NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/, 10KSB, 1998-03-25

NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/
10KSB, 1998-03-25
INDUSTRIAL ORGANIC CHEMICALS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB

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

For the fiscal year ended December 31, 1997

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from __________ to __________

Commission file number: 0-16217

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
(Exact name of small business issuer in its charter)

DELAWARE 33-0041789
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

4710 Bellaire Blvd. - Suite 301
Bellaire, Texas 77401
(Address of principal executive offices) (Zip Code)

Registrant's telephone number: (713) 662-2699

Securities registered pursuant to Section 12(b) of the Act: NONE

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

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

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X YES NO
----- -----

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ____
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State issuer's revenues for its most recent fiscal year: $3,553,117

The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of February 27, 1998 was $4,648,554. The
information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is an affiliate or that any
person whose holdings are included is not an affiliate, and any such admission
is hereby disclaimed. The information provided is solely for record keeping
purposes of the Securities and Exchange Commission.

Applicable Only to Corporate Registrants

As of February 28, 1998, there were 31,318,726 shares of Common Stock,
par value $.001 per share, outstanding.

Transitional Small Business Disclosure Format (check one)

YES X NO
----- -----

Documents incorporated by reference: Part of the Registrant's Proxy
Statement for the Registrant's 1998 Annual Meeting of Stockholders (the "1998
Proxy Statement") are incorporated by reference into Items 9, 10, 11 and 12.
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PRIVATE SECURITIES LITIGATION

REFORM ACT SAFE HARBOR STATEMENT

When used in this Annual Report on Form 10-KSB and in other public
statements by the Company and Company officers, the words "expect", "estimate",
"project", "intend", and similar expressions are intended to identify forward-
looking statements regarding events and financial trends which may affect the
Company's future operating results and financial condition. Such statements are
subject to risks and uncertainties that could cause the Company's actual results
and financial condition to differ materially. Such factors include, among
others, the risk factors described under Item 1 in this Annual Report.
Additional factors are described in the Company's other public reports filed
with the Securities and Exchange Commission. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the result
of any revision of these forward-looking statements to reflect events or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.

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PART I

ITEM 1. BUSINESS OF THE REGISTRANT

GENERAL-BACKGROUND
------------------

North American Technologies Group, Inc. ("NATK" or the "Company") is in the
business of identifying, acquiring and commercializing technologies which
management believes represent a significant innovation in its intended market.
In recent years, the Company has conducted its business through five principal
business groups: EET, Inc. (for the commercialization of EET's patented
TECHXTRACT/(R)/ technology for the environmental decontamination of buildings
and equipment, removal of stains from concrete, and the descaling of industrial
deposits), Industrial Pipe Fittings, Inc. (for the development of technologies
and businesses related to the manufacturing and distribution of transition
fittings for high-density polyethylene ("HDPE") pipe), GAIA Technologies, Inc.
(for the commercialization of technologies related to manufacturing and
distribution of products made from recycled plastics and rubber), Riserclad
International, Inc. (for the development of a corrosion protection system for
steel structures in marine applications and related products), and other
businesses/technologies owned by NATK but not separated into distinct
subsidiaries (for the development of a proprietary hydrocarbon upgrading
technology and other environmentally related technologies). In December 1997,
the Company added another business group, TieTek, Inc. (for the
commercialization of a synthetic railroad crosstie manufactured from primarily
recycled plastics, rubber and other waste materials). Unless the context
requires otherwise, the term "Company" refers to North American Technologies
Group, Inc. and its subsidiaries. The Company was organized as Mail Boxes Coast
to Coast, Inc. as of December 24, 1986 under the laws of the State of Delaware
and in 1993 changed its name to its present name following divestiture of its
predecessor business.

The Company's business strategy is to acquire and/or internally develop
businesses that are based on proprietary technologies, proprietary manufacturing
processes and/or defensible market niches. These technologies will be
commercially developed to provide a mix of products, services and licensing
arrangements to customers in a range of separate and distinct industries. As
these technologies develop at their own individual rates, the Company will
analyze how it can best profit from this development and maximize full
commercialization. The Company believes that the optimum development of its
technologies will sometimes necessitate licensing or selling the technologies to
outside interests who are in a better position to realize the full potential of
the related businesses. As such, during the development of these technologies,
it was and is anticipated that the Company will go through various cycles of
acquisitions versus divestitures and/or licensing programs. The timing and
nature of these cycles will be determined by the actual development and success
of individual technologies as well as the Company's need to internally generate
cash to fund the development of those technologies that are deemed to be of the
greatest long term value to the Company.

As a result of this periodic evaluation of its technologies, during 1997
the Company sold or licensed certain of its businesses and technologies that had
been sufficiently commercialized

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and which might be better developed by outside interests with resources or
capabilities in specific areas related to those businesses. The management and
Board of Directors of the Company believed that executing such a plan would
benefit the Company because cash would be generated to further develop the
Company's remaining technologies, management could focus its efforts on a fewer
number of businesses, and overhead costs would be significantly reduced. As a
result, during 1997 several of the Company's businesses and/or technologies have
been either licensed or sold, as described more fully below. In addition, the
reduction in the number of technologies will allow the Company to focus its
resources in the short to mid-term on the commercialization of the TieTek
synthetic railroad crosstie. In the future, it is the Company's intent to
continue to identify new products and applications that can be derived through
the development of its current technologies, or new technologies or businesses
that may be acquired by the Company. However, due to the limited financial and
management resources of the Company, there can be no assurance that the Company
will undertake additional acquisitions in the short to medium term, if at all.

EET, Inc.
---------

In March 1995, the Company acquired by merger EET, Inc. ("EET"), a company
formed in 1993 when it purchased certain patents and proprietary technologies
and processes from EnClean, Inc. Prior to its acquisition by the Company, EET
was owned by approximately forty shareholders, including Tim Tarrillion, the
current CEO and President of the Company, and Judith Knight Shields, the current
Senior Vice President, CFO and Treasurer of the Company. EET and the Company
were not affiliated prior to the acquisition of EET. The acquisition of EET was
accounted for as a "pooling of interests."

In October 1997, the Company sold certain assets of EET that were used by
its Waste Management Services division in Austin, Texas to a company in the
environmental services industry. The Company received $55,000 in cash as
consideration, and recognized a gain of approximately $20,000.

In January 1998, the Company entered into a non-binding letter of intent
with an unrelated company in the environmental services industry to sell the
patents and technology related to EET's TECHXTRACT process. If the transaction
is completed, for which there can be no assurances, the Company would receive
consideration of $200,000 cash and long-term notes with a face value of
approximately $800,000. The assets that would be sold have a book value of
approximately $500,000 on December 31, 1997. In the event this transaction is
not consummated, the Company would re-evaluate its options as to other licensing
or sale transactions.

Industrial Pipe Fittings, Inc.
------------------------------

In June 1995, the Company acquired by merger Industrial Pipe Fittings, Inc.
("IPF"), a Houston, Texas-based manufacturer and distributor of proprietary and
standard thermoplastic fittings for the mining, environmental and water works
industries formerly owned by David Daniels, previously a director and officer of
the Company, and two other unrelated individuals. See "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS." The acquisition of IPF was accounted for as a
"pooling of interests."

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In October 1997, the Company sold all the net assets of IPF to an unrelated
company. As consideration, the Company received $900,694 in cash and a six-
month non-interest bearing note with an original face amount of $50,000. The
Company recognized a loss of approximately $100,000 on the transaction.

GAIA Technologies, Inc.
-----------------------

In December 1995, the Company acquired substantially all of the assets of
GAIA Technologies, Inc. ("GAIA"), including a number of patented and proprietary
technologies and other business assets relating to the use of recycled rubber
and plastics for the manufacture of synthetic construction materials, porous
pipe, and certain other products with advanced structural properties. The
acquisition of GAIA was accounted for under the purchase method of accounting
with the results of operations of GAIA included in the consolidated results of
operations of the Company from the effective date of the acquisition.

In June 1997, the Company sold the technology for manufacturing air-
conditioner support pads ("A/C pads") which had been acquired from GAIA, along
with certain related equipment to an unrelated manufacturing company. As
consideration, the Company received $25,000 cash, a note receivable of $550,000,
and future royalty payments through June 2007 up to a maximum of $1,000,000.
There was no gain or loss recognized on this transaction.

The Company has decided to suspend the operations associated with the
porous pipe product line due to the additional cash investment needed to develop
the infrastructure for engineering, installation and on-going technical support
for integrated commercial irrigation projects. During the year ended December
31, 1997, the Company recognized an impairment in the value of the porous pipe
assets of approximately $1,100,000, representing substantially all the assets
associated with this product line.

Riserclad International, Inc.
-----------------------------

In June 1996, the Company, through a newly formed subsidiary, Riserclad
International Inc. ("RII"), acquired the rights to a patented corrosion
protection technology known as "Riserclad" from an unrelated company. The
Riserclad technology protects steel surfaces in the "splash zone" of marine
structures such as offshore oil platforms, and bridge pilings and supports. The
acquisition of the Riserclad technology was accounted for under the purchase
method of accounting with the results of operations of RII included in the
consolidated results of operations of the Company from the effective date of the
acquisition.

In November 1997, the Company licensed its Riserclad technology and sold
certain net assets to a company owned by the former President of RII and other
unrelated individuals. As consideration, the Company received $100,000 cash as
a license fee, approximately $50,000 cash for the sale of certain assets, two
notes receivable of $301,960 and $100,000, and future royalty payments
calculated as a percentage of net revenues, as defined, above a specified
minimum. In addition, the Company will receive payments of 50% of the gross
profits of the licensee on revenues recognized in 1998 from a specified
territory. The licensee has an option to purchase the Riserclad technology at
anytime between December 31, 2005 and December 31, 2015 for a calculated amount
based on previous years royalties, but not less than $100,000. The Company

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recognized a gain of approximately $20,000 on the transaction.

TieTek, Inc.
------------

In conjunction with the acquisition of GAIA, the Company entered into a
Crosstie Purchase Option and Loan Agreement pursuant to which it acquired an
option (the "Crosstie Purchase Option") to purchase all of the capital stock of
TieTek, Inc., a Texas corporation ("TieTek"), which was owned by three
individuals, including an officer and director of the Company. See "CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS." In 1995, the Company licensed to
TieTek the rights to use certain of GAIA's patented and proprietary technologies
to develop synthetic railroad crossties and certain other related products. The
Company also agreed to lend up to $1,500,000 (the "Crosstie Loan") to TieTek,
the proceeds of which loan were to be used in connection with developing the
synthetic railroad crossties. The Crosstie Loan was collateralized by a pledge
of, and lien on, all of TieTek's assets and the capital stock, and 666,667
shares of the Company's Common Stock. Under the Crosstie Purchase Option and
Loan Agreement, the Company had until December 29, 1998 to acquire 100% of the
capital stock of TieTek.

In December 1997, the Company exercised its option to acquire TieTek and it
became a wholly-owned subsidiary of NATK. The Company's consideration for the
exercise of the option consisted of the assumption of TieTek's liabilities
(totaling $1,470,770, of which $1,463,800 represented the outstanding balance on
the Crosstie Loan between NATK and TieTek, and as such is eliminated in the
consolidation of the Company's financial statements), the release as collateral
of 666,667 shares of Company Common Stock owned by the former shareholders of
GAIA, and the execution of a Royalty Agreement providing for certain royalty
payments calculated on the gross profit of TieTek for a fifteen year period.
The Royalty Agreement also provides for certain minimum payments in the event
the Company does not, or is incapable of, building sufficient manufacturing
capacity to meet demonstrated market demand, as defined, for TieTek's synthetic
railroad crosstie. The Company intends to actively pursue the commercialization
of TieTek's composite railroad crosstie technology.

Management Restructuring
------------------------

During 1995, the Company underwent a major restructuring of its management
group. This restructuring was primarily a result of the acquisition of EET and
the merging of EET's existing management personnel into the Company. Included
in EET's management was Tim B. Tarrillion, who was named President and Chief
Executive Officer of the Company once the merger with EET was completed. When
the previous Chairman of the Board of Directors resigned in July 1995, Mr.
Tarrillion was also named to the position of Chairman.

In addition to the executives that joined the Company as a result of the
EET acquisition, Mr. Tarrillion hired two individuals in 1995 (Donovan Boyd, as
Chief Operating Officer, and Judith Knight Shields, as Chief Financial Officer)
who had worked with him when he was President and Chief Operating Officer of
EnClean Inc. ("EnClean"). EnClean was a publicly traded industrial and
environmental services company that Mr. Tarrillion had co-founded in 1984 which
grew to over $100 million in revenues by 1992 and was acquired by Rust
International in 1993. In addition, the Company's management team included
David Daniels, as a Director and

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Executive Vice President of the Company, as well as President of IPF. Mr.
Daniels had been a member of the Company's management team prior to 1995.

As a result of the licensing and/or selling of certain technologies during
1997, the Company again restructured its management group. In November 1997,
Donovan Boyd resigned as Chief Operating Officer to accept a position with an
unrelated company in Houston. Mr. Boyd remains as a Director of the Company. In
December 1997, David Daniels resigned as Executive Vice President and Director
of the Company to pursue other interests. The executive management of the
Company now consists of Mr. Tarrillion, Ms. Shields, and Dr. Henry Sullivan, one
of the original principals of GAIA and the current President of TieTek.

DESCRIPTION OF BUSINESS AND TECHNOLOGIES
- ----------------------------------------

TIETEK'S COMPOSITE RAILROAD CROSSTIE TECHNOLOGY
-----------------------------------------------

Development of the TieTek Crosstie Technology
---------------------------------------------

Originally, the desire to develop a technology to produce a composite
railroad tie was born out of the potentially unique set of properties which
might be created by the combination of rubber and plastic, and the potential
availability of large sources of recycled rubber and recycled or waste plastics
at very low prices. Rubber, primarily elastomers, has a specific set of
physical properties which are significantly different from certain types of
plastics, commonly referred to as thermoplastics. Elastomers stretch and
recover their original shape, whereas thermoplastics are more rigid and can be
deformed by pressure or temperature. Each set of properties has its value in
specific applications, but usually the two are used in separate situations and
not in combination. By using a proprietary technology to combine the two
materials together, it was found that products with certain unique properties
could be made.

Because of these unique properties, it was believed early in the
development of the TieTek Composite Railroad Crosstie Technology that a
synthetic crosstie could be manufactured with properties similar to wooden ties.
Such a tie could be used as an equal and interchangeable replacement for wooden
ties in any service. The objective was for the TieTek Crosstie to be fastened
with a standard spike (with no pre-drilled hole), require no special handling,
to be used in mixed service with wooden ties and to use the same track
maintenance equipment that is used to install replacement wooden ties. At the
same time, because of the properties of the components used, it was believed
that the TieTek Crosstie would outlast wooden ties and have significant
environmental advantages over the use of wooden ties.

Another important component of the TieTek Crosstie's development was
evolution of the manufacturing system design. TieTek's developers realized
early on that the formulation and the manufacturing system had to be coupled
together into one system in order to engender a commercially viable technology.
The results of their efforts is the current TieTek Composite Railroad Crosstie
Technology, which is the marriage of a unique, low-cost composite formulation
and an integrated manufacturing system. In September 1997, the manufacturing
system's design was verified when a continuous production run produced 400
TieTek Crossties. This production run proved its ability to mass produce a
consistent product from multiple and varied feedstocks. In addition, it
provided the first use of a quality control system to verify the

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internal integrity of each tie produced. The equipment and process performed
very well and supplied critical data that will be used to design the first
production facility.

The results of the last two years of TieTek's development program is the
current TieTek Crosstie, which is believed to achieve or exceed all the product
characteristic objectives that were initially established for this technology.
The current formulation consists primarily of recycled plastics, rubber, other
waste materials and fillers that were identified to meet the performance and
cost objectives for this product. The physical properties of the TieTek Crosstie
are comparable to wooden ties that have been in service only a few years, and
tests have shown that the TieTek Crosstie should retain these properties longer
than wooden ties. And unlike wooden ties, every TieTek Crosstie made is
essentially identical, with very consistent shape, dimensions, quality and
properties. Wooden tie quality can be very inconsistent from tie to tie with
some wooden ties often being destroyed or rejected during the installation
process. The TieTek Crosstie manufacturing process incorporates a quality
control system that verifies each crosstie's properties. Also, the TieTek
Crosstie emits much less odor and vapor than wooden creosote-treated ties, and
will not have the oily residue on its surface typically experienced with
creosoted ties. Since the crosstie is made primarily from recycled plastics and
rubber, it will not be susceptible to decay or bug infestation. Although the
TieTek Crosstie may be slightly heavier than wooden ties, the additional weight
would be minimal, and should not be a problem for the railroad crews, since the
ties in the field are handled primarily with mechanically operated equipment.

In summary, the developers of the TieTek Composite Railroad Crosstie
Technology now believe that their product meets their objective of matching most
of the qualities of the standard wooden railroad crosstie. In addition, the
TieTek Crosstie seems to have several advantages over both wooden and/or other
alternate ties. Overall, the outstanding features of the TieTek Crosstie are:

. Comparable performance to wooden ties
. Can be nailed or spiked just like wood; can be installed with traditional
wood tie hardware
. No problem with splitting/cracking--no end pieces required
. Can be used interchangeably with wood ties
. Individual ties are identical in size, weight, dimensions, and overall
quality
. Can be installed using existing machinery used for wooden ties with no
modification
. Lasts longer and retains properties longer than wooden ties
. Does not require the use of any toxic preservatives
. Made from 80% recycled materials
. Consumes waste products not otherwise easily recycled--rubber tires, etc.
. Has no future hidden disposal costs--product can be recycled again
. Decreases worldwide consumption of hardwood trees

In addition, because of its expected longer life compared to wooden ties,
the long term cost savings of installing the TieTek Crosstie versus a wooden tie
and a concrete tie indicate that the U.S. Railroad industry could save a
significant amount of capital currently spent on replacing old, worn-out ties.

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TieTek is now in the process of completing plans for its first permanent
production facility. This plant should be able to produce more than 2,000 ties
per month and should supply enough product to meet the current demand for field-
testing and market introduction of the TieTek Crossties. The production facility
will also allow TieTek to expand its product introduction program to include all
Class I railroads in the United States, a number of significant U.S. regional
railroads, and several major rail interests in foreign countries. The complete
commercialization of the technology will be accomplished with the construction
of several larger regional production facilities located throughout the U.S. and
in countries around the world. TieTek is currently investigating the options of
building and operating its own set of plants in combination with a strategy of
selling regional manufacturing licenses to third party interests.

Market for the TieTek Crosstie
------------------------------

The need for replacement ties is set by a country's total miles of track
and the rate at which a given crosstie wears out. This rate of deterioration is
determined by many factors including the quality of the original material,
weather conditions, bug infestation, and volume of traffic over the track. To
extend the life expectancy of the wooden tie, it has become common practice to
pressure treat the ties with various preservatives to reduce the rate of decay
and insect attack. As such, a quality hardwood tie, that has been pressure
treated with a preservative (such as creosote), can be expected to last between
25 to 30 years under average conditions and average use, but life expectancy can
be as low as 10 years in severe conditions and as much as 50 years in ideal
conditions.

In the United States, wooden ties currently seem to average somewhat less
than a 30-year life. Given that there are about 150,000 miles of mainline track
in the U.S. and approximately 3,000 ties per mile of track, a 30-year life
translates into an annual demand of 15 million replacement ties. However, U.S.
total demand is somewhat higher when the demand from shortline railroads,
transits and new construction is included. In addition, this demand is expected
to increase as the life expectancy of wooden ties decreases due to use of lesser
quality wood, restrictions on the use of preservatives, employment of heavier
rolling stock and anticipated higher rail traffic volume.

An analysis of the number of miles of mainline track in selected countries
outside the United States suggests that the market for ties outside the United
States could be as high as 60 million ties per year. The largest potential
markets, outside of the U.S. and North America, are in Europe and Asia.

Installation and Testing of the TieTek Crosstie
-----------------------------------------------

Throughout the development process, working prototypes have been placed in
service at various rail sites in different services as described below:

. Two original test ties were placed in service in March of 1996 on a mainline
track near Conroe, Texas. Approximately eighteen freight trains pass over the
track per day. The ties have experienced no failures and continue in
commercial service.

. Three ties were installed on the mainline of a Houston area rail terminal in
August of 1996.

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The track section where they were installed is considered a "severe service
area" due to tonnage, frequency, poor roadbed, 3-degree curve, chemical
spillage and high humidity. To date, these ties have passed all inspections by
the Senior Right-of-Way Engineer who subsequently approved additional
installations at this site.

. At the same time, three other TieTek crossties were installed in another
area of the Houston terminal. One of these ties did develop a crack and was
removed for further inspection in early 1997. The crack was the result of a
manufacturing flaw (that has since been corrected) and the location of the tie
below a loosely bolted rail joint. However, inspection also verified that
there was virtually no wear on the critical bottom side of the tie which had
been in contact with sharp rock ballast.

. Another five ties were installed in February 1997 in the same "severe service
area" of the Houston terminal. However, this time all five were installed in
a row as opposed to being separated by standard wooden ties. These ties were
installed using the two types of procedures commonly used for standard wooden
ties (i.e. heavy, automated hydraulic equipment versus a backhoe and manual
spike driving). The ties performed identically to wooden ties during the
installation process in both cases. The ties continue to function without any
problems or signs of wear.

. Ten prototype synthetic ties were installed at the Houston terminal in March
1997 in consecutive positions on a low speed, high tonnage section of track at
the terminal. These ties were installed with a backhoe and manually driven
spikes. Later, there was a train derailment (unrelated to the track or ties)
over these TieTek crossties and nearby wooden ties. The TieTek Crossties were
gouged where the train wheel ran over them, but were subsequently approved for
reinstallation by the railroad. The wooden crossties in the area were
destroyed and could not be reused. The TieTek crossties were reinstalled and
are still in service.

. Another ten TieTek Crossties were installed in 1997 in another area of severe
service in the same Houston terminal. In this new location, several softwood
ties had been previously installed and had failed almost immediately after
installation. Conversely, the TieTek Crossties that were put in this area have
performed very well despite the severe conditions and the previous failure of
the softwood ties.

. In early 1998, one hundred TieTek Crossties were installed under a mainline
track in a swampy area of northern Louisiana. Installations crews installed
these ties with standard wooden tie procedures and equipment and experienced
no problems.

. In early 1998, ten TieTek Crossties were installed under a shortline
railroad's track in Virginia.

. Twenty TieTek Crossties have been installed at a railroad test track in
Pueblo, Colorado. Initial tests indicated performance equivalent to that of
wooden ties.

. Seventy-five TieTek Crossties have been installed on a mainline track in the
desert

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conditions of Colton, California.

. Eighty TieTek Crossties are scheduled to be installed under a mainline track
in East Texas within the next few months.

. Seventy-five TieTek Crossties await installation under a mainline track in
Kansas that is used to transport western coal to eastern markets.

In addition to the many field installations to date, the TieTek Crosstie
prototypes have also been tested by several independent laboratories. Five
separate series tests of various TieTek Crosstie prototypes have been conducted
at the Wood Science Laboratory at the University of Illinois at Champaign-Urbana
under the direction of Dr. Poo Chow. Dr. Chow and the Wood Science Laboratory
are partially funded by the American Association of Railroads (AAR), and their
testing program was strongly recommended by a major U.S. railroad company.
During these series of tests, the TieTek Crosstie has been evaluated for
compression strength, hardness, stiffness, and three measures of spike
performance in the tie--measuring resistance to spike drive, spike pull and
lateral movement. In these tests, the TieTek Crosstie latest prototype's
overall performance was similar to wood ties that would have been in service for
just a few years. The laboratory also conducted accelerated aging tests using
vacuum, steam, freezing, and water cycles to simulate thirty years of weather-
related effects on the ties. These tests showed the TieTek Crossties had much
less degradation of properties as compared to wooden ties. In summary, the
tests showed that after about five years the TieTek Crosstie prototype's
performance would probably be equal to or better than oak and superior to lesser
quality woods. Furthermore, the tests indicated a much slower rate of
degradation of properties as compared to wooden ties, indicating that the TieTek
Crosstie would probably last longer than the equivalent wooden creosote-treated
ties.

TieTek is also testing its crosstie at an independent testing facility
known as the Transportation Technology Center in Pueblo, Colorado. This
facility is also sponsored by the AAR and conducts a variety of tests on all
types of new technologies concerning the track, the locomotives, and the cars
used in the U.S. Railroad industry. TieTek has commissioned them to test its
crosstie in a variety of tests including the single tie push test and the effect
of high volume heavy loads on the life of the tie. The results of these tests
are expected during 1998. Initial tests show the TieTek crossties grip the
ballast/roadbed at least as well as wooden ties.

OTHER TECHNOLOGIES
------------------

The Company owns patents related to EET's TECHXTRACT/(R)/ process.
TECHXTRACT/(R)/ is a patented technology that permits the extraction of
subsurface contaminants without destroying the surface or substrate. Management
believes that this technology is unique in its ability to remediate contaminated
porous surfaces where surface cleaning is ineffective or insufficient, and
physical (destructive) processes are unacceptable or uneconomical.

The technology was originally developed for removing all types of
polychlorinated biphenyls ("PCBs") from an array of substrates. Areas and
equipment that have been cleaned

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using the TECHXTRACT/(R)/ technology are routinely sampled and tested by
independent laboratories which have verified that the contaminant extraction
process has been successful in achieving levels of extraction that meet the
United States Environmental Protection Agency's ("EPA") clean-up standard for
PCB's of 10 mg/100cm2. TECHXTRACT/(R)/ was further developed to extract
radioactive contaminants for the Department of Energy and several other
customers. EET has demonstrated or developed chemistry and applications for the
deradiation of concrete floors and walls, metal working equipment, tools, lead
bricks/shielding, clothing, internal piping, evaporation basins, and holding
tanks. Deradiation has been effective on both surface and fixed contaminants, as
verified by surface smears and by alpha, beta/gamma, and x-ray detectors.

The Company owns patents for a corrosion protection technology known as
"Riserclad." The technology was designed to protect steel surfaces in the
"splash zone" of marine structures such as offshore oil platforms and bridge
pilings and supports. The "splash zone" is an area affected by wave and tidal
action in marine environments. This zone cannot be protected by cathodic
protection systems that operate below the water line, nor can it be protected
for any extended period of time by paint or coating systems that may work well
above the waterline. The Riserclad technology uses a patented epoxy coating,
known as "Riserbond," that can be applied on any surface above and below the
water line and chemically bonds to unprotected steel surfaces. The technology
further provides a hard outer shell, known as "Riserclad," which is placed over
the metal and epoxy, and also chemically bonds to the epoxy. The hard shell
protects the epoxy from damage caused by floating debris, wave action, and
marine vessels.

In November 1997, the exclusive worldwide license for the Riserclad
technology was sold to a company comprised of the former President of RII and
other unrelated individuals.

The Biocatalytic Hydrocarbon Upgrade Process (the "BioKatTTM Hydrocarbon
Process") is based on enzyme technologies that the Company believes may
catalytically alter the molecular structure of long chain hydrocarbons and
simultaneously reduce the sulfur and metal content of the treated hydrocarbons.
Development of this technology to date has focused on the upgrading of heavy,
sulfurous crude oils. Although other companies are pursuing technologies to
biologically upgrade crude oil and/or other petroleum fractions, management
believes that the manner in which the BiokatTTM Hydrocarbon Process uses the
catalytic properties of enzymes distinguishes itself from other competing
processes. However, given that the specifics of competing processes are not
well defined and are not known to the general industry, the Company cannot
completely judge the effectiveness of BioKatTTM versus these other processes.

12
<PAGE>

During 1997, the Company worked with a major international oil company to
further test the effectiveness of this technology. Under this program and under
the supervision of the oil company's representatives, the Company produced a
certain amount of "upgraded" crude oils and the oil company reimbursed the
Company for the time and expense of these production runs. The oil company
selected two crude oils for testing which would have a commercial "need" for
this technology if it can be fully developed. Although these tests continued to
show the positive effects of this technology, the Company and the oil company
realized that more development work was needed before this technology could have
commercial applications, if at all. Since the Company did not have the resources
to complete the development and commercialization of this technology, management
began discussions with several companies interested in purchasing or licensing
this technology. Such a transaction, if completed, would include an up-front
cash payment and future royalties if and when the process became a commercial
success. As of the date of this report, these discussions are on-going.

COMPETITION
- -----------

Given that the Company has sold or licensed many of its technologies and
businesses and is currently focusing on the TieTek Composite Railroad Crosstie
Technology, the Company's direct competition consists of those companies that
produce wooden crossties and a small group of competitors who are also
attempting to produce some type of synthetic or composite railroad crosstie.

There are many competitors that produce and sell creosote-treated wooden
crossties, but the largest producers of these ties are Allied-Signal
Corporation, Kerr-McGee Corporation, Mellott Wood Preserving Company, Western
Tar Products Corporation, and several others. These competitors are
significantly larger than the Company and have significantly more resources
available for the marketing of their products. The wooden tie industry have
been very active in positioning their product as the only product that can meet
the complete needs of the railroad industry. The Company anticipates that there
may be a natural attempt to discredit or delay the acceptance of any synthetic
or composite crosstie if such a product is perceived to be a significant threat
to the long term demand for wooden crossties.

There are also many producers of plastic lumber who indicate they are
developing a synthetic railroad crosstie, but the only company that seems to
have shown an ability to produce any functional prototypes is U.S. Plastic
Lumber Corporation, headquartered in Boca Raton, Florida.

SALES, MARKETING AND JOINT VENTURE AGREEMENTS
- ---------------------------------------------

As a result of the acquisitions and restructuring that were effected by the
Company in 1995 and 1996, and the licensing and/or sale of certain technologies
during 1997, the Company's approach to sales and marketing has continued to
change over time. Prior to 1997, the Company had a sales and marketing strategy
for each of its businesses designed to meet the needs of the structure of their
specific market and industry. To varying extent and depending on the specific
needs of the market, the Company employed a full range of sales and marketing
techniques, including an internal sales staff, manufacturers' representatives,
licensees, finders' incentive programs, joint ventures, advertising and other
promotional programs. However, as the Company

13
<PAGE>

has sold or licensed certain of its technologies, its marketing efforts on all
product lines except TieTek's have essentially been eliminated. Although the
Company will retain interest in the future success of some of the technologies
that it has sold or licensed through royalty agreements, the Company will not
take an active part in the sales or marketing of any of those technologies. The
Company's sales and marketing strategy is now focused on TieTek's composite
railroad crosstie and can be summarized as follows.

The marketing strategy for the TieTek composite railroad crosstie will be
based on its ability to be used as an interchangeable replacement for wooden,
creosote-treated crossties. Because management believes that the TieTek crosstie
will have several advantages over wooden ties including its ability to resist
decay and bug infestation, its longer expected life, its environmental
advantages, its ease of handling and performance consistency, TieTek anticipates
pricing its crosstie at a slight premium to the standard market price for the
highest quality hardwood crossties.

It is also likely that TieTek will develop a brand name for its product in
each country where it is marketed. TieTek has filed a trademark application for
the name "TRACKER" in the United States. The intent is to develop an identity
for the product within the railroad industry which over time will become almost
a generic name for a composite railroad crosstie.

The initial product introduction strategy for the TieTek crosstie has been
intentionally very cautious. Up until recently, TieTek has worked almost
exclusively with a single, major railroad to make sure that any product defects
or failures were corrected in the initial stages of the product's development
and before the prototypes were in widespread use. As TieTek has become more
confident in its crosstie's capabilities and soundness, it has begun introducing
the product to more railroad companies in the United States. Within the first
full year of production from the first commercial scale plant, TieTek plans to
introduce and market the product to all Class I railroads and major independent
railroads in the United States, and to begin marketing to several major
railroads in countries outside the U.S.

The expected promotional activities for the TieTek crosstie will include
joint presentations by TieTek and railroad industry officials at technical
conferences sponsored by the railroad industry, advertising in trade journals,
advertising for foreign partners and licensees, and seminars with environmental
agencies in various states to promulgate the product's environmental advantages.

TieTek also anticipates that it will use a combination of agents, marketing
representatives, licensees, joint venture partners, and other business
combinations to manufacture, market and distribute the product in both the
United States and throughout the world.

PATENTS AND PROPRIETARY RIGHTS
- ------------------------------

The Company is the beneficiary of patent protection on the TECHXTRACT/(R)/
process. In addition, EET holds four other patents on environmental treatment
technologies that may have commercial value but have not yet produced any
significant revenue. Furthermore, GAIA holds

14
<PAGE>

a patent on the compounding, molding and extrusion of shapes and structures
using recycled polymers. These technologies form the basis for manufacturing
products which GAIA had sold historically. As part of the purchase of the
Riserclad technology, the Company purchased the rights to two patents covering
the epoxy formulations and the Riserclad system. The Company still holds the
right to these patents since it sold a license for the technology and not the
technology itself.

In addition, the Company has applied for patent protection for its TieTek
composite railroad crosstie technology. This patent application has had its
initial review by the U.S. Office of Patents and Trademarks, and TieTek's
management believes that it will be granted one or more patents covering the
formulation and manufacturing process included in this technology. TieTek
also intends to extend the protection of these patents to foreign countries
where available and applicable. Furthermore, the Company intends to apply for
patents for any other of its technologies as they are developed or extended, if
such patent protection is available and advantageous to the Company.

Beyond these current or future patents, there is currently no patent
protection for any other of the Company's products or technologies. While the
Company believes it possesses proprietary rights to some of its other products
and technologies including unpatented trade secrets and know-how, and that its
continuing technological innovations will enable it to maintain a competitive
position in the manufacture and use of its products and services, no assurances
can be given that others will not independently develop substantially equivalent
proprietary information and technology or otherwise gain access to the Company's
trade secrets or disclose such technology, nor can the Company assure that it
can meaningfully protect its unpatented trade secrets. A substantial number of
patents have been issued in the markets in which the Company competes and
competitors may have filed applications for, or may have been issued patents or
may obtain additional patents and proprietary rights relating to, products or
processes which are competitive with those of the Company. Although the Company
does not believe that its products and processes infringe the patent rights of
others, the Company has not obtained a complete patent search with respect to
all of its proprietary technologies and there can be no assurance that other
issued patents might need to be licensed or circumvented. The Company can make
no assurance that its pending patent applications, including but not limited to,
the application with respect to its proprietary Crosstie technology, will result
in issued patents, that any patents issued will be held valid and enforceable if
challenged or that a competitor will not independently develop substantially
equivalent proprietary information and technology or competitive noninfringing
products or processes. Moreover, although the federal government protects the
exclusive production, use or sale of patented technologies, processes, products,
mechanical configurations, chemical information or formulations or other
patentable proprietary information for seventeen years, the Company is solely
responsible for enforcing claims of suspected patent infringement. There can be
no assurance that the Company will have the financial resources available to
enforce such claims or be successful in asserting any such claims. As used in
this context and throughout this Report, "proprietary information" refers to
technology, mechanical configurations, chemical information or formulations,
processes, applications techniques and/or other know-how developed by the
Company and its employees or consultants.

15
<PAGE>

WARRANTY
- --------

Typically, the Company has traditionally provided its services, products,
and technologies on an "as is" or "best efforts" basis. As such, no warranty is
expressed or implied. However, in some cases, some limited "warranties" do
apply. For example, EET has in the past provided its TECHXTRACT/(R)/ services
on a "guaranteed results" basis. That is, EET agreed to decontaminate to a
preset, verifiable level or the customer will not be required to pay. However,
once the cleanup standard is met, no future guarantee is given or required. In
only very limited instances, has EET not been paid for the work in connection
with this guarantee, amounting to $10,000 in the aggregate. However, EET is
currently in a dispute with one of its customers relating to the cost of
disposal of certain personal protective equipment that was contaminated during a
decontamination project. EET feels that it adequately disclosed the nature of
this residual contamination and is not responsible for the alleged disposal
problems or costs. Regardless, management believes that any loss related to this
disposal issue would be covered by EET's environmental consultants' insurance.

For TieTek, GAIA, Riserclad, TECHXTRACT/(R)/ and IPF products, the Company
does assume some responsibility that the products they manufacture will perform
as indicated in company literature. If the products are used as instructed and
fail, the Company, at times, will replace the product at no cost to the
customer. To date, such replacement of failed or discarded products has not
been significant. In addition, the Company carries product liability insurance
when it is deemed necessary. Although there have been several product liability
claims related to IPF products, management believes its product liability
insurance is sufficient for its purposes and any warranty issues are not
significant.

RAW MATERIALS
- -------------

Historically, the raw materials used in the Company's products have been
readily available from several sources of suppliers. In addition, the Company
has not experienced any significant raw material price increases in its recent
past. However, the commercial success of the TieTek Composite Crosstie
Technology will be highly dependent on the availability and pricing of several
key raw materials. A key component in the raw material mix for this product is
recycled plastic. The price and availability of recycle plastics can fluctuate
significantly, and high prices and tight supply could seriously affect the
economics of manufacturing TieTek's composite crossties. As part of the
technology's development, TieTek has focused on using multiple, low-grade
sources of recycled plastic and feels that the flexibility that it has built
into its manufacturing process and its raw material strategy should mitigate the
potential effects that changes in raw material supply could have on the
economics of this product. Still, raw material supply and pricing will always
have a direct and significant effect on the economics of this product line.

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

The Company is engaged in continuing research and development with respect
to the expansion of the commercial opportunities of its products. During the
years ended December 31, 1997 and 1996, respectively, the Company incurred
$57,489 and $263,936 in research and

16
<PAGE>

development expenses.

HUMAN RESOURCES
- ---------------

The Company currently employs six full-time employees and one part-time
employee. Three of the employees are in management, one is in operations, and
all others are in administration and accounting. Only two of the Company's
employees have employment agreements. None of its employees are covered by
collective bargaining agreements. All of the Company's personnel, as well as
companies with which it has an ongoing relationship, however, are covered by
non-circumvention, non-disclosure agreements over the Company's technologies.
The Company believes that its relations with its employees are good.

GOVERNMENTAL REGULATIONS
- ------------------------

Historically, the Company's operations were focused on environmental
remediation and related services. The Company's operations were, therefore,
subject to extensive federal and state environmental laws and regulations
including the Clean Water Act, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and
Recovery Act of 1976 ("RCRA"), the Pollution Prevention Act of 1990, the
Superfund Amendments and Reauthorization Act ("SARA") and the state law
counterparts of each of these federal laws. These laws and related regulations
govern, among other things, the discharge of pollutants into the waters of the
United States, the generation and transportation of solid and hazardous waste,
the treatment, storage and disposal of such waste and the investigation and
remediation of hazardous waste sites. Historically, these environmental laws
and regulations directly regulated the Company's operations, subjected it to
numerous potential liabilities and required the Company to obtain and maintain
numerous permits and approvals in order to conduct its operations.

With the licensing or selling of certain technologies during 1997, the
Company has significantly reduced the effect that environmental regulations will
have on the Company's operations. Nevertheless, based on the Company's prior
operations, it is still subject to certain of the environmental laws and
regulations described above including the liability provisions. The Company
continually reviews applicable environmental regulatory requirements, both
internally and through independent consultants, and believes that it is in
substantial compliance with these requirements. However, since environmental
laws and regulations are subject to change, no assurance can be given that
existing laws and regulations will not be amended or new laws and regulations
will not be adopted which will impose extensive regulations and greater
associated costs on the Company in the future.

17
<PAGE>

RISK FACTORS
- ------------

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

LACK OF OPERATING REVENUE AND PROFITS
-------------------------------------

The Company has incurred an accumulated deficit from its inception to
December 31, 1997 of $32,180,115. Further, until the Company is able to
generate material revenues from the commercialization of its TieTek Composite
Railroad Crosstie, there can be no assurances that profitable operation can be
attained or maintained in the short term, if at all. Should losses continue at
their historic rate, there can be no assurances that the Company can remain
viable as a going concern for more than the short term.

CAPITAL NEEDS; GOING CONCERN EXPLANATORY PARAGRAPH
--------------------------------------------------

Through the year ended December 31, 1997, the Company incurred operating
losses which could continue for the near term at expected levels of between
$100,000 to $200,000 per month. The Company has historically met its working
capital requirements through the license of its technologies, issuance of
convertible debentures and financing transactions involving the private
placement of equity securities or equity equivalents. Operating revenues have
not historically provided a meaningful source of working capital for the
Company. Because of these recurring losses, the Company will require additional
working capital to develop and support its technologies and businesses until the
Company either achieves a level of revenues adequate to generate sufficient cash
flows from operations, or receives additional financing necessary to support the
Company's working capital requirements.

Management is currently in negotiations with certain holders of the
Company's Series F and G Cumulative Convertible Preferred Stock ("Holders")
regarding an additional investment in the Company. The preliminary discussions
have indicated that the Holders, through a new subseries of the Series G
Cumulative Convertible Preferred Stock, would fund up to $2,000,000 before the
end of the second quarter. The new subseries would have approximately the same
terms as the Subseries I preferred stock issued in 1997, except that the
conversion price would be based upon arms-length negotiations between the
Company and the Holders. As of the date of this report, no definitive agreement
has been reached with the Holders. It is anticipated that the issuance of the
Subseries II shares will be submitted for stockholder approval at the 1998
Annual Meeting of Stockholders, as required by NASDAQ rules.

To the extent that funds generated from operations, existing working
capital resources and the proposed financing discussed above are insufficient,
the Company will have to raise additional working capital. No assurance can be
given that additional financing will be available, or if available, will be on
terms acceptable to the Company. If adequate working capital is not available,
the Company may be required to curtail its operations.

18
<PAGE>

Due to these uncertainties, the reports of the Company's independent
auditors for the years ended December 31, 1997 and 1996 contain an explanatory
paragraph as to the substantial doubt about the Company's ability to continue as
a going concern. The Company's long-term viability and growth will depend upon
the successful commercialization of its technologies and its ability to obtain
adequate financing, as to which there can be no assurances.

SUBSTANTIAL DILUTION FROM CONVERTIBLE SECURITIES
------------------------------------------------

The Company is presently authorized to issue 100,000,000 shares of Common
Stock, of which 31,318,726 shares are outstanding as of the date of this Report.
The Company may in the future be caused to issue up to approximately 32 million
additional shares of its Common Stock upon the conversion of its outstanding
Series F Convertible Preferred Stock (the "Series F Shares), the Series G
Convertible Preferred Stock (the "Series G Shares"), a convertible note and upon
the exercise of its outstanding options and warrants. This could conceivably
result in an increase in the Company's outstanding shares of Common Stock from
31,318,726 to 63,318,726 or more. Issuance of this many shares is likely to
have an extremely dilutive effect upon the existing stockholders. Furthermore,
sales of substantial amounts of the Company's common stock in the public market
could have an adverse effect upon the market price of the Company's Common Stock
and make it more difficult for the Company to sell its equity securities in the
future and at prices its deems appropriate.

VOLATILITY OF SHARE PRICE - RECENT DECLINE IN MARKET VALUE
----------------------------------------------------------

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

REVISIONS TO NASDAQ LISTING STANDARDS; POSSIBLE RESTRICTIONS ON TRADING
-----------------------------------------------------------------------
ACTIVITIES
----------

On February 22, 1998 the NASDAQ SmallCap Market adopted new maintenance
standards which require all listed companies to maintain a $1.00 minimum bid.
As of the date of this Report, the Company's share price is below $1.00.
Pursuant to applicable NASDAQ rules, the Company has until on or about May 26,
1998 to come into compliance with the NASDAQ minimum bid requirement or be
subject to possible immediate delisting from the NASDAQ SmallCap Market. A
delisting of the Company's common stock from the NASDAQ SmallCap Market could,
among other things, adversely affect the Company's ability to attract new
investors and to make acquisitions by issuing shares of Common Stock. A
delisting will also decrease the liquidity of the shares of Common Stock and
consequently reduce the trading price and increase the transaction costs of
trading such shares. The Board of Directors of the Company has resolved to
effectuate a reverse stock split (the "Reverse Stock Split") in order to reduce
the

19
<PAGE>

number of outstanding shares of Common Stock of the Company. This is intended to
have the effect of increasing the Company's stock price above $1.00 in order to
comply with the NASDAQ SmallCap Market maintenance standards. The Reverse Stock
Split is subject to approval by the Company's stockholders and will be presented
at the Company's Annual Stockholders Meeting which is currently scheduled for
May 12, 1998. If the Company's stockholders do not approve the Reverse Stock
Split, the Company would be subject to possible immediate delisting from the
NASDAQ SmallCap Market. Even if the Company's stockholders approve the Reverse
Stock Split, there can be no assurance that this action will raise the bid price
of the Company's Common Stock above $1.00, that such price, if achieved, would
be maintained, or if maintained that the Company's Common Stock would not be
delisted by NASDAQ for other reasons.

Although the Company intends to effectuate the Reverse Stock Split, in the
event that the Company's shares fail to maintain a minimum bid price of $1.00,
the Company could be subject to delisting and would instead trade in the less
liquid OTC Electronic Bulletin Board and trading in the Common Stock would be
subject to certain rules under the Exchange Act which apply to lower-priced
securities, otherwise defined as "penny stocks."

To the extent the Company's securities constitute "penny stocks", Rule
15g-9 promulgated under the Securities Exchange Act of 1934 (the "Exchange Act")
will impose limitations upon trading activities which would make sale of the
shares more difficult than in the case of securities which were not "penny
stocks." Rule 15g-9 restricts the solicitation of sales of "penny stocks" by
broker-dealers unless first the broker: (i) obtains from the purchaser
information concerning his financial situation, investment experience and
investment objectives; (ii) reasonably determines that the purchaser has
sufficient knowledge and experience in financial matters that the person is
capable of evaluating the risks of investing in "penny stocks"; and (iii)
delivers and receives back from the purchaser a manually signed written
statement acknowledging the purchaser's investment experience and financial
sophistication.

Furthermore, Rules 15g-2 through 15g-6 promulgated under the Exchange Act
provide a series of additional rules requiring broker-dealers engaging in
transactions in "penny stocks" to first provide to their customers a series of
disclosures and documents, including: (i) a standardized risk disclosure
document identifying the risks inherent in investing in "penny stocks"; (ii) all
compensation received by the broker-dealer in connection with the transaction;
(iii) current quotation prices and other relevant market data; and (iv) monthly
account statements reflecting the fair market value of the securities.

"Penny stocks" are defined at Rule 3a51-1 as a security other than a
security that: (i) is listed on any national securities exchange or The NASDAQ
Stock MarketSM; (ii) has a price of $5.00 or more per share or whose issuer is
not a "blank check" company; or (iii) whose issuer has net tangible assets in
excess of $2,000,000, (if the issuer has been in business for at least three (3)
years) or $5,000,000 (if the issuer has been in business for less than three (3)
years).

EFFECT OF OUTSTANDING PREFERRED SHARES, OPTIONS AND WARRANTS
------------------------------------------------------------

The holders of the Series F Shares and Series G Shares and outstanding
options and

20
<PAGE>

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

COMPETITION AND RISK OF TECHNOLOGICAL OBSOLESCENCE
--------------------------------------------------

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

TECHNOLOGY RIGHTS
-----------------

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

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

DEPENDENCE ON THIRD PARTIES; MANUFACTURING DIFFICULTIES
-------------------------------------------------------

The Company, at times, is dependent on third parties for the production of
its products, equipment and the production of certain enzymes/chemicals used in
its technologies. There can be no assurance that these parties will meet the
Company's requirements for quality, quantity and timeliness, or that the Company
would be able to find substitutes if necessary.

21
<PAGE>

SALES AND MARKETING
-------------------

The Company intends to market certain products in the United States as well
as other parts of the world. To do so, the Company must either develop a
substantial sales force with technical expertise or license distribution rights
to third parties with such expertise. There can be no assurance that the Company
will be able to build such a sales force or find appropriate licensees or that
sales and marketing efforts will be successful.

DEPENDENCE ON KEY PERSONNEL
---------------------------

To a material extent, the Company's future success is dependent upon the
continued efforts of its Chief Executive Officer, Mr. Tim B. Tarrillion and its
Vice-President of Technology, Dr. Henry W. Sullivan. While the Company
currently has an employment agreement with Mr. Tarrillion, the Company does not
have an employment agreement with Dr. Sullivan. The loss of the services of Mr.
Tarrillion and Dr. Sullivan would likely have a material adverse effect on the
Company's business. The Company maintains keyman life insurance naming the
Company as the beneficiary on Mr. Tarrillion and Dr. Sullivan.

DIVIDEND POLICY
---------------

To date, the Company has paid no dividends on its shares of Common Stock
and does not intend to pay dividends in the foreseeable future.

CLASSIFIED BOARD; DELAWARE ANTI-TAKEOVER LAW
--------------------------------------------

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

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

22
<PAGE>

Authorization and Discretionary Issuance of Preferred Stock
-----------------------------------------------------------

The Company's Certificate of Incorporation authorizes the issuance of up to
an aggregate of 10,000,000 shares of "blank check" preferred stock with such
designations, rights and preferences as may be determined from time to time by
the Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which would adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company, which could have the effect of discouraging bids for the
Company and thereby prevent stockholders from receiving the maximum value for
their shares. Although the Company is in discussions with holders of the Series
G Shares with respect to an additional investment in the Company upon
substantially the same terms as the outstanding Series G Shares, there are no
present agreements to issue any additional shares of its preferred stock.
However, there can be no assurance that additional shares of preferred stock of
the Company will not be issued at some time in the future.

ITEM 2. PROPERTIES

The Company leases 7,860 square feet in Houston, Texas for its corporate
headquarters which provides executive offices for the Company. This lease
expires in September 2000, and has monthly rent obligations of $10,480. The
licensor of the Riserclad technology occupies a portion of the office space on a
month-to-month basis for $2,200 per month.

In October 1997, the Company formalized into writing its verbal lease
agreement with Mr. Daniels, a former director and officer of the Company, for
the 9,000 square foot manufacturing, warehouse and office facility used by IPF.
The lease provides for payments of $3,100 per month through January 2001, plus
reimbursement to the lessor for insurance and taxes. In connection with the
sale of the net assets of IPF, the Company entered into a month-to-month
sublease agreement with the purchaser for a monthly rental of $2,100. The
Company anticipates that in the event the purchaser terminates the month-to-
month agreement, it will be able to utilize the facilities for the operations of
TieTek.

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

ITEM 3. LEGAL PROCEEDINGS

Thomas W. Reid v. North American Gold Corp. and Karr Capital, Inc., is a
matter commenced in July 1993 in the 134th Judicial District Court of Dallas
County, Texas, by Thomas Reid against North American Gold Corp., which was the
corporate predecessor of NAT, a wholly owned subsidiary of the Company. Mr.
Reid alleges in his complaint that he was denied the right to purchase 150,000
shares of stock of North American Gold Corp. for $.50 per share. Mr. Reid sued
for conveyance of the stock or alternatively for damages, plus attorneys' fees.
Mr. Reid's claim is based upon a letter dated July 17, 1991, purportedly signed
by Mr. Robert Ciccarelli as President of Karr Capital, an unrelated Canadian
corporation.

23
<PAGE>

Discovery is ongoing, and management cannot evaluate the Company's exposure at
this time.

From time to time the Company may be involved in various legal actions
arising in the normal course of business relating to product liability issues
for which the Company maintains insurance. There are currently two such actions
involving the performance of certain products sold by IPF, and one such action
relating to work performed by EET. These claims are currently being handled by
the Company's insurance companies, and management believes their outcomes will
not have a material adverse effect on the Company's financial position or
results of operations.

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

None.

24
<PAGE>

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS

MARKET INFORMATION
- ------------------

The Company's Common Stock is traded on the over-the-counter market and
listed on the National Association of 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.

1996 High Bid Low Bid
- ---- -------- -------
<S> <C> <C>
First Quarter $1.00 $.50
Second Quarter 1.50 .56
Third Quarter 1.13 .69
Fourth Quarter .81 .47

1997
- ----

First Quarter $ .81 $.47
Second Quarter .75 .44
Third Quarter .47 .25
Fourth Quarter .31 .09
</TABLE>
__________________________

The high and low bid prices for the Company's Common Stock are rounded
to the nearest 1/32. Such prices are inter-dealer prices without retail mark-
ups or commissions and may not represent actual transactions.

HOLDERS
- -------

Records of the Company's stock transfer agent indicate that as of December
31, 1997, the Company had approximately 400 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 3,000 stockholders.

DIVIDENDS
- ---------

The Company has not paid any cash dividends on its Common Stock 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. The Company is precluded from paying
dividends on the common stock by the terms of its outstanding Series F
convertible preferred stock.

25
<PAGE>

RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------

During 1997, the Company sold securities in a number of transactions
which were exempt from registration under the Securities Act. These
transactions are described in detail under Item 6, Management's Discussion and
Analysis of Financial Condition and Capital Resources-Liquidity and Capital
Resources, which is incorporated herein by reference. The following provides a
description of the exemptions from registration for the issuances of securities
in 1997:

Series G Convertible Preferred Stock
------------------------------------

In March 1997, the Company issued 16,400 shares of Series G
Convertible Preferred Stock for $1,640,000 in cash. These securities were
issued to institutional investors in reliance upon section 4(2) of the
Securities Act and/or Regulation D thereunder. The Company did not pay any
brokerage commissions in connection with this transaction.

Common Stock
------------

In February and May 1997, the Company issued 2,032,944 shares of
Common Stock upon conversion of 25 shares of Series E Preferred Stock. These
shares were issued to an institutional investor in Europe in reliance upon
Regulation S under the Securities Act. No brokerage or underwriting commissions
were paid in connection with this transaction.

In November 1997, the Company issued 2,174,285 shares of Common Stock
upon conversion of 13,754 shares of Series F Preferred Stock and 2,500 shares of
Series G Preferred Stock. These securities were issued to institutional
investors in reliance upon section 4(2) of the Securities Act and/or Regulation
D thereunder. The Company did not pay any brokerage commissions in connection
with this transaction.

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

BACKGROUND AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the
accounts of North American Technologies Group, Inc. ("NATK") and its wholly-
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated. North American Technologies Group, Inc. and its subsidiaries
are referred to herein as the Company.

26
<PAGE>

GAIA Holdings, Inc. and its affiliates through NATK's wholly-owned subsidiary
GAIA Technologies, Inc. ("GAIA") (December 1995); (d) acquired certain assets of
MPT Services Inc. through NATK's wholly-owned subsidiary Riserclad
International, Inc. ("RII") (June 1996); and (e) acquired 100% of the
outstanding stock of TieTek, Inc. ("TieTek") in a transaction accounted for
using the purchase method (December 1997). These subsidiaries' operations are
described as follows: EET provides on-site decontamination of buildings and
equipment contaminated with polycholorinated byphenyls, 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 condenser support pads ("A/C pads"), made from recycled
rubber and thermoplastic. Riserclad reformulates and markets a corrosion
protection system for steel structures in marine applications. TieTek has
developed the technology to manufacture synthetic railroad crossties from
crumbed tire rubber and other recycled materials.

The Company evaluates its portfolio of technologies on a periodic
basis to determine the best method to use for each technology's
commercialization. The Company realizes that the optimum development of its
technologies may sometimes necessitate licensing or selling a technology to an
outside interest who is in a better position to realize its full potential. As
such, it is anticipated that the Company will go through cycles of acquisitions
versus divestitures and/or licensing programs. The timing and nature of these
cycles will be determined by the actual development and success of individual
technologies, as well as the Company's need to internally generate cash to fund
the development of those technologies that are deemed to be the greatest long
term value to the Company.

As a result of this evaluation of its technologies, during 1997 the
Company sold or licensed certain of its businesses and technologies that had
been sufficiently commercialized and which might be better developed by outside
interests with resources or capabilities in specific areas related to those
businesses. As a result, the Company completed the following transactions in
1997: (a) sold the AC pad technology and certain related equipment (June 1997);
(b) sold the net assets of IPF (October 1997); (c) sold certain assets of EET
that were used in the Waste Management Services division located in Austin,
Texas (October 1997); and (d) licensed the Riserclad technology and sold certain
assets of RII (December 1997).

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 1997, the Company incurred net losses
of $4,331,291 and had an accumulated deficit of $32,180,115. The Company's net
operating losses should continue for the near term at expected levels of between
$100,000 to $200,000 per month. The Company has historically met its working
capital requirements through financing transactions involving the private
placement of equity securities or equity equivalents, the issuance of
convertible debentures, and through the license of its technologies. Operating
revenues have not historically provided a meaningful source of working capital
for the Company. As of December 31, 1997 the Company had working capital of
$191,184 including a cash balance of $348,991.

Over the past two years the Company's principal source of capital has
been a group of

27
<PAGE>

venture capital investors lead by NationsBanc Capital Corporation. The initial
round of financing was a private placement of shares of Series F Cumulative
Convertible Preferred Stock and warrants to purchase common stock, which raised
$6,550,000 in cash proceeds in April and May 1996. The Company completed a
second round of financing with many of the same venture capital investors in
March 1997 in a private placement of shares of Series G Cumulative Convertible
Preferred Stock - Subseries I, which raised $1,640,000 in cash proceeds.

During 1997, as part of the evaluation of its technologies, the
Company licensed or sold several of its technologies. As of a result of these
transactions, the Company received cash proceeds from the sale of certain assets
of $1,002,221, of which approximately $326,000 was used to repay certain
outstanding indebtedness of IPF. The Company also received $100,000 cash as a
license fee for the Riserclad Technology. In addition, as the technologies and
businesses were licensed or sold, the Company reduced its payroll costs
significantly. Currently, the Company employs six full-time employees and one
part-time employee. However, even with the reductions in overhead, the Company
will need additional cash in order to fund its working capital and the costs
anticipated for the commercialization of the TieTek synthetic railroad crosstie.

Management is currently in negotiations with certain holders of the
Company's Series F and G convertible preferred stock ("Holders") regarding an
additional investment in the Company. The preliminary discussions have
indicated that the Holders, through a new subseries of the Series G preferred
stock, would fund up to $2,000,000 before the end of the second quarter of 1998.
The new subseries of preferred stock would have approximately the same terms as
the Series G, Subseries I, convertible preferred stock issued in 1997, except
that the conversion price would be based upon arms-length negotiations between
the Company and the Holders. As of the date of this Report, no definitive
agreement has been reached with the Holders, and there can be no assurances that
the transaction will be completed or that the Holders will approve subsequent
fundings. Due to these uncertainties, the report of the Company's independent
auditors for the year ended December 31, 1997 contains an explanatory paragraph
as to the substantial doubt about the Company's ability to continue as a going
concern. The Company's long-term viability and growth will depend upon the
successful commercialization of its technologies and its ability to obtain
adequate financing, as to which there can be no assurances.

During 1997, the Company used $2,360,550 in cash for its operating
activities. This reflects the net loss for the year of $4,331,291 adjusted for
non-cash expenses of approximately $2,000,000. Included in the non-cash
expenses is an adjustment for the impairment of certain long-lived assets of
$1,202,628. See "Impairment of Certain Long-Lived Assets."

Investing activities provided net cash to the Company of $415,196
during 1997. These funds were generated primarily by the proceeds of $1,002,221
from the sale of certain assets, as described below, less the increase of
$547,788 in the note receivable to TieTek during the year.

In October 1997, the Company sold the net assets of IPF to an
unrelated company. As consideration the Company received $900,694 in cash and a
six-month non-interest bearing note with an original principal amount of
$50,000. The Company recognized a loss of approximately $100,000 on the
transaction. Prior to the sale, net revenues were $1,957,587 and $1,919,025,
and

28
<PAGE>

gross profits were $578,044 and $466,563 for IPF for the years ended December
31, 1997 and 1996, respectively.

In October 1997, the Company sold certain assets of EET that were used
by its Waste Management Services division in Austin, Texas to an unrelated
company. As consideration, the Company received $55,000 cash. A gain of
approximately $20,000 was recognized on the transaction. Prior to the sale, net
revenues were $302,709 and $514,620, and gross profits were $116,936 and
$192,780 for the Waste Management Services division of EET for the years ended
December 31, 1997 and 1996, respectively.

In November 1997, the Company licensed its Riserclad technology to an
unrelated company which included the former President of RII. In addition, the
purchaser acquired certain net assets of RII. As consideration, the Company
received $100,000 cash as a license fee, $46,527 cash for the sale of certain
net assets two notes receivable of $301,960 and $100,000, and future royalty
payments to be received on revenues above a specified minimum, as defined, by
the new company. The Company recognized a gain of approximately $20,000 on the
transaction. Since the future royalty payments are contingent, the Company will
record these royalties as income in the period in which they are earned. Prior
to the license agreement, net revenues were $345,701 and $389,802 and gross
profits were $142,641 and $257,710 for RII for the years ended December 31, 1997
and 1996, respectively.

Financing activities provided net cash to the Company of $1,167,433 during
1997. These funds were generated primarily by the sale of 16,400 shares of
Series G, Subseries I preferred stock for $1,640,000 and the repayment of
certain indebtedness of IPF of $326,000 in connection with the sale of its net
assets in October 1997.

In January 1998, the Company entered into a non-binding letter of intent
with an unrelated company in the environmental services industry to sell EET's
TECHXTRACT technology. If the transaction is completed, for which there can be
no assurances, the Company would receive consideration of $200,000 cash and
long-term notes with a face value of approximately $800,000. The assets that
would be sold have a net book value of approximately $500,000 at December 31,
1997. In the event the transaction is not consummated, the Company would re-
evaluate its options as to other licensing or sale transactions. Net revenues
were $740,693 and $755,639, and gross profits were $275,684 and $156,458 for
EET's TECHXTRACT product line for the years ended December 31, 997 and 1996,
respectively.

In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. The Company's results of operations and financial
position will be unaffected by implementation of these new standards.

Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be

29
<PAGE>

reported in a financial statement that is displayed with the same prominence as
other financial statements.

Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of SFAS 130 and 131 are expected to
have no effect on the Company's financial statement disclosures.

In February 1998, the Financial Accounting Standards Board issued a new
disclosure standard, Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132"). The new standard standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The
statement is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Adoption of SFAS 132 is expected to have no effect on the Company's
financial statement disclosures.

RESULTS OF OPERATIONS

ANALYSIS OF YEARS ENDED DECEMBER 31, 1997 ("1997") AND DECEMBER 31, 1996
("1996")

The total net loss of $4,331,291 for 1997 reflects a slight increase
of $34,895 from the 1996 net loss of $4,296,396. However, included in the net
loss for 1997 is an expense for the impairment of long-lived assets totaling
$1,202,628. Before the effect of this adjustment in 1997, the net loss
decreased $1,167,733. This decrease of $1,167,733 occurred due to a) an
increase in gross profits of $148,812, even though revenues decreased $941,140,
b) a decrease in selling, general and administrative expenses of $577,452, and
c) and change of $441,469 from other expense of $404,063 in 1996 to other income
of $37,406 in 1997. These fluctuations are described in more detail below.

REVENUES
- --------

Revenues decreased $941,140 to $3,553,117 in 1997 from $4,494,257 in
1996. Approximately $800,000 of this decrease occurred from the reduction in
revenues generated by GAIA's AC pad and porous pipe product lines. In June
1997, the Company sold the technology to manufacture the AC pads to an unrelated
company, therefore no revenues were recognized

30
<PAGE>

during the last six months of 1997. In addition, revenues were limited during
the first half of 1997 due to production problems associated with the AC pads.
The Company suspended all operations related to the porous pipe product line in
1997, and recognized an impairment in the failure of certain porous pipe related
assets of approximately $1,100,000. See "Impairment of Certain Long-Lived
Assets." Although the Company sold the net assets of IPF in October 1997, the
loss of IPF's operations for the last two months of 1997 did not contribute to
the total decrease in 1997's revenues due to increased sales at IPF for the ten
months ended October 31, 1997.

Revenues for IPF were essentially the same for the ten month period
prior to its sale in 1997 as compared with the full year of 1996, representing
an increase in its product shipments. EET's and Riserclad's revenues decreased
slightly in 1997, although EET's revenues for 1997 included its Waste Management
Services division for only a ten-month period and Riserclad's revenues included
shipments only through November 30, 1997.

As a result of the licensing or selling certain of its technologies or
businesses during 1997, and given the letter of intent entered into in January
1998 for the sale of EET's TECHXTRACT technology, the Company's revenues for
1998 will be minimal until such time as the TieTek Crosstie is commercialized.
Substantially all of the revenues recognized in 1997 and 1996 originated from
technologies or businesses which were either licensed or sold during 1997, or
which are subject to a letter of intent regarding a possible sale.

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

The gross profit percentage for 1997 of 31% improved significantly as
compared to the gross profit percentage for 1996 of 21%. This improvement
reflects primarily improved margins in EET's TECHXTRACT product line and IPF's
business due to better control over wages and material costs. Also, in 1996 the
manufacturing operations of GAIA experienced depressed margins due to various
manufacturing difficulties.

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

Selling, general and administrative expenses decreased $577,452 to
$4,282,925 in 1997 from $4,860,377 in 1996. This decrease reflects primarily
the reduction in salary and other employee related costs as the Company reduced
its overhead during 1997. The Company anticipates that its salary costs will
continue to decrease from an average of approximately $170,000 per month in 1997
to approximately $50,000 per month in 1998.

IMPAIRMENT OF CERTAIN LONG-LIVED ASSETS
- ---------------------------------------

Management reviews long-lived and intangible assets whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
fully recoverable. During 1997, as the Company licensed or sold certain of its
products or technologies, management determined that an impairment in the value
of certain assets had occurred. Accordingly, a valuation adjustment of
$1,202,628 has been recognized for the year ended December 31, 1997.
Approximately $1,100,000 of this adjustment relates to the patent and certain
equipment

31
<PAGE>

associated with the porous pipe product line, and represents substantially all
of the Company's remaining investment in this product line. Net revenues were
$23,850 and $368,488, and gross profits were ($22,719) and $48,958 for the
porous pipe product line for the years ended December 31, 1997 and 1996,
respectively.

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

In 1996 the Company incurred other expenses totaling $404,063, while
in 1997 it incurred other income totaling $37,406, reflecting a positive change
of $441,469. This was caused primarily by a decrease in interest expense in
1997 to $94,805 from $260,289 in 1996 due to the exchange in April 1996 to
$2,700,000 in convertible debentures for Series F preferred stock.

INCOME TAXES
- ------------

The Company adjusts the deferred tax asset valuation allowance based
on judgements as to the future realization of the deferred tax benefits
supported by demonstrated trends in the Company's operating results. At
December 31, 1997, the Company provided a 100% valuation allowance for the
deferred tax asset because it could not determine whether it was more likely
than not that the deferred tax asset would be realized.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements and supplementary data are included in Items 14(a) and
(b) of this Report and are incorporated by reference thereto.

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

None.

32
<PAGE>

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

Information with regard to this Item is incorporated by reference to
the definitive 1998 Proxy Statement under the captions "ELECTION OF DIRECTORS"
and "COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT."

ITEM 10. EXECUTIVE COMPENSATION

Information with regard to this Item is incorporated by reference to
the definitive 1998 Proxy Statement under the caption "EXECUTIVE COMPENSATION."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with regard to this Item is incorporated by reference to
the definitive 1998 Proxy Statement under the captions "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" and "SECURITY OWNERSHIP OF
MANAGEMENT."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with regard to this Item is incorporated by reference to
the definitive 1998 Proxy Statement under the captions "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS."

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

A. INDEX OF FINANCIAL STATEMENTS

Provided at Page F-1 of this Report

B. FINANCIAL STATEMENT SCHEDULES

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

33
<PAGE>

C. EXHIBITS

<TABLE>
<S> <C>
PLAN OF ACQUISITION,
REORGANIZATION, ARRANGEMENTS,
LIQUIDATION OR SUCCESSION:

2.1 Agreement and Plan of Merger Incorporated by reference to the Company's
between the Company and EET, Inc. Current Report on Form 8-K filed under the
dated February 7, 1995 Securities Exchange Act of 1934 on March 22,
1995 (the "March 22, 1995 8-K")

2.2 Agreement and Plan of Merger Incorporated by reference to the Company's
between Industrial Pipe Fittings, Form S-4, Commission File No. 33-82112 (the
Inc. and the Company dated June 22, "Form S-4")
1995

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

INSTRUMENTS DEFINING THE RIGHTS OF
SECURITY HOLDERS:

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

4.2 Amended and Restated Bylaws Incorporated by reference to the Form S-4

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

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

34
<PAGE>

<TABLE>
<S> <C>
MATERIAL CONTRACTS:

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

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

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

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

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

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

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

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

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

10.10 Employment Agreement of David Incorporated by reference to the March 22,
Daniels dated February 7, 1995 1995 8-K

10.11 Employment Agreement of Judith Incorporated by reference to the March 22,
Shields dated February 23, 1995 1995 8-K
</TABLE>

35
<PAGE>

<TABLE>
<S> <C>
10.12 Employment Agreement of Donovan W. Incorporated by reference to the Form S-4
Boyd dated February 23, 1995

10.13 Consulting Agreement between Filed herewith
Donovan W. Boyd dated as of October
31, 1997

10.14 Agreement between the Company and Filed herewith
David M. Daniels dated as of
December 31, 1997

10.15 GAIA/Thor Royalty Agreement, Incorporated by reference to January 12,
entered into as of December 29, 1996 8-K
1995, by and among GAIA
Technologies, Inc., GAIA Holding,
Inc., Thor Ventures, L.C. and the
Company

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

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

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

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

36
<PAGE>

<TABLE>
<S> <C>
10.20 Promissory Note, Security Agreement Incorporated by reference to January 12,
and Pledge in the principal amount 1996 8-K
of $1,500,000, issued by TieTek,
Inc. in favor of the Company, dated
December 29, 1995

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

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

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

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

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

10.26 Asset Purchase Agreement by and Incorporated by reference to the Current
among the Company, Industrial Pipe Report on Form 8-K filed November 13, 1997
Fittings, Inc. and Houston IPF, LLC ("November 13 1997 8-K")
dated as of October 31, 1997

10.27 Lease Agreement by and among David Incorporated by reference to the November
M. Daniels, as lessor, and the 13, 1997 8-K
Company, as lessee, dated as of
October 30, 1997

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

23.1 Consent of BDO Seidman LLP Filed herewith
</TABLE>

37
<PAGE>

<TABLE>
<S> <C>
27 Financial Data Schedule Filed herewith
</TABLE>

A. REPORTS ON FORM 8-K

Current Report on Form 8-K filed November 13, 1997.
Item 2 - Disposition of assets of Industrial Pipe Fittings, Inc.

38
<PAGE>

SIGNATURES
----------

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

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Dated: March 24, 1998

By:/s/ Tim B. Tarrillion
---------------------
Tim B. Tarrillion
Chief Executive Officer

By:/s/ Judith Knight Shields
-------------------------
Judith Knight Shields
Principal Financial and Accounting Officer

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

39
<PAGE>

Signature Title Date
- --------- ----- ----

/s/ Tim B. Tarrillion Chairman, President March 24, 1998
- --------------------- and Director
Tim B. Tarrillion

/s/ Henry W. Sullivan
- --------------------- Vice President - Technology March 24, 1998
Henry W. Sullivan and Director

/s/ Donovan W. Boyd
- --------------------- Director March 24, 1998
Donovan W. Boyd

/s/ Richard L. Davis
- ---------------------- Director March 24, 1998
Richard L. Davis

/s/ Edwin H. Knight
- ----------------------- Director March 24, 1998
Edwin H. Knight

/s/ Douglas C. Williamson
- -------------------------- Director March 24, 1998
Douglas C. Williamson

40
<PAGE>

INDEX TO FINANCIAL STATEMENTS

PAGE
----

NORTH AMERICAN TECHNOLOGIES GROUP, INC. CONSOLIDATED
FINANCIAL STATEMENTS:

Report of Independent Certified Public Accountants................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996...... F-3
Consolidated Statements of Loss for the Years
Ended December 31, 1997 and 1996................................ F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1997 and 1996.................. F-5 - F-6
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements........................ F-8 - F-27

F-1
<PAGE>

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

North American Technologies Group, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of loss, stockholders' equity and cash flows for each of
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with 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, 1997 and 1996, and the results
of its operations and its cash flows for each of the years then ended, in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and will require additional working capital to develop and
support its technologies and businesses until the Company either achieves a
level of revenues adequate to generate sufficient cash flows from operations, or
receives additional financing necessary to support the Company's working capital
requirements. This condition raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to this
matter are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

BDO Seidman, LLP

Houston, Texas
February 24, 1998

F-2
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>

1997 1996
------------- -------------
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents.................................. $ 348,991 $ 1,126,912
Accounts receivables, less allowance for
doubtful accounts of $18,000 and $125,000................ 285,623 997,411
Inventories (Note 5)....................................... 6,395 585,615
Current portion of notes receivable (Note 6)............... 100,000 -
Prepaid expenses and other................................. 103,087 270,200
------------ ------------
Total Current Assets..................................... 844,096 2,980,138
Notes Receivable, less current portion (Note 6)............. 881,960 1,374,843
Property and Equipment, Less Accumulated
Depreciation (Note 7)...................................... 149,946 1,060,705
Patents and Purchased Technologies, Less Accumulated
Amortization of $268,787 and $320,853...................... 1,797,128 1,412,739
Goodwill, Less Accumulated Amortization of $603,793
and $264,890.............................................. 2,652,391 2,991,293
Other Intangible Assets, Less Accumulated
Amortization of $107,007 and $79,570....................... 126,765 224,202
Other....................................................... 292,291 277,799
------------ ------------
$ 6,744,577 $ 10,321,719
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Current maturities of long-term debt (Note 8).............. $ 3,800 $ 79,288
Accounts payable........................................... 248,362 586,418
Accrued expenses (Note 9).................................. 207,302 287,950
Deferred dividends payable on preferred stock,
including accrued interest (Note 10)..................... 193,448 -
------------ ------------
Total Current Liabilities................................ 652,912 953,656
Long-term Debt, Less Current Maturities (Note 8)............ 503,178 821,631
Deferred dividends payable on preferred stock, including
accrued interest (Note 10)................................ 13,985 -
------------ ------------
Total Liabilities........................................ 1,170,075 1,775,287
------------ ------------
Commitments and Contingencies (Note 13)
Stockholders' Equity (Note 10):
Convertible preferred stock, $.001 par value, 10,000,000
shares authorized; 115,364 and 101,429 shares issued..... 11,536,406 10,765,447
Common stock, $.001 par value, 100,000,000 shares
authorized; 31,318,726 and 27,111,497 shares issued...... 31,320 27,114
Additional paid-in capital................................. 26,348,323 23,809,619
Accumulated deficit........................................ (32,180,115) (25,902,116)
Less notes receivable for sale of stock.................... (161,432) (153,632)
------------ ------------
Total Stockholders' Equity............................... 5,574,502 8,546,432
------------ ------------
$ 6,744,577 $ 10,321,719
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996

1997 1996
----------- -----------

Revenues (Notes 4 and 16).......................... $ 3,553,117 $ 4,494,257
Cost of Revenues................................... 2,436,261 3,526,213
----------- -----------
Gross Profit.................................... 1,116,856 968,044

Selling, General and Administrative Expenses....... 4,282,925 4,860,377
----------- -----------

Operating Loss before valuation adjustment...... (3,166,069) (3,892,333)

Impairment of certain long-lived assets (Note 17).. 1,202,628 -
----------- -----------

Operating loss.................................. (4,368,697) (3,892,333)
----------- -----------
Other Income (Expense):
Interest income................................... 169,402 163,280
Interest expense (Note 9)......................... (94,805) (260,289)
Loss on sale of equipment and other assets........ (51,934) (138,958)
Other............................................. 14,743 (168,096)
----------- -----------

Total Other Income (Expense)....................... 37,406 (404,063)
----------- -----------
Net Loss........................................... $(4,331,291) $(4,296,396)
=========== ===========
Net Loss Per Share (Notes 1 and 10):
Net Loss Per Common Share - Basic................. $ (.22) $ (.25)
=========== ===========
Net Loss Per Common Share - Assuming dilution..... $ (.22) $ (.25)
=========== ===========
Weighted Average Number of Common
Shares Outstanding.............................. 28,864,720 24,264,695
=========== ===========

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

Preferred Stock Common Stock
------------------------------ -----------------------
Shares Amount Shares Amount
---------------- ------------ ------------- --------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996........................ 30 $ 750,000 23,927,285 $23,927
Sale of common stock............................ - - 750,000 750
Stock issued for services....................... - - 363,488 364
Issuance of common stock upon conversion
of convertible debt........................... - - 248,131 249
Sale of Series E and F preferred stock.......... 65,550 7,800,000 - -
Issuance of Series F preferred stock in
exchange for notes payable surrendered........ 27,000 2,700,000 - -
Issuance of common stock upon conversion
of Series D and E preferred stock............. (55) (1,375,000) 2,690,522 2,692
Issuance of common stock to acquire
minority interest of subsidiary............... - - 1,382,071 1,382
Issuance of preferred stock in
lieu of cash dividends........................ 8,904 890,447 - -
Cancellation of common and treasury stock....... - - (2,250,000) (2,250)
Costs associated with equity transactions....... - - - -
Interest on notes receivable from
stockholders.................................. - - - -
Dividends on preferred stock.................... - - - -
Deemed dividends on preferred stock............. - - - -
Net loss for the year........................... - - - -
------- ----------- ---------- -------
BALANCE, December 31, 1996...................... 101,429 10,765,447 27,111,497 27,114
Sale of Series G preferred stock................ 16,400 1,640,000 - -
Issuance of common stock upon conversion of
Series E, F and G preferred stock............. (16,279) (2,250,407) 4,207,229 4,206
Issuance of preferred stock in lieu of
cash dividends................................ 13,814 1,381,366 - -
Dividends on preferred stock.................... - - - -
Deemed dividends on preferred stock............. - - - -
Costs associated with equity transactions....... - - - -
Interest on notes receivable from stockholders.. - - - -
Net loss for the year........................... - - - -
------- ----------- ---------- -------
BALANCE, December 31, 1997...................... 115,364 $11,536,406 31,318,726 $31,320
======= =========== ========== =======
</TABLE>

F-5
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>

Additional Treasury Stock Notes
Paid-In Accumulated ------------------------ Receivable
Capital Deficit Shares Amount Stockholder Total
- ------------ ------------ ----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 20,270,015 $(19,794,812) 450,000 $(16,488) $(145,832) $ 1,086,810
749,250 - - - - 750,000
274,636 - - - - 275,000

157,934 - - - - 158,183
- - - - - 7,800,000

- - - - - 2,700,000

1,372,308 - - - - -

620,518 - - - - 621,900

- (890,447) - - - -
2,250 - (450,000) 16,488 - 16,488
(515,375) - - - - (515,375)

- - - - (7,800) (7,800)
- (42,378) - - - (42,378)
878,083 (878,083) - - - -
- (4,296,396) - - - (4,296,396)
- ------------ ------------ ----------- -------- --------- -----------
23,809,619 (25,902,116) - - (153,632) 8,546,432
- - - - - 1,640,000

2,246,201 - - - - -

- (1,381,366) - - - -
- (194,213) - - - (194,213)
371,129 (371,129) -
(78,626) - - - - (78,626)
- - - - (7,800) (7,800)
- (4,331,291) - - - (4,331,291)
- ------------ ------------ ----------- --------- --------- -----------
$ 26,348,323 $(32,180,115) - $ - $(161,432) $ 5,574,502
============ ============ =========== ========= ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>

1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $(4,331,291) $(4,296,396)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of long-lived assets................................ 1,202,628 -
Depreciation and amortization.................................. 748,815 638,908
Loss on sale of equipment and other assets..................... 51,934 138,958
Equity in net loss of joint venture............................ 87,391 90,869
Provision for bad debts........................................ 94,853 89,040
Accrued interest receivable on notes receivable, stockholders.. (7,800) (7,800)
Accrued interest payable on deferred dividends................. 13,221 -
Stock issued for services...................................... - 200,000
Changes in assets and liabilities:
Accounts receivable........................................... (49,803) (460,305)
Inventories................................................... (10,831) (216,850)
Prepaid expenses and other current assets..................... (20,257) (116,954)
Other assets.................................................. 36,959 (141,081)
Accounts payable and accrued expenses......................... (176,369) (912,353)
----------- -----------
Net cash used in operating activities..................... (2,360,550) (4,993,964)
----------- -----------
Cash flows from investing activities:
Cash received from sale of net asset of IPF,
equipment and other assets....................................... 1,002,221 85,000
Increase in note receivable....................................... (547,788) (575,876)
Purchase of technology and patents................................ (26,717) (355,705)
Purchase of property and equipment................................ (12,520) (548,019)
Redemption of certificates of deposit............................. - 200,000
Payment for non-compete agreement................................. - (120,000)
----------- -----------
Net cash provided by (used in) investing activities....... 415,196 (1,314,600)
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock....................................... 1,640,000 7,800,000
Issuance of common stock.......................................... - 750,000
Issuance of note payable to stockholder........................... - 250,000
Repayment of notes payable and long-term debt..................... (393,941) (1,410,596)
Payment for costs of issuing equity............................... (78,626) (244,876)
Payment of preferred dividends.................................... - (42,378)
----------- -----------
Net cash provided by financing activities................. 1,167,433 7,102,150
----------- -----------
Net increase (decrease) in cash and cash equivalents............... (777,921) 793,586
Cash and cash equivalents, beginning of year....................... 1,126,912 333,326
----------- -----------
Cash and cash equivalents, end of year............................. $ 348,991 $ 1,126,912
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS AND BASIS OF PRESENTATION

The accompanying consolidated financial statements include the accounts of
North American Technologies Group, Inc., ("NATK") and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. North American Technologies Group, Inc. and its subsidiaries are
referred to herein as the Company.

The Company is engaged in the business of identifying, acquiring and
commercializing innovative technologies that have applications in various
industries. During 1995, 1996 and 1997 the Company completed the following
acquisitions: (a) acquired 100% of the outstanding stock of EET, Inc. ("EET")
in a transaction accounted for as a pooling-of-interests (March 1995); (b)
acquired 100% of the outstanding stock of Industrial Pipe Fittings, Inc. ("IPF")
in a transaction accounted for as a pooling-of-interests (June 1995); (c)
acquired certain assets of GAIA Holdings, Inc. and its affiliates through NATK's
wholly-owned subsidiary GAIA Technologies Inc. ("GAIA") (December 1995); (d)
acquired certain assets of MPT Services Inc. through NATK's wholly-owned
subsidiary Riserclad International, Inc. ("RII") (June 1996); (e) acquired 100%
of the outstanding stock of TieTek, Inc. ("TieTek") in a transaction accounted
for using the purchase method (December 1997). These subsidiaries' operations
are described as follows: 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 condenser support pads ("A/C pads"), made from recycled
rubber and thermoplastic. Riserclad reformulates and markets a corrosion
protection system for steel structures in marine applications. TieTek has
developed the technology to manufacture synthetic railroad crossties from
crumbed tire rubber and other recycled materials.

The Company evaluates its portfolio of technologies on a periodic basis to
determine the best method to use for each technology's commercialization. The
Company realizes that the optimum development of its technologies may sometimes
necessitate licensing or selling a technology to an outside interest who is in a
better position to realize its full potential. As such, it is anticipated that
the Company will go through cycles of acquisitions versus divestitures and/or
licensing programs. The timing and nature of these cycles will be determined by
the actual development and success of individual technologies, as well as the
Company's need to internally generate cash to fund the development of those
technologies that are deemed to be of the greatest long term value to the
Company.

As a result of this evaluation of its technologies, during 1997 the Company
sold or licensed certain of its businesses and technologies that had been
sufficiently commercialized and which might be better developed by outside
interests with resources or capabilities in specific areas related to those
businesses. As a result, the Company completed the following transactions in
1997: (a) sold the A/C pad technology and certain related equipment (June
1997); (b) sold the net assets of IPF (October 1997); (c) sold certain assets of
EET that were used in the Waste Management Services division located in Austin,
Texas (October 1997); and (d) licensed the Riserclad technology and sold certain
assets of RII (December 1997). In light of these transactions, the Company has
changed the names of two of its subsidiaries from Industrial Pipe Fittings, Inc.
to NATK IPF, Inc. and from Riserclad International, Inc. to NATK RII, Inc.

F-8
<PAGE>

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

NATK was incorporated on 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 its subsidiary NAT. This
transaction was recorded at book value. Effective August 15, 1996, the Company
acquired the remaining 11.1% minority interest of its subsidiary, North American
Environmental Group, Inc. ("NAEG") (see Note 3(b)).

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, PURCHASED TECHNOLOGIES AND INTANGIBLE ASSETS

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.

Goodwill represents the excess of the purchase price over the fair market
value of net assets received in business combinations accounted for by the
purchase method. Goodwill is being amortized by the straight-line method over
three to 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, three to ten years. The organization costs are being
amortized by the straight-line method over five years.

F-9
<PAGE>

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

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", management reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be fully recoverable. As part of this assessment,
management prepares an analysis of the undiscounted cash flows for each product
that has significant long-lived or intangible asset values associated with it.
This analysis for the asset values during 1997 indicated there had been an
impairment to certain assets' carrying values and an adjustment of $1,202,628
has been recognized in the accompanying financial statements (see Note 17).
Inherent in this analysis is an estimate of both future revenues and
profitability for these products. Management uses a wide variety of information
when preparing these estimates, including items such as the product's market
demand as exhibited by purchase orders, estimates of the market size, current
raw material availability and pricing, as well as management's ability and
willingness to fund the commercialization of the product. Given the early
stages of these products' commercialization, these estimates are subject to
revision in the future as additional information becomes available. It is
reasonably likely that a revision of an estimate could occur that would result
in an adjustment to the carrying value of an asset and such adjustment could be
material to the operating results and financial position of the Company. Any
such adjustment would be included in the continuing operations for that period.

INVESTMENT IN JOINT VENTURE

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

During the year ended December 31, 1997, the joint venture ceased
operations and the Company wrote-off its investment in the joint venture. For
the years ended December 31, 1997 and 1996, the Company's share of operating
losses totalled approximately $87,000 and $91,000, respectively, which included
approximately $29,000 for the write-off of the Company's investment in 1997. At
December 31, 1996, the Company's investment in the joint venture totalled
approximately $87,000.

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 12). 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. For the
years ended December 31, 1997 and 1996, the Company incurred research and
development expenses totalling $57,489 and $263,936, respectively.

F-10
<PAGE>

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

LOSS PER COMMON SHARE

Effective for the year ended December 31, 1997, the Company was required to
adopt Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). In accordance with SFAS 128, the Company is required to provide
basic and dilutive earnings (loss) per common share information.

The basic net loss per common share is computed by dividing the net loss,
plus the dividends on preferred stock, by the weighted average number of common
shares outstanding. Preferred stock dividends include: (i) dividends stated in
the respective certificate of designations; and (ii) dividends deemed to have
been issued by virtue of a conversion price that is computed at the date of
conversion using a discount to the market price of the Company's common stock.
For the years ended December 31, 1997 and 1996, net loss applicable to common
stockholders is as follows:

1997 1996
----------- -----------
Net loss.................................... $(4,331,291) $(4,296,396)
Dividends on preferred stock................ (1,575,579) (932,825)
Deemed dividends on preferred stock......... (371,129) (878,083)
----------- -----------
Net loss applicable to common stockholders.. $(6,277,999) $(6,107,304)
=========== ===========

Diluted net loss per common share is computed by dividing the net loss,
adjusted on an as if converted basis, by the weighted average number of common
shares outstanding plus potential dilutive securities. For the years ended
December 31, 1997 and 1996, potential dilutive securities had an anti-dilutive
effect and where not included in the calculation of diluted net loss per common
share. These securities include options and warrants on 15,878,916 shares of
common stock, convertible debt and preferred stock convertible into 333,333 and
15,200,000 shares of common stock, respectively.

The adoption of SFAS 128 had no effect on net loss per common share for the
year ended December 31, 1996, accordingly, no restatement was necessary.

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.

STOCK OPTIONS AND WARRANTS

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

CASH EQUIVALENTS

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

F-11
<PAGE>

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

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.

FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

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

CONCENTRATION OF CREDIT RISK

At December 31, 1997, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $232,000. 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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.

Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of a Business Enterprise" ("SFAS 131"), establishes standards for the
way that public enterprises report information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

In February 1998, the Financial Accounting Standards Board issued a new
disclosure standard. Statement of Financial Accounting Standard No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132"). The new standard standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The
statement is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Adoption of SFAS 132 is expected to have no effect on the Company's
financial statement disclosures.

F-12
<PAGE>

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

NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN

For the years ended December 31, 1997 and 1996, the Company incurred net
losses of $4,331,291 and $4,296,396, respectively, and had an accumulated
deficit of $32,180,115 at December 31, 1997. Because of these recurring losses,
the Company will require additional working capital to develop and support its
technologies and businesses until the Company either achieves a level of
revenues adequate to generate sufficient cash flows from operations, or receives
additional financing necessary to support the Company's working capital
requirements. This condition raises substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

NOTE 3 - ACQUISITIONS

(a) As part of the acquisition of GAIA in December 1995, the Company
granted an exclusive license to TieTek to develop the railroad crosstie business
using certain technology purchased from GAIA. The Company had the exclusive
right and option to purchase TieTek through 1998 if the Company satisfied
certain funding obligations, as defined. 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.

In December 1997, the Company exercised its option to acquire 100% of the
outstanding stock of TieTek. The Company's consideration consisted of a) the
assumption of TieTek's liabilities totalling $1,470,770, of which $1,463,800
represented the outstanding balance on the Crosstie Loan between the Company and
TieTek, and as such is eliminated in the consolidation of the accompanying
financial statements, b) the release of 666,667 shares of Company common stock
as collateral for the Crosstie loan, and c) the execution of a royalty agreement
providing for certain royalty payments calculated on the gross profits of TieTek
for a fifteen year period. Pursuant to the TieTek royalty agreement, the
Company is required by December 1998 to either a) contractually or financially
commit to the acquisition, lease or construction of a manufacturing facility, as
defined, for the railroad crossties, or b) enter into at least one license
agreement, joint venture or other business arrangement with a third-party who
owns, leases or commits to construct such a manufacturing facility. In the
event this requirement is not satisfied, the Company is required to pay a
minimum royalty of $162,500 quarterly until the first commercial shipment of
railroad crossties has occurred, but for no longer than fifteen years. As of
December 31, 1997, the Company had not entered into any formal agreements
regarding the construction of a manufacturing facility, however, management
believes the Company will be able to fulfill these obligations prior to December
1998.

F-13
<PAGE>

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

TieTek had been owned by three individuals, one who is a director and an
officer of the Company, and another who was a former director of the Company.

The acquisition of the outstanding stock of TieTek has been accounted for
using the purchase method of accounting. Accordingly, the purchase price has
been allocated to the assets acquired based on their estimated fair value at the
date of acquisition. The estimated fair values of the assets acquired are as
follows:

Amount
----------
Current assets.................... $ 34,600
Equipment......................... 41,755
Patents and purchased technology.. 1,394,415
----------
$1,470,770
==========

The operating results of TieTek are not included in the accompanying
statements of loss for the years ended December 31, 1997 and 1996 since the
purchase occurred in December 1997. The following proforma summary presents the
effect on the statements of loss for the years ended December 31, 1997 and 1996
as if the purchase had occurred at the beginning of 1996.

1997 1996
------------ ------------

Revenues............ $ 3,567,000 $ 4,494,000
=========== ===========
Net loss............ $(4,900,000) $(4,945,000)
=========== ===========
Net loss per share.. (.24) (.28)
=========== ===========

These proforma 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) Effective August 15, 1996, the Company acquired the outstanding
minority interest of its subsidiary, North American Environmental Group, Inc.
("NAEG"), by merging it into another wholly-owned subsidiary. The 1,382,071
previously outstanding shares of NAEG were converted on a one-for-one basis into
shares of the Company's common stock. This transaction was accounted for using
the purchase method of accounting, with the issuance by the Company of 1,382,071
shares of common stock for goodwill of $621,900, which is being amortized over a
three-year period.

NOTE 4 - SALE OF CERTAIN ASSETS AND LICENSING AGREEMENTS

(a) In June 1997, the Company sold the technology for manufacturing air
conditioner support pads ("A/C pads"), along with certain related equipment, to
an unrelated company. As consideration, the Company received $25,000 cash, a
note receivable of $550,000, and future royalty payments through June 2007 up to
a maximum of $1,000,000. See Note 6 for the terms of the note receivable.
Since the future royalty payments are contingent, the Company will record these
royalties as income in the period in which they are earned. There was no gain
or loss on this transaction. Net revenues were $97,690 and $546,683, and gross
profits were $13,727 and a deficit of $154,425 for the A/C pad product line for
the years ended December 31, 1997 and 1996, respectively.

F-14
<PAGE>

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

(b) In October 1997, the Company sold the net assets of IPF to an
unrelated company. As consideration, the Company received $900,694 in cash and
a six-month non-interest bearing note with an original principal amount of
$50,000. See Note 6 for terms of the note receivable. The Company recognized a
loss of approximately $100,000 on the transaction. Net revenues were $1,957,587
and $1,919,025, and gross profits were $578,044 and $466,563 for IPF for the
years ended December 31, 1997 and 1996, respectively.

(c) In October 1997, the Company sold certain assets of EET that were used
by its Waste Management Services division in Austin, Texas to an unrelated
company. As consideration, the Company received $55,000 cash. A gain of
approximately $20,000 was recognized on the transaction. Net revenues were
$302,709 and $514,620, and gross profits were $116,936 and $192,780 for the
Waste Management Services division of EET for the years ended December 31, 1997
and 1996, respectively.

(d) In November 1997, the Company licensed its Riserclad technology to an
unrelated company which included the former President of RII. In addition, the
purchaser acquired certain net assets of RII. As consideration, the Company
received $100,000 cash as a license fee, $46,527 cash for the sale of certain
net assets, two notes receivable of $301,960 and $100,000, and future royalty
payments to be received on revenues above a specified minimum, as defined, by
the new company. See Note 6 for terms of the notes receivable. The Company
recognized a gain of approximately $20,000 on the transaction. Since the future
royalty payments are contingent, the Company will record these royalties as
income in the period in which they are earned. Net revenues were $345,701 and
$389,802, and gross profits were $142,641 and $257,710 for RII for the years
ended December 31, 1997 and 1996, respectively.

(e) In January 1998, the Company entered into a non-binding letter of
intent with an unrelated company in the environmental services industry to sell
ETT's TechXTract technology. If the transaction is completed, for which there
can be no assurances, the Company would receive consideration of $200,000 cash
and long-term notes with a face value of approximately $800,000. The assets
that would be sold have a net book value of approximately $500,000 at December
31, 1997. In the event the transaction is not consummated, the Company would
re-evaluate its options as to other licensing or sale transactions. Net
revenues were $740,693 and $755,639, and gross profits were $275,684 and
$156,458 for EET's TechXTract product line for the years ended December 31, 1997
and 1996, respectively.

NOTE 5 - INVENTORIES

At December 31, 1997 and 1996, inventories consisted of the following:

1997 1996
------ --------
Raw materials.... $ - $119,270
Work-in-process.. - 15,271
Finished goods... 6,395 451,074
------ --------
$6,395 $585,615
====== ========

F-15
<PAGE>

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

NOTE 6 - NOTES RECEIVABLE

At December 31, 1997 and 1996, notes receivable consisted of the following:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Note receivable from sale of certain equipment of GAIA (a).. $550,000 $ 550,000
Note receivable from sale of certain assets of RII (b)...... 301,960
Note receivable from sale of certain assets of RII (b)...... 100,000
Note receivable from sale of net assets of IPF (c).......... 30,000 -
Note receivable from TieTek (d)............................. - 764,843
Other....................................................... - 60,000
-------- ----------
981,960 1,374,843
Less current maturities..................................... 100,000 -
-------- ----------
$881,960 $1,374,893
======== ==========
</TABLE>

(a) In November 1996 the Company sold the equipment used to manufacture
A/C pads to its new toll manufacturing vendor in Mississippi. As payment for
the equipment, the Company received $25,000 cash and a 10% note receivable due
in November 2001 that was secured by the equipment. By early 1997 this vendor
was producing A/C pads pursuant to the agreement, however it began to experience
financial difficulties which caused the Company a concern regarding its long-
term ability to continue production. The Company began exploring other options
for its A/C pad product line, and in June 1997 sold both the technology and the
equipment to an unrelated company. In connection with this transaction, the
previous toll manufacturer terminated its contractual agreements with the
Company, and shipped the A/C pad equipment to the new purchaser. As a result,
the 10% note receivable issued in 1996 for $550,000 was cancelled.

As consideration for the sale of the A/C pad technology and its related
equipment, the Company received $25,000 cash, a new note receivable of $550,000,
and future royalty payments through June 2007 up to a maximum of $1,000,000.
The note receivable bears interest at prime less 2% (6.5% at December 31, 1997),
and is payable quarterly based upon the number of pads sold during such quarter.
However, a minimum payment of $50,000, plus accrued and unpaid interest, is due
by June 30, 1998, with minimum payments of $100,000, plus accrued and unpaid
interest, due annually thereafter until June 2003. The note is secured by the
A/C pad equipment.

(b) In November 1997, the Company sold certain assets and licensed its
Riserclad technology to an unrelated company which included the former president
of RII. As a part of the consideration for this transaction, the Company
received (a) a note receivable in the principal amount of $301,960, and (b) a
note receivable in the principal amount of $100,000.

The note receivable for $301,960 is non-interest bearing for two years, and
bears interest at 6% per annum thereafter. The note is secured by the rights
under the license agreement and a certain account receivable of equal dollar
amount. Any payments received by the purchaser from this account receivable
will be remitted in total to the Company as payment against the note. Any
portion of the principal that remains unpaid as of December 1999 will be repaid
in eight equal annual installments, plus any accrued and unpaid interest,
beginning in December 2000.

The note receivable for $100,000 bears interest at 6% per annum and is
payable in five equal annual installments of $20,000, plus interest, beginning
in December 1998. The note is secured by the rights under the license
agreement.

F-16
<PAGE>

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

(c) In connection with the sale of the net assets of IPF, the Company
received a non-interest bearing six-month note receivable from the purchaser in
the original principal amount of $50,000. The outstanding principal balance of
this note is guaranteed by an individual and can be reduced by liabilities
incurred by the purchaser that relate to the pre-acquisition operations of IPF
that were not specifically assumed at the closing. As of the date of this
report, the principal balance outstanding has been reduced to $30,000 because of
certain identified liabilities and an allowance for any unknown liabilities that
may be incurred in the future.

(d) In December 1997, the Company exercised its purchase option to acquire
100% of the outstanding stock of TieTek, Inc. As part of the consideration, the
Company assumed the obligations of TieTek, which included its note payable to
the Company at the date of acquisition of $1,463,800 (including accrued
interest). TieTek's note payable, and NATK's corresponding note receivable,
have been eliminated in the consolidation of the accompanying financial
statements.

NOTE 7 - PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, major classes of property and equipment
consist of:
1997 1996
-------- ----------
Machinery and equipment........ $103,356 $1,141,556
Automobiles.................... 20,718 81,232
Furniture and fixtures......... 124,844 182,120
Leasehold improvements......... - 30,955
-------- ----------
248,918 1,435,863
Less accumulated depreciation.. 98,972 375,158
-------- ----------
$149,946 $1,060,705
======== ==========

NOTE 8 - LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt is as follows:
1997 1996
-------- --------
8% convertible debenture, due August 1999 (a)...... $500,000 $500,000
12% note payable to officer and director, due
January 31, 1997 (b).............................. - 120,000
13%, note payable to officer and director, due
January 1999 (c).................................. - 215,458
Other.............................................. 6,978 65,461
-------- --------
506,978 900,919
Less current maturities....................... 3,800 79,288
-------- --------
$503,178 $821,631
======== ========

F-17
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(a) In August 1994, the Company borrowed $500,000, bearing interest at 8%
per annum, from an individual lender. The loan matures in August 1999 and is
unsecured. 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.

(b) The 12%, unsecured note payable to an officer and director of the
Company was due on January 31, 1997. At January 31, 1997, the note was renewed
whereby $20,000 was due April 1997 with the remaining balance due January 31,
1998. The note was paid in full on October 31, 1997 in conjunction with the
sale of the net assets of IPF.

(c) In January 1996, an officer and director of the Company loaned
$250,000 to IPF under the terms of a 13% promissory note, with monthly payments
of $5,700 and a maturity date of January 1999. Proceeds from the note were
used to purchase equipment, which served as collateral for the note. The note
was paid in full on October 31, 1997 in conjunction with the sale of the net
assets of IPF.

NOTE 9 - RELATED PARTY TRANSACTIONS

Effective December 31, 1997, the Company entered into an agreement with a
director and officer of the Company in full settlement of his employment
contract. The agreement provides for payments through December 1998 totalling
$90,000, vesting of 100,000 options to purchase Common Stock which would have
vested through March 1999, and a reduction in the exercise price of certain
options to purchase 300,000 shares of Common Stock from $1.25 to $.75. The
individual resigned his positions as an officer and director of the Company. An
accrual for $90,000 has been included in the accompanying consolidated financial
statements for the year ended December 31, 1997. The compensation expense
associated with the changes made to the terms of the options was minimal.

Interest expense incurred on notes payable to an officer and director of
the Company totalled approximately $32,000 and $45,000 for the years ended
December 31, 1997 and 1996, respectively (see Note 8).

NOTE 10 - STOCKHOLDERS' EQUITY

Series D Preferred Stock

On December 28, 1995, the Company issued 30 shares of Series D convertible
preferred stock ("Series D") for $750,000. During 1996, the Series D shares
were converted into 1,249,313 shares of the Company's common stock. The Series
D holders were entitled to quarterly cumulative dividends totalling $3,750 per
year per share of preferred stock and certain liquidation preferences. The
Company paid dividends on the Series D shares during 1996 totalling $35,994.

F-18
<PAGE>

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

Series E Preferred Stock

In February and March 1996, the Company issued 50 shares of Series E
convertible preferred stock ("Series E") for proceeds of $1,250,000. During
1996, 25 Series E shares were converted into 1,441,209 shares of the Company's
common stock. During 1997, the remaining 25 Series E shares were converted into
2,032,944 shares of the Company's common stock. The Series E holders had
certain liquidation preferences, and were not entitled to any dividends.

Series F and G Preferred Stock

In April and May 1996, the Company issued 92,500 shares of Series F
convertible preferred stock ("Series F") and stock purchase warrants to purchase
9,250,000 shares of the Company's common stock ("Series F Warrants"). Cash
proceeds of $6,550,000 were received for issuance of 65,500 Series F shares and
6,550,000 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 13.5% convertible
subordinated debentures with a principal balance of $2,700,000 that were issued
in 1995, and their associated warrants. The Series F Warrants were issued with
an original exercise price of $1.00 per share, subject to certain adjustments,
and expire on April 8, 2004. As of December 31, 1997, the adjusted warrant
exercise price was $.85 per share.

In March 1997, the Company issued 16,400 shares of Series G, Subseries I,
convertible preferred stock ("Series G") for cash proceeds of $1,640,000.

Dividends accrue on the Series F and G shares at a per annum rate of $13.50
per share and are payable semi-annually. The Company may elect to defer the
dividend payments until April 1999, in which case, each holder may elect to
either: (i) have such deferred dividends accrue interest at a per annum rate of
13.5%, or; (ii) receive payment of the dividend in the form of additional Series
F or G shares. During 1997, the Company paid dividends (i) on the Series F
shares totalling $1,410,113, of which $1,239,556 was paid by issuance of 12,395
shares of Series F preferred stock, and $170,557 was deferred as a dividend
payable, and (ii) on the Series G shares totalling $165,467, of which $141,810
was paid by issuance of 1,419 shares of Series G preferred stock, and $23,656
was deferred as a dividend payable. During 1996, the Company paid dividends on
Series F shares totalling $896,831, of which $890,447 was paid by issuance of
8,904 shares of Series F preferred stock and $6,384 in cash.

The holders of the Series F and G shares have certain liquidation
preferences. The Series F and G 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 and $.45 per share, respectively. In November
1997, the holder of 13,754 Series F shares with a face value of $1,375,407, and
2,500 Series G shares with a face value of $250,000 converted its holdings into
1,612,569 and 561,716 shares of Company common stock, respectively. In
conjunction with this transactions, deferred dividends of $193,448, including
accrued interest, have been classified as a current liability. As of December
31, 1997, the adjusted conversion rates were $.85 per share for the Series F
shares, and $.45 per share for the Series G shares. On or after April 8, 2001,
the Series F and G 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 and G shares at a face value on or
after April 8, 2004.

Each Series F and G share entitles the holder to voting privileges equal to
the number of shares of common stock into which such share may be converted from
time to time. In addition, the F and G holders have the right to nominate four
positions of a nine-member board of directors.

F-19
<PAGE>

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

The preferred stock purchase agreements and the certificates of designation
for the Series F and G shares contain certain 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 and G holders to convert
their shares into the Company's common stock using a conversion rate computed as
the lesser of (a) the applicable 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 and G 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 and
G 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.

Deemed Dividends on Series D, E and G Preferred Stock

As a result of the conversion privilege and certain other terms of the
Series D, E and G shares, on issuance of the Series D, E and G shares the
Company incurred deemed (non-cash) dividends totalling $1,249,212. The deemed
dividends are computed by taking the difference between the discount to market
conversion rate, as defined, and the per share market price of the Company's
common stock on the date of the preferred stock issuance. The Company records
the non-cash deemed dividend on a pro-rata basis over the conversion period,
only impacting the loss per share calculation (see Note 1). The Company
recognized deemed dividends totalling $371,129 and $878,083, during the years
ended December 31, 1997 and 1996, respectively.

At December 31, 1997, the Company had common stock reserved for future
issuance as follows:
SHARES
----------
Conversion of convertible debt.. 333,333
Conversion of preferred stock... 15,200,000
Stock options outstanding....... 3,100,000
Stock warrants outstanding...... 12,778,916
----------
31,412,249
==========

NOTE 11 - STOCK OPTIONS AND WARRANTS

The Company has not adopted a formal stock option plan, however, as of
December 31, 1997, by approval of the Board of Directors, the Company has
granted the following stock options; approximately 2,975,000 options to current
and former employees and approximately 125,000 options in connection with
financing transactions. In addition, the Company had issued stock warrants
totalling 12,778,916 primarily in connection with financing transactions.

F-20
<PAGE>

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

The Company has elected to continue to account for stock options issued to
employees in accordance with APB opinion 25, "Accounting for Stock Issued to
Employees". During the year ended December 31, 1996 all options issued to
directors, who are also employees, officers and employees were granted at an
exercise price which equalled or exceeded the market price per share at date of
grant, accordingly, no compensation was recorded. No options were granted
during 1997, however, certain options previously granted had a modification of
their exercise price and expiration date which constitutes a new issuance of
options in accordance with SFAS Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, these options were revalued at the
date of the modifications in accordance with SFAS 123. The modified exercise
price equalled or exceeded the market price per share at the modification date,
accordingly, no compensation was recorded.

Effective for the year ended December 31, 1996, the Company was required to
adopt the disclosure portion of SFAS No. 123. This statement requires the
Company to provide pro forma information regarding net loss applicable to common
stockholders and loss per share as if compensation cost for the Company's stock
options granted had been determined in accordance with the fair value based
method prescribed in SFAS 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and 1996
as follows:
1997 1996
--------------- ------------------

Dividend yield....... 0% 0%
Expected volatility.. 94.80% 67.59%-94.78%
Risk free interest... 5.75%-6.32% 5.21%- 7.14%
Expected lives....... 2 to 4.5 years 3.67 to 4.5 years

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

1997 1996
----------- -----------
Net loss applicable to common stockholders
As reported............................... $(6,277,999) $(6,107,304)
=========== ===========
Pro forma................................. $(6,324,499) $(7,039,304)
=========== ===========
Loss per share
As reported............................... $ (.22) $ (.25)
=========== ===========
Pro forma................................. $ (.22) $ (.29)
=========== ===========

Due to the fact that the Company's stock option programs vest over many
years and additional awards may be made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of SFAS
123 been applicable to all years of previous options grants. The above numbers
do not include the effect of options granted prior to 1995 vested in 1997 and
1996.

F-21
<PAGE>

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

A summary of the status of the Company's stock options to employees as of
December 31, 1997 and 1996, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- ------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ------- ------------ ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............................................. 3,350,000 2.10 3,550,000 $1.99
Granted...................................................................... - - 200,000 2.50
Exercised.................................................................... - - - -
Forfeited.................................................................... (375,000) 1.00 (400,000) 1.25
--------- ----- --------- -----
Outstanding at end of year................................................... 2,975,000 $ 1.01 3,350,000 $2.10
========= ====== ========= =====
Options exercisable at year-end.............................................. 2,400,000 $ 1.02 1,442,500 $1.69
========= ====== ========= =====
Weighted-average fair value of options granted during the year.............. $ - $ .46
====== =====
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
Weighted
Average
Remaining
Contract-
Number ual Number
Exercise Outstanding Life Exercisable
Price at 12/31/97 (Years) at 12/31/97
------------ --------- ----- ---------
$ .75 300,000 5.0 300,000
$1.00 2,262,500 7.8 1,687,500
$1.25 400,000 3.25 400,000
$2.50 12,500 7.0 12,500
------------ --------- ----- ---------
$.75 - $2.50 2,975,000 6.9 2,400,000
============ ========= ===== =========

In accordance with SFAS 123, the Company is required to account for options
issued to non-employees for services rendered at the fair value based method
over their vesting period.

At December 31, 1997, the Company had 125,000 stock options outstanding in
connection with debt issuances prior to December 31, 1995. These options have
exercise prices ranging from $.75 to $1.00 and expire September 1999. During
1997 600,000 stock options issued prior to December 31, 1995 in connection with
debt issuances expired. During the year ended December 31, 1996, the Company
issued 150,000 stock options to consultants for services rendered. The
compensation expense recorded in 1996 based on the fair value of the options at
the grant date as calculated using the Black-Scholes option - pricing model was
minimal. During 1997 these stock options expired.

In connection with the stock warrants issued primarily in connection with
financing transactions, the Company had 12,778,916 stock warrants outstanding at
December 31, 1997, of which all are currently exercisable. These warrants have
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 2004.
Of these, 9,250,000 are the Series F warrants, which have a current exercise
price of $.85 and expire April 2004.

F-22
<PAGE>

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

NOTE 12 - 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, 1997 and 1996,
were as follows:

DECEMBER 31, 1997 1996
------------ ---------- -----------

Deferred tax assets
Net operating loss carryforward.. $7,502,000 $ 5,403,000
Impairment of long-lived assets.. 409,000 -
Bad debt reserves................ 6,000 1,084,000
Other............................ 238,000 252,000
---------- -----------
Gross deferred tax assets.......... 8,155,000 6,739,000
Valuation allowance................ (8,155,000) (6,739,000)
---------- -----------
Net deferred tax assets............ $ - $ -
========== ===========

At December 31, 1997 and 1996, the Company provided a 100% valuation
allowance for the deferred tax asset because it could not determine whether it
was more likely than not that the deferred tax asset would be realized.

At December 31, 1997, the Company has net operating loss carryforwards
for federal income tax purposes totalling approximately $22,065,000 which, if
not utilized, will expire as follows:

YEAR
ENDED
DECEMBER 31, AMOUNT
------------ ------

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.............................. 3,798,000
2011.............................. 4,469,000
2012.............................. 6,294,000
-----------
$22,065,000
===========

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.

F-23
<PAGE>

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

NOTE 13 - COMMITMENTS AND CONTINGENCIES

The Company rents equipment and office space under operating leases on both
long and short-term basis. Rent expense for the years ended December 31, 1997
and 1996 totalled approximately $207,000 and $237,000, respectively.

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

YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------

1998..................................... $ 163,000
1999..................................... 163,000
2000..................................... 132,000
2001..................................... 3,000
----------
$ 461,000
==========

In October 1997, the Company entered into a month-to-month sublease
agreement with the purchaser of IPF for the lease of the IPF facility. The
sublease agreement requires a monthly payment of $2,100. The Company
anticipates that in the event the purchaser terminates the lease, it will be
able to use the facility for the operations of TieTek.

See Note 3(a) regarding certain minimum royalty payments pursuant to the
TieTek royalty agreement.

At December 31, 1997, the Company had employment contracts that provide for
payments of approximately $300,000 annually through 1999.

In July 1993, an individual brought action against North American Gold
Corp. (the 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. Discovery is ongoing, and management cannot evaluate the Company's
exposure at this time. The Company intends to vigorously defend itself against
this action.

F-24
<PAGE>

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

NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended December 31, 1997 and 1996, the Company paid
interest totalling approximately $75,000 and $378,000, respectively.

During the year ended December 31, 1997, the Company had the following non-
cash transactions:

(a) The holder of Series E shares totalling 25 shares, with face value
totalling $625,000, converted its holdings into 2,032,944 shares of the
Company's common stock.

(b) The holder of Series F shares totalling 13,754 shares, with face value
totalling $1,375,407, converted its holdings into 1,612,569 shares of the
Company's common stock.

(c) The holder of Series G shares totalling 2,500 shares, with face value
of $250,000, converted its holdings into 561,716 shares of the Company's
common stock.

(d) The Company issued 12,395 Series F shares in payment of dividends
totalling $1,239,556.

(e) The Company issued 1,419 Series G shares in payment of dividends
totalling $141,810.

(f) The Company recognized deemed dividends of $257,240 on its Series E
preferred stock.

(g) The Company recognized deemed dividends of $113,889 on its Series G
preferred stock.

(h) The Company accrued dividends totalling $170,557 on Series F shares.

(i) The Company accrued dividends totalling $23,656 on Series G shares.

(j) The Company transferred inventory with a value of $81,950 to property
and equipment.

(k) The Company transferred equipment and patents held for sale with net
book values totalling $120,536 and $122,794, respectively, to other assets.

(l) A portion of the consideration for the acquisition of TieTek was the
assumption of liabilities of TieTek totalling $1,470,770, which was
allocated to assets acquired as follows: (1) $34,600 to certain current
assets (2) $41,755 to equipment and (3) $1,394,415 to patents and purchased
technology.

(m) The Company received notes receivable totalling $50,000 and $401,960
as a portion of the consideration for the sale of certain assets of IPF and
RII, respectively.

During the year ended December 31, 1996, the Company had the following non-
cash transactions:

(a) The Company sold equipment with a net book value of $626,676 for cash
of $25,000 and a note of $550,000.

(b) The Company issued 1,382,071 shares of its common stock for the
outstanding minority interest of NAEG and recorded goodwill totalling
$621,900. In association with the transaction, the Company reclassified
deferred offering costs totalling $221,377 incurred prior to the year ended
December 31, 1995 to additional paid-in capital.

F-25
<PAGE>

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

(c) The Company issued 363,488 shares of its common stock, of which
100,000 shares were in payment of accrued liabilities at December 31, 1995
totalling $75,000 and 263,488 shares issued for services provided during
1996, totalling $200,000.

(d) The holder of a $150,000 note payable converted the note and accrued
interest totalling $8,185 into 248,131 shares of the Company's common
stock.

(e) The holders of the 13.5% convertible subordinated debentures totalling
$2,700,000 surrendered their notes in exchange for 27,000 of the Company's
Series F shares. In association with this transaction, net deferred
offering costs totalling $49,122 were reclassified to additional paid-in
capital.

(f) The company cancelled 1,800,000 shares of common stock that were held
in escrow at December 31, 1995.

(g) The holders of Series D and E shares totalling 30 and 25 shares,
respectively, with original face values totalling $1,375,000, converted
their holdings into 1,249,313 and 1,441,209 shares of the Company's common
stock.

(h) The Company issued 8,904 Series F shares in payment of dividends
totalling $890,447.

(i) The Company cancelled 450,000 shares of treasury stock that was
recorded as minority interest at December 31, 1995.

(j) The Company transferred property and equipment with a net book value
of $38,863 to inventory.

NOTE 15 - 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. See Note 4 for the sale of certain assets, technology and
licensing agreements regarding this segment.

Manufacturing and Distribution Group: Manufactures and distributes
proprietary and standard products (custom pipe, pipe fittings and valves).
Manufactures and distributes porous pipe, wood substitution, alternative
building materials, and railroad crossties made from recycled rubber and
thermoplastics. Formulates and markets corrosion protection systems for
steel structures in marine applications. See Notes 4 and 17 for the sale
of certain assets, technology, licensing agreements and status of certain
technology regarding this segment.

F-26
<PAGE>
NORTH AMERICAN TECHNOLOGIES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1997 1996
---------- -----------
Revenues from unaffiliated
customers:
Environmental................... $ 1,128,291 $ 1,270,259
Manufacturing and Distribution.. 2,424,826 3,223,998
----------- -----------
Total revenues................ $ 3,553,117 $ 4,494,257
=========== ===========

Operating loss:
Environmental................... $ (757,800) $ (780,599)
Manufacturing and Distribution.. (1,842,859) (1,075,441)
Corporate and other............. (1,768,038) (2,036,293)
----------- -----------
Total operating loss.......... $(4,368,697) $(3,892,333)
=========== ===========

DECEMBER 31,
-----------------------
1997 1996
---------- -----------
Identifiable assets:
Environmental................... $ 866,000 $ 2,051,735
Manufacturing and Distribution.. 5,135,402 7,114,584
Corporate and other............. 743,175 1,155,400
---------- -----------

$6,744,577 $10,321,719
========== ===========

1997 1996
---------- -----------
Capital expenditures:
Environmental................... $ - $ 2,103
Manufacturing and distribution.. 6,413 516,095
Corporate and other............. 6,107 29,821
---------- -----------

$ 12,520 $ 548,019
========== ===========

1997 1996
---------- -----------
Depreciation and amortization:
Environmental................... $ 394,924 $ 311,779
Manufacturing and Distribution.. 334,491 312,139
Corporate and other............. 19,400 14,990
---------- -----------

$ 748,815 $ 638,908
========== ===========

NOTE 16 - FOREIGN SALES

Export sales by the manufacturing and distribution group to foreign
countries were less than 10% of net sales for the year ended December 31, 1997.
Export sales totalled $985,000 for the year ended December 31, 1996, of which
approximately $415,000, $293,000 and $277,000 were to Kuwait, Nigeria and other
foreign countries, respectively.

F-27
<PAGE>

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

NOTE 17 - IMPAIRMENT OF CERTAIN LONG-LIVED ASSETS

Pursuant to the provisions of Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), management reviews long-lived and
intangible assets whenever events or changes in circumstances indicate the
carrying amount of an asset may not be fully recoverable. During 1997, as the
Company continued to implement its strategy of licensing or selling certain of
its products or technologies, management determined that an impairment in the
value of certain assets had occurred. Accordingly, a valuation adjustment of
$1,202,628 has been recognized in the accompanying consolidated statement of
loss for the year ended December 31, 1997. Approximately $1,100,000 of this
adjustment relates to the patent and certain equipment associated with the
porous pipe product line, and represents substantially all of the Company's
remaining investment in this product line. Net revenues were $23,850 and
$368,488, and gross profits were $(22,719) and $48,958 for the porous pipe
product line for the year ended December 31, 1997 and 1996, respectively.

F-28

<PAGE>

EXHIBIT 10.13

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT ("Agreement"), dated as of October 31, 1997, is
by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Texas corporation (the
"Company"), and DONOVAN BOYD, a resident of Harris County, Texas ("Boyd").

FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:

1. CONSULTING SERVICES. Boyd hereby agrees to act as a consultant to the
Company during the period beginning on November 1, 1997, and continuing through
December 31, 1998. As such, Boyd shall be required to provide to the Company,
at the reasonable request of the Company and following reasonable advance
notice, up to 15 hours per month, on the average, consulting service during such
period. Such services may include, among others, consulting with the Company
regarding its current and future railroad tie production, marketing and sales
operations. The Company acknowledges that Boyd may have other full time
employment during such period and agrees that Boyd shall not be required to
perform the consulting services in such a manner that might reasonably be
expected to jeopardize such other employment. Notwithstanding the foregoing, to
the extent Boyd continues as a director of the Company, any of his time expended
as a director of the Company shall not constitute consulting services under this
Agreement.

2. PAYMENT FOR SERVICES. In consideration therefor, the Company shall:

(a) pay to Boyd for the months of November and December of 1997, the amount
he would be entitled to during those months as the "Base Salary," as such term
is defined in that certain Employment Agreement by and between the Company and
Boyd, dated as of February 23, 1995, as the same may have been amended before
the date hereof (the "Employment Agreement"), such amount to be paid in
accordance with the Company's standard payroll practices. The Company shall
also pay to Boyd a sum of $1,000 during each month in the calendar year 1998,
such payment to be made on or before the fifth (5th) calendar day of each such
month. All such sums shall be due and payable regardless of whether the Company
actually requests Boyd to provide any consulting services in any given month.
In the event Boyd performs consulting services which on the average exceed 15
hours per month, the Company shall compensate Boyd for additional time in the
amount of $67 per hour. Boyd agrees to attend a five day production run in
Virginia for no additional compensation;

(b) promptly reimburse Boyd for any out-of-pocket fees and expenses
incurred by him in connection with his performing the consulting services, all
in accordance with the Company's policies for reimbursing its employees for such
fees and expenses, so long as those fees and expenses are thoroughly documented
and promptly
<PAGE>

(and in no event later than three weeks) submitted to the Company after they are
incurred;

(c) continue to provide to Boyd and his family until January 31, 1998, the
same disability income, life, health and dental insurance benefits, if any, as
were provided under the Employment Agreement; provided, however, that the
Company shall not be required to pay any additional premiums for the life
insurance policy currently in effect with respect to Boyd (and Boyd shall be
responsible for causing such policy to be assigned to him and paying all
premiums at the end of its current term in the event he desires to continue such
policy for his own benefit beyond its current paid-for term); and

(d) continue Boyd's participation, at his election, in the Company's 401(k)
plan until December 31, 1997.

3. OTHER EMPLOYMENT-RELATED MATTERS. The parties also agree that: (a)
the provisions of Paragraph (7) of the Employment Agreement ("Breach of
Confidentiality or Entering into Direct Competition") shall continue as an
obligation of Boyd until December 31, 1998; and (b) the provisions of Paragraph
(10)(b) of the Employment Agreement ("Additional Indemnification Rights") shall
continue to apply through December 31, 1998, and for a three (3) year period
thereafter.

4. STOCK OPTIONS. Boyd shall be deemed fully vested in all shares of
common stock, par value $0.001 per share, of the Company ("NATK Common Stock")
that have vested for Boyd on or before the date hereof (i.e., 100,000 shares),
as provided in that certain Stock Option Agreement, dated as of February 23,
1997, as the same has been amended before the date hereof (the "Stock Option
Agreement"). In addition, he shall be deemed to be vested, as of the date
hereof, in an additional 100,000 shares of NATK Common Stock. Boyd shall not,
however, be entitled to any further vesting of shares pursuant to the provisions
of Section 1 of the Stock Option Agreement. All such vested shares shall be
exercisable at an exercise price of $1.00 per share, subject to adjustment as
provided in the Stock Option Agreement. Except as modified by the provisions of
this Section 4, the parties confirm the provisions of the Stock Option Agreement
in its entirety.

5. RESIGNATION. By his execution hereof, Boyd hereby resigns from any and
all other positions (other than as a consultant pursuant to this Agreement) he
may hold as an officer, executive officer, employee and any other positions of
or with the Company and any of its subsidiaries, effective as of the date
hereof; provided, however, that such resignation shall not include a resignation
as a director of the Company.

7. MUTUAL RELEASE. Notwithstanding anything in the Employment Agreement
to the contrary, except as expressly provided in this Agreement: (a) each of
Boyd and the Company release each other from any further obligations under the
Employment Agreement and (b) confirm that no further obligation is owed to such
releasing party by the other party hereto, other than any amounts due Boyd for
payroll,

2
<PAGE>

and fee and expense reimbursements, if any, to be paid in the normal course by
the Company for past services provided. In that regard, and notwithstanding any
provision of the Employment Agreement to the contrary, including without
limitation the provisions of Paragraph 18 thereof ("Survival of Certain
Provisions"), neither party hereto shall have any rights against the other party
hereto, nor shall either party hereto owe the other party hereto any further
obligation, under Paragraphs 1 ("Duties of Executive"), 2 ("Term of Agreement;
Termination"), 4 (""Executive's Rights While Employed by the Company"), 5
("Executive's Rights Upon Termination of Service") or 6 ("Mitigation and Offset
Requirements") of the Employment Agreement.

IN WITNESS WHEREOF, each of the undersigned has executed this Agreement
effective as of October 31, 1997.

"Company" NORTH AMERICAN TECHNOLOGIES GROUP, INC.

By:/s/ Tim B. Tarrillion
---------------------
Tim B. Tarrillion
As its Authorized President and Chief Executive Officer

"Boyd" DONOVAN W. BOYD

/s/ Donovan W. Boyd
------------------------

<PAGE>

EXHIBIT 10.14

AGREEMENT

This Agreement ("Agreement"), dated as of December 31, 1997, is by and
between North American Technologies Group, Inc., a Delaware corporation
("NATK"), and David M. Daniels, an individual ("Daniels").

For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:

1. TERMINATION OF EMPLOYMENT AGREEMENT AND RELATED MATTERS. At the
Closing (as defined below):

(a) Daniels and NATK shall execute and deliver to each other that certain
Termination and Release Agreement, in the form of Exhibit A, attached hereto and
made a part hereof ("Release"); and

(b) NATK agrees to pay to Daniels the amount of $30,000 (the "Initial Cash
Payment"), such amount to be paid by the issuance of a check drawn from the
accounts of NATK at the Closing and immediately delivered to Daniels at the
Closing; provided, however, that upon the execution of this Agreement, NATK
agrees to advance to Daniels $5,000 (without employer withholding) of such
$30,000 amount, and in the event the Closing does not occur on or before January
16, 1998, Daniels agrees to repay such $5,000 in full on or before February 28,
1998; and

(c) NATK agrees that it shall pay to Daniels twenty-five (25) consecutive
payments, each such payment to be equal to $2,400 (an aggregate of $60,000), and
such payments to be paid in accordance with the customary payroll practices of
NATK, and in no event less than twice per month, the first such payment to be
due and payable on January 23, 1998; and

(d) NATK agrees to continue its health and dental insurance coverage for
Daniels during the calendar year 1998 as in effect from time to time during such
period for all its employees; and

(e) NATK shall transfer and convey to Daniels title to a certain computer
notebook that he has been using in connection with his employment with NATK
and/or its subsidiaries; and

(f) Daniels shall resign in writing as a director of NATK; and

(g) all of Daniels' current options to purchase 200,000 shares of common
stock, par value $0.001 per share, of NATK (the "200,000 Option Shares") that
are subject of Section 1 of that certain Stock Option Agreement, dated as of
February 7, 1995, by and between the parties hereto, as the same may have been
amended or modified from time to time before the date hereof (the "200,000 Stock
Option Agreement"), and all additional options to purchase an additional 300,000
shares of common stock, par value $0.001 per share, of NATK (the "300,000 Option
Shares;"
<PAGE>

together with the 200,000 Option Shares, the "Daniels Option Shares"), shall be
deemed fully vested and exercisable in full as of the Closing. In addition, the
option exercise price of the 300,000 Option Shares shall be decreased, at or
before the Closing, from $1.25 to $0.75 per share. At the Closing, NATK agrees
to deliver to Daniels one or more written instruments reasonably satisfactory to
the parties evidencing the provisions of this clause (g) (the "Stock Option
Amendments Document"); and

(h) Daniels shall be released, without further liability, from, and shall
have no further rights under, that certain Stockholders' Agreement, dated as of
April 5, 1996, by and among NATK, certain parties (including without limitation
Daniels) defined therein as the Management Stockholders and certain other
parties defined therein as the Investors, as amended and/or modified by
Amendments No. 1 and No. 2 thereto (as so amended and/or modified, the
"Stockholders' Agreement"), and neither any shares of capital stock of NATK
currently owned by Daniels, any of the Daniels Option Shares, nor the options
relating to any of the Daniels Option Shares shall remain subject to the
provisions of the Stockholders' Agreement, such release and other terms
described in this sentence to be evidenced by a writing (the "Stockholders'
Agreement Release") in form and substance reasonably satisfactory to the parties
hereto. In connection therewith, promptly after the Closing, with respect to
any certificates representing shares of common stock of NATK already issued in
Daniels' name that contain a legend, if any, relating to the Stockholders'
Agreement, NATK agrees to cause such restrictive legend to be removed from those
certificates and to cause certificates representing such shares to be reissued
to Daniels free of such restrictive legend, such reissuance to occur within 15
days of the date Daniels delivers to NATK his certificates containing such a
legend.

The obligations of each party hereto to consummate the transactions
contemplated by this Section shall be conditioned upon (i) a valid action of the
Board of Directors of NATK approving of the transactions contemplated by clauses
(g) and (h) of this Section; and (ii) written approval of the transactions
contemplated by clause (h) of this Section by the appropriate parties to the
Stockholders' Agreement.

2. THE CLOSING. The closing ("Closing") of the transactions contemplated
by Section 1 hereof shall occur at 11:00 a.m., on January 16, 1998, at the
principle executive offices of NATK, or at such other time and place as shall be
reasonably agreed to by the parties hereto; provided, however, that the parties
hereto agree to use reasonable efforts to cause the Closing to occur within two
(2) business days of the date that both the conditions described in the last
sentence of Section 1 have been fulfilled. At the Closing, (a) each of Daniels
and NATK shall execute and deliver to each other the Release, (b) NATK shall
deliver to Daniels a check in the amount of $30,000, less the $5,000 advance
referred to in Section 1(b), and less all applicable employer withholdings, such
amount representing the remaining unadvanced portion of the Initial Cash
Payment, drawn from the accounts of NATK, (c) NATK shall execute and deliver to
Daniels a bill of sale conveying to Daniels title ("AS IS WHERE IS", with no
other representations or warranties) in and to the notebook computer referred to
in Section 1(e), (d) Daniels agrees to deliver to NATK a list setting out the
names, telephone numbers, addresses and other related information that he has
recorded or stored,

2
<PAGE>

whether in written form or in computer file or program form, relating to each
person or party he has been in contact with during his tenure with NATK and/or
any of its subsidiaries, such information to be provided, at the option of NATK,
in both hard copy and in computer file or program format. Daniels hereby
represents, warrants, covenants and agrees that he has not destroyed, deleted or
otherwise made unavailable to NATK, on or prior to the date of this Agreement,
and will not destroy, delete or otherwise make unavailable to NATK, prior to the
delivery of all of the same to NATK, any of the information described in the
immediately preceding sentence, (e) Daniels shall deliver to NATK his written
resignation as a director of NATK, (f) NATK shall execute and deliver to Daniels
the Stock Option Amendments Document, and (g) NATK and Daniels shall deliver to
each other the Stockholders' Agreement Release, which shall have been executed
by the other appropriate parties thereto.

3. DANIELS' COVENANTS. From the date hereof and continuing until January
1, 2002, Daniels agrees that he shall not, without the prior written consent of
NATK, and except pursuant to and consistent with the order of any court,
legislative body or regulatory agency:

(a) engage directly or indirectly (including, by way of example only, as a
principal, partner, venturer, employee or agent), nor have any direct or
indirect interest, in (i) any business which competes with NATK or any of its
subsidiaries in any material way or (ii) the business formerly conducted by a
subsidiary of NATK formerly known as Industrial Pipe Fittings, Inc., a Texas
corporation ("IPF"), in any material way (provided, however, that the provisions
of this clause (a) shall not apply to any investment by Daniels in the stock of
a publicly-traded corporation, provided such investment constitutes less than
one percent (1%) of such corporation's cumulative voting shares);

(b) disclose, communicate or deliver in any manner (including without
limitation any oral disclosure or communication or any written or computer
generated information) to any person or party, either directly or indirectly,
any information regarding NATK's or its past or current subsidiaries' business,
actions, omissions, inactions (including without limitation any actions,
omissions or inactions involving any past or current director, officer,
employee, agent or Board of Directors of NATK or any of its subsidiaries),
customers, results of operations, business practices, financial condition,
strategies or operations, including without limitation disclosing or
communicating any comment, opinion, evaluation or advice regarding any of the
same;

(c) in any capacity bring any claim or legal action against or involving,
or assist, directly or indirectly (including without limitation, acting as an
advisor or witness), any other party in bringing any claim or legal action
against or involving, NATK, its subsidiaries or any of the past or current
directors, officers, employees, agents or consultants relating to any matter
involving NATK's or its past or current subsidiaries' business, actions,
omissions, inactions (including without limitation any action, omissions or
inactions involving any past or current director, officer, employee, agent or
Board of Directors of NATK or any of its subsidiaries); provided, however, that
nothing in this clause (c) shall act so as to prevent Daniels from enforcing his
rights under this Agreement or the Release; provided further, that in enforcing
any such

3
<PAGE>

rights, Daniels agrees to abide by the provisions of this clause (c) to
the maximum extent possible.

(d) Daniels acknowledges and agree that irreparable injury and damage will
result to NATK in the event he fails or refuses to comply with any of the
provisions of this Section in accordance with its specific terms. It is
accordingly agreed that in addition to any other remedy to which NATK may be
entitled at law or in equity, NATK shall be entitled to an injunction or
injunctions to prevent the breach of this Agreement and specifically enforce
this Agreement and the terms and provisions hereof in any action instituted in
any court having subject matter jurisdiction. In addition, no remedy conferred
by any of the specific provisions of this Agreement is intended to be exclusive
of any other remedy, and each and every remedy shall be cumulative and shall be
in addition to every other remedy given hereunder or now or hereafter existing
at law or in equity or by statute or otherwise. The election of any one or more
remedies by NATK shall not constitute a waiver of the right to pursue other
available remedies.

Notwithstanding anything in this Section to the contrary, Daniels shall not
be bound by the provisions of this Section in the event the Closing does not
occur on or before January 16, 1997, as a result of the failure to occur of the
conditions to the Closing, or the failure of NATK to consummate the transactions
contemplated to occur at the Closing for any reason other than Daniels' failure
to consummate such transactions; provided, however, that Daniels shall continue
to be bound by the provisions of this Section in any such event until he repays
the $5,000 advance referred to in Section 1(b) hereof.

4. MISCELLANEOUS.

(a) Expenses. Except as otherwise expressly provided in this Agreement, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses whether or not the transactions contemplated hereby are
consummated.

(b) Entire Agreement; Assignment. This Agreement, including all exhibits
and Schedules hereto, (i) constitutes the entire agreement among the parties
with respect to its subject matter and supersedes all prior agreements and
understandings, both written and oral, among the parties or any of them with
respect to such subject matter and (ii) shall not be assigned by operation of
law or otherwise without the express prior written consent of the other party
hereto, which consent shall not be unreasonably withheld.

(c) Headings. The descriptive headings of the sections, subsections,
exhibits and schedules of this Agreement are inserted for convenience only, do
not constitute a part of this Agreement and shall not affect in any way the
meaning or interpretation of this Agreement.

(d) Counterparts. This Agreement may be executed in counterparts, both of
which shall be deemed to be an original, and all of which together shall be
deemed to

4
<PAGE>

be one and the same instrument.

(e) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without regard to the laws that
might otherwise govern under principles of conflicts of laws applicable thereto.

(F) COURTS IN HARRIS COUNTY, TEXAS TO HAVE EXCLUSIVE JURISDICTION. THE
PARTIES AGREE THAT THE FEDERAL AND STATE COURTS LOCATED IN HARRIS COUNTY, TEXAS
SHALL HAVE EXCLUSIVE JURISDICTION OVER AN ACTION BROUGHT TO ENFORCE THE RIGHTS
AND OBLIGATIONS CREATED IN OR ARISING FROM THIS AGREEMENT, AND EACH OF THE
PARTIES HERETO IRREVOCABLY SUBMITS TO THE JURISDICTION OF SAID COURTS.
NOTWITHSTANDING THE ABOVE, APPLICATION MAY BE MADE BY A PARTY TO ANY COURT OF
COMPETENT JURISDICTION WHEREVER SITUATED FOR ENFORCEMENT OF ANY JUDGMENT AND THE
ENTRY OF WHATEVER ORDERS ARE NECESSARY FOR SUCH ENFORCEMENT.

(g) Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction or other authority to be
invalid, void, unenforceable or against its regulatory policy, the remainder of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.

(h) Employer Withholdings. To the extent required by law, NATK shall have
the right to withhold from any payments due Daniels under this Agreement any
applicable federal, state or local taxes and such other deductions as are
prescribed by law, provided, however, that any such withholdings and deductions
relating to the $5,000 advance referred to in Section 1(b) hereof shall be
withheld or deducted at the time of the payment of the Initial Cash Payment at
the Closing.

IN WITNESS WHEREOF, each of the undersigned has executed this Agreement
effective as of the date first above written.

NATK: NORTH AMERICAN TECHNOLOGIES GROUP, INC.

By:/s/ Tim B. Tarrillion
---------------------
Tim B. Tarrillion
As its Authorized President

Daniels: DAVID M. DANIELS

/s/ David M. Daniels
------------------------

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS

North American Technologies
Group, Inc.
Houston, Texas

We hereby consent to the incorporation by reference in Registration Statement
No. 333-26347 on Form S-3 of our report dated February 24, 1998, relating to the
consolidated financial statements of North American Technologies Group, Inc.
appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.

BDO Seidman, LLP

Houston, Texas
February 24, 1998

<PAGE>
<ARTICLE> 5

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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 348,991
<SECURITIES> 0
<RECEIVABLES> 303,623
<ALLOWANCES> (18,000)
<INVENTORY> 6,395
<CURRENT-ASSETS> 844,096
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