NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/, 10KSB, 1999-04-01

NORTH AMERICAN TECHNOLOGIES GROUP INC /MI/
10KSB, 1999-04-01
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, 1998

[ ] 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: $ 138,828

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 March 15, 1999 was $7,840,000. The
information provided shall in no way be construed as an admission that any
person whose holdings are excluded from the figure is an affiliate or that any
person whose holdings are included is not an affiliate, and any such admission
is hereby disclaimed. The information provided is solely for record keeping
purposes of the Securities and Exchange Commission.

Applicable Only to Corporate Registrants

As of March 15, 1999, there were 3,604,548 shares of Common Stock, par
value $.001 per share, outstanding.

Transitional Small Business Disclosure Format (check one)

YES X NO
- --- ---

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PRIVATE SECURITIES LITIGATION

REFORM ACT SAFE HARBOR STATEMENT

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 Development of Business

General Business Strategy. 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.

The Company's historic business strategy has been to acquire and/or
internally develop businesses that are based on proprietary technologies,
proprietary manufacturing processes and/or defensible market niches. These
technologies would 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 developed at their own individual
rates, the Company would analyze how it could 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.

During 1997, the Company evaluated the businesses and/or technologies that
had been acquired during prior years to determine the optimum course to be
pursued given the level of resources available to the Company. As a result of
this review, the Company decided to concentrate its resources on the
commercialization of its TieTek Composite Railroad Crosstie.

Acquisition of Tie-Tek. 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.

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. In 1995, the
Company licensed to TieTek the rights to use certain of GAIA's patented and
proprietary technologies to develop composite 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 composite railroad crossties. The Crosstie Loan
was collateralized by a pledge of, and lien on, all of TieTek's assets and the
capital stock, and certain shares of the Company's Common Stock which had been
issued in connection with the acquisition of GAIA. 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, which
as a result 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
was eliminated in the consolidation of the Company's financial statements), the
release as collateral of 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 commit to certain financial obligations
relating to the operation of a manufacturing facility with the capacity to
fulfill the demonstrated market demand, as defined, for TieTek's

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composite railroad crosstie. The Company believes it has fulfilled the required
financial commitments, and therefore no minimum payments are due. The Company
intends to actively pursue the commercialization of TieTek's composite railroad
crosstie technology.

Other Businesses. As a result of the periodic evaluation of its
technologies, during 1997 and early 1998 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. 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 and 1998 several of the Company's businesses and/or
technologies had been either licensed or sold, as described more fully below.
In addition, the reduction in the number of technologies allowed the Company to
focus its resources in the short to mid-term on the commercialization of the
TieTek Composite Railroad Crosstie.

EET. 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. EET, Inc. was principally engaged
in 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. Prior to its acquisition by
the Company, EET was owned by approximately forty shareholders, including Tim
Tarrillion, the former 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.

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
in the environmental services industry. The Company received $55,000 in cash as
consideration, and recognized a gain of approximately $20,000.

On March 30, 1998 the Company completed the sale of certain assets of EET
that related to its patented TECHXTRACT/(R) /technology to an unrelated company.
The purchase price therefore consisted of a cash payment of $200,000, two
promissory notes and the assumption by the purchaser of certain contractual
obligations. The first such promissory note is in the principal amount of
$363,436, bears interest at a per annum rate of six percent (6%) and is payable
in twelve (12) quarterly payments, the first such payment being due and payable
on September 30, 1998. The second such promissory note is in the principal
amount of $436,835, bears interest at a per annum rate of nine and one-half
percent (9 1/2%) and is payable in twelve (12) annual payments, the first such
payment being due and payable on September 30, 2001. The purchase price was
based primarily on the expected market value of the technology included in the
assets. The Company recognized a gain of approximately $440,000 on this
transaction.

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, formerly a director and officer of the Company, and two other unrelated
individuals.

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 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, 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.

In June 1997, the Company sold the technology for manufacturing air-
conditioner support pads which had been acquired from GAIA, along with certain
related equipment to an unrelated manufacturing company. As

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consideration, the Company received $25,000 cash, a note receivable of $550,000,
and future royalty payments through June 2007. There was no gain or loss
recognized on this transaction. In September 1998, the Company discounted this
five-year note receivable with a then outstanding principal balance $525,000 for
a cash payment of $420,000 in full settlement of all outstanding obligations
between the parties.

The Company has decided to suspend the on-going operations associated with
the porous pipe product line and pursue possible licensing arrangements. 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.

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 received a payment equal to 50% of the gross
profits of the licensee on revenues recognized in 1998 from a specified
territory amounting to approximately $98,000. 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 recognized a gain of approximately $20,000
on the transaction.

General Description of Business

The Company's principal business is the manufacture and marketing of the
TieTek Composite Railroad Crosstie through its TieTek subsidiary. The TieTek
Crosstie was conceived as an equivalent replacement for wood crossties, but with
a longer life and with several environmental advantages. It has been
successfully tested by a number of independent groups, including several U.S.
railroads. Since its first track installation in March 1996, several thousand
TieTek Crossties have been installed under track in a variety of load and
environmental conditions where they continue to meet performance expectations.
NATK is now executing a manufacturing strategy which will further expand the
entrance of the TieTek Crosstie into the market in 1999.

Description of the Market. A railroad track consists of two steel rails
which are held in place at a fixed distance apart by steel plates attached to
the crossties. The crossties, in turn, are supported by ballast on an improved
roadbed. Although different types of "crossties" have been used throughout the
history of railroad construction, the wooden crosstie has been the dominant
product. Hardwood ties are strong in tension (to hold the rails the correct
distance apart or "in gauge"), in bending (to uniformly distribute the load to
the ballast), and in compression (to support the rail) while providing enough
flexibility to cushion the impact of the wheels on the rail. In addition, the
"nailability" of wood allows the rail and plate to be attached to the tie with
simple steel spikes.

The demand for new ties comes from two sectors: construction of new rail
lines and replacement of ties under existing track as they wear out or decay.
The construction of new track is dictated by the stage of industrialization and
corresponding economic growth in any particular region. As is the case in most
industrialized nations, the demand for ties in new construction in the United
States has been minimal in recent years given the lack of expansion of the
current track system. Thus, most of the demand for new ties in the U.S. is for
the replacement of old ties. Current demand for new ties in the United States is
estimated by the Company, based on industry reference materials, to exceed 15
million ties per year while demand outside the United States is estimated to be
more than 60 million ties per year.

The worldwide supply of crossties fall into four primary categories:
wooden, concrete, steel, and synthetics. According to industry statistics,
wooden ties dominate the market, providing about 86% of U. S. demand and about
75 - 80% in the rest of the world. In the U.S., concrete holds approximately a
10% market share, with

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steel and other alternate materials representing approximately 1-3% of the
market. In Western Europe, concrete and steel are more widely used, each
exceeding a 10% market share.

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

. The tie must be able to support the weight and dynamic forces of the rail and
train without damage to the tie.
. The tie must be able to interact with the ballast and distribute the weight
of the train to the underlying road bed.
. The tie must be able to hold the gauge of the track on straight runs and
curves.
. The rail should be able to be fastened to the tie cheaply and efficiently. If
spikes are used, the tie must be able to hold the spike for the life of the
tie.
. The tie must be stiff enough to support the weight but flexible enough to
absorb the vibration of passing trains with minimal damage to the track and
train.
. The tie should resist decay and last as long as possible with minimal
degradation of original properties.
. The tie must not conduct any electrical impulses between the rails.

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

Technology Development. The TieTek Crosstie technology is based on the
Company's technology to combine rubber and plastic to create products with
unique capabilities. However, TieTek discovered that rubber and plastic alone
would not make a tie that met required performance criteria. After years of
product development, TieTek concluded that a combination of several different
components are needed to produce a composite crosstie with the desired
properties.

The TieTek Crosstie is composed of a proprietary mixture of plastics,
rubber from recycled tires, waste materials, chemical additives, and various
fillers and reinforcement agents. The current formulation was developed after
extensive theoretical, laboratory, and full-scale production testing to match
the flexibility, strength, hardness, weight, density, nailability and other
properties of wood, keeping in mind the need to be competitive with the price of
wood by using lower cost materials. Although the Company believes the current
formulation meets these objectives, research continues to further optimize the
cost and performance characteristics of the TieTek Crosstie. The exact
formulation of TieTek Crossties is proprietary and is covered under a current
patent application.

The Company believes the current TieTek Crosstie achieves the product
characteristic objectives that were initially established for this technology.
The current crossties have consistent shape and dimensions and are very sturdy.
The physical properties are comparable to wooden ties that have been in service
just a few years. Tests have shown that the TieTek Crosstie should maintain its
properties much longer than most wood ties. The TieTek Crosstie can be spiked
either manually or with automated equipment. They contain no toxic
preservatives, and yet will not be susceptible to decay or bug infestation.
Unlike wooden ties, every TieTek Crosstie is essentially the same, and has
consistent quality and properties.

Independent Product Testing. The TieTek Crosstie has undergone a range of
tests conducted at several independent testing facilities. Seven separate series
of tests of various TieTek crosstie prototypes were conducted at the Wood
Science Laboratory at the University of Illinois under the direction of Dr. Poo
Chow. The Laboratory is partially funded by the American Association of
Railroads ("AAR"), and their testing program was strongly recommended by a major
U.S. railroad company which has assisted in the product development. The TieTek
Crosstie was evaluated for compression strength, hardness, stiffness, and three
measures of spike performance in the tie - measuring resistance to spike drive,
spike pull and lateral movement. In these tests, it was shown that, generally,
the TieTek Crosstie's performance was comparable to that of wooden ties in
service only a few years. The laboratory also conducted accelerated aging tests
which showed the TieTek Crosstie had a much slower rate of degradation of its
properties than is common with wooden ties. These tests indicate that the TieTek
Crosstie will last longer than most wooden creosote-treated ties.

TieTek is also testing its crosstie at the independent Transportation
Technology Center testing facility in Pueblo, Colorado. As a subsidiary of the
AAR, this facility conducts a variety of tests on all types of new technologies
concerning track, locomotives, and cars used in the U.S. railroad industry.
TieTek's crossties at

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Pueblo have experienced more than 100 million gross tons of load and 2 million
vibrations in an accelerated wear test, meeting the design objectives of the
crosstie.

Since the development program began, over 5,000 TieTek Crossties have been
produced. Of these, more than 3,000 crossties have been placed in service at
various rail sites and in many different services, and 2,000 crossties were
exported for use in a marine application. Two original test ties were placed in
service in March 1996 on a mainline track near Conroe, Texas. Since then,
TieTek Crossties have been installed in three locations in Texas, as well as in
Louisiana, California, Arizona, Colorado, Illinois, New York, Virginia and
Kansas.

These installations provide a wide range of conditions to test the TieTek
Crosstie under extremes of temperature and moisture, on soft track beds, with
very heavy loads, and in both curved and straight track. The TieTek Crossties
installed to date have not experienced any performance problems.

Manufacturing. The manufacturing process for the TieTek Crosstie is
separated into four sections by function:

. Raw Material Selection and Handling - A critical factor in the economic
viability of the TieTek Crosstie is accessing and feeding a consistent supply
of low cost raw materials. As such, the raw material preparation and
materials handling section of the manufacturing facility is critical to the
overall process. Although this equipment is typically non-proprietary, the
required mixing and blending techniques for the specific raw material slate
during processing involve several trade secrets that are critical to the
overall success of technology.

. Compounding and Mixing - In development of the optimum manufacturing system,
several systems were tested to satisfy the mixing, melting, and compounding
of the raw material into a consistent and homogeneous material required to
make a product with the desired performance characteristics. The key to the
system is its ability to continuously mix and melt together various
components that have very different physical properties including weight,
density, melting, and flow characteristics. The process is further
complicated by the addition of several components that do not melt (non-
melts). The apparatus must melt the plastics and completely mix the molten
plastic with the non-melts for maximum effectiveness. The ability to mix all
raw materials in optimum conditions, and the use of chemical agents to reduce
weight and provide consistent internal structure with enhanced physical
properties, required significant development work. The ratios and sequence of
the mixing process, as well as the introduction of the chemical agents, have
been empirically established and include several proprietary techniques that
the Company believes are unique to the TieTek Crosstie.

. Shaping, Forming and Cooling - the optimum molding process needs to be
feedstock tolerant, easily operated and controlled, and produce a product
that is both dimensionally consistent and internally sound. The current
TieTek Crosstie molding system produces a crosstie that closely resembles a
wooden tie, and whose dimensions and profile are 7" x 9" x 9' (which can be
modified to special order), with no unwanted twisting or warping. Each TieTek
Crosstie produced is essentially identical. Proper cooling techniques have
been established during the TieTek development program to insure the
dimensional stability and consistency of each crosstie.

. Quality Assurance - TieTek has established a series of quality control steps
to verify the external and internal structural integrity of each crosstie
produced. The testing is non-destructive and provides a record of each
crosstie for both improved customer confidence, process feedback and complete
quality control of the manufacturing system.

During the fourth quarter of 1998, approximately 5,000 TieTek Crossties
were produced pursuant to a manufacturing agreement with a private manufacturer
in Delaware. Through this arrangement, the Company has obtained valuable
experience which it expects will facilitate the completion of its first
commercial scale, automated production line. The major components of this
production line have been ordered and will be ready for delivery in the second
quarter of 1999. The completion of the automated manufacturing line is essential
for the Company to cost-effectively manufacture the TieTek Crossties. The
Company is also currently evaluating the potential benefits of continuing
production at its current manufacturer. There can be no assurance that the
Company will be able to install this production equipment successfully or that
the Company will not encounter manufacturing difficulties which could have an
adverse effect on the timing or economics of production.

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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 recycled
plastics can fluctuate significantly, and high prices and tight supply could
seriously affect the economics of manufacturing TieTek's 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 and
the ultimate market price of the crosstie.

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

. The continued maintenance of track is a major factor given the age of the
average track and the goal of the industry to increase traffic volume. The
replacement of crossties is a highly labor intensive and expensive operation,
and the replacement of worn out ties has a direct effect on the capacity of
any given track to carry freight and produce revenue. Longer-life ties would
significantly reduce railroad maintenance costs.

. The potential supplies of quality hardwood continue to decline worldwide.
This will necessarily lead to higher prices and/or use of lower quality
woods.

. As the average quality of wood ties has declined, the dependability and
consistency has also declined, leading to higher installation costs and
shorter tie life.

. Most wooden ties must be treated with creosote to extend the life of the tie.
Creosote is a carcinogenic chemical creating a potential liability for the
railroads from contamination of the right-of-way and associated groundwaters,
exposure to workers during the installation and removal process, and the
proper disposal of discarded ties.

. An aggressive proactive program to use a product which can reduce the use of
toxic preservatives, reduce the consumption of the world's hardwood forests,
and remove problem wastes (such as used tires and recycled plastics) from
landfills, could only help enhance the public's image of the railroad
industry.

Because of these influences on the demand for wooden ties in the railroad
industry, TieTek intends to position the TieTek Crosstie as a preferred
alternative to wood based on the following:

. The TieTek Composite Railroad Crosstie will last longer and hold its
properties better than wood.

. The TieTek Composite Railroad Crosstie can be used interchangeably with wood.

. The TieTek Composite Railroad Crosstie has many environmental advantages. It
uses no preservatives, reduces the demand for hardwoods from worldwide
forests, and consumes waste material (i.e. tires and recycled plastics).

. The TieTek Composite Railroad Crosstie will resist decay and bug infestation.

. The TieTek Composite Railroad Crosstie will not be subject to splitting
caused by the freeze/thaw cycle in colder climates since it is impervious to
water.

. The TieTek Composite Railroad Crosstie has more consistent properties than
wood ties since every tie is essentially identical.

With its many advantages and superior qualities, TieTek believes that the
TieTek Composite Railroad Crosstie will be able to support a price above premium
hardwood creosote-treated ties. Based on information available to the Company,
management believes that wooden ties in the U.S. are currently priced in the
range of $25 to $40, and that wooden ties in Europe and other foreign countries
are currently priced in the range of $35 to $50.

TieTek had worked primarily with a single, major U.S. railroad company in
initially developing and testing this product. This was done intentionally to
make sure that any product defects or failures were corrected in the initial
stages of development and before the prototypes were in widespread use. As
TieTek became more confident in its crosstie's capabilities, it began
introducing the product to other railroad companies and municipal transit

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authorities in the U.S. Within the first full year of production from the first
commercial plant, TieTek plans to introduce and market the product to all the
Class I railroads in the United States, several municipal transit authorities, a
select group of large regional railroads in the United States and to several
major railroads in countries outside the United States. The expected promotional
activities for the TieTek Crosstie will include presentations by TieTek at
technical conferences sponsored by the railroad industry, advertising in trade
journals, and advertising for foreign partners and licensees.

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. However, as of the date of this Report,
the Company has not entered into any such arrangements and initial marketing is
being undertaken by the Company's present employees.

Competition. 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
much larger than the Company and have significantly more resources available for
the marketing of their products. The wooden tie industry has 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 composite crosstie
if such a product is perceived to be a significant threat to the long term
demand for wooden crossties.

Other companies have marketed concrete and steel crossties for special
applications, and there are development programs studying prototype crossties
made from reprocessed wood and thermoset resins, epoxy and glass wrapped wood
ties, and "plastic lumber" ties.

As of the date of this Report, the Company believes that its progress in
developing an alternative to wooden crossties is greater than those of its
competitors. However, there is limited information regarding such development
efforts. There can be no assurance that its competitors will not be able to
develop a competing crosstie which is superior to the Company's, or that such an
alternative will not achieve greater market acceptance.

Patents and Proprietary Protection. 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 the first patent on the formulation has been approved but not
yet issued. TieTek's management also believes that it will be granted one or
more patents covering the 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, and patents relating to the
Company's Riserclad technology (which has been licensed) and its porous pipe
technology, 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

10
<PAGE>

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.

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 year ended December 31, 1997 the Company incurred $57,489
in research and development expenses. Although the Company incurred significant
expenses during 1998 relating to the commercialization of the TieTek Crosstie,
the amount classified as research and development expense incurred during 1998
was not significant.

Human Resources. The Company currently employs five employees. Two of the
employees are in management, one is in operations, and two are in administration
and accounting. 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.

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, 1998 of $36,934,862. Further, until the Company is able to
generate material revenues from the commercialization of its TieTek 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

For the year ended December 31, 1998, the Company incurred a net loss of
$2,732,861, with a cash flow deficit averaging $100,000 to $200,000 per month.
This cash flow deficit will likely increase materially in 1999 during the start-
up phase for the production of its TieTek Crossties. This deficit will likely
continue until commercial sales of these crossties begin to provide cash to the
Company. 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
the proceeds from the sale or license of its technologies. Because of these
recurring losses, the Company will require additional working capital to
continue the commercialization of its TieTek Crosstie 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.

Since December 31, 1998, the Company has raised $419,000 from the sale of
its Series G Subseries III convertible preferred stock. Currently, management
is engaged in discussions with several potential investors and is evaluating a
number of financing alternatives to satisfy its capital requirements. However,
as of the date of this Report, the Company has no commitments for additional
financing and there can be no assurances that the Company will be able to obtain
financing on terms reasonably attractive to the Company, if at all.

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.

11
<PAGE>

Due to these uncertainties, the reports of the Company's independent
auditors for the years ended December 31, 1998 and 1997 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 3,604,548 shares are outstanding as of the date of this Report.
The Company may in the future be caused to issue up to approximately 7.1 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
3,568,955 to 10,704,548 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.

Effect of Outstanding Preferred Shares, Options and Warrants

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

12
<PAGE>

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

To date, the Company has contracted with a toll manufacturer to produce its
TieTek Crosstie. There can be no assurance that the current manufacturer will
continue to meet the Company's requirements for quality, quantity and
timeliness. The Company has entered into a build-to-suit lease agreement for a
manufacturing facility in Houston, Texas which is expected to replace or
supplement its current toll manufacturer. While the Company's personnel have
worked closely with the toll manufacturer, there can be no assurance that the
Company will not experience delays and/or cost overruns which may have a
material adverse effect on its financial condition or future results of
operations.

Sales and Marketing

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

Dependence on Key Personnel

To a material extent, the Company's future success is dependent upon the
continued efforts of its President and Chief Executive Officer, Dr. Henry W.
Sullivan. The Company does not have an employment agreement with Dr. Sullivan.
The loss of the services of Dr. Sullivan would likely have a material adverse
effect on the Company's business. The Company maintains keyman life insurance
in the amount of $250,000 naming the Company as the beneficiary on Dr. Sullivan.

Dividend Policy

To date, the Company has paid no dividends on its shares of Common Stock and
does 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 approximately one-third of the Board) elected each year
to serve a three-year term. A director may be removed only for cause by a vote
of the holders of two-thirds of the voting power of the Company's outstanding
securities. The classified Board of Directors makes it more difficult to change
majority control of the Board, which may discourage attempts by third parties to
make a tender offer or otherwise obtain control of the Company, even if such
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

13
<PAGE>

associates, owns (or, within three years, did own) 15% or more of the
corporation's voting stock. The supermajority voting provisions in the Company's
bylaws and the provisions regarding certain business combinations under the GCL
could have the effect of delaying, deferring or preventing a change in control
of the Company or the removal of existing management. A takeover transaction
frequently affords stockholders the opportunity to sell their shares at a
premium over current market prices.

Authorization and Discretionary Issuance of Preferred Stock

The Company's Certificate of Incorporation authorizes the issuance of up to
an aggregate of 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 investors with
respect to an investment in the Company, 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.

Year 2000

The Company is currently working to minimize the potential impact of the
year 2000 on the processing of date-sensitive information by the Company's
computerized information systems. The year 2000 problem is the result of
computer programs being written using two digits (rather than four) to define
the applicable year, which could result in miscalculation or system failures.
Any software used by the Company for internal operations that is not Year 2000
compliant is expected to be exchanged for Year 2000 compliant software prior to
the occurrence of any internal problems. Based on preliminary information,
costs of addressing potential problems are currently not expected to have a
material adverse impact on the Company's financial position, results of
operations or cash flows in future periods. However, if the Company, its
customers, strategic partners or vendors are unable to resolve any processing
issues in a timely manner, it could result in material financial risk to the
Company. The Company has initiated formal communication with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to the failure of these third parties to solve their own
Year 2000 Problems. The Company has not received responses from all of its
inquiries. The Company has been informed by its bank that the bank is
substantially prepared for Year 2000. The Company has been informed that its
contract manufacturer is currently in the process of converting to Year 2000
compliant systems, and this conversion is scheduled for completion prior to
2000. Furthermore, the Company is completing a new manufacturing facility in
Houston, which the Company believes will be Year 2000 compliant when built, to
take over production prior to 2000 and therefore the Company does not believe
that it will be materially affected if the contract manufacturer would
experience any difficulties relating to Year 2000 issues. There can be no
guarantee that the systems of the other companies on which the Company's system
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse effect on the Company.

ITEM 2. PROPERTIES

The Company leases 5,800 square feet in Houston, Texas for its corporate
headquarters that provides executive offices for the Company. This lease
expires in September 2000, and has monthly rent obligations of approximately
$8,000. The Company intends to relocate its headquarters to the new TieTek
manufacturing facility in early 1999. Although the Company has been actively
trying to sublease their existing lease space to a new tenant, it has been
unsuccessful in doing so as of the date of this Report.

In November 1998, the Company entered into a lease agreement for a 23,000
square foot manufacturing facility on three acres of land in Houston, Texas to
be used for the production of the TieTek Crossties. The lease is renewable at
the Company's option for ten consecutive periods of five years each. The base
monthly rental of $10,200 is subject to adjustment due to certain agreed-upon
costs incurred by the lessor during the construction of the facility. The
monthly rental is currently estimated to be $11,000. The lease provides for a
CPI adjustment to the monthly rental after 2-1/2 years of the initial term and
at the beginning of every renewal period. The Company has an option to lease an
additional 2-1/2 acres and up to 50,000 square feet of additional building
space through December 31, 2001. The lessor has the obligation to construct the
facility within six months of the Company's notice to exercise the option plan.

14
<PAGE>

In November 1998, the Company entered into an agreement with the lessor of
the 9,000 square foot manufacturing and office facility that had been formerly
used for IPF's operations. As a result of this agreement, all obligations under
the lease were terminated for a cash payment of approximately $30,000. The
lease had required monthly payments of $3,100 through January 2001, plus
reimbursement to the lessor for insurance and taxes. The lessor of these
facilities had been an officer and director of the Company prior to 1998.

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. In August 1998 the plaintiff filed a lawsuit to include North
American Technologies Group, Inc. in the proceedings. Discovery is ongoing, and
management cannot evaluate the Company's exposure at this time.

Reconversion Technologies, Inc. and Reconversion Technologies of Texas,
Inc. v. GAIA Technologies Inc., GAIA Holdings, Inc. and certain individuals. A
subsidiary of the Company, GAIA Technologies, Inc., has been named a defendant
in a proceeding filed in the District Court of Harris County, Texas, in January
1998. The proceeding seeks unspecified actual and punitive damages as a
consequence of an injunction and judgment issued against the plaintiffs by the
United States District Court for the Southern District of Texas following a jury
trial involving GAIA Holdings, Inc. and the plaintiffs. In this jury trial,
GAIA Holdings, Inc. alleged that Reconversion Technologies infringed patents,
trademarks and other proprietary rights and violated state laws relating to
porous pipe. GAIA Technologies, Inc. acquired these rights from GAIA Holdings,
Inc. in 1995 and is indemnified by GAIA Holdings, Inc. for any costs that may
result from this action. The Company intends to vigorously defend these claims.

Lin Lar Golf v. Industrial Pipe Fittings, Inc. In August 1997, a
subsidiary of the Company, IPF, was sued in the District Court of Muskogee
County, Oklahoma, in an action alleging breach of express and implied
warranties. The suit seeks approximately $500,000 in incidental and
consequential damages relating to leaks to an irrigation system allegedly caused
by Alprene saddles distributed by IPF. The defense of this action has been
assumed by IPF's products liability insurer, subject to the insurer's
reservation of rights. The Company has notified the manufacturer of the saddles
of the plaintiff's claims and asserted its right to indemnification from the
manufacturer. The Company cannot assess as of the date of this Report the
extent of its potential liability, although management does not believe the suit
will have a material adverse impact on its financial condition or future results
of operations.

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. 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.

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<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") SmallCap Market under the symbol "NATK." The
following table sets forth, for the periods indicated, the range of high and low
bid prices of the Common Stock as reported by NASDAQ.

<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1997
- ----
First Quarter $7.29 $4.23
Second Quarter $6.75 $3.96
Third Quarter $4.23 $2.25
Fourth Quarter $2.79 $ .81

1998
- ----
First Quarter $2.81 $ .84
Second Quarter $2.53 $ .78
Third Quarter $1.00 $ .62
Fourth Quarter $4.62 $ .69
</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.

All stock prices for trading periods before May 13, 1998 have been adjusted
to reflect the Company's 9 for 1 reverse stock split that was effective as of
that date.

Holders

Records of the Company's stock transfer agent indicate that as of December
31, 1998, 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 and
Series G Cumulative Convertible Preferred Stock.

Recent Sales of Unregistered Securities

During 1998, the Company sold securities that were exempt from registration
under the Securities Act. These transactions are described under Item 6,
Management's Discussion and Analysis of Financial Condition and 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 1998:

16
<PAGE>

Series G Cumulative Convertible Preferred Stock -
Subseries II and Subseries III

In 1998, the Company issued 20,000 shares of its Series G Cumulative
Convertible Preferred Stock - Subseries II for $1,975,000 in cash and $25,000 in
payment of professional services. In March 1999, the Company issued 4,190
shares of its Series G Cumulative Convertible Preferred Stock - Subseries III
for $419,000. These securities were issued to institutional and other
accredited 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 these transactions.

Common Stock

In November 1998, the Company issued 78,644 shares of Common Stock upon
conversion of 4,000 shares of Series F Cumulative Convertible Preferred Stock
that had been issued in 1996. These securities were issued to institutional
investors in reliance upon section 3(a)(9) and 4(2) of the Securities Act and/or
Regulation D thereunder. The Company did not pay any brokerage commissions in
connection with these transactions.

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.

During 1997, the Company evaluated the businesses and/or technologies that
had been acquired during the prior years to determine the optimum course to be
pursued given the level of resources available to the Company. As a result of
this review, the Company decided to concentrate its resources on the
commercialization of its TieTek Composite Railroad Crosstie. Accordingly, the
Company has 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. Since June 1997, the Company has completed the following
transactions: (a) sold the air conditioner support pad technology and certain
related

17
<PAGE>

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); and (e) sold certain
assets of EET that related primarily to EET's patented TechXTract technology
(March 1998).

LIQUIDITY AND CAPITAL RESOURCES

For the year ended December 31, 1998, the Company incurred a net loss of
$2,732,861, with a cash flow deficit averaging $100,000 to $200,000 per month.
This net loss principally reflected the pre-commercial operations of the TieTek
Composite Railroad Crosstie business and corporate overhead. As of December 31,
1998, the Company had a net working capital deficit of $318,629, including a
cash balance of $719,212.

During 1998 the Company made significant progress towards the full
commercial production of the TieTek Crosstie, including the production of
approximately 5,000 crossties during the fourth quarter. During 1999, the
Company anticipates building or acquiring significant production capacity to
meet anticipated short term demand. This will require significant expenditures,
including the purchase of manufacturing equipment, the cost of hiring and
training a workforce to operate the plant, and/or the cost of acquiring a
suitable operation. As a result, it can be expected that short-term operating
losses could accelerate from those experienced over the past year.

Historically, the Company has met its working capital requirements through
financing transactions involving the private placement of equity securities or
equity equivalents, the issuance of convertible debentures, and the proceeds
from the sale or license of its technologies.

Over the past three years, the Company's principal source of capital has
been a group of venture capital investors led by BankAmerica Capital Investors
(formerly known as NationsBanc Capital Corporation). These investors have
provided three rounds of financing through a series of Cumulative Convertible
Preferred Stock as follows:

. In April and May 1996, the Company issued shares of Series F Cumulative
Convertible Preferred Stock ("Series F Shares") and warrants for net
cash proceeds of $6,550,000.
. In March 1997, the Company issued shares of Series G Cumulative
Convertible Preferred Stock, Subseries I (the "Series G-I Shares") for
net cash proceeds of $1,640,000.
. In 1998, the Company issued shares of Series G Cumulative Convertible
Preferred Stock, Subseries II (the "Series G-II Shares") for net cash
proceeds of $1,975,000 and professional services of $25,000.
. In March 1999, the Company issued shares of Series G Cumulative
Convertible Preferred Stock, Subseries III (the "Series G-III Shares")
for net cash proceeds of $419,000.

The Series F Shares, Series G-I Shares, Series G-II Shares, and Series G-
III Shares (collectively the "Series F and G Shares") are entitled to an annual
cumulative dividend of 13.5% and are convertible into shares of the Company's
Common Stock at converison prices, as of March 25, 1999, of $4.75, $2.68, $.87,
and $1.50 per share, respectively. In accordance with the certificates of
designation for the Series F and G Shares, the Company has deferred all
preferred stock dividends, or satisfied such dividends through the issuance of
additional shares of preferred stock. However, pursuant to the terms of the
Series F and G Shares, the Company cannot defer dividends after April 5, 1999.
Given the Company's expected financial condition, it is unlikely the Company
will be in a position to pay cash dividends on such shares in 1999. Therefore,
these dividends will accumulate, and must be paid prior to the payment of any
distributions to the common stockholders. The Company does not anticipate any
such distributions in the foreseeable future.

During 1998, the Company received cash proceeds of $200,000 from the sale
or license of its technologies. The Company also received payments of
approximately $600,000 on its notes receivable during 1998, including a payment
of $420,000 in full settlement of a five-year note receivable with an
outstanding principal balance of $525,000. The outstanding notes receivable as
of December 31, 1998 have scheduled principal payments of

18
<PAGE>

$105,000 and $170,000 in 1999 and 2000, respectively.

The Company anticipates that its first automated manufacturing line, with
a capacity of approximately 10,000 crossties per month, will require capital
expenditures of $2,000,000 and additional working capital of up to $1,000,000.
As of December 31, 1998, the Company had made payments totaling $800,000 for
manufacturing equipment, and had open purchase commitments of an additional
$400,000. In March 1999, the Company raised $419,000 through the sale of its
Series G Subseries III convertible preferred stock. Additional financing,
however, will be necessary in order to commence manufacturing operations. The
Company intends to raise up to $3,000,000 in funds, and is currently in
discussions with several potential investors and is evaluating a number of
financing alternatives to satisfy these capital requirements. However, as of the
date of this Report, the Company has no commitments for financing and there can
be no assurance that the Company will be able to obtain financing on terms
reasonably attractive to the Company, if at all. Due to these uncertainties, the
report of the Company's independent public accountants for the year ended
December 31, 1998 contains an explanatory paragraph as to the substantial doubt
about the Company's ability to continue as a going concern. If the Company is
unsuccessful in obtaining financing for its initial facility, the Company will
attempt to contract for the continued manufacture of its crossties from third
parties.

During 1998, the Company used $1,693,957 in cash for its operating
activities, reflecting primarily the net loss for the year of $2,732,861
adjusted for net non-cash expenses which were approximately $800,000.

Investing activities provided net cash to the Company of $121,431 during
1998. These funds were generated primarily from cash received of $602,642 from
the repayment of notes issued in connection with the sale of certain of the
Company's businesses, and $338,538 received from the sale or disposition of
certain assets. Most of these cash proceeds were offset by capital expenditures
of $805,546 relating to the Company's first manufacturing line.

Financing activities provided net cash to the Company of $1,942,747
during 1998. These funds were generated primarily by the sale of 20,000 shares
of Series G-II Shares for cash proceeds of $1,975,000 and services rendered of
$25,000.

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of hedged asset or liabilities that are attributed to the
hedged risk or (b) the earnings effect of the hedged forecasted transaction.
The statement is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999, with early application encouraged, and shall not
be applied retroactively to financial statements of prior periods. Adoption of
SFAS 133 is expected to have no effect on the Company's financial statements.

The Year 2000 Problem is a result of computer programs being written
using two digits rather than four digits to define the applicable year. Any of
the Company's computer programs that have date sensitive software may recognize
a date of "00" as the year 1900 rather than 2000. The Company has completed a
review of its exposure to the Year 2000 issue and has completed a conversion of
its accounting software to a Year 2000 Compliant version. The Company has
initiated formal communication with all of its significant suppliers and large
customers to determine the extent to which the Company is vulnerable to the
failure of these third parties to solve their own Year 2000 Problems. The
Company has not received responses from all of its inquiries. The Company has
been informed by its bank that the bank is substantially prepared for Year 2000.
The Company has been informed that its contract manufacturer is currently in the
process of converting to Year 2000 compliant systems, and this conversion is
scheduled for completion prior to 2000. Furthermore, the Company is completing a
new manufacturing facility in Houston, which the Company believes will be Year
2000 compliant when built, to take over production prior to 2000 and therefore
the Company does not believe that it will be materially affected if the contract
manufacturer would experience any difficulties relating to Year 2000 issues.
There can be no guarantee that the systems of the other companies on which the
Company's system rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company. The costs
incurred by the Company to convert to a Year 2000 Compliant version of
accounting software were not significant.

19
<PAGE>

RESULTS OF OPERATIONS

ANALYSIS OF YEARS ENDED DECEMBER 31, 1998 ("1998") AND DECEMBER 31, 1997
("1997")

The net loss of $2,732,861 for 1998 reflects a decrease of $1,598,430
from the net loss of $4,331,291 in 1997. This decrease is a result of the
reduction of $1,381,970 in selling, general and administrative expenses and the
recognition in 1997 of an impairment in the value of certain long-lived assets
of $1,202,628. These reductions in expenses were offset by the decrease in
gross profits from $1,116,856 in 1997 to a loss of $153,215 in 1998. In
addition, in 1998 the Company recognized net other income of $321,309, whereas
in 1997 the Company recognized net other income of $37,406. These fluctuations
are described in more detail below.

Revenues

Revenues in 1997 of $3,553,117 consisted of sales made by the Company's
subsidiaries IPF, EET Riserclad and GAIA. All of these technologies or
businesses were either licensed or sold during the period from June 1997 to
March 1998. The Company focused its resources in 1998 on the commercialization
of the TieTek Composite Railroad Crosstie. Substantially all of the Company's
revenues in 1998 of $138,828 resulted from the sale of the TieTek Crossties. As
of December 31, 1998 the Company had 2,200 crossties in inventory that were
scheduled for shipment in early 1999.

Gross Profit

The gross profit percentage in 1997 consists of the margin generated from
the products sold by IPF, EET, Riserclad and GAIA. In 1998, the gross profit
consists of the loss incurred from the sales of the TieTek Crosstie in the
fourth quarter. This loss reflects the costs associated with the production run
that produced approximately 5,000 TieTek Crossties. This negative margin
reflects the start-up costs, the small scale of the manufacturing run, the
tolling fee paid to a private manufacturer, and the inability to make volume
purchases of raw materials. The Company anticipated these losses, but believed
the costs were necessary in order to allow the Company to demonstrate its
ability to meet customer demand and to seed the market for future purchase
orders. In addition, the production run provided valuable design and
operational information for the Company's manufacturing facility. The Company's
ability to improve its gross margin depends upon its ability to increase
production efficiencies and manage raw material purchases. To address these
needs, the Company has designed its new manufacturing line to utilize an
automated molding machine, and is in the process of hiring an experienced
purchasing manager. These actions are expected to result in acceptable margins
once full-scale commercial production commences.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $1,381,970 to
$2,900,955 in 1998 from $4,282,925 in 1997. This decrease reflects primarily
the reduction in salary and other employee related costs which were made
possible by the implementation of the Company's strategy to focus its resources
on the commercialization of the TieTek Crosstie. As this strategy was
implemented and certain of the Company's other technologies were licensed or
sold, the administrative costs associated with those technologies were
eliminated. The Company anticipates that selling, general and administrative
expense will increase in the future as warranted to coincide with the continued
commercialization of the TieTek Crosstie.

The Company's decrease in selling, general and administrative expenses
during 1998 was partially offset by the recognition of the following expenses:
a) an accrual of $200,000 for the termination of the corporate office lease in
Houston, Texas; b) an accrual of $150,000 relating to the settlement of the
employment contract of the Company's former Chairman, President and Chief
Executive Officer; and c) the recognition of $100,000 in compensation expense
resulting from the repricing of certain options that had been issued to the
Company's former Chairman, President and Chief Executive Officer.

20
<PAGE>

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 associated with the porous pipe product line, and represents
substantially all of the Company's remaining investment in this product line.
Net revenue was $23,850 and gross profit was ($22,719) for the porous pipe
product line for the year ended December 31, 1997. There were no sales of the
porous pipe product in 1998.

Other Income and Expense

Other income increased in 1998 to a total of $321,309 compared with
$37,406 in 1997. This net increase is a result of the following: a) higher
interest income recognized in 1997 due to the note receivable that was
outstanding to TieTek, Inc. prior to its acquisition in December 1997; b)
increased interest expense due primarily to the recognition of the discount of
$105,000 on the five-year note receivable that was paid in full in September
1998; c) a gain of approximately $440,000 recognized in 1998 from the sale of
certain assets of EET; and d) the recognition of $98,160 in royalty income from
the license of the Riserclad Technology.

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,
1998, 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.

21
<PAGE>

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS

Directors and Executive Officers

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

<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Douglas C. Williamson 47 Chairman of the Board of Directors and
Director of the Company for term expiring
1999

Henry W. Sullivan 59 President and Chief Executive Officer of
the Company; President of TieTek, Inc.;
Director of the Company for term expiring 2001

Edwin H. Knight 45 Director of the Company for term expiring 2000

Tim B. Tarrillion 48 Director of the Company for term expiring 1999

Judith Knight Shields 41 Senior Vice President-Finance, Chief Financial
Officer and Treasurer of the Company
</TABLE>

All directors of the Company hold office for a term of three years or
until their successors are duly elected and qualified. Executive officers hold
office at the pleasure of the Board of Directors. The Board of Directors met
four times during 1998. All directors attended in 1998 at least 75% of the
meetings of the Board and committees of which they are a member.

Board Meetings And Committees

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

Financial Audit:
Douglas C. Williamson
Edwin H. Knight

Compensation:
Douglas C. Williamson
Edwin H. Knight

The purpose of the Financial Audit Committee is to oversee the financial
reporting procedures of the Company, insure adequate financial and internal
controls, review the scope of the Company's annual audit and recommend the
selection of independent auditors. The primary responsibilities of this
committee include: reviewing with the Company's Chief Financial Officer the
adequacy of quarterly and annual SEC filings; reviewing and

22
<PAGE>

consulting with the Company's independent auditors regarding their reports of
audit and accompanying management letters; reviewing all financial statements,
financial controls, internal controls and accounting practices of the Company;
evaluating the performance and cost of the Company's independent auditors;
recommending to the Board of Directors the selection of the Company's auditors
for the upcoming year; and monitoring compliance by the Company's management and
employees with major Company policies and financial controls.

The membership of the Financial Audit Committee is designed to include a
minimum of two directors. The Company's Chief Financial Officer serves as an
ex-officio member of the committee and attends all meetings except the annual
review of the Company's financial controls and accounting procedures with the
Company's independent auditors. The Financial Audit Committee met once during
1998.

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

The membership of the Compensation Committee is designed to include at
least two outside (non-employee) directors. The Compensation Committee did not
meet during 1998.

Directors' Compensation

The directors of the Company receive no fees or other compensation in
connection with their services as directors.

Biographies

Douglas C. Williamson

Mr. Williamson was elected to the Board of Directors in 1996. Mr.
Williamson is currently a Managing Director and Senior Vice President of
BancAmerica Capital Investors (one of the equity investment groups affiliated
with the recently merged NationsBank/Bank of America organization, including
NationsBanc Capital Corporation). Mr. Williamson joined NationsBanc Capital
Corporation in 1989. Prior to that, he had eight years of experience in senior
management with two operating companies (including roles as president) and six
years of experience in corporate finance and corporate lending with Rotan Mosle,
W.R. Grace and Cleveland Trust. Mr. Williamson serves on the boards of
directors of the following companies: 3DX Technologies, Inc. (an oil and gas
company focusing on the exploration of domestic properties using the combination
of 3D seismic data and the latest computer aided software and technology);
CallWare Technologies, Inc. (develops and markets open architecture computer
telephony software solutions); Empirical Software, Inc. (develops software
targeted for the market of client/server performance and reliability management
tools); GX Technology Corporation (software developer and imaging services
company that is a leading independent supplier of 2D and 3D seismic modeling,
imaging software products, and imaging services used in oil and gas
exploration); HAHT Software, Inc. (provides enterprise Web application software
development solutions); Med Solutions, Inc. (provides radiology utilization
management services for the health care industry); Memorial Operations Company
(acquires and manages cemeteries and funeral homes); Takeout Taxi Holdings, Inc.
(provides restaurant delivery services through company-owned and franchised
stores); and Z-Tel Technologies, Inc. (provider of telephony-related services to
retail customers, such as inexpensive long-distance, voice-mail and "follow-me"
services). Mr. Williamson earned his MBA from Columbia University and his BA
from Denison University and later earned his CPA. Mr. Williamson serves on the
Company's Board of Directors as a nominee of the holders of the Series F, G-I
and G-II Shares.

23
<PAGE>

Henry W. Sullivan

Dr. Sullivan was elected to the Board of Directors in April 1997. Dr.
Sullivan became Vice President of Technology of the Company in July 1996 and
President of TieTek, Inc. in December 1997. In January 1999, Dr. Sullivan
assumed the additional positions of President and Chief Executive Officer of the
Company. Prior to joining the Company, Dr. Sullivan was employed by Shell Oil
Company where he spent twenty-three years in various positions and, in 1984, was
named Vice President of Shell Chemical Company. Dr. Sullivan joined Huntsman
Petrochemical Corporation in 1988 as its President, and became Vice Chairman of
its parent company, Huntsman Chemical Corporation, a year later. From 1991 to
1995 he was President and Chief Executive Officer of GAIA Holdings, Inc., until
joining the Company as President of GAIA Technologies, Inc. and later TieTek,
Inc. Dr. Sullivan has served as Chairman and Director of several companies and
organizations in manufacturing and polymer technology, including the Executive
Committee of the Society of the Plastics Industry. He currently serves as a
Director of the Sarkeys Energy Center at the University of Oklahoma. Dr.
Sullivan holds a Bachelor's degree in Chemical Engineering from Cooper Union and
Master's and PhD. degrees in Chemical Engineering from New York University.

Edwin H. Knight

Mr. Knight was elected to the Board of Directors in 1996. Mr. Knight
manages Harrison Interests, Ltd., a privately held Texas limited partnership
whose lines of business are oil and gas exploration and production, real estate
and cattle ranching. He has managed Harrison Interests, Ltd. for thirteen years
and holds a Bachelor's Degree from Louisiana State University and is a Certified
Public Accountant. Mr. Knight serves on the Company's Board of Directors as a
nominee of the holders of the Series F, G-I and G-II Shares.

Tim B. Tarrillion

Mr. Tarrillion served as Chief Executive Officer, President and a
Director of the Company from March 7, 1995 until January 22, 1999. Prior to
joining the Company, Mr. Tarrillion was the Founder and President of EET, Inc.
("EET") (1993 to 1995). Prior to starting EET, Mr. Tarrillion was co-founder,
President and Chief Operating Officer of EnClean, Inc. (1984 to 1993). EnClean
provided industrial and environmental cleaning services to companies in the
refining, petrochemical, steel, paper and utility industries, and was acquired
by Rust International in 1993. Mr. Tarrillion holds an MBA from Harvard
University and a Master's Degree and Bachelor's Degree in Chemical Engineering
from Rice University.

Judith Knight Shields

Ms. Shields joined the Company in March 1995. She currently holds the
position of Senior Vice President-Finance, Chief Financial Officer and
Treasurer. Prior to her current position with the Company, Ms. Shields was Vice
President of Mergers and Acquisitions and subsequently Controller, with EnClean.
Her ten years of experience prior to joining EnClean were in public accounting
and venture capital. She graduated summa cum laude from Texas A&M University
with a Bachelors Degree in Accounting and is a Certified Public Accountant.

Agreements With Holders Of Preferred Stock

Pursuant to agreements relating to the purchase of the Series F and G
Preferred Stock (the "Purchase Agreements") between the Company, NBCC and
certain other investors (collectively, with NBCC, the "Investors"), the Company
has agreed to nominate to the Board of Directors, for so long as the Series F
and G Preferred Stock are owned by the Investors or permitted assignees or
permitted transferees, (i) four (4) members designated by the holders of a
majority in interest of the Series F and G Preferred Stock taken together as a
group, at least one (1) of whom shall be designated by NBCC so long as NBCC owns
at least fifty percent (50%) of the Series F and G Preferred Stock; (ii) four
(4) members designated by the holders of Common Stock; and (iii) one (1) member
designated jointly by the holders of the Common Stock and the holders of a
majority in interest of the Series F and G Preferred Stock taken together as a
group. The requisite holders of the Series F and G Preferred Stock have agreed
that for so long as the number of Directors constituting the Board shall be six,
three (3) directors will be designated by the Investors and three (3) will be
designated by the holders of the Common Stock. Currently,

24
<PAGE>

pursuant to the Purchase Agreements, the Investors' nominees are: Douglas C.
Williamson and Edwin H. Knight. With the recent changes to the Board of
Directors, the Company and the principal holders of the Series F and G Shares
are in discussions regarding revisions to this agreement, although as of the
date of this Report, no such revised agreement has been reached.

If the Company shall breach any of the covenants or obligations set forth
in the Purchase Agreements and such breach remains uncured, the holders of a
majority in interest of the Series F and G Preferred Stock taken together as a
group shall be entitled then and thereafter to nominate and elect a majority of
directors to the Company's Board of Directors, at least two (2) of which
majority shall be designees of NBCC.

Changes In Control

If the Company breaches any of its covenants or obligations set forth in
the Purchase Agreements and such breach were to remain uncured, the holders of a
majority in interest of the Series F, G-I and G-II Shares taken together as a
group would be entitled then and thereafter to nominate and elect a majority of
directors to the Company's Board of Directors, at least two (2) of which
majority shall be designees of BancAmerica Capital Investors.

ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth a summary of the compensation paid or
accrued for the fiscal years ended December 31, 1996, 1997 and 1998 by the
Company to or for the benefit of its former Chairman, President and Chief
Executive Officer, who was the only officer whose compensation exceeded $100,000
for the year ended December 31, 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION> Long Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
------------------------------------ -------------------------- -----------
Name Other
and Annual Restricted Stock All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year(s) Salary($) Bonus($) sation($) Award(s) ($) SARS (#) Payouts($) sation($)
- -----------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tim B. 1998 $193,275 - - - - - 3,504/(2)/
Tarrillion 1997 184,833 - - - 44,444/(1)/ - 6,951/(2)/
Former Chief 1996 185,903 - - - - - 5,940/(2)/
Executive
Officer and
President
====================================================================================================================================

</TABLE>
- -------------------------------
(1) Consists of options granted during fiscal year ended December 31, 1995
which were repriced as of July 10, 1997.
(2) Represents life insurance premiums paid by the Company on policies on the
executives' lives and matching contributions to the Company's 401-K plan.

Stock Options

During the 1998 fiscal year, the Company did not grant any stock options
to any of the named executive officers. No stock appreciation rights have been
granted to employees.

25
<PAGE>

The following table sets forth for the named executive officer information
regarding stock options exercised by such officer during the 1998 fiscal year,
together with the number and value of stock options held at 1998 fiscal year-
end, each on an aggregated basis.

<TABLE>
<CAPTION>
Aggregated Option Exercises in the 1998 Fiscal Year
and Fiscal Year-End Option Value
- ------------------------------------------------------------------------------------------------------------------

Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Number of Fiscal Year-End Fiscal Year-End
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable /(1)/
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tim B. Tarrillion -- -- 44,444/11,111 $0/$0
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
/(1)/ The last sales price of the Company's Common Stock as reported on the
NASDAQ SmallCap Market on December 31, 1999 was $3.25 which was lower than
the exercise price of the options.

Employment Agreements

Effective December 23, 1998 the Company entered into an agreement with Mr.
Tarrillion in full settlement of his employment contract. The agreement
provides for the resignation of Mr. Tarrillion's officer positions as of January
22, 1999, with the continuation of his employment as a full-time consultant
through March 31, 1999. From April 1 through December 31, 1999, Mr. Tarrillion
will be available on an "as-needed" basis and his salary and benefits will
continue through such date. Mr. Tarrillion's current annual salary is
approximately $190,000. As part of the agreement, the exercise price of 55,555
options was reduced from $9.00 to $4.50. Of these options, 44,444 are currently
vested and 11,111 will vest on December 31, 1999. In addition, Mr. Tarrillion
agreed that he will not seek re-election to the Board of Directors when his term
expires at the 1999 Annual Meeting of Stockholders.

In February 1995 the Company entered into an employment agreement with Ms.
Shields. Ms. Shields' employment agreement provides for a base salary of
$120,000, plus bonuses and cost of living increases, as well as options to
purchase 33,333 shares of the Company's Common Stock which vest over four years
commencing on March 31, 1996. Her agreement is for a term of five years. In
September 1997, the Company and Ms. Shields entered into an amendment to her
employment agreement whereby she is compensated on a hourly basis, using a rate
computed from her salaried compensation. This agreement was entered into due to
the decreased administrative duties required of Ms. Shields as the Company's
technologies were either sold or licensed, and as a further reduction of the
Company's overhead costs. This voluntary arrangement may be terminated at any
time by either party, in which case the provisions of Ms. Shields' original
employment agreement would be in effect.

Stock Options And Warrants

The Company presently has no formal stock option plan. However, through
December 1998 the Company has outstanding options to purchase 338,889 shares of
the Company's Common Stock. Of these, 330,556 are outstanding to current and
former employees, have option prices ranging from $4.50 to $22.50, vest 20% to
25% per year and expire through June 2006. As noted above, the exercise price
for Mr. Tarrillion's options was reduced from $9.00 to $4.50 per share in
December 1998. The remaining options were granted to current or past note
holders, have an exercise price of $6.75 and expire through September 1999.
Included in these options to employees are 202,776 granted to current or former
directors of the Company and 33,333 granted to other executive officers of the
Company.

26
<PAGE>

1999 Stock Incentive Plan and Repricing of Certain Outstanding Options

Subsequent to year-end, the Compensation Committee of the Board of
Directors approved, subject to stockholder approval, the Company's 1999 Stock
Incentive Plan (the "Plan"). The Plan authorizes the Compensation Committee to
grant options in the maximum amount of 10% of the total issued and outstanding
shares of the Company or reserved for issuance upon the conversion or exercise
of outstanding convertible securities. Of these options, up to a maximum of
1,000,000 shares may be issued pursuant to incentive stock options granted under
the Plan. The Plan will be submitted for stockholder approval at the 1999
Annual Meeting of Stockholders.

The Compensation Committee approved, subject to stockholder approval of
the Plan, new grants of ten-year options under the Plan to Henry Sullivan,
President and Chief Executive Officer (40,000 shares), Judith Knight Shields,
Chief Financial Officer (10,000 shares), and each of the outside directors of
the Company (10,000 shares each). All such options are subject to vesting
provisions and have an exercise price of $3.00.

The Compensation Committee also approved a reduction in the exercise price
of an aggregate of 55,555 outstanding options previously granted to Henry
Sullivan and Judith Shields from $9.00 to $4.50. All other terms of the options
remained in effect.

27
<PAGE>

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The following tables set forth as of March 15, 1999 certain information
with respect to the beneficial ownership of the Company's Common Stock and
Series F, Series G-I and Series G-II Shares by any person (including any "group"
as that term is used in Section 13(d)(3) of the Exchange Act) known by the
Company to be the beneficial owner of more than five percent (5%) of any class
of the Company's voting securities based upon filings with the Securities and
Exchange Commission. As of March 15, 1999, there were 3,604,548 outstanding
shares of Common Stock, 106,554 outstanding Series F Shares, 17,397 outstanding
Series G-I Shares, and 21,265 outstanding Series G-II Shares. The tables below
do not give effect to the issuance of the Series G-III Shares on March 31, 1999.

Common Stock

<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership/(1)/ of Class/(1)/
- ------------------------------------ ------------ -------------
<S> <C> <C>
BancAmerica Capital Investors 3,780,191/(2)/ 51.2%
(formerly NationsBanc Capital Corporation)
901 Main Street, 22nd Floor
Dallas, Texas 75202

The CCG Charitable 379,477/(3)/ 9.5%
Remainder Unitrust #1
14450 T.C. Jester Boulevard, Suite 170
Houston, Texas 77014

David S. Holland 312,586/(4)/ 8.0%
1 Riverway, Suite 1700
Houston, Texas 77056

Harrison Interests, Ltd. 252,984/(5)/ 6.6%
Texas Commerce Bank Bldg., Suite 1900
Houston, Texas 77002

Henry W. Sullivan 229,890/(6)/ 6.4%
4710 Bellaire Boulevard, Suite 301
Bellaire, Texas 77401

Pecaut Capital Investors, LP 202,388/(7)/ 5.3%
511 6th Street
Sioux City, Iowa 51101

William T. Aldrich 190,739/(8)/ 5.3%
10406 Memorial Drive
Houston, Texas 77024

Tim B. Tarrillion 185,167/(9)/ 5.1%
4710 Bellaire Boulevard, Suite 301
Bellaire, Texas 77401
</TABLE>
___________________________

28
<PAGE>

/(1)/ Calculated in accordance with Item 403 of Regulation S-B and Rule
13d-3(d) as promulgated under the Exchange Act. Includes shares of Common
Stock which the holder has the right to acquire upon exercise or
conversion of outstanding options, warrants or other convertible
securities (such as the Series F, Series G-I and G-II Shares) within
sixty (60) days of January 29, 1999.

/(2)/ Includes 3,224,635 shares of Common Stock issuable upon conversion of
Series F, Series G-I and Series G-II Shares. Includes 555,556 shares of
Common Stock which may be acquired upon exercise of Common Stock purchase
warrants. Does not include 10,000 shares of Common Stock issuable upon
exercise of options granted to Mr. Williamson in his capacity as Director
which were assigned to BankAmerica Capital Investors and which will vest
upon his attendance at future board meetings.

/(3)/ Includes 296,143 shares of Common Stock issuable upon conversion of
Series F, Series G-I and Series G-II Shares. Includes 83,333 shares of
Common Stock which may be acquired upon exercise of Common Stock purchase
warrants.

/(4)/ Includes 312,586 shares of Common Stock issuable upon conversion of
Series G-II Shares.

/(5)/ Includes 197,429 shares of Common Stock issuable upon conversion of
Series F and Series G-I Shares. Includes 55,556 shares of Common Stock
which may be acquired upon exercise of Common Stock purchase warrants.

/(6)/ Dr. Sullivan is deemed to beneficially own 176,851 shares of Common Stock
by virtue of his position as a principal executive officer of GAIA
Holdings, Inc., which owns 61,728 shares of Common Stock, and Thor
Ventures, L.C. which owns 115,123 shares of Common Stock. Includes 29,455
shares of Common Stock issuable upon the conversion of Series G-II
Shares. Includes 4,585 shares owned through a profit sharing plan for the
benefit of Dr. Sullivan and 16,666 shares which may be acquired upon
exercise of options. Does not include 5,555 shares issuable upon exercise
of options which do not vest until December 29, 1999.

/(7)/ Includes 157,943 shares of Common Stock issuable upon conversion of
shares of Series F and Series G-I Shares. Includes 44,444 shares of
common stock which may be acquired upon exercise of Common Stock purchase
warrants.

/(8)/ Mr. Aldrich is deemed to beneficially own 176,851 shares of Common Stock
by virtue of his position as principal executive officer of GAIA
Holdings, Inc. which owns 61,728 shares of Common Stock, and Thor
Ventures, L.C. which owns 115,123 shares of Common Stock. Also includes
13,888 shares which may be acquired upon exercise of options.

/(9)/ Includes 58,944 shares of Common Stock and 5,555 Common Stock purchase
warrants received by Mr. Tarrillion in conjunction with a merger
transaction between the Company and EET in March 1995. Includes 45,658
shares owned through a profit sharing plan for the benefit of Mr.
Tarrillion and 44,444 shares which may be acquired upon exercise of
options. Includes 29,455 shares of Common Stock issuable upon the
conversion of Series G-II Shares. Does not include 11,111 shares issuable
upon exercise of options which do not vest until December 31, 1999. Does
not include 16,534 shares owned by trusts on behalf of Mr. Tarrillion's
minor children which are held by an independent trustee as to which Mr.
Tarrillion disclaims any beneficial ownership.

29
<PAGE>

Series F, Series G Subseries I and Series G Subseries II Preferred Stock

<TABLE>
<CAPTION>
Amount and Amount and
Amount and Nature of Nature of
Nature of Series G Series G
Name and address of Series F Percentage Subseries I Percentage Subseries II Percentage
Beneficial Owner Ownership of Class(1) Ownership Of Class(1) Ownership of Class(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BancAmerica Capital Investors 71,444 67.0% 12,575 72.3% 10,831 51.0%
(formerly NationsBanc Capital
Corporation)
901 Main Street, 66th Floor
Dallas, Texas 75202

The CCG Venture Partners 10,717/(2)/ 10.1% 1,886/(2)/ 10.8% - -
14450 T.C. Jester Boulevard
Suite 170
Houston, Texas 77014

Harrison Interests, Ltd. 7,144 6.7% 1,257 7.2% - -
Texas Commerce Bank Bldg.
Suite 1990
Houston, Texas 77002

Pecaut Capital Investors, LP 5,715 5.4% 1,006 5.8% - -
511 6th Street
Sioux City, Iowa 51101

David S. Holland - - - - 2,708 12.7%
1 Riverway, Suite 1700
Houston, Texas 77056

Bruce F. Harrison, as Trustee - - - - 1,072 5.0%
Texas Commerce Bank Bldg.
Suite 1900
Houston, Texas 77002
</TABLE>
- ---------------------
/(1)/ Calculated in accordance with Item 403 of Regulation S-B and Rule
13d-3(d) as promulgated under the Exchange Act. Includes shares of Common
Stock which the holder has the right to acquire upon exercise or
conversion of outstanding options, warrants or other convertible
securities (such as the Series F, Series G-I and Series G-II Shares)
within sixty (60) days of March 15, 1999. Calculations were made using
the conversion prices as of March 15, 1999 as follows: Series F -
$4.747754; Series G-I - $2.678428; Series G-II - $.86625.

/(2)/ Registered in the name of The CCG Charitable Remainder Unitrust No. 1 for
which CCG Venture Partners, LLC provides investment management services.
CCG Venture Partners, LLC disclaims beneficial ownership of these shares.

30
<PAGE>

Security Ownership Of Management

The following table sets forth as of March 15, 1999 the beneficial
ownership of the Company's Common Stock by (i) the executive officer identified
in the Summary Compensation Table appearing herein; (ii) each director and
nominee for director; and (iii) all directors and executive officers as a group.
As of March 15, 1999, there were 3,604,548 outstanding shares of Common Stock,
106,554 outstanding Series F Shares, 17,397 outstanding Series G-I Shares, and
21,265 outstanding Series G-II Shares. The table below does not give effect to
the issuance of the Series G-III Shares on March 31, 1999.

<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percentage
Name and Address of Beneficial Owner Ownership/(1)/ of Class/(1)/
- ------------------------------------ -------------- -------------
<S> <C> <C>
Henry W. Sullivan 229,890/(2)/ 6.4%
4710 Bellaire Boulevard, Suite 301
Houston, Texas 77401

Tim B. Tarrillion 185,167/(3)/ 5.0%
4710 Bellaire Boulevard, Suite 301
Bellaire, Texas 77401

Douglas C. Williamson -/(4)/ -
901 Main Street, 66th Floor
Dallas, Texas 75202

Edwin H. Knight -/(5)/ -
707 Travis, Suite 1900
Houston, Texas 77002

Judith Knight Shields 70,744/(6)/ 2.0%
4710 Bellaire Boulevard, Suite 301
Houston, Texas 77401

All officers and directors as a group 485,801 12.9%
(5) persons
</TABLE>
- -------------------
/(1)/ Calculated in accordance with Item 403 of Regulation S-B and Rule
13d-3(d) as promulgated under the Exchange Act. Includes shares of Common
Stock which the holder has the right to acquire upon exercise or
conversion of outstanding options, warrants or other convertible
securities (such as the Series F, Series G-I and Series G-II Shares)
within sixty (60) days of March 15, 1999.

/(2)/ Dr. Sullivan is deemed to beneficially own 176,851 shares of Common Stock
by virtue of his position as a principal executive officer of GAIA
Holdings, Inc., which owns 61,728 shares of Common Stock, and Thor
Ventures, L.C. which owns 115,123 shares of Common Stock. Includes 29,455
shares of Common Stock issuable upon the conversion of Series G-II
Shares. Includes 4,585 shares owned through a profit sharing plan for the
benefit of Dr. Sullivan and 16,666 shares which may be acquired upon
exercise of options. Does not include 5,555 shares issuable upon exercise
of options which do not vest until December 29, 1999.

/(3)/ Includes 58,944 shares of Common Stock and 5,555 Common Stock purchase
warrants received by Mr. Tarrillion in conjunction with a merger
transaction between the Company and EET in March 1995. Includes 45,658
shares owned through a profit sharing plan for the benefit of Mr.
Tarrillion and 44,444 shares which may be acquired upon exercise of
options. Includes 29,455 shares of Common Stock issuable

31
<PAGE>

upon the conversion of Series G-II Shares. Does not include 11,111 shares
issuable upon exercise of options which do not vest until December 31,
1999. Does not include 16,534 shares owned by trusts on behalf of Mr.
Tarrillion's minor children which are held by an independent trustee as
to which Mr. Tarrillion disclaims any beneficial ownership.

/(4)/ Mr. Williamson is a Senior Vice President at BancAmerica Capital
Investors ("BCI"). Does not include 3,224,635 shares of Common Stock
issuable to BCI upon conversion of its holdings of Series F, Series G-I
and Series G-II Shares. Does not include 555,555 shares of Common Stock
which may be acquired by BCI upon exercise of Common Stock purchase
warrants. Does not include 10,000 shares of Common Stock issuable upon
the exercise of options granted to Mr. Williamson in his capacity as
Director which were assigned to BankAmerica Capital Investors and which
will vest upon his attendance at future board meetings.

/(5)/ Mr. Knight manages Harrison Interests Ltd. Does not include 197,429
shares of Common Stock issuable to Harrison Interests, Ltd. upon
conversion of its holdings of Series F, Series G-I and Series G-II
Shares. Does not include 55,555 shares of Common Stock which may be
acquired by Harrison Interests, Ltd. upon exercise of Common Stock
purchase warrants. Does not include 10,000 shares of Common Stock
issuable upon the exercise of options granted to Mr. Harrison in his
capacity as Director which will vest upon his attendance at future board
meetings.

/(6)/ Includes 1,111 shares received by Ms. Shields and her husband in
connection with the merger transaction between the Company and EET in
March 1995. Includes 11,903 shares owned through a profit sharing plan
for the benefit of Ms. Shields and 33,333 shares which may be acquired
upon exercise of options. Includes 23,564 shares of Common Stock issuable
upon the conversion of shares of Series G-II Shares.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In May 1998, BancAmerica Capital Investors purchased 10,000 Series G-II
Shares for cash proceeds of $1,000,000. Mr. Williamson, Chairman of the Board
and Director of the Company is a Managing Director and Senior Vice President of
BCI. In November 1998, Mr. Sullivan, Mr. Tarrillion and Ms. Shields purchased
250, 250 and 200 shares of the Company's Series G-II Shares for cash proceeds of
$25,000, $25,000 and $20,000, respectively. These transactions were completed
on terms identical to those negotiated with third-party investors.

Effective December 23, 1998 the Company entered into an agreement in full
settlement of Mr. Tarrillion's employment contract. See "Executive
Compensation - Employment Agreements."

Involvement in Certain Legal Proceedings

To the best of the Company's knowledge, there have been no events under any
state or federal bankruptcy laws, no criminal proceedings, no judgments, orders,
decrees or injunctions entered against any officer or director, and no
violations of federal or state securities or commodities laws material to the
ability and integrity of any director or executive officer during the past five
years.

Compliance With Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors and certain officers of the Company, as well as persons who own more
than 10% of a registered class of the Company's equity securities ("Reporting
Persons"), to file reports with the Securities and Exchange Commission. The
Company believes that during the year ended December 31, 1998, all Reporting
Persons timely complied with all filing requirements applicable to them, except
for a Form 4 for Mr. Tim B. Tarrillion in connection with the repricing of
certain options which was subsequently filed with the Securities and Exchange
Commission.

32
<PAGE>

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.

C. Exhibits

<TABLE>
<CAPTION>
Plan of Acquisition, reorganization,
arrangements, liquidation or succession:
<C> <S> <C>
2.3 Asset Purchase Agreement between Gaia Incorporated by reference to the Current Report on
Technologies, Inc., Gaia Holdings, Inc., Form 8-K filed January 12, 1996 ("January 12, 1996
Thor Ventures, L.C. and Thor Industries, 8-K")
Inc. and the Company dated December 29,
1995

3.1 Certificate of Amendment to the Restated Incorporated by reference to the Company's Form
Certificate of Incorporation of the 10-QSB for the six months ended June 30, 1998 ("June
Company 30, 1998 10-QSB")

Instruments defining the rights of
security holders:

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

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

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

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

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

4.6 Certificate of Designation of Cumulative Filed herewith
Convertible Preferred Stock, Series G -
Subseries III

Material Contracts:

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

33
<PAGE>

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

10.3 Stock Option Agreement between Judith Incorporated by reference to the Form S-4
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 of Incorporated by reference to the Company's Annual
Tim Tarrillion 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 of Incorporated by reference to the 1995 Form 10-K
Donovan W. Boyd

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

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

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

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

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

10.13 Consulting Agreement between Donovan W. Incorporated by reference to the Company's Annual
Boyd dated as of October 31, 1997 Report on Form 10-KSB for the year ended December
31, 1997 (the "1997 Form 10-KSB")

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

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

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

</TABLE>

34
<PAGE>

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

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

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

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

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

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

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

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

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

10.32 For of Stock Purchase Agreement for an Incorporated by reference to the June 30, 1998 10-QSB
Additional Closing dated as of May 21,
1998 by and among the Company, its
operating subsidiaries, NationsBanc
Capital Corporation and certain other
Investors

10.33 Agreement between the Company and Tim B. Filed herewith
Tarrillion dated as of December 23, 1998

10.34 Amended and Restated Stock Option Filed herewith
Agreement between Henry W. Sullivan and
the Company dated December 29, 1995

</TABLE>

35
<PAGE>

<TABLE>
<C> <S> <C>
10.35 Amended and Restated Stock Option Filed herewith
Agreement between Judith Shields and the
Company dated February 23, 1995

10.36 1999 Stock Incentive Plan Filed herewith

10.37 Incentive Stock Option Agreement between Filed herewith
Henry W. Sullivan and the Company dated
February 22, 1999

10.38 Incentive Stock Option Agreement between Filed herewith
Judith Shields and the Company dated
February 22, 1999

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

23.1 Consent of BDO Seidman LLP Filed herewith

27 Financial Data Schedule Filed herewith
</TABLE>

D. Reports on Form 8-K

There were no Current Reports on Form 8-K during the quarter ended December
31, 1998.

36
<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 31, 1999

By: /s/ Henry W. Sullivan
---------------------------------------
Henry W. Sullivan
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.

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Douglas C. Williamson Chairman and Director March 31, 1999
- ---------------------------
Douglas C. Williamson

/s/ Henry W. Sullivan Chief Executive Officer, March 31, 1999
- --------------------- President and Director
Henry W. Sullivan

/s/ Edwin H. Knight Director March 31, 1999
- -------------------
Edwin H. Knight

/s/ Tim B. Tarrillion Director March 31, 1999
- ---------------------
Tim B. Tarrillion
</TABLE>

37
<PAGE>

INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

PAGE
----

North American Technologies Group, Inc. Consolidated Financial Statements:
<S> <C>
Report of Independent Certified Public Accountants ........................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............... F-3
Consolidated Statements of Loss for the Years
Ended December 31, 1998 and 1997......................................... F-4
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998 and 1997........................... F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and 1997................................... F-6
Notes to Consolidated Financial Statements................................. F-7 - F-24
</TABLE>

F-1
<PAGE>

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

North American Technologies Group, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of North American
Technologies Group, Inc. as of December 31, 1998 and 1997, 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, 1998 and 1997, 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 financing for working capital and
capital expenditures to commercialize and support its business until the Company
achieves a level of revenues adequate to generate sufficient cash flows from its
operations. These conditions raise 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
January 22, 1999, except for Note 18,
which is as of March 31, 1999.

F-2
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>

1998 1997
------------- -------------
<S> <C> <C>
Assets
------
Current Assets:
Cash........................................................ $ 719,212 $ 348,991
Accounts receivables, less allowance for
doubtful accounts of $18,000 for 1997..................... 5,617 285,623
Inventories (Note 5)........................................ 186,783 6,395
Current portion of notes receivable (Note 6)................ 105,000 100,000
Prepaid expenses and other.................................. 84,341 103,087
------------ ------------
Total Current Assets...................................... 1,100,953 844,096
Notes Receivable, Less Current Portion (Note 6).............. 761,639 881,960
Property and Equipment, Less Accumulated
Depreciation (Note 7)....................................... 841,998 149,946
Patents and Purchased Technologies, Less Accumulated
Amortization of $131,551 and $268,787....................... 1,586,017 1,797,128
Goodwill, Less Accumulated Amortization of $815,717
and $603,793............................................... 1,964,301 2,652,391
Other Intangible Assets, Less Accumulated
Amortization of $74,975 and $107,007........................ 80,025 126,765
Other........................................................ 43,473 292,291
------------ ------------
$ 6,378,406 $ 6,744,577
============ ============

Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Current maturities of long-term debt (Note 8)............... $ 500,000 $ 3,800
Accounts payable............................................ 208,202 248,362
Accrued expenses (Notes 9 and 13)........................... 519,453 207,302
Deferred dividends payable on preferred stock,
including accrued interest (Note 10)...................... 191,927 193,448
------------ ------------
Total Current Liabilities................................. 1,419,582 652,912
Long-term Debt, Less Current Maturities (Note 8)............. - 503,178
Deferred dividends payable on preferred stock, including
accrued interest (Note 10)................................. 163,553 13,985
------------ ------------
Total Liabilities......................................... 1,583,135 1,170,075
------------ ------------
Commitments and Contingencies (Note 13)
Stockholders' Equity (Note 10):
Convertible preferred stock, $.001 par value, 10,000,000
shares authorized; 147,468 and 115,364 shares issued...... 14,746,815 11,536,406
Common stock, $.001 par value, 100,000,000 shares
authorized; 3,558,502 and 3,479,858 shares issued......... 3,559 3,480
Additional paid-in capital.................................. 27,148,991 26,376,163
Deficit..................................................... (36,934,862) (32,180,115)
Less notes receivable for sale of stock..................... (169,232) (161,432)
------------ ------------
Total Stockholders' Equity................................ 4,795,271 5,574,502
------------ ------------
$ 6,378,406 $ 6,744,577
============ ============
</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, 1998 and 1997

1998 1997
---- ----
<S> <C> <C>
Revenues (Notes 4 and 16)............................................ $ 138,828 $ 3,553,117
Cost of Revenues..................................................... 292,043 2,436,261
----------- -----------
Gross Profit (loss)............................................... (153,215) 1,116,856

Selling, General and Administrative Expenses......................... 2,900,955 4,282,925
----------- -----------

Operating Loss before valuation adjustment........................ (3,054,170) (3,166,069)

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

Operating loss.................................................... (3,054,170) (4,368,697)
----------- -----------
Other Income (Expense):
Interest income..................................................... 67,494 169,402
Interest expense (Notes 6(c) and 9)................................. (193,433) (94,805)
Gain (loss) on disposition of equipment and other assets (Note 4)... 349,088 (51,934)
Royalty income (Note 4)............................................. 98,160 -
Other............................................................... - 14,743
----------- -----------

Total Other Income - Net............................................. 321,309 37,406
----------- -----------
Net Loss............................................................. $(2,732,861) $(4,331,291)
=========== ===========
Net Loss Per Share (Notes 1 and 10):
Net Loss Per Common Share - Basic................................... $ (1.36) $ (1.98)
=========== ===========
Net Loss Per Common Share - Assuming dilution....................... $ (1.36) $ (1.98)
=========== ===========
Weighted Average Number of Common
Shares Outstanding................................................ 3,490,146 3,207,191
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1996....................... 101,429 $10,765,447 3,012,388 $3,012
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) 467,470 468
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 3,479,858 3,480
Sale of Series G preferred stock................. 20,000 2,000,000 - -
Issuance of common stock upon conversion of
Series F preferred stock....................... (4,000) (400,000) 78,644 79
Issuance of preferred stock in lieu of
cash dividend................................... 16,104 1,610,409 - -
Dividends on preferred stock..................... - - - -
Deemed dividends on preferred stock.............. - - - -
Costs associated with equity transactions........ - - - -
Compensation costs associated with
repricing of stock options..................... - - - -
Interest on notes receivable from
stockholders.................................... - - - -
Net loss for the year............................ - - - -
------- ----------- --------- ------
Balance, December 31, 1998....................... 147,468 $14,746,815 3,558,502 $3,559
======= =========== ========= ======

Notes
Additional Receivable
Paid-In for Sale
Capital Deficit of Stock Total
----------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996....................... $23,833,721 $(25,902,116) $(153,632) $ 8,546,432
Sale of Series G preferred stock................. - - - 1,640,000
Issuance of common stock upon conversion of
Series E, F and G preferred stock.............. 2,249,939 - - -
Issuance of preferred stock in lieu of
cash dividends................................. - (1,381,366) - -
Dividends on preferred stock..................... - (194,213) - (194,213)
Deemed dividends on preferred stock.............. 371,129 (371,129) - -
Costs associated with equity transactions........ (78,626) - - (78,626)
Interest on notes receivable from stockholders... - - (7,800) (7,800)
Net loss for the year............................ - (4,331,291) - (4,331,291)
----------- ------------- --------- -----------
Balance, December 31, 1997....................... 26,376,163 (32,180,115) (161,432) 5,574,502
Sale of Series G preferred stock................. - - - 2,000,000
Issuance of common stock upon conversion of
Series F preferred stock....................... 399,921 - - -
Issuance of preferred stock in lieu of
cash dividend................................... - (1,610,409) - -
Dividends on preferred stock..................... - (113,295) - (113,295)
Deemed dividends on preferred stock.............. 298,182 (298,182) - -
Costs associated with equity transactions........ (25,275) - - (25,275)
Compensation costs associated with
repricing of stock options..................... 100,000 - - 100,000
Interest on notes receivable from
stockholders.................................... - - (7,800) (7,800)
Net loss for the year............................ - (2,732,861) - (2,732,861)
----------- ------------ --------- -----------
Balance, December 31, 1998....................... $27,148,991 $(36,934,862) $(169,232) $ 4,795,271
=========== ============ ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

NORTH AMERICAN TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998 and 1997

Increase (Decrease) in Cash
<TABLE>
<CAPTION>

1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(2,732,861) $(4,331,291)
Adjustments to reconcile net loss to
net cash used in operating activities:
Impairment of long-lived assets................................. - 1,202,628
Depreciation and amortization................................... 578,847 748,815
Valuation allowance on inventory................................ 50,000 -
Compensation expense............................................ 100,000 -
Discount on note receivable..................................... 105,000 -
(Gain) loss on disposition of equipment and other assets........ (349,088) 51,934
Equity in net loss of joint venture............................. - 87,391
Provision for bad debts......................................... 189,950 94,853
Accrued interest receivable on notes receivable, stockholders... (7,800) (7,800)
Accrued interest payable on deferred dividends.................. 34,752 13,221
Changes in assets and liabilities:
Accounts receivable............................................ 298,006 (49,803)
Inventories.................................................... (232,802) (10,831)
Prepaid expenses and other current assets...................... 43,746 (20,257)
Other assets................................................... 16,302 36,959
Accounts payable and accrued expenses.......................... 211,991 (176,369)
----------- -----------
Net cash used in operating activities...................... (1,693,957) (2,360,550)
----------- -----------
Cash flows from investing activities:
Cash received from disposition of net assets of IPF (in 1997),
equipment and other assets........................................ 338,538 1,002,221
(Increase) decrease in notes receivable............................ 602,642 (547,788)
Payments relating to patents....................................... (14,203) (26,717)
Purchase of property and equipment................................. (805,546) (12,520)
----------- -----------
Net cash provided by investing activities.................. 121,431 415,196
----------- -----------
Cash flows from financing activities:
Issuance of preferred stock........................................ 1,975,000 1,640,000
Repayment of notes payable and long-term debt...................... (6,978) (393,941)
Payment for costs and fees of equity issuances..................... (25,275) (78,626)
----------- -----------
Net cash provided by financing activities.................. 1,942,747 1,167,433
----------- -----------
Net increase (decrease) in cash..................................... 370,221 (777,921)
Cash beginning of year.............................................. 348,991 1,126,912
----------- -----------
Cash end of year.................................................... $ 719,212 $ 348,991
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

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

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business and Basis of Presentation

North American Technologies Group, Inc. ("NATK"), was incorporated on
December 24, 1986 in the State of Delaware. The accompanying consolidated
financial statements include the accounts of NATK and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. North American Technologies Group, Inc. and its subsidiaries are
referred to herein as the Company.

The Company's historic business strategy has been to acquire and/or
internally develop businesses that are based on proprietary technologies,
proprietary manufacturing processes and/or defensible market niches. These
technologies would 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 developed at their own individual
rates, the Company would 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.

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); 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 provided on-site decontamination of
buildings and equipment contaminated with polycholorinated biphenyls,
radioactive isotopes or other toxic materials utilizing EET's patented
TechXTract system. IPF manufactured and distributed proprietary and standard
transition products (custom pipe, pipe fittings and valves). GAIA manufactured
and distributed 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. RII reformulated and marketed a
corrosion protection system for steel structures in marine applications. TieTek
has developed the technology to manufacture composite railroad crossties from
crumbed tire rubber and other recycled materials.

During 1997 and 1998, the Company evaluated the businesses and/or
technologies that had been acquired during the prior years to determine the
optimum course to be pursued given the level of resources available to the
Company. As a result of this review, the Company decided to concentrate its
resources on the commercialization of its TieTek Composite Railroad Crosstie.
Accordingly, the Company has 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. Since June 1997, the Company has completed the
following transactions: (a) sold the air conditioner support 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); and (e)
sold certain assets of EET that related primarily to EET's patented TechXTract
technology (March 1998).

F-7
<PAGE>

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

Inventories

Inventories consist of composite railroad crossties and raw materials and
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.

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 for the year ended December
31, 1997 (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.

Property and Equipment

Property and equipment are stated at cost. 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 bases of assets and liabilities. The Company adjusts
the deferred tax asset valuation allowance based on judgments as to future
realization of the deferred tax benefits supported by demonstrated trends in the
Company's operating results.

F-8
<PAGE>

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

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, 1998 and 1997, the Company's research and development
expenses were not significant.

Loss Per Common Share

The Company provides basic and dilutive earnings (loss) per common share
information for each year presented. The basic net loss per common share is
computed by dividing the net loss, plus the dividends on preferred stock, by the
weighted average number of common shares outstanding. Preferred stock dividends
include: (i) dividends stated in the respective certificate of designations; and
(ii) dividends deemed to have been issued by virtue of a conversion price that
at the date of issuance is less than the market price of the Company's common
stock. For the years ended December 31, 1998 and 1997, net loss applicable to
common stockholders is as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net loss..................................... $(2,732,861) $(4,331,291)
Dividends on preferred stock................. (1,723,704) (1,575,579)
Deemed dividends on preferred stock.......... (298,182) (371,129)
----------- -----------
Net loss applicable to common stockholders... $(4,754,747) $(6,277,999)
=========== ===========
</TABLE>

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, 1998 and 1997, potential dilutive securities had an anti-dilutive
effect and were not included in the calculation of diluted net loss per common
share. For the year ended December 31, 1998, these securities include options
and warrants on 1,708,306 shares of common stock, convertible debt and preferred
stock convertible into 37,037 and 5,396,138 shares of common stock,
respectively. For the year ended December 31, 1997, these securities included
options and warrants on 1,764,324 shares of common stock, convertible debt and
preferred stock convertible into 37,037 and 1,688,889 shares of common stock,
respectively.

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. Royalty revenues are recognized when earned.

Stock Options and Warrants

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

Management's Estimates and Assumptions

The preparation of financial statements in conformity with 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.

F-9
<PAGE>

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

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, 1998, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $597,579. Through the year
ended December 31, 1997, the Company extended credit to its customers in various
industries, including petrochemical, construction, mining, waterworks and
environmental, and there was no concentration of credit risk. For the year
ended December 31, 1998 and thereafter, the Company will extend credit to its
customers primarily in the railroad industry.

Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). This statement standardizes the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of hedged asset or liabilities that are attributable to
the hedged risk or (b) the earnings effect of the hedged forecasted transaction.
The statement is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999, with early application encouraged, and shall not
be applied retroactively to financial statements of prior periods. Adoption of
SFAS 133 is expected to have no effect on the Company's financial statements.

NOTE 2 - FINANCIAL CONDITION AND GOING CONCERN

For the years ended December 31, 1998 and 1997, the Company incurred net
losses of $2,732,861 and $4,331,291, respectively, and had an accumulated
deficit of $36,934,862 at December 31, 1998. Because of these recurring losses,
the Company will require additional financing for working capital and capital
expenditures to continue the commercialization of the TieTek Composite Railroad
Crosstie until the Company achieves a level of revenues adequate to generate
sufficient cash flows from its operations. 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.

Management is currently in negotiations with certain potential investors
regarding an investment in the Company. As of the date of this report, no
definitive agreement has been reached and there can be no assurance that the
transaction will be completed.

F-10
<PAGE>

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

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 (the "Crosstie Loan").

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, b) the release of 74,074 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.

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 year ended December 31, 1997 since the purchase
occurred in December 1997. The following unaudited proforma summary presents
the effect on the statement of loss for the year ended December 31, 1997 as if
the purchase had occurred at the beginning of 1997.

1997
-----------
Revenues............. $ 3,567,000
===========
Net loss............. $(4,900,000)
===========
Net loss per share... $ (2.16)
===========

The 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 January 1, 1997 or of results which may occur in the future.

F-11
<PAGE>

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

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.
There was no gain or loss on this transaction. In September 1998, the Company
discounted the note receivable for a cash payment of $420,000 in settlement of
all obligations between the Company and the purchaser. See Note 6 for the terms
and settlement of the note receivable. Net revenues and gross profit were
$97,690 and $13,727, respectively, for the A/C pad product line for the year
ended December 31, 1997.

(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 and gross
profit were $1,957,587 and $578,044, respectively, for IPF for the year ended
December 31, 1997.

(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 and gross
profit were $302,709 and $116,936, respectively, for the Waste Management
Services division of EET for the year ended December 31, 1997.

(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 with original principal balances 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. During
1998 the Company received royalty payments of approximately $98,000. Net
revenues and gross profit were $345,701 and $142,641, respectively, for RII for
the year ended December 31, 1997.

(e) In March 1998, the Company sold certain assets of EET to an unrelated
company. The assets sold related primarily to EET's patented TechXTract
technology used to provide on-site decontamination of buildings and equipment
contaminated with polychlorinated biphenyls, radioactive isotopes or other toxic
materials. The Company received consideration of $200,000 cash and two notes
receivable totalling $800,271. See Note 6 for terms of the notes receivable.
The Company recognized a gain of approximately $440,000 on the transaction. Net
revenues were $17,086 and $740,693, and gross profits were $6,331 and $275,684
for EET's TechXTract product line for the years ended December 31, 1998 and
1997, respectively.

NOTE 5 - INVENTORIES

At December 31, inventories consisted of the following:

1998 1997
-------- ------
Raw materials.... $ 68,560 $ -
Finished goods... 118,223 6,395
-------- ------
$186,783 $6,395
======== ======

At December 31, 1998, the Company provided a valuation allowance of
approximately $50,000 to reduce inventory to its estimated market value.

F-12
<PAGE>

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

NOTE 6 - NOTES RECEIVABLE

At December 31, notes receivable consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Notes receivable from the sale of certain assets of EET, net (a).............. $ 786,639 $ -
Note receivable from sale of certain assets of RII, net (b)................... 80,000 401,960
Note receivable from sale of certain equipment of GAIA (c).................... - 550,000
Note receivable from sale of net assets of IPF (d)............................ - 30,000
-------- --------
866,639 981,960
Less current maturities....................................................... 105,000 100,000
-------- --------
$ 761,639 $ 881,960
======== ========
</TABLE>

(a) In March 1998, the Company sold certain assets of EET to an unrelated
company. As a part of the consideration for this transaction the Company
received two notes with original principal balances totalling $800,271, which
are secured by the technology sold. The first promissory note has an original
principal balance of $363,436, bears interest at 6% per annum, and is payable in
twelve quarterly payments beginning September 30, 1998. The second promissory
note has an original principal balance of $436,835, bears interest at 9-1/2% per
annum, and is payable in twelve annual payments beginning September 30, 2001.
In addition to the regularly scheduled quarterly payments, the purchaser is
required to make payments equal to 10% of amounts it has invoiced in any quarter
in excess of $100,000.

(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 (i) a note receivable in the principal amount of $301,960, and (ii) a
note receivable in the principal amount of $100,000.

The note receivable with an original principal balance of $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 becomes payable in eight equal annual installments, plus any
accrued and unpaid interest, beginning in December 2000. During 1998 the
Company received payments of $111,100 relating to this note. At December 31,
1998, the remaining principal balance of $190,860 was fully reserved because the
ultimate collection of the amount is primarily dependent on the sale of certain
inventories by the purchaser which have been located for over one year in a
foreign country that is experiencing political unrest.

The note receivable with an original principal balance of $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.

(c) As consideration for the sale of the A/C pad technology and its
related equipment in 1997, the Company received $25,000 cash, a note receivable
of $550,000, and future royalty payments through June 2007. In September 1998,
the Company discounted the five-year note receivable with a then outstanding
principal balance of $525,000 for a cash payment of $420,000 in full settlement
of all obligations between the parties. The discount of $105,000 has been
included in interest expense for the year ended December 31, 1998.

(d) 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. As of December 31, 1997, the
principal balance outstanding had been reduced to $30,000 because of certain
identified liabilities and an allowance for any unknown liabilities that may be
incurred in the future. During 1998, additional adjustments were made to the
note receivable and the Company ultimately collected approximately $13,000 in
full payment of this note.

F-13
<PAGE>

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

NOTE 7 - PROPERTY AND EQUIPMENT

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

1998 1997
-------- --------
Machinery and equipment......................... $ 885,585 $103,356
Automobiles..................................... - 20,718
Furniture and fixtures.......................... 123,444 124,844
--------- --------
1,009,029 248,918
Less accumulated depreciation................... 167,031 98,972
--------- --------
$ 841,998 $149,946
========= ========

NOTE 8 - LONG-TERM DEBT

At December 31, long-term debt is as follows:
1998 1997
-------- --------

8% convertible debenture, due August 1999....... $500,000 $500,000
Other........................................... - 6,978
-------- --------
500,000 506,978
Less current maturities......................... 500,000 3,800
-------- --------
$ - $503,178
======== ========

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 $13.50 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 $13.50 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.

NOTE 9 - RELATED PARTY TRANSACTIONS

In November 1998, certain officers and directors of the Company purchased
700 shares of the Series G, Subseries II, convertible preferred stock for cash
proceeds of $70,000 on the same terms as other third party investors.

In November 1998, the Company entered into an agreement with the lessor of
the manufacturing and office facility that had been formerly used for IPF's
operations. As a result of this agreement, all obligations under the lease
terminated for a cash payment of approximately $30,000. For the years ended
December 31, 1998 and 1997, rent expenses under this agreement, net of sublease
rental income, was approximately $23,400 and $30,600, respectively. The lessor
of these facilities had been an officer and director of the Company prior to
1998.

Effective December 23, 1998, the Company entered into an agreement with the
President and Chief Executive Officer of the Company, in full settlement of his
employment contract. The agreement provides for the resignation of this
individual's officer positions as of January 22, 1999, with the continuation of
his employment as a full-time consultant through March 31, 1999. From April 1
through December 31, 1999, the individual will be available on an "as needed"
basis and his salary and benefits will continue through such date. As part of
the agreement, the exercise price of 55,555 common stock options was reduced
from $9.00 to $4.50. Of these options, 44,444 are currently vested and 11,111
will vest on December 31, 1999. As of December 31, 1998, the Company had
recognized an accrual of $150,000 for compensation costs for the period April 1,
1999 through December 31, 1999. In addition, the Company recognized
compensation expense associated with the changes made to the terms of the
options of $100,000.

F-14
<PAGE>

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

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 provided for payments through December 1998 totalling
$90,000, vesting of 11,111 options to purchase Common Stock which would have
vested through March 1999, and a reduction in the exercise price of certain
options to purchase 33,333 shares of Common Stock from $11.25 to $6.75. The
individual resigned his positions as an officer and director of the Company.
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 for the year ended December 31, 1997.

NOTE 10 - STOCKHOLDERS' EQUITY

Reverse Stock Split

In May 1998, the stockholders of the Company approved a 9 for 1 reverse
stock split. Accordingly, all outstanding common stock and all per share data
have been retroactively adjusted to reflect the reverse stock split. In
addition, all outstanding common stock options and warrants and their exercise
prices, along with the preferred stock conversion prices, have been adjusted
accordingly to reflect the reverse stock split.

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 160,134 shares of the Company's
common stock. During 1997, the remaining 25 Series E shares were converted into
225,883 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
1,027,778 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
727,778 Series F Warrants. The remaining 27,000 Series F shares and 300,000
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 $9.00 per share, subject to certain adjustments,
and expire on April 8, 2004. As of December 31, 1998, the adjusted warrant
exercise price was $4.75 per share.

In March 1997, the Company issued 16,400 shares of Series G, Subseries I,
convertible preferred stock ("Series G Subseries I") for cash proceeds of
$1,640,000. In May through November 1998, the Company issued 20,000 shares of
Series G, Subseries II, convertible preferred stock ("Series G Subseries II")
for cash proceeds of $1,975,000 and services rendered of $25,000.

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 1998, the Company paid dividends (i) on the Series F
shares totalling $1,383,581, of which $1,275,962 was paid by issuance of 12,760
shares of Series F preferred stock, and $107,619 was deferred as a dividend
payable, and (ii) on the Series G shares totalling $340,123, of which $334,447
was paid by issuance of 3,344 shares of Series G preferred stock, and $5,676 was
deferred as a dividend payable. 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.

F-15
<PAGE>

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

The holders of the Series F and G shares have certain liquidation
preferences. The Series F, Series G Subseries I, and Series G Subseries II
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 $4.75, $2.68
and $.87 per share, respectively. In November 1998, holders of 4,000 Series F
shares with a face value of $400,000 converted their holdings into 78,644 shares
of Company common stock. 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 179,174 and 62,413 shares of Company common
stock, respectively. In conjunction with this transaction, deferred dividends
of $191,927 have been classified as a current liability. 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.

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 E and G Preferred Stock

As a result of the conversion privilege and certain other terms of the
Series E and G shares, on issuance of the Series E and G shares the Company
incurred deemed (non-cash) dividends. The deemed dividends are computed by
taking the difference between the 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 period from the date of issuance of such shares until the date such
shares may be converted only impacting the loss per share calculation (see Note
1). The Company recognized deemed dividends totalling $298,182 and $371,129,
during the years ended December 31, 1998 and 1997, respectively.

F-16
<PAGE>

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

At December 31, 1998, the Company had common stock reserved for future
issuance as follows:
Shares
---------
Conversion of preferred stock.... 5,396,138
Stock warrants outstanding....... 1,369,417
Stock options outstanding........ 338,889
Conversion of convertible debt... 37,037
---------
7,141,481
=========

NOTE 11 - STOCK OPTIONS AND WARRANTS

The Company has not adopted a formal stock option plan, however, as of
December 31, 1998, by approval of the Board of Directors, the Company has
granted the following stock options; 330,556 options to current and former
employees and 8,333 options in connection with financing transactions. In
addition, the Company had issued stock warrants totalling 1,369,417 primarily in
connection with financing transactions.

The Company accounts for stock options issued to employees in accordance
with APB opinion 25, "Accounting for Stock Issued to Employees". No options
were granted during 1998 and 1997, however during 1998 and 1997, 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.

SFAS No. 123 requires the Company to provide pro forma information
regarding net loss applicable to common stockholders and loss per share as if
compensation cost for the Company's stock options granted had been determined in
accordance with the fair value based method prescribed in SFAS 123. The Company
estimates the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997 as follows:

1998 1997
-------- ---------------

Dividend yield........ 0% 0%
Expected volatility... 95.0% 94.80%
Risk free interest.... 5.92% 5.75%-6.32%
Expected lives........ 4 years 2 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:
<TABLE>
<CAPTION>

1998 1997
------------ -----------
<S> <C> <C>
Net loss applicable to common stockholders
As reported................................ $(4,754,747) $ (6,277,999)
=========== ==============
Pro forma.................................. $(4,767,497) $ (6,324,499)
=========== ==============
Loss per share
As reported................................ $ (1.36) $ (1.98)
=========== ==============
Pro forma.................................. $ (1.37) $ (1.98)
=========== ==============
</TABLE>

F-17
<PAGE>

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

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 1998 and
1997.

A summary of the status of the Company's stock options to employees as of
December 31, 1998 and 1997, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
---------- ------- --------- --------
<S> <C> <C> <C> <C>

Outstanding at beginning of year......... 330,556 $ 9.13 372,223 $ 9.27
Granted.................................. 55,555 4.50 329,167 9.08
Exercised................................ - - - -
Forfeited................................ (55,555) (9.00) (370,834) 9.22
------- ------ -------- ------
Outstanding at end of year............... 330,556 $ 8.38 330,556 $ 9.13
======= ====== ======== ======
Options exercisable at year-end.......... 298,611 $ 8.48 266,667 $ 9.18
======= ====== ======== ======
Weighted-average fair value of options
granted during the year................. $ 1.80 $ .21
====== ======
</TABLE>
The following table summarizes information about fixed stock options
outstanding to current or former employees at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Exercise Outstanding Life Exercise Exercisable Exercise
Price at 12/31/98 (Years) Price at 12/31/98 Price
--------- ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
$4.50 55,555 6.45 $ 4.50 44,444 $ 4.50
$6.75 33,333 4.0 $ 6.75 33,333 $ 6.75
$9.00 195,835 6.8 $ 9.00 175,001 $ 9.00
$11.25 44,444 2.25 $11.25 44,444 $11.25
$22.50 1,389 6.0 $22.50 1,389 $22.50
------- -------- ------- ------- -------- -------
$4.50 - $22.50 330,556 5.9 $ 8.37 298,611 $ 8.46
============== -======= ======= ======= ======== =======
</TABLE>

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.

In connection with the stock warrants issued primarily in connection
with financing transactions, the Company had 1,369,417 stock warrants
outstanding at December 31, 1998, of which all are currently exercisable. These
warrants have exercise prices that range from $4.89 to $18.00 per share, which
equaled or exceeded the market price per share at the date of grant, and expire
through the year 2004. Of these, 1,027,778 are the Series F warrants, which
have a current exercise price of $4.75 and expire April 2004, and 341,639 are
warrants issue prior to year end 1997, which have current exercise prices
ranging from $4.75 to $18.00 and primarily expire by December 31, 1999.

F-18
<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 bases of assets and liabilities
as measured by the enacted tax rates which will be in effect when these
differences reverse.

The components of deferred income tax assets at December 31, were as
follows:
<TABLE>
<CAPTION>

December 31, 1998 1997
------------ -------- ---------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward............... $ 8,326,000 $ 7,502,000
Impairment of long-lived assets............... 280,000 409,000
Bad debt reserves............................. 65,000 6,000
Other......................................... 123,000 238,000
---------- ----------
Gross deferred tax assets....................... 8,794,000 8,155,000
Valuation allowance............................. (8,794,000) (8,155,000)
--------- ----------
Net deferred tax assets......................... $ - $ -
========= ==========
</TABLE>

At December 31, 1998 and 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.

At December 31, 1998, the Company has net operating loss carryforwards
for federal income tax purposes totalling approximately $24,487,000 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
2018.................................... 2,422,000
-----------
$24,487,000
===========

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-19
<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, 1998
and 1997 totalled approximately $400,000 and $207,000, respectively. Rent
expense for the year ended December 31, 1998 includes an accrual of $200,000 for
the termination of the current corporate office lease agreement as described
below.

During November 1998, the Company entered into a lease agreement for a
23,000 square foot manufacturing and office facility in Houston, Texas to be
used for the production of the TieTek Crossties. The lease is renewable at the
Company's option for ten consecutive periods of five years each. The base
monthly rental of $10,200 is subject to adjustment due to certain agreed-upon
costs incurred by the lessor during the construction of the facility. The
monthly rental is currently estimated to be $11,000. The lease provides for a
CPI adjustment to the monthly rental after 2-1/2 years of the initial term and
at the beginning of every renewal period. The Company has an option to lease an
additional 2-1/2 acres and up to 50,000 square feet of additional building space
through December 31, 2001. The Lessor has the obligation to construct the
facility within six months of the Company's notice to exercise the option.

The Company intends to relocate its corporate headquarters into the offices
at the manufacturing facility. During 1998, the Company subleased a portion of
its current office space. However, as of December 31, 1998, the Company had
been unable to sublease the remaining office space which provides for monthly
lease payments of approximately $8,000 through September 2001. An accrual of
$200,000 for the termination of the existing lease and related expenses has been
recognized in the accompanying financial statements.

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

Year Ending December 31, Amount
----------------------- ---------

1999............................................. $ 228,000
2000............................................. 204,000
2001............................................. 132,000
2002............................................. 132,000
2003............................................. 132,000
----------
$ 828,000
==========

At December 31, 1998, the Company had outstanding purchase commitments
for manufacturing equipment of approximately $400,000.

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.

In January 1998, GAIA was named as a defendant in a proceeding that
seeks unspecified actual and punitive damages as a consequence of an injunction
and judgment issued following a jury trial involving GAIA Holdings, Inc. and the
plaintiff. In this jury trial, GAIA Holdings, Inc. alleged that the plaintiff
infringed patents, trademarks and other proprietary rights and violated state
laws relating to porous pipe. GAIA acquired these rights from GAIA Holdings,
Inc. in 1995 and is indemnified by GAIA Holdings, Inc. for any costs that may
result from this action. The Company intends to vigorously defend these claims.

F-20
<PAGE>

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

In August 1997, IPF was sued in an action alleging breach of express
and implied warranties. The suit seeks approximately $500,000 in incidental and
consequential damages relating to leaks to an irrigation system allegedly caused
by products distributed by IPF. The defense of this action has been assumed by
IPF's products liability insurer, subject to the insurer's reservation of
rights. The Company has notified the manufacturer of the product of the
plaintiff's claims and asserted its right to indemnification from the
manufacturer. As of January 22, 1999, the Company cannot assess the extent of
its potential liability, although management does not believe the suit will have
a material adverse impact on its financial condition or future results of
operations.

NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

During the years ended December 31, 1998 and 1997, the Company paid
interest totalling approximately $50,000 and $75,000.

During the year ended December 31, 1998, the Company had the following
non-cash transactions:
(a) The holders of Series F shares totalling 4,000 shares, with face
value of $400,000, converted their holdings into 78,644 shares of the
Company's common stock.
(b) The Company issued 12,760 Series F shares in payment of dividends
totalling $1,275,962.
(c) The Company issued 3,344 Series G shares in payment of dividends
totalling $334,447.
(d) The Company recognized deemed dividends of $298,182 on its Series
G Subseries II preferred stock.
(e) The Company accrued dividends totalling $113,295 on its Series F
and Series G shares.
(f) The Company received notes receivable totalling $800,271 as a
portion of the consideration for the sale of EET's TechXTract
technology. In association with the sale the Company accrued a
liability of $60,000 for a lawsuit settlement.
(g) The Company issued 250 Series G, Subseries II, preferred stock for
$25,000 of professional services rendered.
(h) The Company disposed of other assets with a net book value of
$39,681.

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 225,883 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 179,174 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 62,413 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-21
<PAGE>

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

(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.

NOTE 15 - BUSINESS SEGMENTS

The Company's management has defined its operating segments by the type
of products and services provided and the related industries. Accordingly, 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.

December 31,
---------------------------
1998 1997
------------ ------------

Revenues from unaffiliated customers:
Environmental......................... $ 17,086 $ 1,128,291
Manufacturing and Distribution........ 121,742 2,424,826
----------- -----------
Total revenues...................... $ 138,828 $ 3,553,117
=========== ===========

Operating loss:
Environmental......................... $ (358,957) $ (757,800)
Manufacturing and Distribution........ (1,089,295) (1,842,859)
Corporate and other................... (1,605,918) (1,768,038)
----------- -----------
Total operating loss................ $(3,054,170) $(4,368,697)
=========== ===========

F-22
<PAGE>

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

December 31,
---------------------------
1998 1997
------------ -----------

Identifiable assets:
Environmental....................... $ 931,307 $ 866,000
Manufacturing and Distribution...... 4,668,080 5,135,402
Corporate and other................. 779,019 743,175
---------- ----------
$ 6,378,406 $ 6,744,577
========== ==========
Capital expenditures:
Environmental....................... $ - $ -
Manufacturing and distribution...... 795,893 6,413
Corporate and other................. 9,653 6,107
---------- ----------
$ 805,546 $ 12,520
========== ==========

Depreciation and amortization:
Environmental....................... $ 245,774 $ 394,924
Manufacturing and Distribution...... 268,463 334,491
Corporate and other................. 64,610 19,400
---------- ----------
$ 578,847 $ 748,815
========== ==========

Interest income:
Environmental....................... $ 16,368 $ -
Manufacturing and distribution...... 16,439 23,895
Corporate and other................. 34,687 145,507
---------- ----------
$ 67,494 $ 169,402
========== ==========

Interest expense:
Environmental....................... $ 1,100 $ 1,048
Manufacturing and distribution/(a)/. 110,540 41,474
Corporate and other................. 81,793 52,283
---------- ----------
$ 193,433 $ 94,805
========== ==========

/(a)/For the year ended 1998 interest expense included a $105,000 discount
on a note receivable, see Note 6(c).

NOTE 16 - MAJOR CUSTOMERS

For the year ended December 31, 1998, the Company had sales to one customer
that represented 80%, of total revenues. For the year ended December 31, 1997,
the Company had no sales over 10% of total revenue to any single customer.

F-23
<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 and gross loss were
$23,850 and $22,719, respectively, for the porous pipe product line for the year
ended December 31, 1997.

NOTE 18 - SUBSEQUENT EVENT

In March 1999, the Company issued 4,190 shares of its Series G, Subseries III,
convertible preferred stock ("Series G Subseries III") for cash proceeds of
$419,000. The Series G Subseries III shares have the same rights and privileges
as the Series G Subseries I and Series G Subseries II shares, except that the
initial conversion price is $1.50 per share. In addition, although this initial
conversion price is subject to certain adjustments, it may not be reduced below
$1.25 per share, except to give effect to reclassifications and stock splits.

F-24

<PAGE>

EXHIBIT 4.6

CERTIFICATE OF DESIGNATION OF CUMULATIVE CONVERTIBLE
PREFERRED STOCK, SERIES G - SUBSERIES III

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Henry W. Sullivan and Judith Knight Shields do hereby certify that they are
the President and Secretary, respectively, of North American Technologies Group,
Inc., a Delaware corporation (hereinafter referred to as the "Corporation" or
the "Company"); that, pursuant to the Corporation's Restated Certificate of
Incorporation, Section 151 of the Delaware General Corporation Law and the
Master Certificate of Designation relating to the Company's Cumulative
Convertible Preferred Stock, Series G (the "Master Certificate of Designation"),
the Board of Directors of the Corporation adopted the following resolutions on
March 22, 1999, and that none of the Series G Cumulative Convertible Preferred
Stock - Subseries III has been issued.

Pursuant to the terms of the Master Certificate of Designation, there is
hereby created a subseries of Preferred Stock designated as Cumulative
Convertible Preferred Stock, Series G - Subseries III (the "Series G Preferred -
Subseries III Shares"), which shall consist of 11,000 shares. The Series G
Preferred-Subseries III Shares shall have the preferences, voting powers,
relative, participating, optional or other special rights and privileges, and
the qualifications, limitations and restrictions as provided below and as
provided in the Master Certificate of Designation.

The initial conversion price (the "Subseries Conversion Price") of the
Series G Preferred - Subseries III Shares shall be $1.50 and notwithstanding
anything contained herein or in the Master Certificate of Designation to the
contrary: (i) the Subseries Conversion Price shall not be subject to any
adjustment pursuant to Section 3(c)(iv) of the Master Certificate of Designation
to an amount below $1.25; and (ii) the Series G Preferred - Subseries III Shares
shall not be converted into shares of Common Stock pursuant to Section 3(a)(ii)
of the Master Certificate of Designation utilizing a divisor of less than $1.25
unless due to an adjustment to the Subseries Conversion Price pursuant to
Section 3(c)(vi) thereof. Holders of the Subseries III Shares shall not
transfer any beneficial ownership interest in such shares unless such transferee
agrees to the provisions of that certain Stock Purchase Agreement For An
Additional Closing dated as of March 22, 1999 which is on file at the principal
office of the Corporation.

IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Subseries to be duly executed by its President and attested to by its
Secretary, this 25 day of March, 1999.

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

DATE: March 25, 1999 /s/ Henry W. Sullivan
-------------- ---------------------------------------
Henry W. Sullivan, President and
Chief Executive Officer

DATE: March 25, 1999 /s/ Judith Knight Shields
---------------- ---------------------------------------
Judith Knight Shields, Secretary

<PAGE>

EXHIBIT 10.33

AGREEMENT

This Agreement ("Agreement"), made as of December 23, 1999, is by and
between North American Technologies Group, Inc., a Delaware corporation
("NATK"), and Tim B. Tarrillion, an individual resident of the State of Texas
("Tarrillion").

WITNESSETH:

WHEREAS, NATK and Tarrillion are party to a certain employment agreement
dated February 7, 1995 (the "Employment Agreement"); and

WHEREAS, NATK employed Tarrillion as Chief Executive Officer ("CEO") and
President; and

WHEREAS, Tarrillion was Chairman of the Board of Directors of NATK; and

WHEREAS, NATK and Tarrillion desire to terminate their employment
relationship on mutually acceptable terms; and

WHEREAS, the parties desire to settle fully all matters arising out of or
relating in any manner to the Employment Agreement, as respects Tarrillion's
employment with and severance of employment from NATK;

NOW, THEREFORE, in consideration of the promises and conditions set forth
herein, the sufficiency of which hereby is acknowledged, and intending to be
legally bound, NATK and Tarrillion agree as follows:

1. Definitions

As used in this Agreement, any reference to NATK shall include its
predecessors and successors and, in their capacities as such, all of its past,
present and future shareholders, directors, officers, employees,
representatives, attorneys, and assigns, as well as all NATK affiliates,
controlling corporations, divisions and subsidiaries; and any reference to
Tarrillion shall include, in their capacities as such, his attorneys, heirs,
administrators, representatives, successors, agents and assigns.

2. Consideration

(a) NATK. NATK hereby agrees to provide Tarrillion with the following
severance benefits:

(1) Salary continuation at the level in effect as of the date of this
Agreement until December 31, 1999, in an annual amount equal to
$189,927.40 less all applicable income tax and other
withholdings, and payable, at intervals consistent with NATK's
current payroll practices;

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(2) Continued life insurance benefits, if any, in the amounts
currently provided through December 31, 1999;

(3) Continued health care insurance coverage through December 31,
1999; and

(4) Reimbursement for all business expenses allowable under the
Employment Agreement incurred by Tarrillion consistent with the
Company's existing policies.

No amounts in wage or fringe benefits received from employment or
otherwise by Tarrillion shall offset in any manner the obligations of
NATK hereunder.

(b) Tarrillion. Tarrillion acknowledges that he has provided NATK with a
letter resigning as Chairman of the Board of Directors of NATK
effective on the date hereof. However, Tarrillion may continue to act
as a director through NATK's 1999 annual meeting.

Tarrillion agrees to continue his responsibilities as President and
CEO through a date mutually agreeable to the Company and Tarrillion,
not later than January 22, 1999, and thereafter until March 31, 1999
will devote his full time and energy through such date to NATK's
business as an advisor, working in concert with NATK's Board of
Directors, with principal responsibility to perform a due diligence
review in connection with a potential acquisition of Brandywine
Compounding Company ("BCC") and/or complete construction and start -up
of Houston manufacturing facilities. Without limiting the generality
of the foregoing, Tarrillion shall undertake any reasonable travel
requested by NATK's Board of Directors to BCC to complete his due
diligence of BCC. Notwithstanding the foregoing, Mr. Tarrillion will
be permitted reasonable absences to pursue employment opportunities.
Post-March 31, 1999, Tarrillion agrees to consult with NATK on an "as
needed"/"as available" basis for the remainder of 1999.

3. Stock Options

(a) Vesting of Unvested Portion of Existing Common Stock Options.
Unvested Options previously granted to Tarrillion to purchase 11,111
NATK common stock, par value $0.001 per share ("Common Stock"), shall
vest on December 31, 1999 notwithstanding anything to the contrary in
the option agreement relating to such options.

(b) Repricing of Options to Purchase Common Stock. Notwithstanding the
terms of the Option Agreement originally dated February 7, 1995 and
amended on December 1, 1995 and July 10, 1997, Tarrillion's 55,555
existing options to purchase Common Stock shall be re-priced from
$9.00 to $4.50. All such options shall expire on June 30, 2006.

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<PAGE>

4. Releases

(a) Tarrillion. Tarrillion hereby fully, irrevocably and
unconditionally releases and discharges NATK from any and all manner
of claims, complaints, demands, causes of action, obligations,
liabilities, and expenses (including attorneys, fees and costs), of
every kind, either at law or in equity, arising from Tarrillion's
employment with or severance of employment from NATK, including any
claim relating to the Employment Agreement, health benefit claims, or
any claim arising under any federal, state or local employment
discrimination or fair employment practices law, such as the Federal
Age Discrimination in Employment Act. It is expressly agreed and
understood that this release is a GENERAL RELEASE.

The parties agree, however, that this Agreement does not effect a
release or waiver by Tarrillion of any rights to indemnification under
the Employment Agreement or the Certificate of Incorporation or By-
Laws of NATK or any pension or profit sharing benefits from NATK to
which he may be entitled under company policy, and the parties further
agree that to the extent that NATK makes any contribution to existing
profit sharing or 401(k) plans for the fiscal year ended December 31,
1999, Tarrillion shall be entitled to a payment to his accounts, on
terms which are consistent with the terms of the payments to the
accounts of other NATK officers. In addition, and not in limitation
of the foregoing, Tarrillion hereby forever releases and discharges
NATK from any liability or obligation to reinstate or reemploy him in
any employment capacity.

(b) NATK. NATK hereby fully, irrevocably and unconditionally
releases and discharges Tarrillion from any and all manner of claims,
charges, complaints, demands, causes of action, contracts,
obligations, liabilities, and expenses (including attorneys' fees and
costs) of every kind, either at law or in equity, including any claim
relating to the Employment Agreement or Tarrillion's employment with
NATK, except for fraudulent or criminal conduct. NATK represents that
as of the date of this Agreement NATK has no knowledge of any
fraudulent or criminal conduct by Tarrillion. It is expressly agreed
and understood that this release is a GENERAL RELEASE.

5. Covenant Not to Sue

(a) Tarrillion Covenant Not to Sue. Tarrillion represents and
warrants that he has not filed, nor has he assigned to any third
person, any complaints, charges or claims for relief against NATK with
any local, state or federal court or administrative agency.
Tarrillion further agrees and covenants not to sue or to bring, or
assign to any third person, any claims or charges against NATK with
respect to any matter arising before the date of this Agreement or
covered by the release set forth in paragraph 4 (a), above, and not to
assert against NATK in any

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<PAGE>

action, suit, litigation or proceeding any matter arising before the
date of this Agreement or covered by the release set forth in
Paragraph 4 (a) above.

(b) NATK Covenant Not To Sue. NATK represents and warrants that it
has not filed, nor has it assigned to any third person, any
complaints, charges or claims for relief against Tarrillion with any
local, state or federal court or administrative agency. NATK further
agrees and covenants not to sue or to bring, or assign to any third
person, any claims or charges against Tarrillion with respect to any
matter arising before the date of this Agreement or covered by the
release set forth in paragraph 4 (b) above, and not to assert against
Tarrillion in any action, suit, litigation or proceeding any matter
arising before the date of this Agreement or covered by the release
set forth in paragraph 4 (b) above.

6. Resignation

Tarrillion shall resign as Chairman of the Board of Directors, President
and CEO of NATK effective as of a date mutually agreeable to the Company and
Tarrillion, not later than January 22, 1999. Tarrillion acknowledges that
effective as of such date, he resigns all positions that he holds with the NATK
Parties, except, however, that Tarrillion may continue to serve as a director of
NATK through the 1999 Annual Meeting of the Stockholders of NATK, at which he
shall not seek re-election.

7. Confidentiality Agreement and Restrictive Covenants

(a) Confidential Information. Tarrillion acknowledges that during the
course of his employment with NATK he had access to and was entrusted with NATK
confidential and proprietary information including, but not limited to,
information concerning sales processes and procedures; costs; general business
procedures and operations; proprietary formulae and manufacturing processes,
techniques and methods, sales and/or profits; financial matters; merchandising,
sales and marketing strategies and techniques; expansion plans; methods of doing
business or servicing customers; methods of pricing or charging for services;
business forms developed by or for NATK; form and content of proposals; reports
and analyses; names of suppliers, personnel, customers and potential customers;
advertising sources and potential advertising sources; bids; contracts;
proposals; software programs, however embodied; and information about or
belonging to customers, potential customers, suppliers or others ("Confidential
Information"). Except as permitted or directed by NATK's Board of Directors in
writing or as required by law, Tarrillion shall not utilize, divulge, furnish or
make accessible to anyone any Confidential Information, for his profit or any
third party. Tarrillion acknowledges that the above-described knowledge or
information constitutes a unique and valuable asset of the NATK Parties,
acquired at great time and expense by the NATK Parties, and that any disclosure
or other use of such knowledge or information other than for the sole benefit of
the NATK Parties, would be wrongful and would cause irreparable harm to the NATK
Parties.

(b) Restrictive Covenant. Tarrillion shall not: (i) engage in any
business activity in direct or indirect competition with the Company and its
subsidiary, TIE-TEK, Inc. ("TIE-TEK"),

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<PAGE>

for a period of five (5) years from the date hereof in TIE-TEK's proposed
business of manufacturing and marketing railroad cross-ties and other products
resulting from TIE TEK/NATK processes, such as marine lumber, A/C pads, etc. (as
determined as of the Effective Date of this Agreement); (ii) request directly or
indirectly, that any present or potential customer or supplier, cancel, limit or
postpone their business with NATK; or (iii) hire or solicit for employment,
directly or indirectly, or actively attempt to influence, any NATK employee or
independent contractor to terminate his relationship with NATK.

8. Standstill Agreement

For and in consideration of the mutual covenants and promises contained
herein, during the term of this Agreement, and for a period of five (5) years
thereafter, neither Tarrillion nor any family member (defined for this purpose
to include his spouse and children) or company, partnership or trust in which
Tarrillion (or such family member) owns five (5%) percent or more of its equity
or voting interests or for which Tarrillion serves as an employee, agent,
officer, director, or partner will: (i) for the purposes of subparagraphs (ii)
or (iii) hereafter, acquire, offer to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any voting securities or direct or
indirect rights or options to acquire any voting securities of NATK; (ii) make,
or in any way participate, directly or indirectly, in any "solicitation" of
"proxies" to vote (as such terms are interpreted in the proxy rules of the
Securities and Exchange Commission), or seek to advise or influence any person
or entity with respect to the voting of any voting securities of NATK, or (iii)
form, join or in any way participate in a "group" within the meaning of Section
13 (d) (3) of the Securities Exchange Act of 1934 with respect to any voting
securities of NATK for the purpose of seeking to control the management, Board
of Directors or policies of NATK. Further, the parties acknowledge that NATK
would not have an adequate remedy at law for money damages in the event that
this covenant were not performed in accordance with its terms and therefore
Tarrillion agrees that NATK shall be entitled to specific enforcement of the
terms hereof in addition to any other remedy to which it may be entitled, at law
or in equity.

9. Injunctive Relief.

Tarrillion acknowledges that any breach by him of paragraphs 7 or 8 of this
Agreement would substantially and materially impair and irreparably harm NATK's
business and goodwill; that such impairment and harm would be difficult to
measure and, therefore, total compensation in solely monetary terms would be
inadequate. Tarrillion therefore agrees that in the event of any breach or
threatened breach by him of paragraphs 7 or 8, NATK shall be entitled, in
addition to monetary damages or other remedies, to equitable relief, including
injunctive relief, and payment by Tarrillion of all costs and expenses incurred
by NATK in enforcing said paragraph against Tarrillion, including attorneys'
fees incurred by NATK.

10. Miscellaneous.

(a) Breach. The parties agree that in the event one party breaches any
part or parts of this Agreement, legal proceedings may be instituted against
that party for breach of contract. The

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<PAGE>

nonprevailing party in such legal proceedings shall reimburse the prevailing
party for the reasonable costs and expenses, including attorneys, fees,
incurred.

(b) SEC Filings. NATK shall permit its counsel to assist Tarrillion in
making any necessary filings with the Securities and Exchange Commission.

(c) References. NATK agrees that it will provide Tarrillion with a letter
of reference substantially in the form attached hereto as Exhibit A.

(d) Non-Disparagement. NATK and Tarrillion agree not to engage in any
conduct or make any statement that would disparage the other or their respective
business interests in any way.

(e) Announcement. A press release shall be prepared by NATK and
Tarrillion jointly, announcing the mutual Severance Agreement to the public.

(f) Stockholders' Agreement and Removal of Legends From Share Certificates.
That certain Stockholders' Agreement dated as of April 5, 1996 by and among
NATK, Tarrillion and the Management Stockholders named therein and the Investors
named therein, as amended to date, shall not apply to any Common Stock owned by
Tarrillion from and after December 31, 1999. NATK will reissue a share
certificate representing certificate No. NAT-0979 free of any legend under the
Securities Act of 1933 ninety days after he ceases to be an officer or director
of NATK.

(g) Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas. Any action arising out of or
relating to any of the provisions of this Agreement may be brought and
prosecuted only in the courts of, or located in, the State of Texas, and in the
event of such election the parties hereto consent to the jurisdiction and venue
of said courts.

(h) Captions. Captions herein are inserted for convenience, do not
constitute a part of this Agreement, and shall not be admissible for the purpose
of proving the intent of the parties.

(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, and in pleading or
proving any provision of this Agreement it shall not be necessary to produce
more than one such counterpart.

(j) Entire Agreement. This Agreement contains and constitutes the entire
understanding and agreement between the parties hereto respecting the subject
matter hereof and supersedes and cancels all previous negotiations, agreements,
commitments, and writings in connection herewith. Neither of the parties hereto
has relied upon any representation made by or on behalf of the other party and
the same are not enforceable except to the extent set forth in writing in this
Agreement.

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<PAGE>

(k) Attorney Review, Etc. Tarrillion and NATK affirm that the only
consideration for signing this Agreement are the terms stated herein, and that
no other promises or agreements of any kind have been made to or with either of
them by any person or entity whatsoever to cause them to sign this Agreement.
Tarrillion states and represents that he has been provided the opportunity for
at least seven days to review and consider this Agreement, that he fully
understands the meaning and intent of this Agreement and that he has had an
opportunity to discuss and review the terms of this Agreement fully with his
attorney. Tarrillion further states and represents that he has carefully read
this Agreement, understands the contents hereof, freely and voluntarily assents
to all the terms and conditions hereof, and signs the same as his own free act.

IN WITNESS WHEREOF, all parties have set their hands and seals to this
Agreement as of the date written above.

Witness

/s/ Judy Shields /s/ Tim B. Tarrillion
- -------------------------------- -----------------------------------
Tim B. Tarrillion

Attest: NORTH AMERICAN TECHNOLOGIES
GROUP, INC.

/s/ Brenda Straube By: /s/ Edwin H. Knight
- -------------------------------- -------------------------------

<PAGE>

EXHIBIT 10.34

AMENDED AND RESTATED
STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT ("Agreement"), dated as of December 29, 1995,
is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware
corporation (the "Company"), and HENRY W. SULLIVAN ("Employee").

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

1. Grant of Option; Vesting Schedule.

(a) Grant of Option. The Company hereby grants to Employee an option the
("Option") to purchase, subject to the terms and conditions hereof, from the
Company twenty-two thousand two hundred and twenty-two (22,222) shares (the
"Option Shares") of Common Stock, par value $0.001 per share, of the Company
(the "Common Stock") beginning on the Commencement Date (as defined below) and
ending at 5:00 p.m. Eastern Standard Time, on June 30, 2006 (the "Termination
Date"), at an exercise price equal to $4.50 per share of Common Stock. As used
herein, the term "Commencement Date" shall mean the date first set out above.
The number of Option Shares and the exercise price per share shall be subject to
adjustment from time to time upon the occurrence of certain events as set forth
below. The shares of Common Stock or any other shares or other units of stock
or other securities or property, or any combination thereof then receivable upon
exercise of the Option, as adjusted from time to time, are sometimes referred to
hereinafter as "Exercise Shares." The exercise price per share as from time to
time in effect is referred to hereinafter as the "Exercise Price." The Option
is not an "incentive stock option" as described in Section 422A of the Internal
Revenue Code of 1986, as amended.

(b) Vesting Schedule. Following the Commencement Date, the Option shall
vest and be exerciseable (unless earlier terminated as provided herein) on
December 29 in the years set forth below and in the amounts set forth below:

Number of
December 29 Shares

1996 5,556
1997 5,556
1998 5,555
1999 5,555
------
Total 22,222

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; provided, however, that (i) the Option to acquire such shares shall vest on
the date set forth above only in the event that Employee is in the employ of the
Company or any of its subsidiaries in any capacity on such date and (ii) the
Option to acquire any Exercise Shares, if not earlier terminated by the terms of
this Agreement, shall terminate on June 30, 2006 regardless of the date on which
the Option to acquire such Exercise Shares vested as provided in this clause
(b). The period beginning on the Commencement Date and ending on the
Termination Date is sometimes referred to herein as the Option Period. Except
as provided otherwise in the next succeeding paragraph, if Employee is not in
the employ of the Company or any of its subsidiaries in any capacity on any of
the various vesting dates set forth above, regardless of the reason therefore,
then the Option with respect to such year shall not vest.

Notwithstanding anything herein to the contrary, in the event Employee is
no longer employed by the Company or any of its subsidiaries as a result of the
termination of such employment relationship:

(x) by the Company or any of its subsidiaries for any reason other than
"Cause" (as such term is then defined in any written employment agreement
between Employee, on the one hand, and the Company or any such subsidiary, on
the other hand (the "Employment Agreement"), or the death or disability (as such
term may be defined in such Employment Agreement) of Employee, or

(y) by Employee for "Good Reason" (as such term may be defined in such
Employment Agreement),

then 50% of all Option Shares that have not vested on or before the date of such
termination shall immediately vest as of such termination date, and the Option
Period with respect to such newly vested Option Shares shall begin on such
termination date and shall continue for a period of five years thereafter and
expire on the fifth anniversary date of such termination date.

2. Exercise of Option. The Option may be exercised, so long as it is then
valid and outstanding, from time to time in whole (as to Option Shares then
exercisable) or in part, and if in part, on as many occasions during the Option
Period as Employee shall desire, subject to the terms and provisions of this
Agreement. The Option may be exercised upon delivery on any business day to the
Company at its address set forth below (or such other office of the Company, if
any, as shall theretofore have been designated by the Company by written notice
to the Employee) of the following:

(a) a completed and executed Notice of Option Exercise in the form set
forth in Appendix A hereto and made a part hereof; and

(b) payment of the full Exercise Price for the number of Exercise Shares
set forth in the Notice of Option Exercise, in lawful money of the United States
of America, by certified

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<PAGE>

check or cashier's check made payable to the order of the Company (or with the
consent of the Company, the purchase price therefor may be paid in whole or in
part by the delivery to the Company of certificates representing shares of
Common Stock held by Employee, duly endorsed for transfer or accompanied by
blank stock, each of which shares shall be valued at a price equal to its then
Current Market Value, as defined below).

In the event that Employee is no longer in the employ of the Company or any of
its subsidiaries in any capacity, Employee shall be entitled to exercise this
Option, according to the terms and conditions set forth herein, to purchase only
that number of Option Shares in which Employee has become vested prior to the
termination of such employment or, pursuant to the provisions of the last
paragraph of Section 1(b) hereof, immediately as of such termination.

3. Issuance of Exercise Shares; Delivery of Stock Certificate. The Company
shall, within ten (10) business days (or as soon thereafter as is practicable)
of the exercise of this Option, issue in the name of and cause to be delivered
to the Employee (or such other person or persons, if any, as the Employee shall
have designated in the Notice of Option Exercise) one or more certificates
representing the Exercise Shares to which the Employee (or such other person or
persons) shall be entitled upon such exercise under the terms hereof. Such
certificate or certificates shall be deemed to have been issued and the Employee
(or such other person or persons so designated) shall be deemed to have become
the record holder of the Exercise Shares as of the date of the due exercise of
this Option.

4. Exercise Shares Fully Paid and Non-assessable. The Company agrees and
covenants that all Exercise Shares issuable upon the due exercise of the Option
will, upon issuance of a certificate therefor in accordance with the terms
hereof, be duly authorized, validly issued, fully paid and non-assessable and
free and clear of all taxes (other than taxes which, pursuant to this Agreement,
the Company shall not be obligated to pay) or liens, charges, and security
interests created by the Company with respect to the issuance thereof.

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<PAGE>

full exercise of this Option. At the time of or before taking any action which
would cause (pursuant to the provisions of this Section 5) an adjustment
resulting in a reduction of the Exercise Price below the then par value (if any)
of the Exercise Shares issuable upon exercise of the Options, the Company will
take any corporate action which may be necessary in order to assure that the par
value per share of the Exercise Shares is at all times equal to or less than the
Exercise Price per share and so that the Company may validly and legally issue
fully paid and non-assessable Exercise Shares at the Exercise Price, as so
adjusted. The Company will also from time to time take similar action if at any
time the Exercise Price is below the then par value of the Exercise Shares.

6. Fractional Shares. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Option or to
deliver stock certificates which evidence fractional shares of capital stock.
In the event that any fraction of an Exercise Share would, except for the
provisions of this Section 6, be issuable upon the exercise of this Option, the
Company shall pay to the Employee an amount in cash equal to such fraction
multiplied by the Current Market Value (as defined herein) of the Exercise
Share. For purposes of this subparagraph, the "Current Market Value" shall
mean, and be determined, as follows:

(a) if the type of securities representing the Exercise Shares are traded
in the over-the-counter market and not on any national securities exchange and
not in the NASDAQ Reporting System, the average of the mean between the last bid
and asked prices per share, as reported by the National Quotation Bureau, Inc.,
or another generally accepted reporting service, for the last business day prior
to the date on which this Option is exercised, or if not so reported, the
average of the closing bid and asked prices for an Exercise Share as furnished
to the Company by any member of the National Association of Securities Dealers,
Inc., selected by the Company for that purpose;

(b) if the type of securities representing the Exercise Shares are listed
or traded on a national securities exchange or in the NASDAQ National Market
System, the closing price on the principal national securities exchange on which
they are so listed or traded or in the NASDAQ National Market System, as the
case may be, on the last business day prior to the date of the exercise of this
Option. The closing price referred to in this clause (b) shall be the last
reported sales price or, in case no such reported sale takes place on such day,
the average of the reported closing bid and asked prices, in either case, on the
national securities exchange on which the Exercise Shares are then listed or in
the NASDAQ Reporting System; or

(c) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.

7. Payment of Taxes. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Exercise Shares upon the exercise of this
Option; provided,

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<PAGE>

however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issue of any
certificates representing the Exercise Shares in a name other than that of the
Employee, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

8. Rights of Employee. The Employee shall not, by virtue of anything
contained in this Agreement or otherwise, be entitled to any right whatsoever,
either in law or equity, of a stockholder of the Company, including without
limitation, the right to receive dividends or to vote or to consent or to
receive notice as a shareholder in respect of the meetings of shareholders or
the election of directors of the Company or any other matter, with respect to
any Exercise Shares prior to the acquisition of such Exercise Shares on the
exercise of this Option as provided in this Agreement.

9. Adjustment of Exercise Shares and Exercise Price. The Exercise Price
and the number and kind of Exercise Shares purchasable upon the exercise of this
Option shall be subject to adjustment from time to time upon the happening of
certain events as provided in this Section 9. The Exercise Price in effect at
any time and the number and kind of securities purchasable upon exercise of this
Option also shall be subject to adjustment as hereinafter provided.

(a) In the case the Company shall (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or classify its outstanding Common Stock into a greater number of
shares or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective date of such
subdivision, classification, combination or reclassification shall be
proportionally adjusted so that the Employee, upon any exercise of this Option
immediately thereafter shall be entitled to receive the aggregate number and
kind of shares which, if this Option had been exercised by such Employee
immediately prior to such date, he would have owned upon such exercise and been
entitled to receive upon such dividend, subdivision, classification, combination
or reclassification. For example, if the Company declares a 2 for 1 stock
dividend or stock split and the Exercise Price immediately prior to such event
was $5.00 per share, the adjusted Exercise Price immediately after such event
would be $2.50 per share, and as a result, the number of Option Shares would
double. Such adjustment shall be made successively whenever any event listed
above shall occur.

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<PAGE>

immediately prior to the date of such issuance by a fraction, the numerator of
which shall be the sum of the number of shares of Common Stock outstanding on
the record date mentioned below and the number of additional shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock so offered (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market price per share of
the Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding on such record date and the number of
additional shares of Common Stock offered for subscription or purchase (or into
which the convertible securities so offered are convertible). Such adjustment
shall be made successively whenever such rights or warrants are issued and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.

(c) Whenever the Exercise Price payable upon exercise of this Option is
adjusted pursuant to the provisions of (a) or (b) above, the number of Exercise
Shares purchasable upon exercise of this Option shall simultaneously be adjusted
by multiplying the number of Exercise Shares initially issuable upon exercise of
this Option by the Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.

(d) For the purpose of any computation under the subsection above, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing prices for 30 consecutive business days before
such date. The closing price for each day shall be the last sale price (regular
way) or, in case no such reported sale takes place on such day, the average of
the last reported bid and lowest reported asked prices as reported by NASDAQ, or
other similar organization if NASDAQ is no longer reporting such information, or
if not so available, the fair market price as determined by the Board of
Directors.

(e) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least one cent ($0.01) in
such price; provided, however, that any adjustments which by reason of the
provisions of this sentence are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 9 shall be made to the nearest
cent or to the nearest one-hundredth of a share, as the case may be. Anything
in this section to the contrary notwithstanding, the Company shall be entitled,
but shall not be required, to make such changes in the Exercise Price, in
addition to those required by this Section 9 as it, in its sole discretion,
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, classification, reclassification or
combination of Common Stock, issuance of warrants or options or other

6
<PAGE>

rights to acquire Common Stock or distribution of evidences of indebtedness or
other assets (excluding cash dividends) referred to hereinabove in this Section
9 hereafter made by the Company to the holders of its Common Stock shall not
result in any tax to the holders of its Common Stock or securities convertible
into Common Stock.

(f) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of this Option to be mailed
to the Employee, at the address set forth in this Agreement for notice, and
shall cause a certified copy thereof to be mailed to its transfer agent, if any.
The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 9, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.

(g) In the event that at any time, as a result of an adjustment made
pursuant to this Section 9, the Employee thereafter shall become entitled to
receive any Exercise Shares of the Company other than Common Stock, thereafter
the number of such other shares so receivable upon exercise of this Option shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in this Section 9.

10. Restrictions on Exercise and Transferability. This Option, and the
rights of Employee under this Agreement, shall be exerciseable only by the
Employee or, upon his death or disability, by his estate or any duly appointed
guardian, executor, administrator, trustee or other legal representative(s), and
shall not be transferred or assigned to any other party other than Employee's
estate upon his death.

(a) LIMITATION ON SALES OF EXERCISE SHARES. Notwithstanding any of the
other provisions of this Agreement, and regardless of whether the Exercise
Shares are subject to an effective registration statement under the Securities
Act of 1933, as amended, sales of Exercise Shares by the Employee shall be
limited during the time period commencing on July 10, 1997 and ending on June
30, 2001. From July 10, 1997 until June 30, 1998, there shall be no sales
allowed of the Exercise Shares. Effective June 30, 1998 the Employee shall be
allowed to sell twenty-five percent (25%) of the total number of Exercise Shares
issuable upon the exercise of this Option. Thereafter, the Employee may sell an
additional 25% of the total number of Exercise Shares issuable upon exercise of
this Option after each of the one year periods ended June 30, 1999, 2000 and
2001. Any Exercise Shares that are not sold by Employee during the year in
which such Exercise Shares are eligible to be sold may be sold in any subsequent
year.

7
<PAGE>

(together with the Act, the "Securities Laws"), any of the Exercise Shares
issued or to be issued upon the exercise of the Option. In addition, in the
event that any such Exercise Shares are not so registered, Employee consents to
the placement on the certificate or certificates representing such Exercise
Shares a legend or legends to the effect that, among other things, neither such
certificate or certificates nor the Exercise Shares evidenced thereby have been
registered under any Securities Laws and that no sale, transfer or other
disposition thereof or any interest therein may be made or shall be recognized
unless in the satisfactory written opinion of counsel for, or satisfactory to,
the Company, such transaction would not violate or required registration under
such Securities Laws. The Company may also place on such certificate or
certificates any other legend it deems necessary or desirable in order to
conform to any of the Securities Laws.

12. Certain Registration Rights. If at any time prior to the Termination
Date the Company registers under the Act any shares of Common Stock to be issued
to an executive officer of the Company or any of its subsidiaries upon exercise
of an option (a "Management Option") to acquire such shares of Common Stock
granted in connection with such person's employment with the Company or any of
its subsidiaries as an executive officer, then the Company shall offer in
writing to Employee a corresponding right to receive shares of Common Stock that
are registered under the Act upon the exercise of any of Employee's then vested
and unexercised shares of Common Stock under this Agreement upon similar terms
and provisions as those offered to such other executive officer. In addition,
if at any time prior to the Termination Date the Company offers to register any
of such other executive officer's outstanding shares of Common Stock that were
issued to him upon exercise of a Management Option, then the Company shall offer
in writing to Employee at the same time a corresponding right to cause the
Company to register any of the Employee's then outstanding shares of Common
Stock that were issued to him upon exercise of the Option granted under this
Agreement. The rights granted in favor of Employee under this Section 12: (a)
shall be as equal in nature to the rights granted in favor of such other
executive officer as is reasonably practicable, (b) shall relate to a
proportionate number of Employee's shares of Common Stock as the Board of
Directors of the Company deems reasonable and (c) shall be subject to such other
reasonable terms and conditions as the Board of Directors of the Company may
then impose.

13. Notices. All notices or other communications under or relating to
this Agreement shall be in writing and shall be deemed to have been given if
delivered by hand or mailed by certified mail, postage prepaid, return receipt
request, addressed as follows:

If to the Company: North American Technologies Group, Inc.
4710 Bellaire Blvd., Suite 301
Bellaire, Texas 77401
Attention: Corporate Secretary

If to the Employee: Henry W. Sullivan
4710 Bellaire Blvd., Suite 301
Bellaire, Texas 77401

8
<PAGE>

Either of the Company or the Employee may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Section.

14. Amendments. This Amended and Restated Stock Option Agreement includes
a) the amendment entered into as of July 10, 1997; b) the effect of the
Company's 9 to 1 reverse stock split which was effective May 13, 1998; and c)
the amendment to the stock option agreement approved by the Board of Directors
on February 22, 1999 in which the exercise price was reduced to $4.50. This
Agreement may be further amended or supplemented only by a writing signed by
both parties hereto.

15. Successors and Assigns. Subject to the provisions of Section 10 hereof,
this Agreement shall inure to the benefit of and be binding on the respective
successors, assigns and legal representatives of the Employee and the Company.

16. Severability. If for any reason any provision, paragraph or terms of
this Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and Sections of this Agreement shall be deemed to be severable.

17. Governing Law. To the full extent controllable by stipulation of the
Company and Employee, this Agreement shall be interpreted and enforced under
Texas law.

18. Headings. Headings used herein are included herein for convenience of
reference only and shall not affect the construction of this Agreement or
constitute a part of this Agreement for any other purpose.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first set out above.

"Company" NORTH AMERICAN TECHNOLOGIES
GROUP, INC.

By: /s/ Douglas C. Williamson
--------------------------------
Douglas C. Williamson
Chairman of the Board

"Employee" HENRY W. SULLIVAN

/s/ Henry W. Sullivan
--------------------------------

9
<PAGE>

APPENDIX A

NOTICE OF STOCK OPTION EXERCISE

Pursuant to that certain Stock Option Agreement, dated as of ____________,
1995, as amended to date (the "Agreement"), by and between North American
Technologies Group, Inc., a Delaware corporation (the "Company"), and the
undersigned, and subject to the vesting periods set forth therein, the
undersigned hereby irrevocably elects to exercise an option to acquire
________________ shares of _____________________________, at an exercise price
of $____ per share, or an aggregate purchase price of $__________. Enclosed
herewith is a certified check or cashier's check made payable to the order of
the Company in the amount of the aggregate purchase price set forth in the
preceding sentence [or, if, applicable: "; provided, however, that $________ of
such purchase price therefor is hereby paid by the delivery to the Company of
______ shares of Common Stock represented by certificate no(s) ___________, duly
endorsed for transfer or accompanied by a blank stock power, all in accordance
with the terms and provisions of the Agreement"]. Each capitalized terms used
herein, unless otherwise defined, has the meaning given such term in the
Agreement.

The undersigned hereby represents and agrees that the Exercise Shares
purchased pursuant hereto are being purchased for investment and not with a view
to the distribution or resale thereof, and that the undersigned understands that
said Exercise Shares have not been registered under the Securities Laws.

The undersigned requests that a certificate for the Exercise Shares be
issued in the name of: ______________________________________
______________________________________
______________________________________
[Please print name, address]

Address of Employee (if different from above):

_________________________________
_________________________________
_________________________________

Dated:__________________

Name of Employee: _________________________________
Employee's Signature: _________________________________

<PAGE>

EXHIBIT 10.35

AMENDED AND RESTATED
STOCK OPTION AGREEMENT

THIS STOCK OPTION AGREEMENT ("Agreement"), dated as of February 23, 1995,
is by and between NORTH AMERICAN TECHNOLOGIES GROUP, INC., a Delaware
corporation (the "Company"), and JUDITH KNIGHT SHIELDS ("Employee").

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

1. Grant of Option; Vesting Schedule.

(a) Grant of Option. The Company hereby grants to Employee an option the
("Option") to purchase, subject to the terms and conditions hereof, from the
Company an aggregate of thirty three thousand three hundred and three (33,333)
shares (the "Option Shares") of Common Stock, par value $0.001 per share, of the
Company (the "Common Stock") beginning on the Commencement Date (as defined
below) and ending at 5:00 p.m. Eastern Standard Time, on June 30, 2006 (the
"Termination Date"), at an exercise price equal to $4.50 per share of Common
Stock. As used herein, the term "Commencement Date" shall mean the date first
set out above. The number of Option Shares and the exercise price per share
shall be subject to adjustment from time to time upon the occurrence of certain
events as set forth below. The shares of Common Stock or any other shares or
other units of stock or other securities or property, or any combination thereof
then receivable upon exercise of the Option, as adjusted from time to time, are
sometimes referred to hereinafter as "Exercise Shares." The exercise price per
share as from time to time in effect with respect to any Option Shares is
referred to hereinafter as the "Exercise Price." The Option is not an
"incentive stock option" as described in Section 422A of the Internal Revenue
Code of 1986, as amended.

(b) Vesting Schedule. Following the Commencement Date, the Option shall
vest and be exerciseable (unless earlier terminated as provided herein) on March
31 in the years set forth below and in the amounts set forth below:

Number of
March 31 Shares

1996 16,666
1997 5,556
1998 5,556
1999 5,555
------
Total 33,333

1
<PAGE>

; provided, however, that (i) the Option to acquire such shares shall vest on
the date set forth above only in the event that Employee is in the employ of the
Company or any of its subsidiaries in any capacity on such date and (ii) the
Option to acquire any Exercise Shares, if not earlier terminated by the terms of
this Agreement, shall terminate on June 30, 2006 regardless of the date in which
the option to acquire such Exercise Shares vested as provided in this clause
(b). The period beginning on the Commencement Date and ending on the
Termination Date is sometimes referred to herein as the Option Period. If
Employee is not in the employ of the Company or any of its subsidiaries in any
capacity on any of the various vesting dates set forth above, regardless of the
reason therefore, then the Option with respect to such year shall not vest.

(a) a completed and executed Notice of Option Exercise in the form set
forth in Appendix A hereto and made a part hereof; and

(b) payment of the full Exercise Price for the number of Exercise Shares
set forth in the Notice of Option Exercise, in lawful money of the United States
of America, by certified check or cashier's check made payable to the order of
the Company (or with the consent of the Company, the purchase price therefor may
be paid in whole or in part by the delivery to the Company of certificates
representing shares of Common Stock held by Employee, duly endorsed for transfer
or accompanied by blank stock, each of which shares shall be valued at a price
equal to its then Current Market Value, as defined below).

2
<PAGE>

5. Reservation of Exercise Shares. At the time of or before taking any
action which would cause an adjustment pursuant to this Agreement increasing the
number of shares of capital stock constituting the Exercise Shares, the Company
will take any corporate action which may be necessary in order that the Company
have remaining, after such adjustment, a number of shares of such capital stock
unissued and unreserved for other purposes sufficient to permit the exercise of
all the then vested Options under this Agreement of like tenor immediately after
such adjustment. The Company will also from time to time take action to
increase the authorized amount of its capital stock constituting the Exercise
Shares if at any time the number of shares of capital stock authorized but
remaining unissued and unreserved for other purposes shall be insufficient to
permit the exercise of the Options under this Agreement then vested. The
Company may but shall not be limited to reserve and keep available, out of the
aggregate of its authorized but unissued shares of capital stock, for the
purpose of enabling it to satisfy any obligation to issue Exercise Shares upon
exercise of Options, through the Termination Date, the number of Exercise Shares
deliverable upon the full exercise of this Option. At the time of or before
taking any action which would cause (pursuant to the provisions of this Section
5) an adjustment resulting in a reduction of the Exercise Price below the then
par value (if any) of the Exercise Shares issuable upon exercise of the Options,
the Company will take any corporate action which may be necessary in order to
assure that the par value per share of the Exercise Shares is at all times equal
to or less than the Exercise Price per share and so that the Company may validly
and legally issue fully paid and non-assessable Exercise Shares at the Exercise
Price, as so adjusted. The Company will also from time to time take similar
action if at any time the Exercise Price is below the then par value of the
Exercise Shares.

3
<PAGE>

service, for the last business day prior to the date on which this Option is
exercised, or if not so reported, the average of the closing bid and asked
prices for an Exercise Share as furnished to the Company by any member of the
National Association of Securities Dealers, Inc., selected by the Company for
that purpose;

(c) if no such closing price or closing bid and asked prices are
available, as determined in any reasonable manner as may be prescribed by the
Board of Directors of the Company.

7. Payment of Taxes. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Exercise Shares upon the exercise of this
Option; provided, however, that the Company shall not be required to pay any tax
or taxes which may be payable in respect of any transfer involved in the issue
of any certificates representing the Exercise Shares in a name other than that
of the Employee, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.

(a) In the case the Company shall (i) pay a dividend or make a
distribution on its

4
<PAGE>

shares of Common Stock in shares of Common Stock, (ii) subdivide or classify its
outstanding Common Stock into a greater number of shares or (iii) combine or
reclassify its outstanding Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend or
distribution or of the effective date of such subdivision, classification,
combination or reclassification shall be proportionally adjusted so that the
Employee, upon any exercise of this Option immediately thereafter shall be
entitled to receive the aggregate number and kind of shares which, if this
Option had been exercised by such Employee immediately prior to such date, she
would have owned upon such exercise and been entitled to receive upon such
dividend, subdivision, classification, combination or reclassification. For
example, if the Company declares a 2 for 1 stock dividend or stock split and the
Exercise Price immediately prior to such event was $5.00 per share, the adjusted
Exercise Price immediately after such event would be $2.50 per share. Such
adjustment shall be made successively whenever any event listed above shall
occur.

(b) In case the Company shall hereafter issue rights or warrants to all
holders of its Common Stock entitling them to subscribe for or purchase shares
of Common Stock (or securities convertible into Common Stock) at a price (or
having a conversion price per share) less than the current market price of the
Common Stock (as defined in the subsection (d) below) on the record date
mentioned below, the Exercise Price shall be adjusted so that the same shall
equal the price determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction, the numerator of
which shall be the sum of the number of shares of Common Stock outstanding on
the record date mentioned below and the number of additional shares of Common
Stock which the aggregate offering price of the total number of shares of Common
Stock so offered (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market price per share of
the Common Stock, and the denominator of which shall be the sum of the number of
shares of Common Stock outstanding on such record date and the number of
additional shares of Common Stock offered for subscription or purchase (or into
which the convertible securities so offered are convertible). Such adjustment
shall be made successively whenever such rights or warrants are issued and shall
become effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.

5
<PAGE>

10. Restrictions on Exercise and Transferability. This Option, and the
rights of Employee under this Agreement, shall be exerciseable only by the
Employee or, upon her

6
<PAGE>

death or disability, by her estate or any duly appointed guardian, executor,
administrator, trustee or other legal representative(s), and shall not be
transferred or assigned to any other party other than Employee's estate upon her
death.

11. Restrictive Legends. So long as an exemption therefrom is then
available, the Company shall not be required by the terms of this Agreement to
register, under the Securities Act of 1933, as amended (the "Act"), or under
applicable state securities laws (together with the Act, the "Securities Laws"),
any of the Exercise Shares issued or to be issued upon the exercise of the
Option. In addition, in the event that any such Exercise Shares are not so
registered, Employee consents to the placement on the certificate or
certificates representing such Exercise Shares a legend or legends to the effect
that, among other things, neither such certificate or certificates nor the
Exercise Shares evidenced thereby have been registered under any Securities Laws
and that no sale, transfer or other disposition thereof or any interest therein
may be made or shall be recognized unless in the satisfactory written opinion of
counsel for, or satisfactory to, the Company, such transaction would not violate
or required registration under such Securities Laws. The Company may also place
on such certificate or certificates any other legend it deems necessary or
desirable in order to conform to any of the Securities Laws.

7
<PAGE>

a corresponding right to cause the Company to register any of the Employee's
then outstanding shares of Common Stock that were issued to her upon exercise of
the Option granted under this Agreement. The rights granted in favor of Employee
under this Section 12: (a) shall be as equal in nature to the rights granted in
favor of such other executive officer as is reasonably practicable, (b) shall
relate to a proportionate number of Employee's shares of Common Stock as the
Board of Directors of the Company deems reasonable and (c) shall be subject to
such other reasonable terms and conditions as the Board of Directors of the
Company may then impose.

If to the Company: North American Technologies Group, Inc.
4710 Bellaire Boulevard, Suite 301
Bellaire, Texas 77401
Attention: Corporate Secretary

If to the Employee: Judith Knight Shields
14523 Kellywood
Houston, Texas 77079

Either of the Company or the Employee may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Section.

14. Amendments. This Amended and Restated Stock Option Agreement includes
a) the amendment entered into as of December 1, 1995; b) the amendment entered
into as of July 10, 1997; c) the effect of the Company=s 9 to 1 reverse stock
split which was effective May 13, 1998; and d) the amendment to the stock option
agreement approved by the Board of Directors on February 22, 1999 in which the
exercise price was reduced to $4.50. This Agreement may be further amended or
supplemented only by a writing signed by both parties hereto.

15. Successors and Assigns. Subject to the provisions of Section 10
hereof, this Agreement shall inure to the benefit of and be binding on the
respective successors, assigns and legal representatives of the Employee and the
Company.

17. Governing Law. To the full extent controllable by stipulation of the
Company

8
<PAGE>

and Employee, this Agreement shall be interpreted and enforced under Texas law.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed the day and year first set out above.

"Company" NORTH AMERICAN TECHNOLOGIES
GROUP, INC.

By: /s/ Douglas C. Williamson
------------------------------
Douglas C. Williamson
Chairman of the Board

"Employee" JUDITH KNIGHT SHIELDS

/s/ Judith Knight Shields
------------------------------

9
<PAGE>

APPENDIX A

NOTICE OF STOCK OPTION EXERCISE

Address of Employee (if different from above):

_________________________________
_________________________________
_________________________________

Dated:__________________

Name of Employee: _________________________________
Employee's Signature: _________________________________

<PAGE>

EXHIBIT 10.36

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

1999 STOCK INCENTIVE PLAN

1. Purpose. The North American Technologies Group, Inc. 1999 Stock
Incentive Plan (the "Plan") is established to attract, retain and reward persons
providing services to North American Technologies Group, Inc. and any successor
corporation thereto (the "Company") and to motivate such persons to contribute
to the growth and profits of the Company in the future.

The following terms shall be defined as set forth below:

"Act" means the Securities Exchange Act of 1934, as amended.

"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, and Restricted Stock Awards.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.

"Effective Date" means the date on which the Plan is approved by the
stockholders as set forth in Section 13.

"Fair Market Value" of the Stock on any given date means (i) if the Stock
is admitted to quotation on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date
shall be the average of the highest bid and lowest asked prices of the Stock
reported for such date or, if no bid and asked prices were reported for such
date, for the last day preceding such date for which such prices were reported,
or (ii) if the Stock is admitted to trading on a United States securities
exchange or the NASDAQ National Market System, the Fair Market Value on any date
shall be the closing price reported for the Stock on such exchange or system for
such date or, if no sales were reported for such date, for the last day
preceding such date for which a sale was reported; (iii) if the Fair Market
Value cannot be determined on the basis previously set forth in this definition
on the date that Fair Market Value is to be determined, The Board shall in good
faith determine the Fair Market Value of the Stock on such date.

"Incentive Stock Option" means any Stock Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
<PAGE>

"Independent Director" means a member of the Board who is not an employee
or officer of the Company or any Subsidiary.

"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.

"Option" or "Stock Option" means any Option to purchase shares of Stock
granted pursuant to Section 6.

"Stock Award" means any Award granted pursuant to Section 7.

"Stock" means the Common Stock, par value $.001 per share, of the Company,
subject to adjustments pursuant to Section 8.

"Subsidiary" means any corporation or other entity (other than the Company) in
any unbroken chain of corporations or other entities, beginning with the
Company, if each of the corporations or entities (other than the last
corporation or entity in the unbroken chain) owns stock or other interests
possessing 50% or more of the economic interest or the total combined voting
power of all classes of stock or other interests in one of the other
corporations or entities in the chain.

2. Administration. The Plan shall be administered by the full Board of
Directors of the Company or a committee of such Board of Directors comprised of
two or more "Non-Employee Directors" within the meaning of Rule 16b-3(a)(3)
promulgated under the Act (the "Plan Administrator"). Subject to the provisions
of the Plan, the Plan Administrator is authorized to:

(a) construe the Plan and any Award under the Plan;
(b) select the directors, officers, employees and consultants of the
Company and its Subsidiaries to whom Awards may be granted;
(c) determine the number of shares of Stock to be covered by any Award;
(d) determine and modify from time to time the terms and conditions,
including restrictions, of any Award and to approve the form of written
instrument evidencing Awards;
(e) accelerate at any time the exercisability or vesting of all or any
portion of any Award and/or to include provisions in awards providing for such
acceleration;
(f) impose limitations on Awards, including limitations on transfer and
repurchase provisions;
(g) extend the exercise period within which Stock Options may be
exercised; and
(h) determine at any time whether, to what extent, and under what
circumstances Stock and other amounts payable with respect to an Award shall be
deferred either automatically or at the election of the participant and whether
and to what extent the Company shall pay or credit amounts constituting interest
(at rates determined by the Plan Administrator) or dividends or deemed dividends
on such deferrals.

The determination of the Plan Administrator on any such matters shall be
conclusive.

-2-
<PAGE>

3. Eligibility. Awards may be granted only to employees (including
officers and directors who are also employees) and directors of the Company or
its subsidiaries or to individuals who are rendering services as consultants,
advisors or independent contractors to the Company. The Board, in its sole
discretion, shall determine which persons shall be granted Awards (a
"Participant") and, in accordance with subsection (b), which type of Award each
Participant is to receive. Eligible persons may be granted more than one Award.

4. Options and Stock to be Issued under the Plan.

(a) General. Awards may be either incentive stock options ("Incentive
Stock Options") as defined in section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") or nonqualified stock options ("Nonqualified Stock
Options"). Incentive Stock Options and Nonqualified Stock Options are
hereinafter referred to as "Options". Issuances of Common Stock under the Plan
("Stock Awards") and/or common stock issued upon exercise of Options may be
subject to the terms and conditions of stock restriction provisions, including
vesting and repurchase provisions, which provisions may be part of the awardee's
Award agreement or may be part of a separate agreement. Options and/or Stock
Awards are hereinafter referred to as "Awards".

(b) Type of Award Which May Be Granted. Nonqualified Stock Options may
be granted to any employee or prospective employee of the Company. Incentive
Stock Options may be granted only to employees of the Company. A director of the
Company may not be granted an Incentive Stock Option unless the director is also
a employee of the Company. An individual who is rendering services as a
director, consultant, advisor or independent contractor may be granted only a
Nonqualified Stock Option and may not be granted an Incentive Stock Option.
Stock Awards may be granted to any eligible person.

5. Shares Subject to the Plan. The number of shares of Stock which may
be issued pursuant to the Plan shall be 10% of the total number of shares of
Stock issuable and outstanding, on a fully diluted basis; provided, however,
that the foregoing formula shall never result in a decrease in the maximum
number of shares available under this Plan at the time of its approval by the
Board. For purposes of the foregoing limitation, the shares of Stock underlying
any Awards which are forfeited, canceled, reacquired by the Company, satisfied
without the issuance of Stock or otherwise terminated (other than by exercise)
shall be added back to the number of shares of Stock available for issuance
under the Plan. Notwithstanding the foregoing, on and after the date that the
Plan is subject to Section 162(m) of the Code, Stock Options with respect to no
more than 500,000 shares of Stock may be granted to any one individual
participant during any one calendar year period. Common Stock to be issued
under the Plan may be either authorized and unissued shares or shares held in
treasury by the Company. In no event shall more than 1,000,000 Incentive Stock
Options be issued pursuant to the Plan.

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<PAGE>

6. Options.

(a) Time for Granting Options. All options shall be granted, if at all,
within ten (10) years from the earlier of the date the Plan is adopted by the
Board or the date the Plan is duly approved by the Stockholders of the Company.

(b) Terms, Conditions and Form of Options. Subject to the provisions of
the Plan, the Board shall determine for each Option (which need not be
identical) the number of shares of Stock for which the Option shall be granted,
the exercise price of the Option, the timing and terms of exercisability and
vesting of the Option, whether the Option is to be treated as an Incentive Stock
Option or as a Nonqualified Stock Option and all other terms and conditions of
the Option not inconsistent with the Plan. Options granted pursuant to the Plan
shall be evidenced by written agreements specifying the number of shares of
Common Stock covered thereby, in such form as the Board shall from time to time
establish, which agreements may incorporate all or any of the terms of the Plan
by reference and shall comply with and be subject to the following terms and
conditions:

(i) Exercise Price. The exercise price for each option shall be
established in the sole discretion of the Board; provided, however, that (i) the
exercise price per share for an Incentive Stock Option shall be not less than
the fair market value (as defined below) of a share of Stock on the date of the
granting of the Option, (ii) the exercise price per share for a Nonqualified
Stock Option shall not be less than fifty percent (50%) of the fair market value
of a share of Common Stock on the date of the granting of the Option and (iii)
no Incentive Stock Option granted to a Participant who at the time the Incentive
Stock Option is granted owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company within the
meaning of section 422(b)(6) of the Code (a "Ten Percent Owner Optionee") shall
have an exercise price per share less than one hundred ten percent (110%) of the
fair market value of a share of Stock on the date of the granting of the Option.
Notwithstanding the foregoing, an option (whether an Incentive Stock Option or a
Nonqualified Stock Option) may be granted with an exercise price lower than the
minimum exercise price set forth above if such option is granted pursuant to an
assumption or substitution for another option in a manner qualifying with the
provisions of section 424(a) of the Code.

(c) Exercise Period of Options. The Board shall have the power to set
the time or times within which each option shall be exercisable or the event or
events upon the occurrence of which all or a portion of each option shall be
exercisable and the term of each option; provided, however, that (i) no
Incentive Stock Option shall be exercisable after the expiration of ten (10)
years after the date such option is granted, and (ii) no Incentive Stock Option
granted to a Ten Percent Owner Optionee shall be exercisable after the
expiration of five (5) years after the date such Option is granted (such period
or periods being hereinafter referred to as the "Option Period") and provided
further that, unless the option agreement provides otherwise:

(i) If a Participant shall cease to be employed by the Company or
to serve as a director or consultant, as the case may be, all Options to which
the Participant is then

-4-
<PAGE>

entitled to exercise may be exercised only within three months after the date of
termination and within the Option Period or, if such termination was due to
disability or retirement (as hereinafter defined), within one year after
termination of employment and within the Option Period. Notwithstanding the
foregoing: (a) in the event that any termination of employment shall be for
Cause (as defined herein) or the Participant becomes an officer or director of,
a consultant to or employed by a Competing Business (as defined herein), during
the Option Period, then any and all Options held by such Board participant shall
forthwith terminate; and (b) the Board may, in its sole discretion, extend the
Option Period of any Option for up to five years from the date of termination of
employment regardless of the original Option Period. For purposes of the Plan,
retirement shall mean the termination of employment with the Company or service
on the Board other than for Cause, at any time after the age 65.

(ii) For purposes of this Plan, the term "Cause" shall mean (a)
with respect to an individual who is party to a written agreement with the
Company which contains a definition of "cause" or "for cause" or words of
similar import for purposes of termination of employment thereunder by the
Company, "cause" or "for cause" as defined in such agreement; (b) in all other
cases (I) the willful commission by an employee of a criminal or other act that
causes substantial economic damage to the Company or substantial injury to the
business reputation of the Company; (II) the commission of an act of fraud in
the performance of such person's duties to or on behalf of the Company; or (III)
the continuing willful failure of a person to perform the duties of such person
to the Company (other than a failure to perform duties resulting from such
person's incapacity due to illness) after written notice thereof (specifying the
particulars thereof in reasonable detail) and a reasonable opportunity to cure
such failure are given to the person by the Board of Directors of the Company.
For purposes of the Plan, no act, or failure to act, on the part of any person
shall be considered "willful" unless done or omitted to be done by the person
other than in good faith and without reasonable belief that the person's action
or omission was in the best interest of the Company.

(iii) For purposes of this Plan, the term "Competing Business"
shall mean: any person, corporation or other entity engaged in the business of
selling or attempting to sell any product or service which is the same as or
similar to products or services sold by the Company within the last year prior
to termination of such person's employment, consultant relationship or
directorship, as the case may be, hereunder.

(d) Payment of Exercise Price. The Option exercise price of each share
purchased pursuant to an Option shall be paid in full at the time of each
exercise (the "Payment Date") of the Option (I) in cash; (II) by delivering to
the Company a notice of exercise with an irrevocable direction to a broker-
dealer registered under the Act to sell a sufficient portion of the shares and
deliver the sale proceeds directly to the Company to pay the exercise price;
(III) in the discretion of the Plan Administrator, through the delivery to the
Company of previously-owned shares of Common Stock having an aggregate Fair
Market Value equal to the Option exercise price of the shares being purchased
pursuant to the exercise of the Option; provided, however, that shares of Common
Stock delivered in payment of the Option price must have been held by the
participant for at least six (6) months in order to be utilized to pay the
Option price;

-5-
<PAGE>

or (IV) in the discretion of the Plan Administrator, through any combination of
the payment procedures set forth in subsections (I)-(III) of this Section
6(c)(iv).

(e) Standard Forms of Stock Option Agreement.

(i) Nonqualified Stock Options. Unless otherwise provided for by
the Board at the time an Option is granted, an Option designated as a
"Nonqualified Stock Option" shall comply with and be subject to the terms and
conditions set forth in the form of Nonqualified Stock Option agreement attached
hereto as Exhibit A and incorporated herein by reference.

(ii) Incentive Stock Options. Unless otherwise provided for by the
Board at the time an Option is granted, an Option designated as an "Incentive
Stock Option" shall comply with and be subject to the terms and conditions set
forth in a form of Incentive Stock Option agreement attached hereto as Exhibit B
and incorporated herein by reference.

(f) Fair Market Value Limitation. To the extent that the aggregate fair
market value (determined at the time the option is granted) of Common Stock with
respect to which Incentive Stock Options are exercisable by a Participant for
the first time during any calendar year (under all stock option plans of the
Company, including the Plan) exceeds One Hundred Thousand Dollars ($100,000),
such Options shall be treated as Nonqualified Stock Options. For purposes of
this Plan, the fair market value of the shares of Common Stock subject to an
Award shall be determined in good faith by the Board; provided, however, that
(i) if the Stock is admitted to quotation on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), the fair market value
on any given date shall be the average of the highest bid and lowest asked
prices of the Stock reported for such date or, if no bid and asked prices were
reported for such date, for the last day preceding such date for which such
prices were reported, or (ii) if the Stock is admitted to trading on a United
States securities exchange or the NASDAQ National Market System, the fair market
value on any date shall be the closing price reported for the Stock on such
exchange or system for such date or, if no sales were reported for such date,
for the last day preceding such date for which a sale was reported.
Notwithstanding the foregoing, the Board of Directors may provide at the time an
Award is made that the fair market value of a share of Common Stock shall be
determined on an alternative basis based upon the advice of the Company's
independent public accountants and counsel.

7. Stock Awards.

(a) The Board may grant Stock Awards to any officer, employee, director
or consultant of the Company and its subsidiaries. A Stock Award entitles the
recipient to acquire shares of Common Stock subject to such restrictions and
conditions as the Board may determine at the time of grant. Conditions may be
based on continuing employment (or other business relationship) and/or
achievement of pre-established performance goals and objectives.

(b) Upon execution of a written instrument setting forth the Stock Award
and paying any applicable purchase price, a Participant shall have the rights of
a shareholder with

-6-
<PAGE>

respect to the Stock subject to the Stock Award, including, but not limited to
the right to vote and receive dividends with respect thereto. Unless the Board
shall otherwise determine, certificates evidencing the Stock Award shall remain
in the possession of the Company until such Common Stock is vested as provided
in Section 7(c) below.

(c) The Board at the time of grant shall specify the date or dates and/or
the attainment of pre-established performance goals, objectives and other
conditions on which Stock Awards shall become vested, subject to such further
rights of the Company or its assigns as may be specified in the instrument
evidencing the Stock Award. If the grantee or the Company, as the case may be,
fails to achieve the designated goals or the grantee's relationship with the
Company is terminated prior to the expiration of the vesting period, the grantee
shall forfeit all shares of Common Stock subject to the Stock Award which have
not then vested.

(d) Unvested Stock Awards may not be sold, assigned transferred, pledged or
otherwise encumbered or disposed of except as specifically provided herein or in
the written instrument evidencing the Stock Award.

8. Effect of Change in Stock Subject to Plan. Any other provision of the
Plan notwithstanding:

(a) If, through or as a result of any merger, consolidation, sale of all or
substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, the outstanding shares of Stock are
increased or decreased or are exchanged for a different number or kind of shares
or other securities of the Company, or additional shares or new or different
shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Stock or other securities, the Plan
Administrator shall make an appropriate or proportionate adjustment in (i) the
number of Stock Options that can be granted to any one individual participant,
(ii) the number and kind of shares or other securities subject to any then
outstanding Awards under the Plan, and (iii) the price for each share subject to
any then outstanding Stock Options under the Plan, without changing the
aggregate exercise price (i.e., the exercise price multiplied by the number of
shares) as to which such Stock Options remain exercisable. The adjustment by the
Plan Administrator shall be final, binding and conclusive.

(b) In the event that, by reason of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation, the
Board of Directors shall authorize the issuance or assumption of a stock Option
or stock Options in a transaction to which Section 424(a) of the Code applies,
then, notwithstanding any other provision of the Plan, the Plan Administrator
may grant an Option or Options upon such terms and conditions as it may deem
appropriate for the purpose of assumption of the old Option, or substitution of
a new Option for the old Option, in conformity with the provisions of Code
Section 424(a) and the rules and regulations thereunder, as they may be amended
from time to time.

(c) No adjustment or substitution provided for in this Section 8 shall
require the Company to issue or to sell a fractional share under any stock
Option agreement or share

-7-
<PAGE>

award agreement and the total adjustment or substitution with respect to each
stock Option and share award agreement shall be limited accordingly.

(d) In the case of (i) the dissolution or liquidation of the Company, (ii)
a merger, reorganization or consolidation in which the Company is acquired by
another person or entity (other than a holding company formed by the Company),
(iii) the sale of all or substantially all of the assets of the Company to an
unrelated person or entity, or (iv) the sale of all of the stock of the Company
to a unrelated person or entity (in each case, a "Fundamental Transaction"), the
Plan and all Awards granted hereunder shall terminate, unless provision is made
in connection with the Fundamental Transaction for the assumption of the Awards
heretofore granted, or the substitution of such Awards with new awards of the
successor entity, with appropriate adjustment as to the number and kind of
shares and, if appropriate, the per share exercise price as provided in
Subsections (a) and (b) of this Section 8. In the event of such termination each
participant shall be notified of such proposed termination and permitted to
exercise for a period of at least 15 days prior to the date of such termination
all Options held by such participant which are then exercisable.

9. Transfer of Control. An "Ownership Change" shall be deemed to have
occurred in the event any of the following or any similar transaction occurs
with respect to the Company:

(a) The direct or indirect sale or exchange by the Stockholders of the
Company of all or substantially all of the stock of the Company;

(b) A merger or consolidation in which the Company is merged or
consolidated with another corporation or entity, other than a corporation or
entity that is an "affiliate" of the Company (as such term is defined in Rule
144(a) promulgated under the Securities Act of 1933, as amended);

(c) The sale, exchange, or transfer of all or substantially all of the
assets of the Company (other than a sale, exchange, or transfer to one (1) or
more subsidiary corporations of the Company); or

(d) A liquidation or dissolution of the Company.

In the event of an Ownership Change, all unvested shares underlying
outstanding Awards shall automatically become fully vested and in the case of
Options immediately exercisable, and shall be deemed to have attained such
status immediately prior to the Ownership Change. In the event of an Ownership
Change, any Options which are neither assumed or substituted for in connection
with the Ownership Change nor exercised as of the date of the Ownership Change
shall terminate and cease to be outstanding effective as of the date of the
Ownership Change, unless otherwise provided by the Board. In the event of an
Ownership Change, each Participant shall be given at least 15 days prior written
notice of such Ownership Change and shall be permitted to exercise any Options
during this 15 day period.

-8-
<PAGE>

10. Options Non-Transferable. During the lifetime of the Participant, the
Options shall be exercisable only by the Participant. No Option shall be
assignable or transferable by the Participant, except by will or by the laws of
descent and distribution.

11. Compliance with Governmental Regulations. Notwithstanding any
provision of the Plan or the terms of any agreement entered into pursuant to the
Plan, the Company shall not be required to issue any shares hereunder prior to
registration of the shares subject to the Plan under the Securities Act of 1933,
if such registration shall be necessary, or before compliance by the Company or
any Participant with any other provisions of either of those acts or of
regulations or rulings of the Securities and Exchange Commission thereunder, or
before compliance with other federal and state laws and regulations and rulings
thereunder, including the rules of The NASDAQ Stock Market. The Company shall
use its best efforts to effect such registrations and to comply with such laws,
regulations and rulings forthwith upon advice by its counsel that any such
registration or compliance is necessary.

12. Termination or Amendment of Plan or Awards. The Board, including any
duly appointed committee of the Board, may terminate or amend the Plan or any
Award at any time; provided, however, that no such action shall deprive any
person, without such person's consent, of any rights previously granted pursuant
to the Plan or Award.

13. Stockholder Approval. Option Awards and Stock Awards may be made as
of the date of approval of the Plan by the Board of Directors of the Company,
provided however, that no Option Awards or Stock Awards shall become vested
until such time as the Plan shall have received Stockholder approval. In the
event that the Stockholders of the Company shall not have approved the Plan
within twelve months of the date of Board approval of the Plan, any Option
Awards and Stock Awards outstanding shall become null and void.

14. Compliance with Section 16. With respect to persons subject to
Section 16 of the Securities Exchange Act of 1934, transactions under this Plan
are intended to comply with all applicable conditions of Rule 16b-3 (or its
successor rule and shall be construed to the fullest extent possible in a manner
consistent with this intent). To the extent that any Award fails to so comply,
it shall be deemed to be modified to the extent permitted by law and to the
extent deemed advisable by the Plan Administrator in order to comply with Rule
16b-3.

15. Tax Withholding.

(a) Whenever shares are to be issued or cash is to be paid under the
Plan, the Company shall have the right to require the participant to remit to
the Company an amount sufficient to satisfy federal, state and local tax
withholding requirements prior to the delivery of any certificate for shares or
any proceeds; provided, however, that in the case of a participant who receives
an Award of shares under the Plan which is not fully vested, the participant
shall remit such amount on the first business day following the Tax Date. The
"Tax Date" for purposes of this Section 15 shall be the date on which the amount
of tax to be withheld is determined. If a participant makes a disposition of
shares acquired upon the exercise of an Incentive Stock Option within either two
years after the Option was granted or one year after its

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<PAGE>

exercise by the participant, the participant shall promptly notify the Company
and the Company shall have the right to require the participant to pay to the
Company an amount sufficient to satisfy federal, state and local tax withholding
requirements.

(b) A participant who is obligated to pay the Company an amount required to
be withheld under applicable tax withholding requirements may pay such amount
(i) in cash; (ii) in the discretion of the Plan Administrator, through the
delivery to the Company of previously-owned shares of Common Stock having an
aggregate Fair Market Value on the Tax Date equal to the tax obligation provided
that the previously owned shares delivered in satisfaction of the withholding
obligations must have been held by the participant for at least six (6) months;
or (iii) in the discretion of the Plan Administrator, through a combination of
the procedures set forth in subsections (i) and (ii) of this Section 15(b).

(c) A participant who is obligated to pay to the Company an amount required
to be withheld under applicable tax withholding requirements in connection with
either the exercise of a Non-Qualified Stock Option, or the receipt of a
Restricted Stock Award, Stock Award or Performance Share Award under the Plan
may, in the discretion of the Plan Administrator, elect to satisfy this
withholding obligation, in whole or in part, by requesting that the Company
withhold shares of stock otherwise issuable to the participant having a Fair
Market Value on the Tax Date equal to the amount of the tax required to be
withheld; provided, however, that shares may be withheld by the Company only if
such withheld shares have vested. Any fractional amount shall be paid to the
Company by the participant in cash or shall be withheld from the participant's
next regular paycheck.

(d) An election by a participant to have shares of stock withheld to
satisfy federal, state and local tax withholding requirements pursuant to
Section 15(c) must be in writing and delivered to the Company prior to the Tax
Date.

IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that
the foregoing North American Technologies Group, Inc. 1999 Stock Incentive Plan
was duly adopted by the Board of Directors of the Company on the 22 day of
February, 1999.

/s/ Judith Knight Shields
-------------------------
Secretary

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<PAGE>

PLAN HISTORY

__________________, 1999 Board of Directors adopts Plan with a share
reserve of [NUMBER] shares

__________________, 1999 Stockholders approve Plan with a share
reserve of [NUMBER] shares

-11-

<PAGE>

EXHIBIT 10.37

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Incentive Stock Option Agreement

February 22, 1999

Employee/Optionee: Henry Sullivan

Number of shares of
Common Stock subject
to this Agreement: 40,000

Pursuant to the North American Technologies Group, Inc. 1999 Stock
Incentive Plan (the "Plan"), the Compensation Committee of the Board of
Directors of North American Technologies Group, Inc. (the "Company") has granted
to you on this date an option (the "Option") to purchase the number of shares of
the Company's Common Stock, $.001 par value per share ("Common Stock"), set
forth above. Such shares (as the same may be adjusted as described in Section 13
below) are herein referred to as the "Option Shares." The Option shall
constitute and be treated at all times by you and the Company as an "incentive
stock option" as defined under Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"). The terms and conditions of the Option are set
out below.

1. Date of Grant. The Option is granted to you on February 22, 1999.

2. Termination of Option. Your right to exercise the Option (and to
purchase the Option Shares) shall expire and terminate in all events on the
earlier of (i) February 21, 2009 or (ii) the date provided in Section 11 below
in the event you cease to be employed by the Company or any subsidiary or parent
thereof

3. Option Price. The purchase price to be paid upon the exercise of the
Option is $3.00 per share (subject to adjustment as provided in Section 13
hereof).

4. Vesting Provisions. Except as provided in Section 5 hereof, you will
not be entitled to exercise all of the Options (and purchase Option Shares)
prior to February 21, 2003. Commencing on February 21, 2000 and on each of the
three succeeding anniversaries of that date on which you shall continue to be
employed by the Company or any subsidiary or parent thereof, you shall become
entitled to exercise the Option with respect to 10,000 of the Option Shares
(rounded to the nearest whole share) until the Option expires and terminates
pursuant to Section 2 hereof.

5. Acceleration of Options. The Board of Directors of the Company, in its
sole discretion, may at any time accelerate the time set forth in Section 4 at
which the Option may be exercised by you with respect to any Option Shares.
<PAGE>

6. Exercise of Option. To exercise the Option, you must deliver a
completed copy of the attached Option Exercise Form to the address indicated on
the Form, specifying the number of Option Shares being purchased as a result of
such exercise, together with payment in full of the exercise price for all the
Option Shares being purchased. Payment of the option price may be made, at your
election, (I) in cash; (II) by delivering to the Company a notice of exercise
with an irrevocable direction to a broker-dealer registered under the Act to
sell a sufficient portion of the shares and deliver the sale proceeds directly
to the Company to pay the exercise price; (III) in the discretion of the Plan
Administrator, through the delivery to the Company of previously-owned shares of
Common Stock having an aggregate Fair Market Value equal to the Option exercise
price of the shares being purchased pursuant to the exercise of the Option;
provided, however, that shares of Common Stock delivered in payment of the
Option price must have been held by the participant for at least six (6) months
in order to be utilized to pay the Option price; or (IV) in the discretion of
the Plan Administrator, through any combination of the payment procedures set
forth in subsections (I)-(III). For the purposes of this Section 6, "Fair Market
Value" shall mean, with respect to a share of Common Stock, as follows: (i) if
the shares of Common Stock are listed or admitted to trading on one or more
national securities exchanges, the average of the last reported sales prices per
share regular way or, in case no such reported sales take place on any such day,
the average of the last reported bid and asked prices per share regular way, in
either case on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading, for the 20 trading days
immediately preceding the date upon which the Fair Market Value is determined;
(ii) if the shares of Common Stock are not listed or admitted to trading on a
national securities exchange but are quoted by the NASD Automated Quotation
System ("NASDAQ") or any other nationally recognized quotation service, the
average of the last reported sales prices per share regular way or, in case no
reported sale takes place on any such day or the last reported sales prices are
not then quoted by NASDAQ or such other quotation service, the average for each
such day of the last reported bid and asked prices per share, for the 20 trading
days immediately preceding the date on which Fair Market Value is determined as
furnished by the National Quotation Bureau Incorporated or corresponding source
or any similar successor organization; or (iii) if the shares of Common Stock
are not listed or admitted to trading on a national securities exchange or
quoted by NASDAQ or any other nationally recognized quotation service, the "Fair
Market Value" shall be the fair market value thereof determined in good faith by
the Board of Directors of the Company on a basis consistent with the manner of
determining the fair market value of the Company's Common Stock for purposes of
offering the Company's Common Stock to equity investors.

7. No Rights as Stockholders. Neither the holder nor his legal
representative shall be, or have any rights and privileges of, a shareholder of
the Company in respect of any Common Stock, unless and until certificates for
such Common Stock shall have been issued.

8. Restrictions on the Issuance of Shares. The issuance of the shares upon
exercise of the Option shall be subject to compliance with all applicable
requirements of Federal, state or foreign law with respect to such securities.
The Option may not be exercised if the issuance of shares upon such exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations. In addition, the Option may not be
exercised unless: (i) a registration statement under the Securities Act of 1933,
as amended (the
<PAGE>

"Securities Act"), shall at the time of exercise of the Option be in effect with
respect to the shares issuable upon exercise of the Option or (ii) in the
opinion of legal counsel to the Company, the shares issuable upon exercise of
the Option may be issued in accordance with the terms of an applicable exemption
from the registration requirements of the Securities Act. You are cautioned that
the Option may not be exercisable unless the foregoing conditions are satisfied.
Accordingly, you may not be able to exercise the Option when desired even though
the Option is vested. Questions concerning this restriction should be directed
to the Chief Financial Officer of the Company. As a condition to the exercise of
the Option, the Company may require you to satisfy any qualifications that may
be necessary or appropriate, to evidence compliance with any applicable law or
regulation and to make any representation or warranty with respect thereto as
may be requested by the Company.

9. Transferability of Option. The Option may not be transferred by you
(other than by will or the laws of descent and distribution) and may be
exercised during your lifetime only by you.

10. Stockholder Approval. Option Awards and Stock Awards may be made as of
the date of approval of the Plan by the Board of Directors of the Company,
provided however, that no Option Awards or Stock Awards shall become vested
until such time as the Plan shall have received Stockholder approval. In the
event that the Stockholders of the Company shall not have approved the Plan
within twelve months of the date of Board approval of the Plan, any Option
Awards and Stock Awards outstanding shall become null and void.

11. Termination of Employment.

(a) In the event that (i) the Company or any subsidiary or parent
thereof terminates your employment "for cause," as defined in the Plan or as
such term is defined in your Employment Agreement, if any, between the Company
and you (the "Employment Agreement"), or (ii) you terminate your employment with
such entity for any reason whatsoever (other than as a result of your death or
"disability" (within the meaning of Section 22(e)(3) of the Code) or retirement
(as defined in the Plan)), then the Option may only be exercised within one
month after such termination, and only to the same extent that you were entitled
to exercise the Option on the date your employment was so terminated and had not
previously done so.

(b) In the event that you cease to be employed by the Company or any
subsidiary or parent thereof as a result of the termination of your employment
by the Company or any subsidiary or parent thereof at any time other than "for
cause" or as a result of your death or disability (within the meaning of Section
22(e)(3) of the Code), or retirement (as defined in the Plan), the Option may
only be exercised within three months after the date you cease to be so
employed, and only to the same extent that you were entitled to exercise the
Option on the date you ceased to be so employed by reason of such termination
and had not previously done so.

(c) In the event that you cease to be employed by the Company or any
subsidiary or parent thereof by reason of a "disability" (within the meaning of
Section 22(e)(3) of the Code), or retirement (as defined in the Plan), the
Option may only be exercised within one year after the date you cease to be so
employed, and only to the same extent that you were
<PAGE>

entitled to exercise the Option on the date you ceased to be so employed by
reason of such disability and had not previously done so.

(d) In the event that you die while employed by the Company or any
subsidiary or parent thereof, the Option may only be exercised within one year
after your death. In such event, the Option may be exercised during such one-
year period by the executor or administrator of your estate or by any person who
shall have acquired the Option through bequest or inheritance, but only to the
same extent that you were entitled to exercise the Option immediately prior to
the time of your death and you had not previously done so.

(e) Notwithstanding any provision contained in this Section 11 to the
contrary, in no event may the Option be exercised to any extent by anyone after
February 21, 2009.

12. Representations.

(a) You represent and warrant to the Company that, unless a registration
statement is in effect under the Securities Act, upon exercise of the Option,
you will be acquiring the Option Shares for your own account for the purpose of
investment and not with a view to or for sale in connection with any
distribution thereof, and you understand that (i) neither the Option nor the
Option Shares have been registered with the Securities and Exchange Commission
by reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act and (ii) the Option Shares must be held
indefinitely by you unless a subsequent disposition thereof is registered under
the Securities Act or is exempt from such registration. If a registration
statement is not in effect under the Securities Act at the time of exercise of
the Option, the stock certificates for any Option Shares issued to you will bear
the following legend:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW, AND MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE
BEEN SO REGISTERED OR AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.

(b) You further represent and warrant that you understand the Federal,
state and local income tax consequences of the granting of the Option to you,
the acquisition of rights to exercise the Option with respect to any Option
Shares, the exercise of the Option and purchase of Option Shares, and the
subsequent sale or other disposition of any Option Shares. In addition, you
understand that the Company will be required to withhold Federal, state or local
taxes in respect of any compensation income realized by you upon exercise of the
Option granted hereunder. To the extent that the Company is required to withhold
any such taxes, you hereby agree that the Company may deduct from any payments
of any kind otherwise due to you an amount equal to the total Federal, state and
local taxes required to be so withheld, or if such payments are inadequate to
satisfy such Federal, state and local taxes, or if no such payments are due or
to become due to you, then you agree to provide the Company with cash funds or
make
<PAGE>

other arrangements satisfactory to the Company regarding such payment. It is
understood that all matters with respect to the total amount of taxes to be
withheld in respect of any such compensation income shall be determined by the
Board of Directors in its sole discretion, but acting in good faith.

13. Adjustments: Reorganization, Reclassification, Consolidation, Merger or
Sale.

(a) In the event that, after the date hereof, the outstanding shares of the
Company's Common Stock shall be increased or decreased or changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation through reorganization, merger or
consolidation, recapitalization, reclassification, stock split, split-up,
combination or exchange of shares or declaration of any dividends payable in
Common Stock, the Board of Directors of the Company shall appropriately adjust
the number of shares of Common Stock (and the option price per share) subject to
the unexercised portion of the Option (to the nearest possible full share), and
such adjustment shall be effective and binding for all purposes of this
Agreement and the Plan.

(b) If any capital reorganization or reclassification of the capital stock
of the Company or any consolidation or merger of the Company with another
entity, or the sale of all or substantially all its assets to another entity,
shall be effected after the date hereof in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then you shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified in the
Option and in lieu of the shares of Common Stock of the Company immediately
theretofore receivable upon the exercise of the Option, such shares of stock,
securities or assets (including cash) as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore so receivable had
such reorganization, reclassification, consolidation, merger or sale not taken
place.

14. Transfer of Control. An "Ownership Change" shall be deemed to have
occurred in the event any of the following or any similar transaction occurs
with respect to the Company:

(a) The direct or indirect sale or exchange by the Stockholders of the
Company of all or substantially all of the stock of the Company;

(c) The sale, exchange, or transfer of all or substantially all of the
assets of the Company (other than a sale, exchange, or transfer to one (1) or
more subsidiary corporations of the Company); or
<PAGE>

(d) A liquidation or dissolution of the Company.

15. Continuation of Employment. Neither the Plan nor the Option
shall confer upon you any right to continue in the employ of the Company or any
subsidiary or parent thereof, or limit in any respect the right of the Company
or any subsidiary or parent thereof to terminate your employment or other
relationship with the Company or any subsidiary or parent thereof, as the case
may be, at any time.

16. Plan Documents. This Agreement is qualified in its entirety by
reference to the provisions of the Plan, which are incorporated herein by
reference.

17. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware. If any one or more
provisions of this Agreement shall be found to be illegal or unenforceable in
any respect, the validity and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>

Please acknowledge receipt of this Agreement by signing the enclosed copy
of this Agreement in the space provided below and returning it promptly to the
Secretary of the Company.

NORTH AMERICAN
TECHNOLOGIES GROUP, INC.

By /s/ Judith Knight Shields
----------------------------
Authorized Officer

Accepted and Agreed to
As of the date first above written:

/s/ Henry W. Sullivan
- -----------------------------------
Employee/Optionee

<PAGE>

EXHIBIT 10.38
NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Incentive Stock Option Agreement
February 22, 1999
Employee/Optionee: Judith Knight Shields
Number of shares of
Common Stock subject
to this Agreement: 10,000

Pursuant to the North American Technologies Group, Inc. 1999 Stock
Incentive Plan (the "Plan"), the Compensation Committee of the Board of
Directors of North American Technologies Group, Inc. (the "Company") has granted
to you on this date an option (the "Option") to purchase the number of shares of
the Company's Common Stock, $.001 par value per share ("Common Stock"), set
forth above. Such shares (as the same may be adjusted as described in Section
13 below) are herein referred to as the "Option Shares." The Option shall
constitute and be treated at all times by you and the Company as an "incentive
stock option" as defined under Section 422(b) of the Internal Revenue Code of
1986, as amended (the "Code"). The terms and conditions of the Option are set
out below.

1. Date of Grant. The Option is granted to you on February 22, 1999.

3. Option Price. The purchase price to be paid upon the exercise of
the Option is $3.00 per share (subject to adjustment as provided in Section 13
hereof).

4. Vesting Provisions. Except as provided in Section 5 hereof, you
will not be entitled to exercise all of the Options (and purchase Option Shares)
prior to February 21, 2003. Commencing on February 21, 2000 and on each of the
three succeeding anniversaries of that date on which you shall continue to be
employed by the Company or any subsidiary or parent thereof, you shall become
entitled to exercise the Option with respect to 2,500 of the Option Shares
(rounded to the nearest whole share) until the Option expires and terminates
pursuant to Section 2 hereof.

5. Acceleration of Options. The Board of Directors of the Company,
in its sole discretion, may at any time accelerate the time set forth in Section
4 at which the Option may be exercised by you with respect to any Option Shares.
<PAGE>

6. Exercise of Option. To exercise the Option, you must deliver a
completed copy of the attached Option Exercise Form to the address indicated on
the Form, specifying the number of Option Shares being purchased as a result of
such exercise, together with payment in full of the exercise price for all the
Option Shares being purchased. Payment of the option price may be made, at your
election, (I) in cash; (II) by delivering to the Company a notice of exercise
with an irrevocable direction to a broker-dealer registered under the Act to
sell a sufficient portion of the shares and deliver the sale proceeds directly
to the Company to pay the exercise price; (III) in the discretion of the Plan
Administrator, through the delivery to the Company of previously-owned shares of
Common Stock having an aggregate Fair Market Value equal to the Option exercise
price of the shares being purchased pursuant to the exercise of the Option;
provided, however, that shares of Common Stock delivered in payment of the
Option price must have been held by the participant for at least six (6) months
in order to be utilized to pay the Option price; or (IV) in the discretion of
the Plan Administrator, through any combination of the payment procedures set
forth in subsections (I)-(III). For the purposes of this Section 6, "Fair
Market Value" shall mean, with respect to a share of Common Stock, as follows:
(i) if the shares of Common Stock are listed or admitted to trading on one or
more national securities exchanges, the average of the last reported sales
prices per share regular way or, in case no such reported sales take place on
any such day, the average of the last reported bid and asked prices per share
regular way, in either case on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading, for the 20
trading days immediately preceding the date upon which the Fair Market Value is
determined; (ii) if the shares of Common Stock are not listed or admitted to
trading on a national securities exchange but are quoted by the NASD Automated
Quotation System ("NASDAQ") or any other nationally recognized quotation
service, the average of the last reported sales prices per share regular way or,
in case no reported sale takes place on any such day or the last reported sales
prices are not then quoted by NASDAQ or such other quotation service, the
average for each such day of the last reported bid and asked prices per share,
for the 20 trading days immediately preceding the date on which Fair Market
Value is determined as furnished by the National Quotation Bureau Incorporated
or corresponding source or any similar successor organization; or (iii) if the
shares of Common Stock are not listed or admitted to trading on a national
securities exchange or quoted by NASDAQ or any other nationally recognized
quotation service, the "Fair Market Value" shall be the fair market value
thereof determined in good faith by the Board of Directors of the Company on a
basis consistent with the manner of determining the fair market value of the
Company's Common Stock for purposes of offering the Company's Common Stock to
equity investors.

8. Restrictions on the Issuance of Shares. The issuance of the
shares upon exercise of the Option shall be subject to compliance with all
applicable requirements of Federal, state or foreign law with respect to such
securities. The Option may not be exercised if the issuance of shares upon such
exercise would constitute a violation of any applicable federal, state or
foreign securities laws or other law or regulations. In addition, the Option
may not be exercised unless: (i) a registration statement under the Securities
Act of 1933, as amended (the
<PAGE>

9. Transferability of Option. The Option may not be transferred by
you (other than by will or the laws of descent and distribution) and may be
exercised during your lifetime only by you.

10. Stockholder Approval. Option Awards and Stock Awards may be made
as of the date of approval of the Plan by the Board of Directors of the Company,
provided however, that no Option Awards or Stock Awards shall become vested
until such time as the Plan shall have received Stockholder approval. In the
event that the Stockholders of the Company shall not have approved the Plan
within twelve months of the date of Board approval of the Plan, any Option
Awards and Stock Awards outstanding shall become null and void.

11. Termination of Employment.

entitled to exercise the Option on the date you ceased to be so employed by
reason of such disability and had not previously done so.

(e) Notwithstanding any provision contained in this Section 11 to the
contrary, in no event may the Option be exercised to any extent by anyone after
February 21, 2009.

12. Representations.

(a) You represent and warrant to the Company that, unless a
registration statement is in effect under the Securities Act, upon exercise of
the Option, you will be acquiring the Option Shares for your own account for the
purpose of investment and not with a view to or for sale in connection with any
distribution thereof, and you understand that (i) neither the Option nor the
Option Shares have been registered with the Securities and Exchange Commission
by reason of their issuance in a transaction exempt from the registration
requirements of the Securities Act and (ii) the Option Shares must be held
indefinitely by you unless a subsequent disposition thereof is registered under
the Securities Act or is exempt from such registration. If a registration
statement is not in effect under the Securities Act at the time of exercise of
the Option, the stock certificates for any Option Shares issued to you will bear
the following legend:

(b) You further represent and warrant that you understand the Federal,
state and local income tax consequences of the granting of the Option to you,
the acquisition of rights to exercise the Option with respect to any Option
Shares, the exercise of the Option and purchase of Option Shares, and the
subsequent sale or other disposition of any Option Shares. In addition, you
understand that the Company will be required to withhold Federal, state or local
taxes in respect of any compensation income realized by you upon exercise of the
Option granted hereunder. To the extent that the Company is required to
withhold any such taxes, you hereby agree that the Company may deduct from any
payments of any kind otherwise due to you an amount equal to the total Federal,
state and local taxes required to be so withheld, or if such payments are
inadequate to satisfy such Federal, state and local taxes, or if no such
payments are due or to become due to you, then you agree to provide the Company
with cash funds or make
<PAGE>

13. Adjustments: Reorganization, Reclassification, Consolidation,
Merger or Sale.

(a) In the event that, after the date hereof, the outstanding shares
of the Company's Common Stock shall be increased or decreased or changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another corporation through reorganization, merger or
consolidation, recapitalization, reclassification, stock split, split-up,
combination or exchange of shares or declaration of any dividends payable in
Common Stock, the Board of Directors of the Company shall appropriately adjust
the number of shares of Common Stock (and the option price per share) subject to
the unexercised portion of the Option (to the nearest possible full share), and
such adjustment shall be effective and binding for all purposes of this
Agreement and the Plan.

(b) If any capital reorganization or reclassification of the capital
stock of the Company or any consolidation or merger of the Company with another
entity, or the sale of all or substantially all its assets to another entity,
shall be effected after the date hereof in such a way that holders of Common
Stock shall be entitled to receive stock, securities or assets with respect to
or in exchange for Common Stock, then you shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified in the
Option and in lieu of the shares of Common Stock of the Company immediately
theretofore receivable upon the exercise of the Option, such shares of stock,
securities or assets (including cash) as may be issued or payable with respect
to or in exchange for a number of outstanding shares of such Common Stock equal
to the number of shares of such stock immediately theretofore so receivable had
such reorganization, reclassification, consolidation, merger or sale not taken
place.

14. Transfer of Control. An "Ownership Change" shall be deemed to
have occurred in the event any of the following or any similar transaction
occurs with respect to the Company:

(a) The direct or indirect sale or exchange by the Stockholders of the
Company of all or substantially all of the stock of the Company;

(d) A liquidation or dissolution of the Company.

16. Plan Documents. This Agreement is qualified in its entirety by
reference to the provisions of the Plan, which are incorporated herein by
reference.

17. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware. If any one or more
provisions of this Agreement shall be found to be illegal or unenforceable in
any respect, the validity and enforceability of the remaining provisions hereof
shall not in any way be affected or impaired thereby.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>

Please acknowledge receipt of this Agreement by signing the enclosed
copy of this Agreement in the space provided below and returning it promptly to
the Secretary of the Company.

NORTH AMERICAN
TECHNOLOGIES GROUP, INC.

By /s/ Henry W. Sullivan
-----------------------------
Authorized Officer

Accepted and Agreed to
As of the date first above written:

/s/ Judith Knight Shields
- ----------------------------------
Employee/Optionee

<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 and Registration Statement No. 333-01141 and 333-16549
on Form S-8 of our report dated January 22, 1999, except for Note 18, which is
as of March 31, 1999, 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, 1998. Our report contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern.

/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP

Houston, Texas
March 31, 1999

<PAGE>

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