named as defendants in a lawsuit filed by the Florida
Department of Insurance in which it is alleged, among other things, that such
brokerage firm issued false account confirmations. The Company also learned
that such brokerage firm has applied for withdrawal as a registered
broker/dealer in a number of states, including the state in which such
securities were to have been held.

After learning of the lawsuit, the Company unsuccessfully attempted to gain
reliable information about the existence and the value of the securities that
were to have been held for the Company's benefit in connection with the ESF
note. Accordingly, as of December 31, 1995, the Company decided to write-off
the note receivable of $2,800,763 and accrued interest recognized during 1995 of
$283,966, for a total loss of $3,084,729.

The Company has made demand for payment of the ESF note, in accordance with
the agreement and is exploring its other options against ESF and the brokerage
firm charged with holding the collateral for the note.

(b) On December 29, 1995, the Company, in association with the acquisition
of GAIA (see Note 2(a)), has provided TieTek with a credit facility that allows
TieTek to borrow a maximum of $1,500,000 to be used exclusively for the
development of the crosstie technology. The loan bears interest at 10% and is
due two years after the earlier of (1) the date the Company provides notice that
they will not exercise their option or (2) the expiration of the option period.
The loan is collateralized by TieTek's assets, capital stock and 666,667 shares
of the Company's common stock issued for the purchase of GAIA.

NOTE 5 - PROPERTY AND EQUIPMENT

At December 31, 1995 and 1994, major classes of property and equipment
consist of:

<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Machinery and equipment....................... $1,433,223 $ 492,855
Automobiles................................... 81,232 60,514
Furniture and fixtures........................ 110,387 131,153
Leasehold improvements........................ 49,032 49,032
---------- ---------
1,673,874 733,554
Less: Accumulated depreciation............... (272,240) (140,696)
---------- ---------

$1,401,634 $ 592,858
========== =========
</TABLE>

NOTE 6 - INVESTMENT IN JOINT VENTURE

Effective January 1, 1995, the Company entered into a joint venture
agreement with a non-affiliated company. The Company has a 50% ownership
interest in the joint venture which is accounted for using the equity method of
accounting and is included in other assets. The joint venture performed a
demonstration project for a major environmental company which documented the
Terrazyme system to be effective in cleaning certain waste streams for recycle
and reuse. In December 1995, the Company suspended any additional funding of
the joint venture pending the results of a current test project and the
development of waste streams sufficient to justify further investment. During
1995, the Company had contributed cash totalling $210,829 and equipment valued
at $200,000. The Company's share of net loss from the joint venture for the
year ended December 31, 1995 totalled $231,712.

The following is a summary of financial position at December 31, 1995, and
results of operations of the joint venture for the year ended December 31, 1995:

<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Assets:
Current.................................................... $ -
Equipment.................................................. 358,233
----------
$ 358,233
==========
Liabilities:
Current.................................................... $ -
Equity..................................................... 358,233
----------
$ 358,233
==========

Revenues................................................... $ -
Expenses................................................... 463,424
----------
Net loss................................................... $ (463,424)
==========
</TABLE>

The net income (loss) from affiliates totalling $50,000 and $(233,846) for
1994 and 1993, respectively, represents the Company's share of net income (loss)
from a joint venture which was terminated in June 1994.

<PAGE>

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

NOTE 7 - SHORT-TERM BORROWINGS

At December 31, 1995 and 1994, short-term borrowing were as follows:

1995 1994
---------- --------
<S> <C> <C>
12% note payable, due March 1996 (a)......... $1,050,000 $ -
Line of credit (b)........................... - 300,000
Other........................................ 61,658 -
---------- --------
$1,111,658 $300,000
========== ========
</TABLE>

(a) The Company issued the note payable in association with the purchase
of GAIA (see Note 2(a)). The note is due March 28, 1996, including interest at
12% and is collateralized by all assets acquired from GAIA. On March 26,1996, an
amendment to the note was executed to extend the maturity date to April 15,
1996. The note was paid in full upon the issuance of the Series F convertible
preferred stock on April 8, 1996, see Note 20.

(b) Borrowings outstanding under EET's $500,000 line of credit with a
bank. The borrowings bear interest at the bank's prime plus 2%. This agreement
was repaid and terminated when the Company acquired EET.

(c) In January 1994, the Company entered into an agreement with ESF which
provided for a line of credit. As additional consideration for the loan, the
Company issued ESF 200,000 shares of common stock with a quoted market price
totalling $650,000. Effective December 31, 1994, the Company and the lender
agreed to terminate the agreement, cancel the related common shares and offset
all outstanding borrowings plus accrued interest totalling $356,473 against the
note receivable owed to the Company by the lender (see Note 4(a)).

The Company's weighted average short-term borrowing rate for the years
ended December 31, 1995 and 1994 were 10.2% and 10.5%, respectively.

NOTE 8 - LONG-TERM DEBT

At December 31, 1995 and 1994, long-term debt is as follows:

<TABLE>
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
13.5% convertible subordinated debentures
due September 2000 (a)................................................ $2,700,000 $ -
12% convertible note payable, due
January 1996 (b)...................................................... 150,000 -
Convertible debenture, prime rate plus 2%
(10.5% at December 31, 1995), due June
1996 (c).............................................................. 250,000 250,000
8% convertible debenture, due August
1999 (d).............................................................. 500,000 500,000
12% note payable to officer, due January 31, 1997 (e)................... 120,000 -
Note payable, 6%, paid-off in 1995...................................... - 100,000
Note payable, prime plus 2.5%
paid-off in 1995...................................................... - 212,500
Other................................................................... 79,857 -
--------- ----------
3,799,857 1,062,500
Less current maturities................................................. (264,396) (562,500)
-------- --------
$3,535,461 $ 500,000
========== =========
</TABLE>

(a) In September 1995, the Company borrowed $2,700,000 from issuance of
convertible subordinated debentures and stock warrants to acquire 2,700,000
shares of the Company's common stock at an exercise price of $1 per share. The
notes bear interest at 13.5% per annum, which is payable semi-annually beginning
March 1996, but may be deferred during the first three years at the option of
the Company. The principal amount of the notes and any deferred interest is
convertible at the holder's option into the Company's common stock at $1.00 per
share, subject to anti-dilution provisions, as defined, any time after September
1996, through the maturity date of September 2000. Any portion of the debt that
has not been converted is due in September 2000. The notes are subordinated to
all existing and future senior indebtedness of the Company.

As part of the closing on the Series F preferred stock in April 1996, the
holders of the subordinated debentures converted the $2,700,000 principal
balance of their notes into 27 shares of Series F convertible preferred stock.
Interest on the subordinated debentures through the closing of $198,000 was paid
prior to the conversion (see Note 20).

(b) In January 1996, the note payable and accrued interest was converted
into 248,131 shares of the Company's common stock in accordance with the
original terms of the agreement. Accordingly, the note has been classified as
long-term at December 31, 1995.

(c) The debentures are convertible into the Company's common stock by
dividing the principal balance by 75% of the average trading price of the stock
during the ten days preceding conversion.

(d) In August 1994, the Company borrowed $500,000, bearing interest at 8%
per annum, from an individual lender. The loan matures in August 1999. The
Company may prepay the loan with a penalty amounting to 2% of the principal
balance for each year the prepayment precedes the scheduled maturity date. The
loan is convertible into shares of the Company's common stock at $1.50 per share
which exceeded the fair market value at the date of the agreement. However, if
the Company elects to prepay the loan when the market price is below $1.50 per
share, the lender has the option to convert the loan into shares of common stock
at a 15% discount from the then-current market price.

(e) The note payable to an officer of the Company is unsecured, bears
interest at 12% payable monthly, and is due on January 31, 1997.

23
<PAGE>

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

NOTE 9 - RELATED PARTY TRANSACTIONS

At December 31, 1995, the Company had accrued $250,000 in settlement of the
former Chairman of the Board's five-year employment agreement. The settlement is
payable in bi-weekly payments of $11,538, beginning January 12, 1996. From July
1995 through December 1995, the former Chairman was a consultant to the Company
and was paid $15,000 a month.

Included in long-term debt at December 31, 1995, is a note payable to an
officer of the Company (see Note 8). The Company incurred no interest expense
on this note for 1995.

At December 31, 1994, notes payable stockholders consisted of various
unsecured notes payable to stockholders of the Company. The notes are due on
demand and bear interest at 8% per annum. Interest expense for the years ended
1995, 1994 and 1993 totalled $10,849, $28,933 and $8,889, respectively.

Simultaneously, with the purchase of GAIA, certain former officers of GAIA
became officers of the Company. In addition, the former stockholders of GAIA
have the right to select an individual as director of the Company. See Notes 7
and 2(a), for note payable and other transactions with GAIA in association with
the purchase of certain assets.

In 1994, $290,000 of notes payable to the stockholders of EET were
converted to preferred stock. In 1995, the preferred stock was redeemed as a
result of the acquisition of EET (see Note 10).

NOTE 10 - MINORITY INTEREST

The minority interest shown on the consolidated balance sheets are
comprised of the following at December 31:

<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Preferred shares
522728 Alberta $2.50 convertible
preferred 4,500 shares and 8,000
shares outstanding in 1995 and 1994,
respectively................................................. $ 16,488 $ 29,312

EET, Inc.
Preferred stock $1.00 par value,
cumulative; 305,000 shares outstanding
in 1994 and redeemed in 1995 for $305,000................... - 305,000
---------- ----------
$ 16,488 $ 334,312
========== ==========
</TABLE>

NOTE 11 - STOCKHOLDERS' EQUITY

On December 28, 1995, the Company issued 30 shares of Series D convertible
preferred stock (Series D) for $750,000. The Series D holders are entitled to
quarterly cumulative dividends totalling $3,750 per year per share of preferred
stock and certain liquidation preferences. At the option of the Series D
holders, the preferred stock may be converted into the Company's common stock
using a conversion rate computed as the lesser of (a) a calculated value
utilizing a discount to market as defined or (b) $.875 per share. The Series D
stock can not be converted until March 11, 1996, at which time one third is
eligible for conversion, with the remaining two thirds eligible for conversion
in April and May 1996. In March 1996, 10 shares of Series D convertible
preferred stock were converted into 414,800 shares of the Company's common
stock.

During 1994, the Company issued 220 shares of Series A convertible
preferred stock (Series A) for net proceeds totalling $2,024,000. Each share of
Series A was convertible into the Company's common stock at a conversion rate
equal to $10,000 divided by 77% of the closing bid price of the Company's common
stock on the conversion date, per share. During 1994, Series A holders elected
to convert 170 shares for 1,219,751 shares of the Company's common stock. In
1994, as an inducement not to convert any further Series A shares, the Company
issued 15 shares of Series B and C convertible preferred stock to the holders of
the Series A shares. The Series B and C preferred stock were issued with
conversion terms identical to those of the Series A. The Company realized no
proceeds from the issuance of the Series B and C preferred shares. During 1995,
all remaining Series A, B and C preferred stock were converted into 424,506
shares of the Company's common stock.

During 1995 and 1994, 3,500 and 1,000 shares, respectively, of $3.50
convertible preferred stock of the Company's majority-owned subsidiary 522728
Alberta, Ltd. were converted into 350,000 and 100,000 shares, respectively, of
the Company's common stock which was issued from treasury stock.

During 1993, the Company purchased the minority interest in one of its
majority-owned subsidiaries (NAT). In accordance with a plan of arrangement
with the minority stockholders, each majority stockholder received one share of
the Company's common stock in exchange for two shares of the subsidiary's stock
held by the minority stockholders. The Company issued 4,443,147 shares of
treasury stock and 1,034,626 shares of common stock for the purchase of the
minority interest and recorded the transaction at book value of the subsidiary.

In association with the Company's purchase of the remaining minority
interest of the subsidiary described above, 3,250,000 shares were subject to
escrow; 1,625,000 shares are "Class I Escrow Shares" and 1,625,000 shares are
"Class II Escrow Shares." These shares are treated as contingent shares, and
accordingly, have been excluded from weighted average shares in the computation
of loss per common shares.

The provisions relating to the "Class I Escrow Shares" were not met, and
these shares were retired effective December 31, 1994. The "Class II Escrow
Shares" shall be released if the Company shall be acquired prior to December 31,
1996 for a purchase price exceeding $250,000,000. At December 31, 1995, these
shares are held in escrow.

At December 31, 1995, the Company had common stock reserved for future
issuance as follows:

<TABLE>
<CAPTION>
SHARES
-----------
<S> <C>
Conversion of convertible debt.............................. $ 3,900,000
Conversion of preferred stock............................... 1,100,000
Stock options outstanding................................... 4,900,000
Stock warrants outstanding.................................. 5,300,000
-------------

$ 15,200,000
=============
</TABLE>

<PAGE>

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

NOTE 12 - INVESTMENT - SALE OF MARKETING RIGHTS

In February 1993, the Company sold rights to market its environmental
technologies throughout Canada, excluding the Provinces of Alberta and
Saskatchewan. In exchange, the Company received 600,000 common shares of Katlor
Environmental Technologies, Inc. (Katlor), a publicly traded Canadian
corporation. Such shares were restricted for a period of one year from the date
of the transaction. At the time of the transactions, unrestricted common shares
of Katlor had a quoted market value of Canadian $2.32 per share (U.S. $1.83).
Because the shares received represent such a large percentage (8.1%) of the
outstanding common shares of Katlor and because the shares could not be sold for
a period of one year, management of the Company assigned a value of U.S.
$600,000 (U.S. $1.00 per share) to the transactions. For the year ended
December 31, 1993, the Company had recorded a gain of $600,000 from the sale of
marketing rights in the consolidated statement of loss.

During the fourth quarter of 1994, the market price of the Katlor shares
experienced a dramatic decline and, subsequently, Katlor filed for bankruptcy
protection. There has been no public trading in Katlor common stock since
December 31, 1994. Due to the current bankruptcy filing and because management
believes it is unlikely that the Company will be able to recognize any proceeds
from its investment, the balance of $600,000 was written off and recorded as a
loss in the statement of loss for the year ended December 31, 1994.

NOTE 13 - MINING ASSETS

During 1993, the Company abandoned its claim to certain properties in
Canada and, accordingly, wrote off its investment in those properties amounting
to $43,251. In 1994, the Company decided not to pursue further development of
any of its mining properties and, accordingly, wrote off the remainder of its
investment in those properties totalling $794,314.

NOTE 14 - DISCONTINUED OPERATIONS

Effective July 29, 1994, EET entered into a formal plan to dispose of its
analytical services operations. On July 29, 1994, EET sold the fixed assets of
the analytical division to a third party. All remaining assets and liabilities,
which consisted of accounts receivable and accrued liabilities, were retained by
the Company. This is considered a discontinued operation. No gain or loss on
the disposal of the discontinued segment was incurred because the analytical
services operations did not continue beyond July 29, 1994 and there was no gain
or loss on the disposal of the assets.

NOTE 15 - INCOME TAXES

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

The components of deferred income tax assets at December 31, 1995 and 1994,
were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 1994
------------ ----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward.............. $ 3,886,000 $ 2,685,000
Bad debt reserves............................ 1,076,000 -
Other........................................ 125,000 4,000
----------- -----------
Gross deferred tax assets..................... 5,087,000 2,689,000
Valuation allowance........................... (5,087,000) (2,689,000)
----------- -----------
Net deferred income taxes..................... $ - $ -
=========== ===========
</TABLE>

At December 31, 1995, the Company has net operating loss carryforwards
for federal income tax purposes totalling approximately $11,429,000 which, if
not utilized, will expire as follows:

<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1999.........................................................$ 162,000
2000......................................................... 32,000
2001......................................................... 102,000
2002......................................................... 391,000
2003......................................................... 376,000
2004......................................................... 457,000
2005......................................................... 169,000
2006......................................................... 559,000
2007......................................................... 462,000
2008......................................................... 1,669,000
2009......................................................... 3,125,000
2010......................................................... 3,925,000
----------
$11,429,000
===========
</TABLE>

The figures above are stated on a consolidated basis. Federal tax
laws only permit the use of net operating loss carryforwards by the individual
entities that originally sustained the losses.

<PAGE>

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

NOTE 16 - STOCK OPTIONS AND WARRANTS

The Company has not adopted a formal stock option plan, however, as of
December 31, 1995, by approval of the Board of Directors, the Company has
granted the following stock options: approximately 3,550,000 options to
directors, officers and employees and approximately 1,350,000 options to
consultants and in connection with financing transactions.

All of the options to directors, officers and employees are exercisable at
prices that range from $1.00 to $2.50, which equaled or exceeded the market
price per share at the date granted. These options generally vest over a four or
five year period and expire five years after vesting. All options issued to
consultants and in connection with financing transactions are exercisable at
prices that range from $.75 to $2.50, which equalled or exceeded the market
price per share at the date granted. These options primarily vest immediately
and expire through the year 1999.

As of December 31, 1995, the Company has issued stock warrants totalling
5,278,916 primarily in connection with financing transactions. These warrants
are exercisable at prices that range from $.75 to $6.00 per share, which equaled
or exceeded the market price per share at the date of grant, and expire through
the year 2000.

At December 31, 1995, the Company had stock options and warrants available
for exercise totalling 2,375,000 and 5,278,916, respectively, at exercisable
prices ranging from $.75 to $6.00.

NOTE 17 - COMMITMENTS AND CONTINGENCIES

The Company rents equipment and office space under operating leases on both
long and short-term basis. Rent expense amounted to approximately $168,000,
$156,000 and $259,000, for the years ended December 31, 1995, 1994 and 1993,
respectively.

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1996............................................ $ 144,000
1997............................................ 170,000
1998............................................ 126,000
1999............................................ 126,000
2000............................................ 94,000
----------

$ 660,000
==========
</TABLE>

At December 31, 1995, the Company had employment contracts that provide for
payments of approximately $1,090,000 annually through 1999.

At December 31, 1995, the Company had an outstanding letter of credit
totalling $200,000. The letter of credit is collateralized by a certificate of
deposit and expires June 1, 1996.

In November 1988, a suit was filed against MBCC, the predecessor to the
Company, by a former franchisee. The plaintiff alleged that the Company failed
to provide the plaintiff with an offering prospectus and made false
representations. The suit claims damages in excess of $425,000. The court
recently granted the Company's motion to dismiss the action based upon the
plaintiff's failure to prosecute the action. The plaintiff responded by filing a
motion to reinstate the action, which is now before the court. The Company
intends to vigorously defend against this action.

In April 1993, an individual brought an action against NAT and other
defendants, which seeks delivery of 200,000 shares of common stock of NAT and
damages amounting to $1.7 million (CND) for failure to provide the shares on a
timely basis. The Company intends to vigorously defend against this action.

In July 1993, an individual brought action against North American Gold
Corp. (predecessor to NAT) and a brokerage firm for the conveyance of 150,000
shares of North American Gold Corp. at $.50 per share or alternatively, for
damages and attorney fees. The claim is based upon a letter dated July 17, 1991,
purportedly signed by the president of the brokerage firm named in the suit. The
Company intends to vigorously defend against this action.

Under a 1992 license agreement, the Company received exclusive rights to
purchase a certain proprietary stabilized enzyme. During the second quarter of
1993, management discovered that the licensor had violated the agreement by
selling the enzyme to its competitors. In response to this violation and because
the enzyme proved to be ineffective, the Company terminated the agreement. In
September 1993, the licensor brought suit in federal court for delivery of
90,000 common shares of NATK which were being held in escrow under the terms of
the license agreement. The Company was successful in terminating the federal
court proceedings and thereby requiring arbitration before the American
Arbitration Association. The arbitration proceedings were completed in February
1996, and the Company is awaiting the arbitrator's decision.

In April 1995, the Company filed a lawsuit against a former officer and
director of the Company. In late 1994, the Company commenced an investigation of
this former director's activities, and on January 23, 1995, requested and
received his resignation. The Company's claims against him are based on actions
taken both before and after his resignation and include breaches of duties owed
by him to the Company, torts against the Company and defamation of the Company's
business reputation. The Company has requested relief in the form of a temporary
injunction, permanent injunction and other damages. In June 1995, the former
officer filed a counter lawsuit against the Company and other parties, which has
been dismissed. The lawsuit also includes claims against a former officer of a
subsidiary of the Company. The claims against him include breach of duties owed
by him to the Company and torts against the Company, based on his alleged aid to
the former officer and director. This individual has filed a counter lawsuit
against the Company and other parties.

If the foregoing litigation is decided against the Company, it could have a
material adverse effect on the financial conditions of the Company.

<PAGE>

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

NOTE 18 - SUPPLEMENTAL CASH FLOW INFORMATION

During the year ended December 31, 1995, the Company paid interest
totalling approximately $25,000. For the years ended December 31, 1994 and 1993,
the Company paid no interest.

During 1995, the Company issued shares of common stock for the acquisition
of EET and IPF totalling 3,070,729. These acquisitions have been accounted for
as pooling-of-interests (see Note 2(b)). Accordingly, these non-cash
transactions have been recorded in the years the acquired companies were
organized due to the restatement of the Company's consolidated financial
statement.

During 1995, in association with the purchase of GAIA, the Company issued
1,666,667 shares of common stock, issued debt of $1,050,000 and assumed
liabilities of $194,000.

During 1995, the Company contributed equipment with a book value totalling
$200,000 to a 50% owned joint venture.

In 1995 and 1994, the Company issued 125,000 and 20,000 shares,
respectively, of the Company's common stock for compensation and services
provided totalling $55,000 and $31,260, respectively.

In 1993, the Company sold marketing rights (see Note 12) in exchange for
common stock valued at $600,000.

In 1993, the Company acquired the remaining minority interest in a
subsidiary through the issuance of 4,443,147 common shares held in the treasury
and 1,034,626 newly issued common shares. The transaction was recorded at net
book value or $743,017.

NOTE 19 - BUSINESS SEGMENTS

The Company has two reportable business segments, as noted below:

Environmental Group: Environmental services and energy resource
reclamation, including enzyme processes, mechanical systems and bioremedial
technologies.

Manufacturing and Distribution Group: Manufactures and distributes
proprietary and standard products (custom pipe, pipe fittings and valves).
Manufactures and distributes porous pipe, wood substitution and alternative
building materials made from recycled rubber and thermoplastics.

<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
Environmental......................... $1,725,384 $ 1,440,290 $ 269,073
Manufacturing and Distribution........ 917,351 505,407 -
---------- ----------- -----------
Total revenues....................... $2,642,735 $ 1,945,697 $ 269,073
========== =========== ===========
Operating income (loss):
Environmental......................... $(1,943,874) $(2,101,652) $(2,111,810)
Manufacturing and Distribution........ (4,088) 30,785 -
Other................................. (2,279,738) (1,885,423) (2,560,175)
----------- ----------- -----------
Total operating loss................. $(4,227,700) $(3,956,290) $(4,671,985)
=========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
Identifiable assets:
Environmental..................................... $ 1,827,628 $ 1,940,169
Manufacturing and Distribution.................... 5,012,144 194,221
Other............................................. 1,044,947 6,056,287
----------- -----------

$ 7,884,719 $ 8,190,677
=========== ===========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Capital expenditures:
Environmental........................................... $ 150,297 $ 422,187 $ 549,158
Manufacturing and distribution.......................... 991,004 58,115 -
Other................................................... 19,019 - -
---------- ---------- ----------

$1,160,320 $ 480,302 $ 549,158
========== ========== ==========

Depreciation and amortization:
Environmental........................................... $ 230,851 $ 211,104 $ 79,416
Manufacturing and Distribution.......................... 27,236 8,785 -
Other................................................... 25,797 18,720 -
---------- ---------- ----------

$ 283,884 $ 238,609 $ 79,416
========== ========== ==========
</TABLE>

<PAGE>

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

NOTE 20 - SUBSEQUENT EVENTS

In January 1996, an officer and director of the Company loaned $250,000 to
IPF under the terms of a promissory note. The note bears interest at 13%,
requires monthly payments of $5,700, matures January 1999 and is collateralized
by equipment. Proceeds from the note were used to purchase equipment.

Subsequent to year end, the Company issued 50 shares of Series E
convertible preferred stock (Series E) for net proceeds of $1,218,750. The
Series E holders have certain liquidation preferences, and are not entitled to
any dividends. At the option of the Series E holders, the preferred stock may
be converted into the Company's common stock using a conversion rate computed as
the lesser of (a) a calculated value utilizing a discount to the market price,
as defined or (b) $1.50 per share. One-fourth of the Series E shares can be
converted after August 1996, with another one-fourth available for conversion
every three months thereafter. In addition, the Company at its option may redeem
any of the Series E preferred stock still outstanding on or after February 16,
1999 at $25,000 per share.

On April 8, 1996, the Company issued 82,000 shares of Series F convertible
preferred stock (Series F) and stock purchase warrants to purchase 8,200,000
shares of the Company's common stock (Series F Warrants). Cash proceeds of
$5,500,000 were received for issuance of 55,000 Series F shares and 5,500,000
Series F Warrants. The remaining 27,000 Series F shares and 2,700,000 Series F
Warrants were issued in exchange for the surrender of the 13.5% convertible
subordinated debentures and the warrants (see Note 8(a)). The Series F Warrants
have an exercise price of $1.00 per share, subject to certain adjustments, and
expire on April 8, 2004.

Dividends accrue on the Series F shares at a per annum rate of $13.50 per
share and are payable semi-annually. The Company may elect to defer and accrue
dividend payments during the first three years, in which case, each holder may
elect to receive payment of the dividend in the form of additional Series F
shares. All accrued but unpaid dividends shall accrue interest at a rate of
13.5%. The holders of the Series F shares have certain liquidation preferences.
The Series F shares may be converted into the Company's common stock at the
option of the holder using a conversion rate, subject to certain adjustments, of
$1.00 per share. On or after April 8, 2001, the Series F shares can be converted
at the holder's option using the lesser of (a) the current conversion price; or
(b) a calculated value utilizing a discount to the market price, as defined.
Subject to certain conversion rights, the Company may redeem the Series F shares
at a face value on or after April 8, 2004.

Each Series F share entitles the holder to voting privileges equal to the
number of shares of common stock into which such Series F share may be converted
from time to time. In addition, the Company has agreed to cause its Board of
Directors to be increased to nine positions, four of which may be filled by
nominees selected by the holders of the Series F shares.

The preferred stock purchase agreement and the certificate of designation
for the Series F shares contain covenants which, if breached by the Company,
provide for certain remedies. Certain of these covenants are considered outside
of the Company's control. These covenants include, among other things, that the
Company obtain a minimum net worth, as defined in the agreement, by December 31,
2000. For breach of these covenants that are outside of the Company's control
the remedy allows the Series F holders to convert their shares into the
Company's common stock using a conversion rate computed as the lesser of (a) the
conversion price, as adjusted; or (b) a calculated value utilizing a discount to
the market price, as defined. Also, the stock purchase agreement contains
certain covenants that are considered within the control of the Company. These
covenants, among other things, require the delivery of financial information and
restrict the Company from incurring additional debt if, immediately upon
incurrence of such debt, the Company's debt to equity ratio exceeds a certain
ratio, as defined by the agreement. For breach of these covenants that are
within the Company's control the remedies allow the Series F holders to elect a
majority of the Company's Board of Directors and to either (1) convert their
shares into the Company's common stock using a conversion rate computed as the
lesser of (a) the conversion price, as adjusted; or (b) a calculated value
utilizing a discount to the market price, as defined; or (2) request the Company
to redeem their shares. If the Series F holders elect redemption, the shares
will be redeemed at the greater of (a) the fair market value, as defined; or (b)
the initial purchase price, plus unpaid dividends and interest, if any. At the
Company's option, the shares may be redeemed with cash or a three year
promissory note.

The proceeds of the Series E and Series F preferred stock issuances will be
used to repay certain debt, accrued interest, and to meet general working
capital needs. Because of the significance of the Series E and Series F
preferred stock issuances, a pro forma balance sheet presentation has been
provided to show the effect of the issuances of the Series E and Series F
preferred stock, repayment of certain debt and accrued interest, and the
exchange of debt for Series F preferred stock, as if such events occurred at
December 31, 1995.

<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
STOCKHOLDER INFORMATION

Common Stock Information:
The Company's Common Stock is traded on the over-the-counter market and listed
on the National Association Securities Dealers, Inc. Automated Quotation System
(NASDAQ) under the symbol "NATK." The following table sets forth, for the
periods indicated, the range of high and low bid prices of the Common Stock as
reported by the National Quotation Bureau.

High Bid Low Bid
1994
First Quarter................... 5.25 3.00
Second Quarter.................. 4.25 2.50
Third Quarter................... 3.25 1.25
Fourth Quarter.................. 2.75 1.25

1995
First Quarter................... 3.125 1.625
Second Quarter.................. 1.94 .94
Third Quarter................... 1.50 .813
Fourth Quarter.................. 1.03 .46

These quotations represent prices between dealers and do not include retail
markups, markdowns, or commissions and do not necessarily represent actual
transactions.

Holders:
Records of the company's stocks transfer agent indicate that as of March 31,
1996, the Company had approximately 340 record holders of its Common Stock. A
significant number of the shares of the Company are held by financial
institutions in "street name." Inquiry of brokerage sources leads management to
believe that it is likely that the Company has more than 2,300 stockholders.

Dividend Policy:
The Company has not paid any cash dividends to date and does not anticipate or
contemplate paying cash dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for working capital of
the Company.

Annual Meeting
Stockholders are invited to attend the Annual Meeting of Stockholders of North
American Technologies Group, Inc. The Annual Meeting will be held at 10:00 a.m.
on June 27, 1996 at the Houstonian Hotel, 111 Post Oak Lane, Houston, Texas
77024.

10-K Information:
A copy of the Company's 1995 Form 10-K as filed with the Securities and Exchange
Commission is available, without charge, by calling or writing North American
Technologies Group, Inc.

Investor Relations:
Security analysts, investment
professionals and stockholders
should direct inquiries to
Carolyn George, Manager
Shareholder Relations at
(713) 662-2699.

Corporate Headquarters:
North American Technologies
Group, Inc.
4710 Bellaire Boulevard
Suite 301
Bellaire, Texas 77401

Transfer Agent and Registrar:
Continental Stock Transfer
and Trust Company
2 Broadway
New York, NY 10004
Phone: (212) 509-1000

NASDAQ Symbol: NATK

Auditors:
BDO Seidman, LLP
1200 Smith
Suite 3060
Houston, Texas 77002

Corporate Counsel:
Buchanan Ingersoll
Professional Corporation
Two Logan Square
12th Floor
18th and Arch Streets
Philadelphia, PA 19103-2771

Directors
Tim B. Tarrillion
President
Chief Executive Officer
Chairman of the Board

David M. Daniels
Executive Vice President

Donovan Boyd
Sr. Vice President
Chief Operating Officer

William T. Aldrich
Executive Vice President
Gaia Technologies, Inc.

Officers
Tim B. Tarrillion
President
Chief Executive Officer
Chairman of the Board

David M. Daniels
Executive Vice President

Donovan Boyd
Sr. Vice President
Chief Operating Officer

Judy Knight Shields
Sr. Vice President
Chief Financial Officer