UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~MARCH 29~~June 28, 2009

¨	TRANSITION REPORT UNDER 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 as specified in its charter)

Delaware

33-0041789

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

429 Memory Lane, Marshall, Texas 75672

(Address of principal executive offices)

(972) 996-5750

(Issuer’s telephone number)

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 (the “Exchange Act”) during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filings requirements for the past 90 days. Yes ¨x No x¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant is required to submit and post such files). YES ¨ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

(Do not check if a smaller

reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 11,~~547~~772,~~863~~556 common shares outstanding as of ~~June 30~~August 12, 2009.

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

Index

		Page No.
PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Unaudited Consolidated Balance Sheets as of March 29, 2009 and September 28, 2008	3
	Unaudited Consolidated Balance Sheets as of June 28, 2009 and September 28, 2008	3
	Unaudited Consolidated Statements of Operations for the three and six months ended March 29, 2009 and March 30, 2008	4
	Unaudited Consolidated Statements of Operations for the three and nine months ended June 28, 2009 and June 29, 2008	4
	Unaudited Consolidated Statements of Cash Flows for the six months ended March 29, 2009 and March 30, 2008	5
	Unaudited Consolidated Statements of Cash Flows for the nine months ended June 28, 2009 and June 29, 2008	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Forward Looking Statements	14
	Overview	1415
	Critical Accounting Policies	1516
	Results of Operations	1617
	Liquidity and Capital Resources	1819
Item 4T.	Controls and Procedures	2022
PART II.	OTHER INFORMATION	2325
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2325
Item 6.	Exhibits	2325
SIGNATURES		2325

PART I: FINANCIAL INFORMATION

ITEM 1: Financial Statements

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	March 29, 2009			September 28, 2008
	June 28, 2009			September 28, 2008
Assets
Current Assets:
Cash and cash equivalents	$	~~352~~281,~~251~~721		$	443,818
Accounts receivable, net of allowance for doubtful accounts of $198,700		21,~~350~~973,~~494~~935			3,841,079
Inventories, net		21,~~555~~753,~~757~~517			3,623,065
Prepaid expenses and other		~~251~~91,~~082~~624			55,950
Total Current Assets		54,~~509~~100,~~584~~797			7,963,912
Property and equipment, net		8,~~637~~425,~~129~~095			8,864,779
Patents, less accumulated amortization of $1,324,024 and $1,265,571		743,263			799,865
Patents, less accumulated amortization of $1,353,253 and $1,265,571		715,484			799,865
Other assets		~~273~~264,~~906~~606			296,506
Total Assets	$	1513,~~163~~505,~~882~~982		$	17,925,062
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable	$	21,~~909~~882,~~478~~928		$	2,759,596
Accrued royalty expense		~~354~~378,~~117~~609			411,990
Accrued interest, including $315,245 and $519,522 to related parties		320,390			538,178
Accrued interest, including $323,862 and $519,522 to related parties		329,097			538,178
Accrued warranty costs		21,~~695~~920,~~124~~036			3,197,708
Other accrued expenses		~~738~~827,~~873~~350			873,379
Note payable—insurance		~~134~~53,~~499~~799			—
Capital lease obligations, current portion		41,~~100~~769			39,943
Promissory note payable to a related party		850,000			—
Bridge loan, including $1,872,727 to related parties		2,000,000			—
Total Current Liabilities		98,~~193~~283,~~581~~588			7,820,794
Capital lease obligations, net of current portion		~~181~~171,~~739~~043			199,367
Bridge loan, including $1,872,727 to related parties		—			2,000,000
Convertible debentures, including $2,809,110 to related parties, net of unamortized debt discount totaling $1,421,411 and $1,954,441		1,578,589			1,045,559
Convertible debentures, including $2,809,110 to related parties, net of unamortized debt discount totaling $1,154,897 and $1,954,441		1,845,103			1,045,559
Note payable to a related party		14,000,000			14,000,000
Total Liabilities		24,~~953~~299,~~909~~734			25,065,720
Commitments and Contingencies
Stockholders’ Deficit:
Convertible preferred stock, 1,000,000 shares authorized;
Convertible preferred stock, 1,000,000 shares authorized; Series CC, $1,000 stated value and liquidation preference per share, 54,040 shares issued and outstanding		8,773,684			8,773,684
Series CC, $1,000 stated value and liquidation preference per share, 54,040 shares issued and outstanding		8,773,684			8,773,684
Common stock, $.001 par value, 30,000,000 shares authorized; 11,547,863 and 10,863,100 shares issued and outstanding		11,548			10,863
Common stock, $.001 par value, 30,000,000 shares authorized; 11,147,863 and 10,863,100 shares issued and outstanding		11,148			10,863
Additional paid-in capital		104,876,190			104,624,841
Additional paid-in capital		104,808,560			104,624,841
Accumulated deficit		(124,455,174	)		(120,550,046	)
Accumulated deficit		(123,383,419	)		(120,550,046	)
Total Stockholders’ Deficit		(10,793,752	)		(7,140,658	)
Total Stockholders’ Deficit		(9,790,027	)		(7,140,658	)
Total Liabilities and Stockholders’ Deficit	$	13,505,982		$	17,925,062
Total Liabilities and Stockholders’ Deficit	$	15,163,882		$	17,925,062

The accompanying notes are an integral part of these unaudited consolidated financial statements.

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three Months Ended

~~Six~~Nine Months Ended

March 29, 2009

March 30, 2008

March 29, 2009

March 30, 2008

June 28, 2009

June 29, 2008

June 28, 2009

June 29, 2008

Sales, net

74,~~442~~990,~~436~~166

98,~~275~~094,~~478~~099

1419,~~165~~155,~~237~~403

1624,~~296~~390,~~086~~185

Cost of goods sold (exclusive of depreciation and amortization shown below)

63,~~495~~892,~~179~~766

65,~~933~~675,~~137~~678

1216,~~387~~280,~~432~~198

1218,~~989~~665,~~661~~339

Gross Profit

~~947~~1,~~257~~097,400

2,~~342~~418,~~341~~421

12,~~777~~875,~~805~~205

35,~~306~~724,~~425~~846

Selling, general and administrative expenses

1,~~313~~186,~~569~~894

1,~~307~~164,~~807~~021

23,~~641~~828,~~146~~040

23,~~395~~559,~~341~~362

Depreciation and amortization

~~373~~321,~~012~~977

~~261~~297,~~018~~782

~~684~~1,~~593~~006,570

~~573~~871,~~484~~266

Operating Profit (Loss)

(~~739~~411,~~324~~471

)

~~773~~956,~~516~~618

(1,~~547~~959,~~934~~405

)

~~337~~1,~~600~~294,218

Other (Income) Expense:

Interest expense, net, including $587,222, $589,204, $1,217,883 and $1,085,018 to related parties

622,850

603,913

1,290,908

1,107,550

Interest expense, net, including $629,097, $649,674, $1,846,980 and $1,734,693 to related parties

665,038

684,567

1,955,946

1,792,117

Other, net

(24,~~237~~754

)

(~~3,878~~751

)

(510,~~469~~223

)

(34,~~878~~629

)

Total Other (Income) Expense, net

~~620~~660,~~613~~284

~~600~~683,~~035~~816

1,~~285~~945,~~439~~723

1,~~103~~787,~~672~~488

Net Income (Loss)

(1,~~359~~071,~~937~~755

)

~~173~~272,~~481~~802

(23,~~833~~905,~~373~~128

)

(~~766~~493,~~072~~270

)

Net Income (Loss) Available to Common Stockholders

(1,~~359~~071,~~937~~755

)

~~173~~272,~~481~~802

(23,~~833~~905,~~373~~128

)

(~~766~~493,~~072~~270

)

Net Income (Loss) Per Share Available to Common Stockholders:

Net Income (Loss) Per Common Share – basic

(0.1209

)

0.0203

(0.2635

)

(0.0805

)

Net Income (Loss) Per Common Share – diluted

(0.1209

)

0.0102

(0.2635

)

(0.0805

)

Weighted Average Number of Common Shares outstanding:

Basic

11,~~138~~530,~~234~~281

910,~~997~~360,~~947~~184

11,~~050~~210,~~615~~504

9,~~730~~940,~~299~~261

Diluted

11,~~138~~530,~~234~~281

1314,~~742~~508,~~330~~614

11,~~050~~210,~~615~~504

9,~~730~~940,~~299~~261

The accompanying notes are an integral part of these unaudited consolidated financial statements.

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended
	Nine Months Ended
	March 29, 2009			March 30, 2008
	June 28, 2009			June 29, 2008
Cash flows from operating activities:
Net loss	$	(23,~~833~~905,~~373~~128	)	$	(~~766~~493,~~072~~270	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount		~~533~~799,~~029~~544			~~433~~700,~~941~~456
Stock option compensation expense		1624,~~432~~462			1962,~~497~~712
Issuance of common stock for interest, including $156,909 and $597,647 to related parties		167,572			604,222
Issuance of common stock for interest, including $213,091 and $962,027 to related parties		227,572			976,530
Provision for warranty expense		77103,~~636~~737			~~886~~967,~~201~~142
Depreciation and amortization		684,593			573,484
Provision for doubtful accounts		—			50,000
Depreciation and amortization		1,006,570			871,266
Net change in operating assets and liabilities:
Accounts receivable		1,~~490~~867,~~585~~144			(43,~~712~~614,~~477~~610	)
Inventories		1,~~088~~898,~~022~~532			~~281~~(642,~~939~~973	)
Prepaid expenses and other current assets		(~~195~~35,~~132~~674	)		(~~208~~165,~~116~~904	)
Other assets		1927,~~352~~028			5259,~~207~~883
Accounts payable		~~149~~(876,~~882~~668	)		~~184~~(535,~~859~~499	)
Accrued royalty expense		(5733,~~873~~381	)		~~(74~~127,~~776~~576	)
Accrued interest		(~~217~~209,~~788~~081	)		86125,~~919~~086
Accrued warranty costs		(~~580~~1,~~220~~381,408	)		(~~212~~309,~~566~~600	)
Other accrued expenses		(~~134~~46,~~504~~031	)		~~(428~~18,~~199~~728	)
Net cash provided by (used in) operating activities		208,213			(3,278,937	)
Net cash used in operating activities		(532,782	)		(1,802,477	)
Cash flows from investing activities:
Purchases of patents and other assets		(13,~~851~~301	)		—
Purchases of property and equipment		(~~415~~503,~~957~~315	)		(~~217~~471,~~993~~907	)
Net cash used in investing activities		(~~417~~506,~~808~~616	)		(~~217~~471,~~993~~907	)
Cash flows from financing activities:
Proceeds from note payable – insurance		268,997			492,898
Payments on note payable – insurance		(~~134~~215,~~499~~198	)		(~~262~~394,~~121~~641	)
Payments on capital lease obligations		(1626,~~470~~498	)		—
Net cash provided by financing activities		118,028			230,777
Proceeds from promissory note payable to a related party		850,000			—
Net decrease in cash and cash equivalents		(91,567	)		(3,266,153	)
Net cash provided by financing activities		877,301			98,257
Net decrease in cash and cash equivalents		(162,097	)		(2,176,127	)
Cash and cash equivalents, beginning of period		443,818			3,839,787
Cash and cash equivalents, end of period	$	~~352~~281,~~251~~721		$	~~573~~1,~~634~~663,660
SUPPLEMENTAL DISCLOSURE
Interest paid in cash, including $766,138 and $0 to related parties	$	794,468		$	7,757
Interest paid in cash, including $1,080,880 and $0 to related parties	$	1,117,045		$	23,028
SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION
Common stock issued for debenture interest (including incremental interest), of which $156,909 and $96,758 was to related parties	$	167,572		$	103,333
Common stock issued for debenture interest (including incremental interest), of which $213,091 and $213,416 was to related parties	$	227,572		$	227,919
Common stock issued for interest on debt to a related party	$	—		$	~~500~~748,~~889~~611
Common stock issued to former officer in settlement of termination	$	—		$	168,000
Incremental debt discount resulting from reduction in 8% convertible debenture conversion price, including $1,484,525 to related parties	$	—		$	1,585,404

The accompanying notes are an integral part of these unaudited consolidated financial statements.

NORTH AMERICAN TECHNOLOGIES GROUP, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—BUSINESS AND BASIS OF PRESENTATION

North American Technologies Group, Inc. (“NATG” or the “Company”) is principally engaged in the manufacturing and marketing of engineered composite railroad crossties, also called ties, through its 100% owned subsidiary TieTek LLC. The Company’s composite railroad crosstie is a direct substitute for a wood tie, but with a longer expected life and with several environmental advantages. The Company began commercial manufacturing and shipping of ties during the third quarter of 2000.

As disclosed in the Company’s Form 10-K for the fiscal year ended September 28, 2008, in connection with the closing of its fiscal 2008 fourth quarter books and records, and in preparation of materials to be furnished to the Company’s former auditors for its annual audit, the Company and its former auditors requested that Mr. Rod Wallace, the former Chief Executive Officer, furnish information related to purchases of raw materials which he claimed to have made personally and for which he was reimbursed by the Company. When satisfactory information was not furnished by Mr. Wallace, the Company engaged the services of outside legal counsel, who in cooperation with the Company’s management, its Audit Committee and an external forensic accountant, began an investigation of the alleged raw materials purchases. That investigation uncovered irregularities in ~~reimbursement~~ reimbursement requests and unauthorized use of Company funds which included $137,620, ~~and~~ $15,450 and $0 during the first, second and ~~second~~third quarters, respectively, of its fiscal year ending September 27, 2009. The Company classified these amounts as alleged fraud expense which is included in selling, general and administrative expenses. Mr. Wallace’s employment was terminated on February 26, 2009. ~~Because of the delay in providing appropriate documentation regarding these purchases to the Company and its auditors, the Company was unable to complete and file this Form 10-Q on a timely basis.~~

The Company uses a 52/53 week accounting year. Each fiscal quarter contains thirteen weeks that end on the Sunday closest to the end of each calendar quarter. The Company’s fiscal year ends on the Sunday closest to the end of the third calendar quarter.

The accompanying consolidated financial statements include the accounts of NATG and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated upon consolidation. The interim consolidated financial statements of NATG and its subsidiaries are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. In the opinion of management, these interim consolidated financial statements include all the necessary adjustments to present fairly the results of the interim periods, and all such adjustments, unless otherwise stated, are of a normal recurring nature. The interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended September 28, 2008, included in the Company’s Annual Report on Form 10-K. The interim results reflected in the accompanying consolidated financial statements are not necessarily indicative of the results of operations for a full fiscal year.

NOTE 2—GOING CONCERN UNCERTAINTY

As of ~~March~~June 2928, 2009, the Company had a cash balance of $~~352~~281,~~251~~721 and a negative working capital balance of $34,~~683~~182,~~997~~791. For the ~~six~~nine months ended ~~March~~ June 2928, 2009 and the year ended September 28, 2008, the Company incurred net losses of $23,~~833~~905,~~373~~128 and $2,924,340, respectively. ~~The~~During ~~Company’s~~the ~~operating~~same ~~activities~~periods, ~~provided~~the ~~cash~~Company ofused ~~$208,213~~cash ~~for~~in ~~the~~operating ~~six~~activities ~~months~~of ~~ended March 29~~$532,782 ~~2009,~~ and ~~used cash of~~ $2,454,089 ~~for the year ended September 28~~, ~~2008~~ respectively. In addition, it is likely that the Company will incur losses for the foreseeable future.

The Company has significant cash needs. OnThe ~~October 31, 2009, the~~ Company ~~will~~is be required to ~~repay~~pay quarterly interest in cash on the bridge loan (“Bridge Loan”), through maturity on October 31, 2009, at which time the entire principal of $2,000,000, ~~together~~will ~~with~~be ~~interest thereon~~due. The Company also has a commitment to pay in 2009 approximately $740,000 for the remaining purchase price of equipment on order with a supplier. The Company is required to pay quarterly interest in cash on the construction loan (“Construction Loan”) with Opus 5949 LLC (“Opus”). ~~Additionally~~On April 8, 2010, the Company is obligated to repay an $850,000 promissory note to a related party. On July 25, 2010, the Company will be required to pay $7,000,000 on the Construction Loan, and thereafter to make quarterly principal payments of $350,000 and the interest thereon beginning in October 2010. On July 31, 2010, the Company will be required to repay $3,000,000 for its 8% convertible debentures (“8% Convertible Debentures”). Additionally, the Company will have to fund its working capital needs, potential operating losses, and capital expenditures. The Company’s viability and ability to pay or refinance its debt obligations, particularly to repay the Bridge Loan, together with interest thereon, to pay quarterly interest, in cash, on the Construction Loan, and to maintain adequate liquidity, depend on a number of factors. The factors include the ability to obtain additional orders at prices that yield positive gross margins, maintain adequate production volumes, ~~the~~reduce ~~reduction of~~ equipment failures that disrupt production, secure the ~~willingness~~ agreement of customers to ~~continue~~an toorderly ~~purchase~~schedule for the replacement of approximately 6,200 ties ~~and~~that ~~pay~~the Company has agreed to replace, procure raw materials at reasonable prices, and to collect accounts receivable in a timely manner. The Company’s inability to achieve any of the aforementioned factors would have a material and adverse effect on its liquidity. There can be no assurances that ~~yield~~the ~~positive~~Company’s ~~gross~~activities ~~margins~~will be successful or that the Company will ultimately achieve sustained profitability. Accordingly, the ~~willingness~~Company ofwill ~~customers~~have to ~~agree~~continue ~~upon~~funding anfuture ~~orderly~~cash needs through financing activities.

The replacement of ties under warranty obligations affects the Company’s liquidity, in that the cost of replacement is incurred without corresponding revenue. The Company agreed to replace approximately 15,100 ties for a specific customer, and as of the date of the filing of this report has completed that replacement. Such replacement has had a material and adverse affect on the Company’s liquidity.

The Company has agreed to replace 6,210 ties for a customer due to discrepancies in size, but a schedule has not yet been agreed to with the customer. The replacement of these ties will likely have a material and adverse impact on the Company’s liquidity and will likely require the Company to seek additional financing if other liquidity factors remained unchanged.

~~schedule~~As ~~for~~of the ~~replacement~~date of ~~ties~~this ~~that~~report, the Company has ~~agreed~~no financing arrangements and no commitments to ~~replace,~~obtain any financing arrangements. There can be no assurance that the ~~procurement~~Company ofwill ~~raw~~be ~~materials~~able atto ~~reasonable~~secure ~~prices,~~financing and ~~the~~that ~~continued collection~~financing, ofif ~~accounts~~secured, ~~receivable~~will incontain aterms ~~timely~~which ~~manner.~~are ~~The~~favorable to the Company’s ~~inability~~and towill ~~achieve~~be ~~any~~sufficient ofto enable the ~~aforementioned~~Company ~~factors~~to ~~could,~~fund operations and ~~most~~pay ~~likely~~debts ~~would,~~and ~~have~~other aliabilities. ~~material~~If ~~and~~the ~~adverse~~Company ~~effect~~raises oncapital ~~its~~by ~~liquidity.~~issuing ~~There~~new ~~can~~common bestock noor ~~assurances~~securities ~~that~~convertible into common stock, the ~~Company’s~~ ~~activities~~percentage ~~will~~ownership beof ~~successful~~its orcurrent ~~that~~stockholders would be reduced, unless the ~~Company~~existing stockholders ~~will~~participate ~~ultimately~~in ~~achieve~~providing ~~sustained~~such ~~profitability~~additional capital. ~~Accordingly~~Also, ~~the~~any ~~Company~~new securities may have torights, ~~continue~~preferences ~~funding~~or ~~future~~privileges ~~cash~~senior ~~needs~~to ~~through~~those ~~financing~~of ~~activities~~the Company’s current common stockholders.

AsThe ofuncertainty ~~the date~~ of ~~this~~achieving ~~report,~~profitability ~~the Company has no financing arrangements~~ and/or noobtaining ~~commitments~~additional ~~to obtain any~~ financing ~~arrangements.~~raises ~~There~~substantial ~~can~~doubt beabout ~~no assurance that~~ the Company’s ~~will~~ability ~~be able~~ to ~~secure~~continue ~~financing~~as a ~~and~~going ~~that~~concern. ~~financing,~~The ifreport ~~secured,~~of ~~will contain terms which are favorable to~~ the Company’s ~~and~~former beindependent ~~sufficient~~registered topublic ~~enable~~accountants accompanying the ~~Company~~consolidated tofinancial ~~fund~~statements ~~operations,~~for ~~and pay debts and other liabilities. If~~ the ~~Company~~ ~~raises~~fiscal ~~capital~~year byended ~~issuing new common stock or securities convertible into common stock~~September 28, ~~the percentage ownership of its current stockholders would be reduced~~2008, ~~unless~~included ~~the~~an ~~existing~~explanatory ~~stockholders~~paragraph ~~participate~~with ~~in providing such additional capital.~~respect ~~Also,~~to ~~any~~the ~~new~~ability ~~securities may have rights, preferences or privileges senior~~ to ~~those~~continue ofas ~~our~~a ~~current~~going ~~common stockholders~~concern.

The uncertainty of achieving profitability and/or obtaining additional financing raises substantial doubt about the Company’s ability to continue as a going concern. The report of the Company’s independent registered public accountants accompanying the consolidated financial statements for the fiscal year ended September 28, 2008, included an explanatory paragraph with respect to the ability to continue as a going concern.

The Company’s consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

NOTE 3—INVENTORIES

The Company uses lower of cost (first-in, first-out) or market to value its inventories. Cost of finished goods includes raw material costs, direct labor, and applied overhead. Inventories consisted of finished goods (composite railroad ties) and raw materials (primarily recycled plastic materials) as of ~~March~~June 2928, 2009 and September 28, 2008, as follows:

	March 29, 2009		September 28, 2008
	June 28, 2009		September 28, 2008
Raw materials	$	1,~~172~~062,~~522~~077	$	1,980,299
Finished goods		1691,~~383,235~~440		1,780,139
Total inventory		21,~~555~~753,~~757~~517		3,760,438
Less: Reserve for obsolete inventory		—		(137,373	)
Total inventory, net	$	21,~~555~~753,~~757~~517	$	3,623,065

NOTE 4—PROPERTY AND EQUIPMENT

Major classes of property and equipment as of ~~March~~June 2928, 2009 and September 28, 2008, consisted of the following:

	March 29, 2009			September 28, 2008
	June 28, 2009			September 28, 2008
Machinery and equipment	$	12,~~491~~578,~~202~~561		$	12,131,333
Building and land		2,436,430			2,436,430
Furniture, fixtures and other		529,003			472,915
Total property and equipment		15,~~456~~543,~~635~~994			15,040,678
Less accumulated depreciation and amortization		(67,~~819~~118,~~506~~899	)		(6,175,899	)
Total property and equipment, net	$	8,~~637~~425,~~129~~095		$	8,864,779

Machinery and equipment included $252,144 of equipment under capital leases as of March 29, 2009 and September 28, 2008. Accumulated depreciation and amortization included $48,538 and $22,070 of amortization related to equipment under capital leases as of March 29, 2009 and September 28, 2008, respectively.

Machinery and equipment included $~~150~~263,~~000~~076 ofand ~~idle~~$252,144 of equipment, ~~net~~under capital leases as of June 28, a2009 ~~reserve~~and ~~for~~September 28, ~~impairment~~2008, respectively. Accumulated depreciation and amortization included $62,865 and $22,070 of amortization related to equipment under capital leases as of ~~March~~ June 2928, 2009 and September 28, 2008, respectively.

Net property, machinery and equipment included $113,000 and $150,000 of idle equipment, net of a reserve for impairment, as of June 28, 2009 and September 28, 2008, respectively.

NOTE 5—ACCRUED WARRANTY LIABILITY

The following table summarizes the activity related to the accrued warranty liability during the three and ~~six~~nine months ended ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008:

Three Months Ended

~~Six~~Nine Months Ended

March 29, 2009

March 30, 2008

March 29, 2009

March 30, 2008

June 28, 2009

June 29, 2008

June 28, 2009

June 29, 2008

Balance at beginning of period

32,~~040~~695,~~570~~124

23,~~612~~162,~~252~~195

3,197,708

2,488,560

Accrual for warranty expense

4126,~~665~~100

~~621~~80,~~095~~941

77103,~~636~~736

~~886~~967,~~201~~142

Product returns to raw material inventory

—

~~29,404~~—

—

35,722

Warranty costs incurred

(~~387~~801,~~111~~188

)

(~~100~~97,~~556~~034

)

(~~580~~1,~~220~~381,408

)

(~~248~~345,~~288~~322

)

Balance at end of period

21,~~695~~920,~~124~~036

3,~~162~~146,~~195~~102

21,~~695~~920,~~124~~036

3,~~162~~146,~~195~~102

As of ~~March~~June 2928, 2009, the balance of the warranty reserve represented approximately 2819,~~000~~200 ties, which consisted of approximately 2415,~~200~~100 ties, the replacement of which will be made for a specific customer, and approximately 34,~~800~~100 ties which are subject to the Company’s general estimate of possible replacements. For a specific customer, the Company ~~plans~~replaced toall ~~replace 19~~15,~~500~~100 ties during the fiscal ~~year~~quarter ending September 27, 2009~~, and the remainder by the end of the third quarter of the year ending September 26, 2010~~.

NOTE 6—DEBT

Debt to Opus 5949 LLC

In 2004, the Company entered into the Construction Loan with Opus (a related party—see Note 10) for $14,000,000 with a 10-year maturity and quarterly principal installments of $350,000 beginning July 1, 2005. An amendment to the Construction Loan note on July 24, 2007 resulted in the deferral of principal installments, totaling $7,000,000, to July 25, 2010. The remaining balance will be paid in quarterly installments of $350,000 starting October 2010 through February 15, 2015. The Construction Loan note, as amended, provides for interest at the rate of 7% per annum until July 24, 2010 after which date the interest reverts to 700 basis points over the prime interest rate. Prior to October 1, 2008, all interest had been paid in shares of $0.001 par value common stock (“Common Stock”). Beginning October 1, 2008 and at the beginning of each calendar quarter thereafter until maturity, interest was and is to be paid in cash. On July 2 31, 2009, the Company and Opus entered into ~~the~~a second Limited Waiver to Construction Loan, which further extends the July 1, 2009 interest payment toof ~~July~~$223,222 31to August 17, 2009 (see Note 11 12).

The Construction Loan is secured by the land and building of the Marshall facility and all tangible and intangible personal property owned by the Company and its subsidiaries, including but not limited to all intellectual property (including its patent rights).

The Construction Loan agreement contains several representations made by the borrower, one of which is a representation that the Company will not install nor otherwise incorporate in the Marshall facility any materials, equipment, or fixtures under any conditional sales agreements or security agreements under which a party has the right to remove or repossess any such items.

The Company was in compliance with the provisions of the Construction Loan and current on all interest payments as of ~~March~~June 2928, 2009, and the date of this report, because the Company and Opus entered into a second Limited Waiver to Construction Loan that extended the July 1, 2009 interest payment of $223,222 to August 17, 2009.

For the three and ~~six~~nine months ended ~~March~~June 2928, 2009 and ~~March~~ June 3029, 2008, the Company recorded interest expense of $260,556 and $247,~~722~~723 in the respective three month periods, and $~~495~~756,~~444~~000 and $743,167 in the respective ~~six~~nine month periods.

During the three months ended ~~March~~June 2928, 2009, the Company paid $~~250~~282,~~445~~333 interest in cash that accrued for the period ~~October~~January 1, ~~2008~~2009 through ~~December~~ March 31, ~~2008~~2009, and for the nine days in April when the payment was made. Because this payment was made on April 9, 2009, four days after the payment grace period, the payment of interest included three days of interest computed at the rate of 18% per annum.

During the three months ended March 30, 2008, the Company issued a total of 449,712 shares of its Common Stock in payment of interest of $250,444 that accrued for the period October 1, 2007 through December 31, 2007.

During the ~~six~~three months ended ~~March~~June 29, ~~2009~~2008, the Company ~~paid~~issued ~~$500~~a total of 215,~~889~~411 ~~interest~~shares of its Common Stock in ~~cash~~payment of interest of $247,722 that accrued for the period ~~July~~January 1, 2008 through ~~December~~March 31, 2008.

During the nine ~~six~~ months ended ~~March~~June 3028, ~~2008~~2009, the Company ~~issued~~paid ~~a total~~$783,222 ofinterest ~~569~~in cash that accrued for the period July 1,~~811~~ ~~shares~~2008 ofthrough ~~its~~March 31, ~~Common~~2009, ~~Stock~~and for nine days in April when the payment ofwas ~~interest~~made. ofBecause ~~$500~~this payment was made on April 9,~~889~~ ~~that~~2009, ~~accrued~~four ~~for~~days after the ~~period~~payment ~~July 1~~grace period, ~~2007~~the ~~through~~payment ~~December~~of interest included three days of interest computed at the rate of 18% ~~31,~~per ~~2007~~annum.

InDuring ~~April 2009,~~ the ~~Company~~nine ~~paid~~months ~~$282,333~~ended ~~interest in cash that accrued for the period January~~June 129, ~~2009 through March 31~~2008, ~~2009, and for nine days in April when~~ the ~~payment~~Company ~~was~~issued ~~made.~~a ~~Because~~total ~~this~~of ~~payment was made on April 9~~785,222 ~~2009,~~shares ~~four~~of ~~days~~its ~~after~~Common ~~the~~Stock ~~payment~~in ~~grace period, the~~ payment of interest ~~included~~of ~~four~~$748,611 ~~days~~that ofaccrued ~~interest~~for ~~computed~~the atperiod ~~the~~July 1, ~~rate~~2007 ofthrough ~~18%~~March ~~per annum~~31, 2008.

On July 2, 2009, the Company and Opus entered into the Limited Waiver to Construction Loan which extended the July 1, 2009 interest payment to July 31, 2009. On July 31, 2009, the Company and Opus entered into a second Limited Waiver to Construction Loan which further extends the July 1, 2009 interest payment of $223,222 to August 17, 2009.

Bridge Loan

Effective March 7, 2007, the Company entered into the Bridge Loan (a portion of which is held by related parties—see Note 10), evidenced by a series of unsecured promissory notes in the aggregate principal amount of $2,000,000. The Bridge Loan bears interest at the rate of 7% per annum, compounded quarterly. Effective as of October 30, 2008, the Company and each holder of the series of promissory notes constituting the Bridge Loan entered into a second amendment to each such note. Under that second amendment, the maturity date of the notes was extended to the earlier to occur of October 31, 2009 or a date on which the Company receives a financing for a minimum of $2,000,000. The accumulated interest since inception of $247,498 was paid in cash on October 31, 2008. Thereafter, interest, approximating $35,000, is to be paid quarterly in cash on January 31, 2009, April 30, 2009, July 31, 2009 and October 31, 2009, the maturity date.

For the three and ~~six~~nine months ended ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008, the Company recorded interest expense of $35,389 and $3738,~~507~~166 in the respective three month periods, and $72107,~~264~~653 and $74112,~~364~~530 in the respective ~~six~~nine month periods.

In January 2009, the Company paid $35,778 interest in cash to the holders of the Bridge Loan notes for interest that accrued from November 1, 2008 through January 31, 2009.

In April 2009, the Company paid $34,611 interest in cash to the holders of the Bridge Loan notes for interest that accrued from February 1, 2009 through April 30, 2009.

On July 31, 2009, the Company paid $35,778 interest in cash to the holders of the Bridge Loan notes for interest that accrued from May 1, 2009 through July 31, 2009.

8% Convertible Debentures

On July 31, 2007, the Company issued debentures in the principal amount of $3,000,000 which are payable in full on July 31, 2010 (~~the “8% Convertible Debentures”) (~~a portion of which are held by related parties—see Note 10). The 8% ~~Convertible~~ Convertible Debentures accrue interest at 8% per annum. Principal of the 8% Convertible Debentures is convertible, at any time, into shares of Common Stock at a conversion price of $0.56 per share, subject to adjustment.

The conversion price may in the future be adjusted because of certain dilutive events, including the issuance of shares of Common Stock in payment of interest to parties (including Opus) other than to the holders of the 8% Convertible Debentures. The Company may in the future issue Common Stock, and if the market price of the Company’s Common Stock declines, the effective conversion price will in turn decline, resulting in potential significant dilution to existing shareholders, upon conversion of the 8% Convertible Debentures to Common Stock.

The 8% Convertible Debentures are unsecured.

The Company is required to pay interest only under the 8% Convertible Debentures until their maturity. Interest is payable in arrears after the end of each of its fiscal quarters on October 1, January 1, April 1 and July 1 of each year during which the 8% Convertible Debentures are outstanding. As permitted under the 8% Convertible Debentures, the Company has elected to pay interest by the issuance of shares of its Common Stock, valued at the lower of the then current conversion price or the daily volume weighted average trading price of the Common Stock for the 20 days prior to the date such interest payment is due.

On the date that the 8% Convertible Debentures were issued, the effective conversion price was less than the Company’s stock price, which resulted in the Company calculating and recording a beneficial conversion feature of $707,298. This amount is being amortized as additional interest expense over the period from the date of issuance to the stated maturity date.

InThe ~~connection~~Company ~~with~~is ~~the~~required ~~issuance~~to ofpay interest only under the 8% Convertible Debentures, ~~the~~until ~~Company~~their ~~issued warrants to purchase~~maturity. ~~375,000~~Interest ~~shares~~is ofpayable ~~Common~~in ~~Stock~~arrears (after the ~~“July~~end ~~2010~~of ~~Warrants”)~~each ~~at an exercise price~~ of ~~$4.00~~its ~~per~~fiscal ~~share.~~quarters ~~The~~on ~~number~~October 1, January 1, April 1 ofand ~~shares~~July 1 of ~~Common~~each ~~Stock~~year ~~that~~during ~~can~~which ~~be purchased and~~ the ~~exercise~~8% ~~price~~Convertible Debentures are ~~subject to adjustments~~outstanding. ~~The~~As ~~issuance~~permitted ofunder ~~Common Stock after~~ the ~~issuance of the~~ 8% Convertible Debentures, ~~at a price lower than~~ the ~~then~~Company ~~effective~~has ~~exercise~~elected ~~price,~~to ~~causes~~pay ~~the~~interest ~~exercise~~by ~~price and~~ the ~~number~~issuance of shares of its Common Stock, ~~that~~valued ~~can~~at bethe ~~purchased~~lower toof bethe ~~adjusted~~then ~~such~~current ~~that~~conversion ~~the~~price ~~proceeds~~or ~~upon exercise are~~ the ~~same~~daily asvolume ~~would~~weighted ~~have~~average ~~been~~trading ~~received~~price byof the ~~Company~~Common ~~had~~Stock for the ~~warrants~~20 days ~~been~~prior ~~exercised~~to on the ~~original~~date ~~issuance~~such ~~date~~interest payment is due.

In connection with the issuance of the 8% Convertible Debentures, the Company issued warrants to purchase 375,000 shares of Common Stock (the “July 2010 Warrants”) at an exercise price of $4.00 per share. The number of shares of Common Stock that can be purchased and the exercise price are subject to adjustments. The issuance of Common Stock after the issuance of the 8% Convertible Debentures at a price lower than the then effective exercise price causes the exercise price and the number of shares of Common Stock that can be purchased to be adjusted, such that the proceeds upon exercise are the same as would have been received by the Company had the warrants been exercised on the original issuance date.

The Company allocated the proceeds received from convertible debt with detachable warrants using the relative fair value of the individual elements at the time of issuance. Using the Black-Scholes valuation model, the Company determined that as of the issuance date the value of the July 2010 Warrants was $707,298. This amount was recorded as a debt discount and is being amortized as additional interest expense over the period from the date of issuance to the stated maturity date.

Pursuant to a provision in the 8% Convertible Debentures that required the conversion price to be adjusted subsequent to the Company’s reverse split of its Common Stock, the conversion price was adjusted to $1.01 on December 8, 2007. Such adjustment represents 100% of the daily volume weighted average trading price of the Common Stock for 22 trading days immediately preceding December 8, 2007. The reduction in the conversion price from $4.00 to $1.01 created an incremental debt discount of $1,585,404, which when added to the previously recorded ~~benefical~~beneficial conversion feature and debt discount, equals the face value of of the 8% Convertible Debentures, which is the maximum amount of debt discount required by accounting principles generally accepted in the United States. The incremental debt discount is being amortized over the remaining term of the debentures. The reverse split of the Company’s Common Stock also resulted in the exercise price of the July 2010 Warrants adjusting to $1.01 and the number of shares of Common Stock that could be purchased upon exercise increasing from 375,000 to 1,485,149.

Also, pursuant to a provision in the 8% Convertible Debentures that required the conversion price to be adjusted due to the issuance of shares of Common Stock, other than to the holders of the 8% Convertible Debentures, at a price lower than the then conversion price, the conversion price was adjusted from $1.01 to $0.56 on January 7, 2008. The issuance of these shares of Common Stock also constituted a dilutive issuance under the July 2010 Warrants. As a result, the exercise price under such warrants was adjusted to $0.56, and the number of shares of Common Stock that could be purchased upon exercise increased from 1,485,149 to 2,678,571.

~~During~~Additionally, the ~~three~~issuance ~~months~~of ~~ended~~shares ~~March 29,~~of Common Stock in January 2009 ~~and~~with ~~March 30,~~respect ~~2008~~to interest on the 8% Convertible Debentures constituted a dilutive issuance under the July 2010 Warrants. As a result, the ~~Company~~exercise ~~recorded~~price ~~interest~~under ~~expense of~~such warrants was adjusted from $600.56 to $0.35 and the number of shares of Common Stock that could be purchased upon exercise increased from 2,~~666~~678,571 to 4,285,714.

~~For~~During the three months ended ~~March~~June 2928, 2009 ~~and March 30~~, ~~2008,~~ the Company ~~recognized~~recorded ~~$207,573 of~~ interest expense ~~related~~ ~~to the amortization~~ of ~~debt discount, and~~ $5860,~~941 of interest expense related to the amortization of the beneficial conversion feature~~667.

During the three months ended ~~March~~June 29, ~~2009~~2008, the Company ~~issued~~recorded ainterest ~~total~~expense of ~~175~~$124,~~239~~586 ~~shares~~(which ofincludes ~~its~~$63,919 ~~Common Stock with respect to interest~~ of ~~$61~~incremental interest,~~333~~ ~~that~~which ~~had~~represents ~~accrued for~~ the ~~period~~product ~~October 1, 2008 through December 31, 2008. The issuance~~ of ~~these shares of Common Stock constituted a dilutive issuance under~~ the ~~July~~market ~~2010~~value ~~Warrants.~~of ~~As a result,~~ the ~~exercise~~shares ~~price under such warrants was adjusted from $0.56 to $0.35~~ and the ~~number~~actual of shares ofissued, ~~Common~~less ~~Stock~~the ~~that~~accrued ~~could~~interest ~~be purchased~~for ~~upon~~the ~~exercise~~period ~~increased from 2~~January 1,~~678,571~~ to2008 4through March 31,~~285,714~~ 2008).

~~During~~For the three months ended ~~March~~June 3028, 2009 and June 29, 2008, the Company ~~issued~~recognized ~~a total of 109~~$207,~~524~~573 ~~shares~~ of ~~its~~interest ~~Common~~expense ~~Stock~~related ~~with respect~~ to ~~interest~~the amortization of debt discount, and $6158,~~333~~942 ~~that~~of ~~had~~interest ~~accrued~~expense ~~for~~related to the ~~period~~amortization ~~October 1,~~of ~~2007~~the ~~through~~beneficial ~~December 31,~~conversion ~~2007~~feature.

During the six months ended March 29, 2009, the Company recorded interest expense of $166,238 (which includes $44,905 of incremental interest, which represents the product of the market value of the shares and the actual shares issued, less the accrued interest for the period July 1, 2008 through September 30, 2008).

During the six months ended March 30, 2008, the Company recorded interest expense of $121,333.

For the six months ended March 29, 2009 and March 30, 2008, the Company recognized $415,146 and $316,058, respectively, of interest expense related to the amortization of debt discount, and $117,883 of interest expense related to the amortization of the beneficial conversion feature.

During the ~~six~~three months ended ~~March~~June 2928, 2009, the Company issued a total of ~~284~~400,~~763~~000 shares of its Common Stock with respect to interest of $~~167~~60,~~571~~000 ~~(which~~that ~~includes~~had ~~$44~~accrued for the period January 1,~~905~~ of2009 ~~incremental~~through ~~interest~~March 31, ~~which~~2009. ~~represents~~The ~~the~~issuance ~~product~~of these shares of ~~the~~Common ~~market~~Stock ~~value~~constituted ofa ~~the~~dilutive ~~shares~~issuance ~~and~~under the ~~actual~~July ~~shares~~2010 ~~issued,~~Warrants. ~~less~~As a result, the ~~accrued~~exercise ~~interest~~price ~~for~~under such warrants was adjusted from $0.35 to $0.15 and the ~~period~~number ~~July 1, 2008~~of ~~through~~shares ~~September 30,~~of ~~2008)~~Common Stock that ~~accrued~~could ~~for~~be ~~the~~purchased ~~period~~upon ~~July 1,~~exercise ~~2008~~increased ~~through~~from ~~December 31~~4,285,714 ~~2008~~to 10,000,000.

During the ~~six~~three months ended ~~March~~June 3029, 2008, the Company issued a total of ~~129~~108,~~784~~335 shares of its Common Stock with respect to interest of $~~103~~124,~~333~~586 (which ~~that~~includes ~~had~~$63,919 of incremental interest, which represents the product of the market value of the shares and the actual shares issued, less the accrued interest for the period ~~July~~January 1, 2008 through March 31, ~~2007~~2008) that had accrued for the period January 1, 2008 through ~~December~~March 31, ~~2007~~2008.

InDuring ~~April 2009,~~ the ~~Company~~nine ~~issued~~months aended ~~total~~June 28, ~~of 400~~2009,~~000~~ ~~shares~~the ofCompany ~~its Common Stock with respect to~~ recorded interest expense of $60226,~~000~~905 ~~that~~(which ~~had~~includes ~~accrued for the period January 1~~$44,905 ~~2009~~of ~~through~~incremental ~~March 31~~interest, ~~2009.~~which ~~The~~represents ~~issuance~~the ofproduct ~~these shares~~ of ~~Common Stock constituted a dilutive issuance under~~ the ~~July~~market ~~2010~~value ~~Warrants.~~of ~~As a result, in April 2009,~~ the ~~exercise~~shares ~~price under such warrants was adjusted from $0.35 to $0.15,~~ and the ~~number~~actual of shares ofissued, ~~Common~~less ~~Stock~~the ~~that~~accrued ~~could~~interest befor ~~purchased~~the ~~upon~~period ~~exercise increased from 4~~July 1,~~285,714~~ to2008 10through September 30,~~000,000~~ 2008).

OnDuring ~~July 2~~the nine months ended June 29, ~~2009~~2008, the Company ~~issued~~recorded ainterest ~~total~~expense of ~~224~~$245,~~693~~919 ~~shares~~(which includes $63,919 of ~~its~~incremental ~~Common~~interest, ~~Stock~~which ~~with~~represents ~~respect~~the toproduct ~~interest~~of the market value of ~~$60~~the shares and the actual shares issued,~~667~~ ~~that~~less ~~had~~the accrued interest for the period ~~April~~ January 1, ~~2009~~2008 through ~~June 30~~March 31, ~~2009~~2008).

For the nine months ended June 28, 2009 and June 29, 2008, the Company recognized $622,719 and $523,631, respectively, of interest expense related to the amortization of debt discount, and $176,825 of interest expense related to the amortization of the beneficial conversion feature.

During the nine months ended June 28, 2009, the Company issued a total of 684,763 shares of its Common Stock with respect to interest of $227,572 (which includes $44,905 of incremental interest, which represents the product of the market value of the shares and the actual shares issued, less the accrued interest for the period July 1, 2008 through September 30, 2008) that accrued for the period July 1, 2008 through March 31, 2009.

During the nine months ended June 29, 2008, the Company issued a total of 238,119 shares of its Common Stock with respect to interest of $227,919 (which includes $63,919 of incremental interest, which represents the product of the market value of the shares and the actual shares issued, less the accrued interest for the period January 1, 2008 through March 31, 2008) that had accrued for the period July 31, 2007 through March 31, 2008.

In July 2009, the Company issued a total of 224,693 shares of its Common Stock with respect to interest of $60,667 that had accrued for the period April 1, 2009 through June 30, 2009.

Promissory Note in the Principal Amount of $850,000

On April 8, 2009, the Company issued a promissory note in the amount of $850,000 to Herakles Investments, Inc. ( “Promissory Note”), an affiliate of Sponsor Investments, LLC (“Sponsor”) and Opus. The unsecured note bears interest at the rate of 15% per annum payable quarterly beginning July 1, 2009. The Promissory Note matures on the earlier of April 8, 2010 or the date on which the Company issues debentures or equity securities to Herakles Investments, Inc. (“Herakles”) pursuant to a stock purchase agreement.

During the three months ended June 28, 2009, the Company recorded interest expense of $29,042.

In July 2009, the Company paid $29,750 interest, in cash, that had accrued for the period April 8, 2009 through June 30, 2009.

NOTE 7—STOCKHOLDERS’ DEFICIT

Warrants

As of ~~March~~June 2928, 2009, the Company had warrants outstanding to purchase 410,~~939~~536,~~284~~253 shares of Common Stock that were issued in connection with ~~financing~~ financing transactions and payments for services. These warrants have exercise prices that range from $0.3515 to $77.00 and expire between ~~May~~April ~~2009~~2010 and 2011.

Future Issuances of Common Stock

As of ~~March~~June 2928, 2009, the Company had Common Stock reserved for future issuance as follows:

		March 29, 2009
		June 28, 2009
Warrants outstanding		410,~~939~~536,~~284~~253
Stock options outstanding		91,333
Convertible Preferred Stock and related warrants outstanding		2,925,834
8% Convertible Debentures		5,357,143
Total		1318,~~313~~910,~~594~~563

Because the conversion price of the 8% Convertible Debentures is in excess of the current market price, it is unlikely that such debt will be converted to Common Stock. By excluding the shares of Common Stock resulting from a potential conversion of the 8% Convertible Debentures, the Company believes that it has sufficient unissued shares available.

On July 1, 2009 and again on July 31, 2009, the Company entered into an agreement with Opus to defer until July 31, 2009 and August 17, 2009, respectively, the payment of interest of $223,222 that accrued for the period April 10, 2009 through June 30, 2009. This interest could be paid in cash or in shares of Common Stock. If the Company elects to make such payment in shares of Common Stock, it would issue 826,749 shares.

Common Stock

As of ~~March~~June 2928, 2009, the Company had 11,~~147~~547,863 shares of its Common Stock issued and outstanding.

In April 2009, the Company issued a total of 400,000 shares of its Common Stock with respect to interest of $60,000 related to the 8% Convertible Debentures.

In January 2009, the Company issued a total of 175,239 shares of its Common Stock with respect to interest of $61,333 related to the 8% Convertible Debentures.

In October 2008, the Company issued a total of 109,524 shares of its Common Stock with respect to interest of $106,238 related to the 8% Convertible Debentures.

Employee Stock Options

Stock-based compensation expense under SFAS 123R for the three months ended ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008 totaled $(48,~~588)~~030 and $~~(104~~43,~~072)~~216, respectively, and for the ~~six~~nine months ended ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008 was $1624,~~432~~462 and $1962,~~497~~712, respectively. For the three months ended March 29, 2009 and March 30, 2008, the Company reversed previously reported stock-based compensation due to the forfeitures of stock options of employees who left the Company, resulting in negative stock-based compensation expense.

As of ~~March~~ June 2928, 2009, the Company had approximately $7163,~~863~~833 of unrecognized compensation cost related to non-vested stock options, which amount is being recognized over the vesting period of the original individual grant. During the ~~six~~nine month period ended ~~March~~June 2928, 2009, the Company granted no options to Board members or employees and no options were exercised. The fair value of options vested during the ~~six~~nine months ended ~~March~~June 2928, 2009 totaled $45,~~294~~407.

1112

NOTE 8—EARNINGS PER SHARE

Basic and diluted earnings per weighted average share outstanding were calculated as follows:

	Three Months Ended					~~Six~~Nine Months Ended
	March 29, 2009			March 30, 2008		March 29, 2009			March 30, 2008
	June 28, 2009			June 29, 2008		June 28, 2009			June 29, 2008
Net income (loss) available to common stockholders	$	(1,~~359~~071,~~937~~755	)	$	~~173~~272,~~481~~802	$	(23,~~833~~905,~~373~~128	)	$	(~~766~~493,~~072~~270	)
Denominator for basic earnings per share—weighted average shares		11,138,234			9,997,947		11,050,615			9,730,299
Denominator for basic earnings per share — weighted average shares		11,530,281			10,360,184		11,210,504			9,940,261
Effect of potentially dilutive securities		—			34,~~744~~148,~~383~~430		—			—
Denominator for dilutive earnings per share—weighted average shares		11,138,234			13,742,330		11,050,615			9,730,299
Denominator for dilutive earnings per share —weighted average shares		11,530,281			14,508,614		11,210,504			9,940,261
Net income (loss) per common share:
Basic	$	(0.1209	)	$	0.0203	$	(0.2635	)	$	(0.0805	)
Diluted	$	(0.1209	)	$	0.0102	$	(0.2635	)	$	(0.0805	)

The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is computed by dividing the net income (loss), adjusted on an as if converted basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the three months ended ~~March~~June 2928, 2009 and the ~~six~~nine months ended ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net income (loss) per common share. These securities were convertible into an aggregate of 1318,~~313~~910,~~594~~563 and 12,952,381 shares of Common Stock as of ~~March~~June 2928, 2009 and ~~March~~June 3029, 2008, respectively.

For the three months ended ~~March~~June 3029, 2008, the effects of options to purchase ~~420~~201,333 shares of Common Stock, warrants to purchase 929,521 shares of Common Stock and the 8% Convertible Debentures convertible into 5,357,143 shares of Common Stock were excluded from the computation of potentially dilutive securities.

NOTE 9—MAJOR CUSTOMERS

~~For~~The ~~the~~Company ~~three~~is ~~and six months ended March 29~~dependent, ~~2009~~in ~~and March 30,~~large ~~2008~~measure, ~~the~~on ~~Company had~~ sales to one major customer. ~~that~~A ~~represented~~reduction ~~approximately 92% and 62%~~ of ~~net~~ sales into ~~the~~that respective three month periods, and approximately 73% and 59% in the respective six month periods. At the end of each quarter, beginning with the quarter ended March 30, 2008, through December 28, 2008, one major customer ~~was~~would ~~entitled~~have to a ~~rebate~~material ofadverse aeffect ~~portion of the sales price of ties purchased by it, with such rebate being based~~ on ~~the~~our ~~Company’s quarterly~~financial ~~profit~~condition ~~computed~~and ~~before~~results ~~the~~of ~~rebate~~operations. ~~The rebate, if any, was paid in the subsequent quarter.~~

AsFor ofthe ~~March~~three and nine months ended June 2928, 2009 and June 29, 2008, the Company had sales to one major customer that represented approximately 8298% and 61% of net sales in the respective three month periods, and approximately 79% and 60% in the respective nine month periods. At the end of each quarter, beginning with the quarter ended March 30, 2008, through December 28, 2008, one major customer was entitled to a rebate of a portion of the sales price of ties purchased by it, with such rebate being based on the Company’s ~~accounts~~quarterly ~~receivable~~profit computed before the rebate. The rebate, if any, was ~~due~~paid ~~from~~in ~~one~~the ~~customer~~subsequent quarter.

As of June 28, 2009, approximately 91% of the Company’s accounts receivable was due from one customer.

NOTE 10—RELATED PARTY TRANSACTIONS

Related parties are those who beneficially own more than 5% of any one class of the Company’s stock. For a description of transactions under the Construction Loan, the Bridge Loan, ~~and~~ the 8% Convertible Debentures, and the Promissory Note, see Note 6.

Opus, an entity that beneficially owns more than 5% of the Company’s Common Stock, is the lender under the Construction Loan. Opus is an affiliate of Sponsor ~~Investments, LLC (“Sponsor”)~~ and Herakles ~~Investments~~, ~~Inc., (“Herakles”),~~ which entities collectively own more than 5% of the Company’s Common Stock.

A substantial portion of the Bridge Loan notes, described in Note 6, in the amounts indicated hereafter are held by the following parties who beneficially own more than 5% of the Company’s stock: Herakles, an affiliate of Sponsor and Opus, $1,174,224; Crestview Capital Master LLC (“Crestview”), $299,513; Midsummer Investment, Ltd (“Midsummer”), $285,354 and Islandia L.P. (“Islandia”), $113,636.

A substantial portion of the 8% Convertible Debentures, described in Note 6, in the amounts indicated hereafter are held by the following parties who beneficially own more than 5% of the Company’s stock: Herakles, $1,761,330; Crestview, $449,280; Midsummer, $428,040 and Islandia, $170,460.

~~During~~Herakles, ~~the~~an ~~three~~affiliate ~~months~~of ~~ended~~Sponsor ~~March 29, 2009~~ and ~~March 30~~Opus, ~~2008,~~is the ~~Company~~holder ~~recorded interest expense~~ of ~~$587,222~~the ~~and $589,204,~~Promissory ~~respectively,~~Note toissued ~~related~~in ~~parties~~April 2009.

During the six months ended March 29, 2009 and March 30, 2008, the Company recorded interest expense of $1,217,883 and $1,085,018, respectively, to related parties.

In March 2009, the Company purchased raw recyclable plastic material totaling $80,000 from Environmental Plastic Solution, Inc. (“EPS”), an affiliate of Sponsor, Herakles and Opus. The Company believes that these purchases were made at commercially reasonable prices for that material.

NOTE 11—SUBSEQUENT EVENTS

In April 2009, the Company issued 400,000 shares of its Common Stock with respect to interest of $60,000 that accrued on the 8% Convertible Debentures during the calendar quarter ended March 31, 2009. The issuance of these shares of Common Stock constituted a dilutive issuance under the July 2010 Warrants. As a result, in April 2009, the exercise price under such warrants was adjusted from $0.35 to $0.15, and the number of shares of Common Stock that could be purchased upon exercise increased from 4,285,714 to 10,000,000.

In April 2009, the Company paid Opus $282,333 interest in cash on the Construction Loan that accrued during the calendar quarter ended March 31, 2009, and for nine days in April 2009 when the Company made the interest payment. Because this payment was made on April 9, 2009, four days after the payment grace period, the payment of interest included four days of interest computed at the rate of 18% per annum.

In April 2009, the Company paid $34,611 interest in cash to the holders of the Bridge Loan notes for interest that accrued from February 1, 2009 through April 30, 2009.

On April 8, 2009, the Company issued a promissory note in the amount of $850,000 to Herakles, an affiliate of Sponsor and Opus. The unsecured note bears interest at the rate of 15% per annum compounding quarterly and matures on the earlier of April 8, 2010 or the date on which the Company issues debentures or equity securities to Herakles pursuant to a stock purchase agreement. On July 1, 2009, the Company paid $29,750 interest, in cash, that had accrued for the period April 8, 2009 through June 30, 2009 on this promissory note.

In April and May 2009, the Company purchased raw recyclable plastic material totaling $531,000 from EPS. The Company believes that these purchases were made at commercially reasonable prices for that material.

On July 2, 2009, the Company and Opus entered into the Limited Waiver to Construction Loan which extends the July 1, 2009 interest payment to July 31, 2009.

On July 2, 2009, the Company issued a total of 224,693 shares of its Common Stock with respect to interest of $60,667 that had accrued on the 8% Convertible Debentures for the period April 1, 2009 through June 30, 2009.

During the three months ended June 28, 2009 and June 29, 2008, the Company recorded interest expense of $629,097 and $649,674, respectively, to related parties.

During the nine months ended June 28, 2009 and June 29, 2008, the Company recorded interest expense of $1,846,980 and $1,734,693, respectively, to related parties.

During the three months and nine months ended June 28, 2009, the Company purchased raw recyclable plastic material totaling $928,242 and $1,008,388, respectively, from Environmental Plastic Solutions, Inc. (“EPS”), an affiliate of Sponsor, Herakles and Opus. The Company believes that these purchases were made at commercially reasonable prices for that material.

NOTE 11—FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with the reporting requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this statement and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair values of accounts receivable, accounts payable and other current assets and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. The Company believes it is not practical to determine the fair value of its debt instruments due to the financial condition of the Company and the related party nature of substantially all of the debt instruments.

NOTE 12—SUBSEQUENT EVENTS

Management has evaluated and disclosed subsequent events up to and including August 12, 2009 which is the date that the financial statements were available for issuance.

In July 2009, the Company issued 224,693 shares of its Common Stock with respect to interest of $60,667 that accrued on the 8% Convertible Debentures for the period April 1, 2009 through June 30, 2009.

In July 2009, the Company paid $35,778 interest in cash to the holders of the Bridge Loan notes for interest that accrued from May 1, 2009 through July 31, 2009.

In July 2009, the Company paid $29,750 interest in cash on the Promissory Note that had accrued for the period April 8, 2009 through June 30, 2009.

In July 2009, the Company agreed to replace 6,210 ties for a specific customer because the ties sold to that customer in a prior year did not meet the customer’s size specifications. The Company and the customer have not yet agreed to a schedule for supplying these replacement ties.

Effective July 24, 2009, the Company’s independent registered public accountants, KBA Group LLP, notified the Company that it had resigned due to the merger of their firm with BKD, LLP. On July 31, 2009, the Company engaged Whitley Penn, LLP to act as their independent registered public accountants.

As of the filing date of this report, the Company has met its warranty obligation for the replacement of approximately 15,000 ties for one specific customer. (See Note 5)

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

Except for historical information, the material contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations is forward-looking. This Quarterly Report on Form 10-Q and other public statements by the Company include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended. We have based these forward–-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by the use of the words “expect”, “estimate”, “project”, “intend”, “plan,” “will,” “should,” “could,” “would,” “anticipate,” “believe,” or the negative of such words and similar expressions. Factors that might cause our actual results, levels of activity, performance or achievements to differ from those expressed or implied in the forward-looking statements include, among others, the risk factors described in Item 1A. Risk Factors, of our Form 10-K for the fiscal period ended September 28, 2008. Additional factors are described in 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. We undertake 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.~~

place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake 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.

Overview

North American Technologies Group, Inc. (“NATG” or the “Company”) is principally engaged in the manufacturing and marketing of engineered composite railroad crossties, also called ties, through its 100% owned subsidiary TieTek LLC. The Company’s composite railroad tie is a direct substitute for a wood tie, but with a longer expected life and several environmental advantages. The Company began commercial manufacturing and shipping of ties during the third quarter of 2000.

As disclosed in the Company’s Form 10-K for the fiscal year ended September 28, 2008, in connection with the closing of its fiscal 2008 fourth quarter books and records, and in preparation of materials to be furnished to the Company’s former auditors for its annual audit, the Company and its former auditors requested that Mr. Rod Wallace, the former Chief Executive Officer, furnish information related to purchases of raw materials which he claimed to have made personally and for which he was reimbursed by the Company. When satisfactory information was not furnished by Mr. Wallace, the Company engaged the services of outside legal counsel, who in cooperation with the Company’s management, its Audit Committee and an external forensic accountant, began an investigation of the alleged raw materials purchases. That investigation uncovered irregularities in reimbursement requests and unauthorized use of Company funds which included $137,620, ~~and~~ $15,450 and $0 during the first, ~~and~~ second and third quarters, respectively, of its fiscal year ending September 27, 2009. The Company classified these amounts as alleged fraud expense which is included in selling, general and administrative expenses. Mr. Wallace’s employment was terminated on February 26, 2009. ~~Because of the delay in providing appropriate documentation regarding these purchases to the Company and its auditors, the Company was unable to complete and file this Form 10-Q on a timely basis.~~

As of ~~March~~June 2928, 2009, the Company had a cash balance of $~~352~~281,~~251~~721 and a negative working capital balance of $34,~~683~~182,~~997~~791. For the ~~six~~nine months ended ~~March~~ June 2928, 2009 and the year ended September 28, 2008, the Company incurred net losses of $23,~~833~~905,~~373~~128 and $2,924,340, respectively. ~~The~~During ~~Company’s~~the ~~operating~~same ~~activities~~periods, ~~provided~~the ~~cash~~Company ofused ~~$208,213~~cash ~~for~~in ~~the~~operating ~~six~~activities ~~months~~of ~~ended March 29~~$532, ~~2009,~~782 and ~~used cash of~~ $2,454,089 ~~for the year ended September 28~~, ~~2008~~respectively. In addition, it is likely that the Company will incur losses for the foreseeable future. The report of the Company’s former independent registered public accountants accompanying the consolidated financial statements for the fiscal year ended September 28, 2008 included an explanatory paragraph with respect to the ability to continue as a going concern.

The market price of our Company’s Common Stock is volatile because the Company has very small public float and a limited trading market. Future announcements concerning our major customers or competitors, the results of product testing, technological innovations or commercial products, government rules and regulations, developments concerning proprietary rights, litigation and public concern as to our manufacturing process may have a significant impact on the market price of the shares of our Common Stock. On July 9, 2009, Sammons Enterprises, Inc. (“Sammons”) filed Amendment No. 5 to its Schedule 13D with the Securities and Exchange Commission stating that they were considering potential funding alternatives for the Company. The filing of the Schedule 13D, and the alternatives contained therein, could have an impact on the Company’s stock price.

14We are dependent, in large measure, on sales to one major customer, Union Pacific Railroad Company (“Union Pacific”). A reduction of sales to Union Pacific would have a material adverse effect on our financial condition and results of operations.

The current economic environment has impacted our customers, existing and potential, and caused them to reduce or delay their spending budgets, resulting in the reduction of tie orders. Although we have reduced our production schedule in reaction to the lower number of purchase orders, our overhead costs remain basically the same, resulting in a higher cost per tie produced, which we are unable to pass on to our customers. We have expanded our marketing efforts to target potential purchasers of ties of different sizes and for new uses, but sales have continued to decline. We do not expect our current operations to generate sufficient cash flow to fund our debt obligations as they become due, and we do not currently have other traditional sources of liquidity available to fund these obligations. Accordingly, the only likely source of funding future cash needs is through financing activities.

We are dependent, in large measure, on sales to one major customer. The loss of our major customer, Union Pacific Railroad Company, would have a material adverse effect on our financial condition and results of operations.

Critical Accounting Policies

We have identified critical accounting policies based upon the significance of each accounting policy to our overall financial statement presentation, as well as the complexity of the accounting policies and our use of estimates and subjective assessments. We have concluded our critical accounting policies are as follows:

Use of Estimates and Assumptions—The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. The most significant estimates and related assumptions include the assessment of the warranty provision and levels of related accrued liability, the impairment of long-lived assets and valuation of debt/equity instruments. Actual results could materially differ from those estimates.

Inventories—The Company uses lower of cost (first-in, first-out) or market to value its inventories. Inventories consist of finished goods (composite railroad ties) and raw materials (primarily recycled plastic ~~material~~materials).

Impairment of Long-Lived Assets—We record impairment losses on long-lived assets used in operations when events and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. The amount of impairment loss recognized is the amount by which the carrying amounts of the assets exceed the estimated fair values.

Revenue Recognition—We recognize revenue from the sale of ties at the time of shipment or when risk of ownership passes to the customer. Costs we incur for shipping and handling of raw materials and finished goods are classified as cost of goods sold.

Our major customer, in keeping with its business practices and that of the railroad industry, has requested that a limited number of ties be kept at our facility, pending pick-up. We recognize revenue from that customer upon: (1) the risk of ownership transferring to the customer, which occurs upon segregation of the customer’s ties to the customer’s designated inventory area, at which time the customer is responsible for insuring the ties, and (2) receiving a written authorization from such customer that informs us that the customer has approved the purchase of a certain number of ties and that directs us to segregate those ties into the customer’s inventory area. Additionally, the following criteria must be met each time the customer approves the purchase of ties: (i) the customer must have requested that the ties be billed to them and held by us, (ii) the customer must have indicated that it will pick up the ties on a relatively fixed delivery schedule (such schedule generally corresponds with its track maintenance projects to be completed during the calendar year) and (iii) the ties in the customer’s inventory must be banded together in standard size lots and be ready for shipment. The customer has complete access to its onsite inventory for removal and delivery to its locations, and the customer may only store a limited number of ties at our location.

Concentration of Credit Risk—Credit risk is limited to cash in banks and accounts receivable from customers as of ~~March~~June 2928, 2009. We do not require collateral from our customers. We evaluate our accounts receivable on a regular basis for collectability and provide for an allowance for potential credit losses as deemed necessary. As of ~~March~~June 2928, 2009, approximately 8291% of the Company’s accounts receivable was due from one customer.

We maintain cash balances in nationally recognized financial institutions. At times our cash balances exceed federally insured limits. We periodically examine the status of those financial institutions and do not believe there is any undue risk associated with our cash balances.

Warranty Reserve—The Company generally provides no written warranties with the sale of its ties. Under limited circumstances, the Company has agreed at times to replace, in kind, ties that have broken upon installation and ties that were manufactured during the same period as the broken ties. In such cases, the Company records a provision for estimated future costs of replacement of ties in the period in which such costs become probable. In addition, the Company records a general estimate for replacement of ties based on historical experience and the current cost to manufacture ties. The warranty reserve is reviewed periodically for adequacy based on actual and expected experience and the current cost of manufacturing a tie.

Convertible Debt—The Company records debt, net of debt discount for beneficial conversion features and warrants on a relative fair value basis. Beneficial conversion features are recorded pursuant to EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” and EITF Issue No. 00-27, “Application of EITF Issue No. 98-5 to Certain Convertible Instruments.” Debt discount is amortized to interest expense over the life of the debt.

Adoption of Recently Issued Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 by one year for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. As required, in the current fiscal year, the Company partially adopted SFAS 157, which has no material impact on the Company’s financial statements. The Company will adopt the remaining provisions of SFAS 157 in fiscal 2010 and does not expect the adoption of these remaining provisions to have a material impact on the Company’s financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option For Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. SFAS 159 is effective for the Company’s fiscal year ending September 26, 2010. The adoption of SFAS 159 is not expected to have a material impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, any non controlling interest and the goodwill acquired in the business combination at the acquisition date. SFAS 141R also establishes principles and requirements for how the acquirer determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R will change the Company’s accounting for business combinations consummated after the effective date.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“~~FAS~~SFAS 161”). ~~FAS~~SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. The objective of the guidance is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. ~~FAS~~SFAS 161 is effective for fiscal years beginning after November 15, 2008, which for the Company would be the fiscal year ending September 26, 2010. Management is currently evaluating the impact of ~~FAS~~SFAS 161 and does not believe that its application will have any effect on the Company’s financial statements.

~~Results~~In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of ~~Operations~~Financial Instruments. FSP No. FAS 107-1 and APB 28-1 amend SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for ~~the~~interim ~~three~~reporting ~~months~~periods ~~ended~~of ~~March 29~~publicly-traded companies, ~~2009~~as ~~versus~~well as in annual financial statements. The Company’s adoption of FSP No. FAS 107-1 and APB 28-1, effective March 30, ~~2008~~2009, did not materially impact the Company’s financial statements.

~~The~~In ~~net~~May ~~loss~~2009, ofthe $1FASB issued SFAS No. 165,~~359,937~~ ~~for~~Subsequent Events (“SFAS 165”). SFAS 165 establishes the ~~three~~period ~~months~~after ~~ended~~the ~~March 29,~~balance ~~2009~~sheet ~~reflects~~date aduring ~~total~~which ~~change~~management of ~~$1,533,418~~a ~~from~~reporting ~~the~~entity ~~net~~should ~~income~~evaluate ofevents ~~$173,481~~or transactions that may occur for potential recognition or disclosure in the financial statements, the ~~three~~circumstances ~~months~~under ~~ended~~which ~~March 30,~~an ~~2008.~~entity ~~This~~should ~~difference~~recognize isevents ~~primarily~~or ~~due~~transactions tooccurring aafter ~~decrease~~the inbalance ~~gross~~sheet ~~profit~~date ofin $1its financial statements,~~395,084~~ and the disclosures that an ~~increase~~entity inshould ~~depreciation~~make ~~and~~about ~~amortization~~events ~~expense~~or transactions that occurred after the balance sheet date. Our adoption of ~~$111~~SFAS 165,~~994~~ effective March 30, 2009, did not have a material impact on the Company’s financial statements.

~~Sales,~~Results ~~net. Product sales, net~~ of ~~any~~Operations ~~earned rebates,~~ for the three months ended ~~March~~June 2928, 2009 ~~and~~versus ~~March~~June 3029, 2008 were $7,442,436 and $9,275,478, respectively, and related solely to the sale of composite railroad crossties. The decrease in net sales of $1,833,042 between these two periods resulted from a 6% decrease in the number of ties sold and a 14% decrease in the average sales price of ties sold.

~~Cost~~The net loss of ~~Goods~~$1,071,755 ~~Sold~~for ~~and Gross Profit. During~~ the three months ended ~~March~~June 2928, 2009, ~~the~~reflects ~~sale of TieTek™ crossties resulted in~~ a ~~gross~~total ~~profit~~change of $~~947~~1,~~257~~344,557 ~~compared~~from tothe anet ~~gross~~income ~~profit~~ of $2272,~~342,341~~802 infor the three months ended ~~March~~June 3029, 2008. ~~The~~This ~~decrease~~difference ~~in gross profit~~ is primarily due to a decrease in ~~net~~gross ~~sales,~~profit ~~partially offset by a decrease in warranty expense. Cost~~ of ~~goods sold consists of raw materials~~$1, ~~direct costs~~321,021. ~~including wages and benefits, royalties, warranty expense, supplies, maintenance, utilities, equipment leases,~~

16Sales, net. Product sales, net of any earned rebates, for the three months ended June 28, 2009 and June 29, 2008 were $4,990,166 and $8,094,099, respectively, and related solely to the sale of composite railroad crossties. The decrease in net sales of $3,103,933 between these two periods resulted from a 29% decrease in the number of ties sold, due to the completion of a project for one customer and the current economic environment, and a 13% decrease in the average sales price of ties sold due primarily to a change in the contract price for projects delivered in the respective periods.

~~Table~~ Gross Profit and Cost of ~~Contents~~Goods Sold. During the three months ended June 28, 2009, the sale of TieTek™ crossties resulted in a gross profit of $1,097,400 compared to a gross profit of $2,418,421 in the three months ended June 29, 2008. The decrease in gross profit is primarily due to a decrease in net sales, partially offset by a decrease in plant operating costs. Cost of goods sold consists of raw materials, direct costs, including wages and benefits, royalties, warranty expense, supplies, maintenance, utilities, equipment leases, and plant burden including salaries and benefits, facility costs and insurance. The cost per tie has been and may in the future be affected by an increase in the price of recycled plastic, a major component of a tie. Because of the fragmented nature of the recycled plastic industry and because there is no organized trading market for recycled plastics, the Company does not engage in hedging or other similar activities to manage the risk of price increases of recycled plastics.

and plant burden including salaries and benefits, facility costs and insurance. The cost per tie has been and may in the future be affected by an increase in the price of recycled plastic, a major component of a tie. Because of the fragmented nature of the recycled plastic industry and because there is no organized trading market for recycled plastics, the Company does not engage in hedging or other similar activities to manage the risk of price increases of recycled plastics.

Warranty expense, included in cost of goods sold, was $41,665 for the three months ended March 29, 2009 compared to $621,095 for the three months ended March 30, 2008. The $621,095 resulted primarily from the Company’s revision of the estimated cost to replace ties that it had previously agreed to replace.

Selling, General & Administrative Expenses (SG&A). SG&A expenses were $1,313,569 for the three months ended March 29, 2009 compared to $1,307,807 for the three months ended March 30, 2008. This overall increase in SG&A reflects primarily increases of $87,874 in payroll expense, $70,648 in sales and marketing expenses, and $28,180 in insurance expense; offset by decreases of $86,041 in consulting expenses and $174,455 in other general expenses.

Additionally, for the three months ended March 29, 2009, SG&A expense includes $15,450 of alleged fraud expenses and $71,532 of investigation expenses.

Depreciation and Amortization. Depreciation and amortization expense was $373,012 for the three months ended March 29, 2009 compared to $261,018 for the three months ended March 30, 2008. This increase is primarily due to depreciation expense related to plant and equipment additions.

Other (Income) Expense, net. Total net other expense of $620,613 for the three months ended March 29, 2009 increased $20,578 from $600,035 for the three months ended March 30, 2008. This increase resulted from a reduction in interest income in 2009.

Results of Operations for the six months ended March 29, 2009 versus March 30, 2008

The net loss of $2,833,373 for the six months ended March 29, 2009 reflects a total change of $2,067,301 from the net loss of $766,072 for the six months ended March 30, 2008. This difference is primarily due to a decrease in gross profit of $1,528,620, an increase in selling, general and administrative expenses of $245,805, an increase in depreciation and amortization expense of $111,109 and an increase in interest expense of $183,358.

Sales, net. Product sales, net of any earned rebates, for the six months ended March 29, 2009 and March 30, 2008 were $14,165,237 and $16,296,086, respectively, and related solely to the sale of composite railroad crossties. The decrease in net sales of $2,130,849 between these two periods resulted from a 1% decrease in the number of ties sold and a 12% decrease in the average sales price of ties sold.

Cost of Goods Sold and Gross Profit. During the six months ended March 29, 2009, the sale of TieTek™ crossties resulted in a gross profit of $1,777,805 compared to a gross profit of $3,306,425 in the six months ended March 30, 2008. The decrease in gross profit is primarily due to a decrease in net sales, partially offset by a decrease in warranty expense. Cost of goods sold consists of raw materials, direct costs, including wages and benefits, royalties, warranty expense, supplies, maintenance, utilities, equipment leases, and plant burden including salaries and benefits, facility costs and insurance. The cost per tie has been and may in the future be affected by an increase in the price of recycled plastic, a major component of a tie. Because of the fragmented nature of the recycled plastic industry and because there is no organized trading market for recycled plastics, the Company does not engage in hedging or other similar activities to manage the risk of price increases of recycled plastics.

Warranty expense, included in cost of goods sold, was $77,636 for the six months ended March 29, 2009 compared to $886,201 for the six months ended March 30, 2008. The $886,201 resulted primarily from the Company’s revision of the estimated cost to replace ties that it had previously agreed to replace.

Selling, General & Administrative Expenses (SG&A). SG&A expenses were $2,641,146 for the six months ended March 29, 2009 compared to $2,395,341 for the six months ended March 30, 2008. This overall increase in SG&A reflects primarily increases of $97,300 in sales and marketing expenses, $43,900 in insurance expense, $72,000 in travel and entertainment expenses; offset by a decrease of $169,238 in other general expenses.

~~Additionally~~Selling, General & Administrative Expenses (SG&A). SG&A expenses were $1,186,894 for the ~~six~~three months ended ~~March~~June 2928, 2009, ~~SG&A~~compared ~~expense~~to ~~includes~~$1,164,021 for the three months ended June 29, 2008. This overall increase of $~~153~~22,~~100~~873 reflects primarily increases of ~~alleged fraud~~$32,644 ~~expenses~~in payroll expense, $19,604 in insurance expense and $7110,~~532~~606 in other general expenses; offset by decreases of ~~investigation~~$69,284 in consulting expenses and $50,000 in bad debt expense.

~~Depreciation and Amortization. Depreciation and amortization expense was $684~~Additionally,~~593~~ for the ~~six~~three months ended ~~March~~June 2928, 2009 ~~compared to $573~~,~~484~~ ~~for~~SG&A ~~the~~expense ~~six~~includes ~~months ended March 30~~$78,841 ~~2008.~~of ~~This~~investigation ~~increase~~expenses isrelated ~~primarily due~~ to ~~depreciation~~the ~~expense~~alleged ~~related~~fraud tothat ~~plant~~occurred ~~and~~in ~~equipment~~previous ~~additions~~quarters.

~~Other~~Depreciation ~~(Income)~~and ~~Expense, net~~Amortization. ~~Total~~Depreciation ~~net~~and ~~other~~amortization expense ofwas $1321,~~285,439~~977 for the ~~six~~three months ended ~~March~~June 2928, ~~2009~~ ~~increased $181~~2009,~~767~~ ~~from~~compared to $1297,~~103,672~~782 for the ~~six~~three months ended ~~March~~June 3029, 2008. This increase is primarily ~~the~~due ~~result~~to ofdepreciation ~~the~~expense ~~recognition~~related ~~of interest attributable~~ to ~~the~~plant ~~8% Convertible Debentures. This recognition of interest resulted from an increase of $44,905 in incremental interest (the product of the market value of the shares of Common Stock~~ and ~~the~~equipment actual number of shares of Common Stock issued, less the accrued interest for the period July 1, 2008 through September 30, 2008), plus an increase of $99,088 in amortization of debt discount attributable to the 8% Convertible Debenturesadditions. Amortization of debt discount increased because of the incremental debt discount created when the conversion price of the 8% Convertible Debentures was adjusted from $4.00 to $1.01 on December 8, 2007.

~~Liquidity~~Other ~~and~~(Income) ~~Capital~~Expense, ~~Resources~~net. Total net other expense of $660,284 for the three months ended June 28, 2009, decreased $23,532 from $683,816 for the three months ended June 29, 2008. This decrease resulted from a reduction of interest expense of $19,529, and an increase in other income of $4,003.

AsResults of ~~March 29,~~Operations ~~2009,~~for the ~~Company~~nine ~~had a cash balance of $352,251 and a negative working capital balance of $3,683,997. For the six~~ months ended ~~March~~June 2928, 2009 ~~and~~versus ~~the year ended September~~June 28, 2008, the Company incurred net losses of $2,833,373 and $2,924,340, respectively. The Company’s operating activities provided cash of $208,213 (primarily due to the reduction of accounts receivable of $1,490,585 and the reduction of inventory of $1,088,022) for the six months ended March 29, ~~2009, and used cash of $2,454,089 for the year ended September 28,~~ 2008. ~~In addition, it is likely that the Company will incur losses for the foreseeable future.~~

~~During~~The net loss of $3,905,128 for the ~~six~~nine months ended ~~March~~June 2928, 2009 reflects a total change of $3,411,858 ~~investing~~from ~~activities~~the ~~used~~net ~~cash~~loss of $~~417~~493,~~808.~~270 Offor ~~this~~the ~~amount~~nine months ended June 29, 2008. This difference is primarily due to a decrease in gross profit of $~~415~~2,~~957~~849,641, ~~was~~an ~~used~~increase toin ~~purchase~~selling, ~~property~~general and ~~equipment~~administrative expenses of $268,678, an increase in depreciation and amortization expense of $1135,~~851~~304 ~~was~~and ~~used~~an toincrease ~~purchase~~in ~~patents~~interest ~~and~~expense ~~other~~of ~~assets~~$163,829.

~~During~~Sales, net. Product sales, net of any earned rebates, for the ~~six~~nine months ended ~~March~~June 2928, 2009, ~~financing~~and ~~activities~~June 29, ~~provided~~2008 ~~cash~~were of$19,155,403 and $~~118~~24,~~028~~390,185, respectively, and related solely to the sale of composite railroad crossties. OfThe ~~this~~decrease ~~amount,~~in net sales of $~~134~~5,~~498~~234,782 ~~was~~between ~~provided~~these bytwo aperiods ~~net~~resulted ~~increase~~from an 11% decrease in athe ~~note~~number ~~payable~~of ties sold, due to the completion of a project for ~~insurance~~one ~~premiums,~~customer ~~offset~~and bythe current economic environment, and a 12% decrease in ~~capital~~the ~~lease obligations~~average ~~arising~~sales ~~from~~price of ties sold, due primarily to a change in the ~~payments~~contract ~~thereon~~price of ties for projects in the respective periods.

~~The~~Gross ~~Company~~Profit ~~has~~and ~~significant~~Cost ~~cash~~of ~~needs~~Goods Sold. OnDuring ~~October 31, 2008,~~ the ~~Company~~nine ~~was~~months ~~required to~~ended ~~pay~~June 28, ~~the accumulated interest of $247~~2009,~~498~~ ~~in cash on~~ the ~~bridge~~sale ~~loan~~of ~~(“Bridge~~TieTek™ ~~Loan”),~~crossties ~~and~~resulted ~~thereafter to pay quarterly interest,~~ in ~~cash,~~a gross ~~through~~profit ~~maturity on October 31, 2009, at which time the entire principal~~ of $2,~~000~~875,~~000~~205 ~~will~~compared ~~be due.~~to ~~The Company also has~~ a ~~commitment~~gross toprofit ~~pay~~of ~~in 2009 approximately~~ $~~740~~5,~~000~~724,846 ~~for~~in the ~~remaining~~nine ~~purchase~~months ~~price~~ended ofJune 29, ~~equipment~~2008. onThe ~~order~~decrease ~~with~~in agross ~~supplier.~~profit ~~The Company~~ is ~~required~~primarily due to ~~pay~~a ~~quarterly~~decrease ~~interest,~~ in ~~cash~~net sales, onpartially ~~the~~offset ~~construction~~by ~~loan (“Construction~~a ~~Loan”)~~decrease ~~with~~in ~~Opus~~warranty ~~5949 LLC (“Opus”)~~expense. ~~Additionally,~~Cost ~~the~~of goods ~~Company~~sold ~~will~~consists ~~have~~of toraw ~~fund its working capital needs~~materials, ~~potential~~direct ~~operating losses~~costs, ~~and~~including ~~capital~~wages ~~expenditures. The Company’s viability~~ and ~~ability~~benefits, ~~to pay or refinance its debt obligations~~royalties, ~~particularly~~warranty ~~to repay the Bridge Loan~~expense, ~~together with interest thereon~~supplies, ~~to pay quarterly interest~~maintenance, ~~in cash~~utilities, onequipment ~~the Construction Loan~~leases, and toplant ~~maintain~~burden ~~adequate~~including ~~liquidity~~salaries ~~depend~~and onbenefits, afacility ~~number~~costs ofand ~~factors~~insurance. The ~~factors~~ ~~include~~cost ~~the~~per ~~ability~~tie tohas ~~maintain~~been ~~adequate production volumes, reducing equipment failures that disrupt production, the willingness of customers to continue to purchase ties~~ and ~~pay~~may ~~prices~~in ~~that yield positive gross margins,~~ the ~~willingness~~future ~~of customers~~be toaffected ~~agree~~by ~~upon~~ an ~~orderly~~increase ~~schedule~~in ~~for~~ the ~~replacement~~price of ~~ties~~recycled ~~that the Company has agreed to replace~~plastic, ~~the~~a ~~ability~~major tocomponent ~~obtain raw materials at reasonable prices, and the continued collection~~ of ~~accounts receivable in~~ a ~~timely manner~~tie. ~~The Company’s~~Because ~~inability~~of tothe ~~achieve~~fragmented ~~any~~nature of the ~~aforementioned~~recycled ~~factors~~plastic ~~could,~~industry and ~~most~~because ~~likely~~there ~~would,~~is ~~have~~no aorganized ~~material~~trading ~~and~~market for ~~adverse~~recycled ~~effect~~plastics, ~~on its liquidity. There can be no assurances that~~ the Company’s ~~activities~~does ~~will~~not beengage ~~successful~~in hedging or ~~that~~other ~~the Company~~similar ~~will~~activities ~~ultimately~~to ~~achieve~~manage ~~sustained profitability. Accordingly,~~ the ~~Company~~risk ~~may~~of ~~have~~price toincreases ~~continue~~of ~~funding~~recycled ~~future cash needs through financing activities~~plastics.

AsWarranty ofexpense, ~~the~~included ~~date~~in cost of ~~this~~goods ~~report~~sold, ~~the~~was ~~Company~~$103,737 ~~has~~for ~~no financing arrangements and no commitments to obtain any financing arrangements. There can be no assurance that~~ the ~~Company~~nine ~~will~~months beended ~~able to secure financing and that financing~~June 28, if2009 ~~secured,~~compared ~~will contain terms which are favorable~~ to ~~the~~$967,142 ~~Company~~for ~~and will be sufficient to enable~~ the ~~Company~~nine tomonths ~~fund~~ended ~~operations~~June 29, ~~and pay debts and other liabilities~~2008. IfThe we$967,142 ~~raise~~resulted ~~capital~~primarily byfrom ~~issuing new common stock or securities~~the ~~convertible~~Company’s ~~into~~revision ~~common stock, the percentage ownership~~ of ~~our current stockholders would be reduced, unless~~ the ~~existing~~estimated ~~stockholders~~cost ~~participate~~to inreplace ~~providing~~ties ~~such~~that ~~additional~~it ~~capital.~~had ~~Also,~~previously ~~any~~agreed ~~new securities may have rights, preferences or privileges senior~~ to ~~those of our current common stockholders~~replace.

Selling, General & Administrative Expenses (SG&A). SG&A expenses were $3,828,040 for the nine months ended June 28, 2009 compared to $3,559,362 for the nine months ended June 29, 2008. This overall increase of $268,678 in SG&A reflects primarily increases of $93,711 in sales and marketing expenses, $38,612 in computer expenses, and $91,081 in accounting and auditing expenses; offset by a decrease of $96,417 in legal expenses, and $158,328 in other general expenses.

Additionally, for the nine months ended June 28, 2009, SG&A expense includes $153,070 of alleged fraud expenses, and $150,099 of investigation expenses.

Depreciation and Amortization. Depreciation and amortization expense was $1,006,570 for the nine months ended June 28, 2009 compared to $871,266 for the nine months ended June 29, 2008. This increase is primarily due to depreciation expense related to plant and equipment additions.

~~The~~Other ~~replacement~~(Income) Expense, net. Total net other expense of ~~ties~~$1,945,723 ~~under~~for ~~warranty~~the ~~obligations~~nine ~~affects~~months ended June 28, 2009 increased $158,235 from $1,787,488 for the ~~Company’s~~nine ~~liquidity~~months ended June 29, in2008. ~~that~~This increase is primarily the ~~cost~~ result of ~~replacement~~$99,088 isin ~~incurred~~amortization ~~without~~of ~~corresponding~~debt ~~revenue.~~discount ~~The~~attributable ~~Company~~to ~~has~~the ~~agreed~~8% Convertible Debentures due to ~~replace~~the incremental ~~approximately~~debt ~~24,200~~discount ~~ties~~created bywhen the ~~end~~conversion price of the ~~third~~8% ~~quarter~~Convertible ofDebentures ~~fiscal~~was ~~2010~~adjusted from $4.00 ~~Such~~to ~~replacement~~$1.01 ~~could~~on ~~have~~December 8, a2007. ~~material~~The ~~and~~Company ~~adverse~~also ~~impact~~incurred onan additional $29,042 of interest expense due to the ~~Company’s~~issuance of the ~~liquidity~~Promissory Note, and ~~may~~experienced ~~require~~a usdecrease toin ~~seek~~interest ~~additional~~income ~~financing~~of if$40,918 ~~other~~due ~~liquidity~~to ~~factors~~reduced ~~remained~~cash ~~unchanged~~balances.

~~The~~Liquidity ~~alleged fraud committed by our former Chief Executive Officer totaled $401,997 during the Company’s fiscal year ended September 28, 2008,~~ and ~~$153,070 during the first and second quarters of its fiscal year ending September 27, 2009, plus related expenses of~~Capital ~~the~~Resources investigation estimated at $136,000 as of May 31, 2009. The Company intends to file a claim in the amount of $250,000, the maximum limits of its coverage, with the carrier of its fraud insurance policy and is evaluating obtaining restitution from Mr. Wallace through legal action. The inability to succeed in the potential areas of recovery may have a material and adverse effect on the financial condition of the Company and significantly affect its liquidity. In addition, there is an ongoing SEC investigation which may impact liquidity as expenses are incurred, and if fines and penalties are assessed against the Company.

~~The~~As ~~uncertainty~~ of ~~achieving~~June 28, ~~profitability~~2009, the Company had a cash balance of $281,721 and~~/or~~ ~~obtaining~~a ~~additional~~negative ~~financing~~working ~~raises~~capital ~~substantial~~balance ~~doubt~~of ~~about~~$4,182,791. For the ~~Company’s~~nine ~~ability~~months toended ~~continue~~June 28, as2009 aand ~~going~~the ~~concern.~~year ~~The~~ended ~~report~~September 28, of2008, the Company’s ~~independent registered~~incurred ~~public~~net ~~accountants~~losses ~~accompanying~~of ~~the~~$3,905,128 ~~consolidated~~and ~~financial~~$2,924,340, ~~statements~~respectively. ~~for~~During the ~~fiscal~~same ~~year~~periods, ~~ended~~the ~~September 28~~Company used cash in operating activities of $532,782 and ~~2008~~$2,454,089, ~~included~~respectively. anIn ~~explanatory~~addition, ~~paragraph~~it ~~with~~is ~~respect~~likely tothat the ~~ability~~Company towill ~~continue~~incur aslosses afor ~~going~~the ~~concern~~foreseeable future.

During the nine months ended June 28, 2009, investing activities used cash of $506,616. Of this amount, $503,315 was used to purchase property and equipment, and $3,301 was used to purchase patents and other assets.

During the nine months ended June 28, 2009, financing activities provided cash of $877,301. Of this amount, $850,000 was provided by the proceeds of a promissory note issued to Herakles Investments, Inc., a related party (“Promissory Note”). Additionally, $53,799 was provided by a net increase in a note payable for insurance premiums, offset by a decrease of $26,498 in capital lease obligations arising from the payments thereon.

The Company has significant cash needs. The Company is required to pay quarterly interest in cash on the bridge loan (“Bridge Loan”) through maturity on October 31, 2009, at which time the entire principal of $2,000,000 will be due. The Company also has a commitment to pay in 2009 approximately $740,000 for the remaining purchase price of equipment on order with a supplier. The Company is required to pay quarterly interest in cash on the construction loan (“Construction Loan”) with Opus 5949 LLC (“Opus”). On April 8, 2010, the Company is obligated to repay an $850,000 promissory note to a related party. On July 25, 2010, the Company will be required to pay $7,000,000 on the Construction Loan, and thereafter to make quarterly principal payments of $350,000 and the interest thereon beginning in October 2010. On July 31, 2010, the Company will be required to repay $3,000,000 for its 8% convertible debentures (“8% Convertible Debentures”). Additionally, the Company will have to fund its working capital needs, potential operating losses, and capital expenditures. The Company’s viability and ability to pay or refinance its debt obligations, particularly to repay the Bridge Loan, together with interest thereon, to pay quarterly interest, in cash, on the Construction Loan, and to maintain adequate liquidity, depend on a number of factors. The factors include the ability to obtain additional orders at prices that yield positive gross margins, maintain adequate production volumes, reduce equipment failures that disrupt production, secure the agreement of customers to an orderly schedule for the replacement of approximately 6,200 ties that the Company has agreed to replace, procure raw materials at reasonable prices, and to collect accounts receivable in a timely manner. The Company’s inability to achieve any of the aforementioned factors would have a material and adverse effect on its liquidity. There can be no assurances that the Company’s activities will be successful or that the Company will ultimately achieve sustained profitability. Accordingly, the Company will have to continue funding future cash needs through financing activities.

As of the date of this report, the Company has no financing arrangements and no commitments to obtain any financing arrangements. There can be no assurance that the Company will be able to secure financing and that financing, if secured, will contain terms which are favorable to the Company and will be sufficient to enable the Company to fund operations and pay debts and other liabilities. If we raise capital by issuing new common stock or securities convertible into common stock, the percentage ownership of our current stockholders would be reduced, unless the existing stockholders participate in providing such additional capital. Also, any new securities may have rights, preferences or privileges senior to those of our current common stockholders.

On July 9, 2009, Sammons Enterprises, Inc. (“Sammons”), a holding company which is the parent of Sponsor Investments, LLC (“Sponsor”), Opus and certain of the principal holders of our debt, filed Amendment No. 5 to its Schedule 13D with the Securities and Exchange Commission (“SEC”) stating that they were considering potential funding alternatives for the Company. Sammons stated its belief that, given the Company’s current business, financial condition and results of operations, the Company may be better

positioned to execute its business plan as a private company. Sammons further stated that, although it had not yet developed any specific proposal, it expected to review and evaluate one or more possible transactions in which Sammons would acquire all of the equity interests in the Company not currently beneficially owned by it and cause the Company to cease to be a public company for SEC reporting purposes (a “Possible Transaction”). In order to determine which course of action to pursue, Sammons has engaged in substantive discussions with the Company regarding its business, financial condition, results of operations and capital structure, and the Company has provided Sammons, on a confidential basis, the information it has requested. Sammons stated that a Possible Transaction could be structured as a tender offer, merger or recapitalization or, if necessary, a financial restructuring. Representatives of Sammons also indicated that Sammons would be willing to consider and evaluate other alternative transactions that might be proposed by the Company, the board of directors and/or the stockholders and other persons, but that Sammons was not considering selling, or disposing of in any other way, its interests in the Company. The board of directors of the Company anticipates forming a special committee of independent directors to evaluate and respond to any proposals submitted by Sammons.

As of the date of this report, Sammons has informed the Company that it is continuing to review and evaluate Possible Transactions, and has not made any specific proposal to the Company. Sammons may never make a specific proposal, and there can be no assurance as to whether or, if so, when any specific proposal may be made, or as to the terms or conditions of any such specific proposal. Sammons has advised us that, as part of its review and evaluation process, Sammons has sought, and may in the future seek, the views of, hold active discussions with and respond to inquiries from members of the board of directors, special committee, officers or representatives of the Company and other persons regarding Possible Transactions, and explore the interest of stockholders and other persons in participating in Possible Transactions. Sammons may also determine to acquire additional securities of the Company, through open market purchases, privately negotiated acquisitions or otherwise. Sammons has reserved the right to change its intention with respect to any or all of such matters.

Sammons and its related parties filing the Schedule 13D beneficially own an aggregate of 16,688,969 shares of Common Stock, representing approximately 72.4% of the outstanding shares of Common Stock, based upon 11,547,863 shares of Common Stock reported by the Company to be outstanding as of June 30, 2009 and an additional 11,497,985 shares of Common Stock that they have the right to acquire within 60 days after the date of the Schedule 13D filing, upon the conversion or exercise of securities convertible into or exercisable for shares of Common Stock. Currently Sammons beneficially owns approximately 45% of the outstanding shares of the Company’s Common Stock.

The Company has agreed to replace 6,210 ties for a customer due to discrepancies in size, but a schedule has not yet been agreed to with the customer. The replacement of these ties will likely have a material and adverse impact on the Company’s liquidity and likely will require the Company to seek additional financing if other liquidity factors remained unchanged.

The alleged fraud committed by our former Chief Executive Officer totaled $401,997 during the Company’s fiscal year ended September 28, 2008, and $153,070 during the first and second quarters of its fiscal year ending September 27, 2009, plus related expenses of the investigation of $151,000 as of June 30, 2009. The Company intends to file a claim in the amount of $250,000, the maximum limits of its coverage, with the carrier of its fraud insurance policy and is evaluating obtaining restitution from Mr. Wallace through legal action. The inability to succeed in the potential areas of recovery will likely have a material and adverse effect on the financial condition of the Company and significantly affect its liquidity. In addition, there is an ongoing SEC investigation which may impact liquidity as expenses are incurred, and if fines and penalties are assessed against the Company.

The uncertainty of achieving profitability and/or obtaining additional financing raises substantial doubt about the Company’s ability to continue as a going concern. The report of the Company’s former independent registered public accountants accompanying the consolidated financial statements for the fiscal year ended September 28, 2008 included an explanatory paragraph with respect to the ability to continue as a going concern.

Construction Loan

In 2004, the Company entered into the Construction Loan with Opus, a related party, for $14,000,000 with a 10-year maturity and quarterly principal installments of $350,000 beginning July 1, 2005. An amendment to the Construction Loan note on July 24, 2007 resulted in the deferral of principal installments, totaling $7,000,000, to July 25, 2010. The remaining balance will be paid in quarterly installments of $350,000 starting October 2010 through February 15, 2015. The Construction Loan note, as amended, provides for interest at the rate of 7% per annum until July 24, 2010 after which date the interest reverts to 700 basis points over the prime interest rate. Prior to October 1, 2008, all interest had been paid in shares of Common Stock. Beginning October 1, 2008 and at the beginning of each calendar quarter thereafter until maturity, interest was and is to be paid in cash. ~~On July 2, 2009, the Company and Opus entered into the Limited Waiver to Construction Loan which extends the July 1, 2009 interest payment to July 31, 2009.~~

During the three months ended ~~March~~June 2928, 2009, the Company paid $~~250~~282,~~445~~333 interest in cash that accrued for the period ~~October~~ January 1, ~~2008~~2009 through ~~December~~ March 31, ~~2008~~2009, and for nine days in April when the payment was made. Because this payment was made on April 9, 2009, four days after the payment grace period, the payment of interest included three days of interest computed at the rate of 18% per annum.

During the ~~six~~nine months ended ~~March~~June 2928, 2009, the Company paid $~~500~~783,~~889~~222 interest in cash that accrued for the period July 1, 2008 through ~~December~~March 31, ~~2008~~2009, and for nine days in April when the payment was made. Because this payment was made on April 9, 2009, four days after the payment grace period, the payment of interest included three days of interest computed at the rate of 18% per annum.

InOn ~~April~~July 2, 2009, the Company ~~paid~~and ~~$282,333~~Opus ~~interest~~entered ininto the Limited Waiver to ~~cash~~Construction ~~that~~Loan ~~accrued~~which ~~for~~extended the ~~period January~~July 1, 2009 ~~through~~interest ~~March~~payment to July 31, 2009. On July 31, 2009, the Company and ~~for~~Opus ~~nine~~entered ~~days~~into ina ~~April~~second ~~when~~Limited Waiver to Construction Loan which further extends the July 1, 2009 interest payment ~~was~~of ~~made~~$223,222 to August 17, 2009.

Bridge Loan

Effective March 7, 2007, the Company entered into the Bridge Loan, a portion of which is held by related parties, evidenced by a series of unsecured promissory notes in the aggregate principal amount of $2,000,000. The Bridge Loan bears interest at the rate of 7% per annum, compounded quarterly. Effective as of October 30, 2008, the Company and each holder of the series of promissory notes constituting the Bridge Loan entered into a second amendment to each such note, under which the maturity date of the notes was extended to the earlier to occur of October 31, 2009 or the date on which the Company receives a financing for a minimum of $2,000,000. The accumulated interest since inception of $247,498 was paid in cash on October 31, 2008. Thereafter, interest is to be paid quarterly in cash. Interest of $35,778, $34,611, and $35,778 was paid on January 31, 2009, April 30, 2009, and July 31, 2009, respectively, and interest approximating $35,000 will be paid on October 31, 2009, the maturity date.

$2,000,000. The accumulated interest since inception of $247,498 was paid in cash on October 31, 2008. Thereafter, interest is to be paid quarterly in cash. Interest of $35,778 and $34,611 was paid on January 31, 2009 and April 30, 2009, respectively, and interest approximating $35,000 will be paid on July 31, 2009 and October 31, 2009, the maturity date.

8% Convertible Debentures

On July 31, 2007, the Company issued debentures, a portion of which are held by related parties, in the principal amount of $3,000,000 which are payable in full on July 31, 2010 (the “8% Convertible Debentures”). The 8% Convertible Debentures accrue interest at 8% per annum. Principal of the 8% Convertible Debentures is convertible, at any time, into shares of Common Stock at a conversion price of $0.56 per share, subject to adjustment.

During the three months ended ~~March~~June 2928, 2009, the Company issued a total of ~~175~~ 400,~~239~~000 shares of its Common Stock with respect to interest of $6160,~~333~~ 000 that had accrued for the period ~~October~~January 1, ~~2008~~2009 through ~~December~~March 31, ~~2008~~2009. The issuance of these shares of Common Stock constituted a dilutive issuance under the July 2010 Warrants. As a result, the exercise price under such warrants was adjusted from $0.5635 to $0.3515 and the number of shares of Common Stock that could be purchased upon exercise increased from 24,~~678~~285,~~571~~714 to 410,~~285~~000,~~714~~000.

During the ~~six~~nine months ended ~~March~~June 2928, 2009, the Company issued a total of ~~284~~684,763 shares of its Common Stock with respect to interest of $~~167~~227,~~571~~ 572 (which includes $44,905 of incremental interest, which represents the product of the market value of the shares and the actual shares issued, less the accrued interest for the period July 1, 2008 through September 30, 2008) that accrued for the period July 1, 2008 through ~~December~~March 31, ~~2008~~2009.

In ~~April~~July 2009, the Company issued a total of ~~400~~224,~~000~~693 shares of its Common Stock with respect to interest of $60,~~000~~667 that had accrued for the period ~~January~~ April 1, 2009 through ~~March~~June 3130, 2009. The issuance of these shares of Common Stock constituted a dilutive issuance under the July 2010 Warrants. As a result, in April 2009, the exercise price under such warrants was adjusted from $0.35 to $0.15, and the number of shares of Common Stock that could be purchased upon exercise increased from 4,285,714 to 10,000,000.

~~On July~~Promissory 2,Note ~~2009,~~in the ~~Company~~Principal ~~issued~~Amount ~~a total~~ of ~~224,693 shares of its Common Stock with respect to interest of~~ $60850,~~667~~000 ~~that had accrued for the period April 1, 2009 through June 30, 2009.~~

On April 8, 2009, the Company issued a promissory note in the amount of $850,000 to Herakles Investments, Inc., (“Herakles”) an affiliate of Sponsor and Opus. The unsecured note bears interest at the rate of 15% per annum payable quarterly beginning July 1, 2009. The note matures on the earlier of April 8, 2010 or the date on which the Company issues debentures or equity securities to Herakles pursuant to a stock purchase agreement.

In July 2009, the Company paid $29,750 interest, in cash, that had accrued for the period April 8, 2009 through June 30, 2009.

Common Stock

In April 2009, the Company issued a total of 400,000 shares of its Common Stock with respect to interest of $60,000 related to the 8% Convertible Debentures.

In January 2009, the Company issued a total of 175,239 shares of its Common Stock with respect to interest of $61,333 related to the 8% Convertible Debentures.

In October 2008, the Company issued a total of 109,524 shares of its Common Stock with respect to interest of $106,238 related to the 8% Convertible Debentures.

Item 4T: Controls and Procedures

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Disclosure Controls and Procedures

NATG’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. During the second ~~fiscal~~half ~~quarter~~ of ~~2009,~~fiscal ~~the~~2008 ~~overall control environment continued to be adversely affected by the alleged fraud committed by the Company’s former chief executive officer. Management believes that this action,~~ and the ~~time~~first ~~necessary~~half ~~for completion~~ of ~~the~~fiscal ~~internal~~2009, ~~investigation by outside legal counsel into~~ the ~~alleged~~overall ~~fraudulent~~control ~~transactions~~environment ~~had~~was aadversely ~~significant~~affected ~~impact on the effectiveness of the operation of the Company’s disclosure~~ ~~controls and procedures during the second quarter of the fiscal year ending September 27, 2009.~~

2022

~~Based~~ by onthe ~~such~~alleged ~~evaluation,~~fraud committed by the Company’s ~~management~~former ~~has~~chief ~~concluded~~executive officer. Management believes that this action, asand the time necessary for completion of the ~~end~~internal investigation by outside legal counsel into the alleged fraudulent transactions had a significant impact on the effectiveness of ~~such~~the ~~period,~~ operation of the Company’s disclosure controls and procedures ~~were~~during that time period, and resulted in a delay in filing of the Form 10-K for fiscal year 2008, and in the filings of the Form 10-Q for the first and second quarters of fiscal year 2009. The Company’s former chief executive officer did not ~~effective~~serve in ~~recording~~that or any capacity with the Company during the third quarter of the Company’s fiscal year ending September 27, ~~processing~~2009, ~~summarizing~~because his employment with the Company had been terminated. No alleged or known fraud was continuing during the third quarter of fiscal 2009, and ~~reporting~~the ~~required~~investigation ~~financial~~by ~~information~~outside onlegal acounsel ~~timely~~into ~~basis~~the alleged fraudulent transactions committed in prior quarters had been completed.

The Company’s management has concluded that, as of the end of the third quarter of the Company’s fiscal year ending September 27, 2009, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting required financial information on a timely basis.

Internal Controls over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, an evaluation of the effectiveness of our internal control over financial reporting was conducted based on the framework in Internal Controls—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Because of the inherent limitations due to, for example, the potential for human error or circumvention of controls, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

In connection with management’s review of our internal control over financial reporting described above, our management concluded that our internal control over financial reporting as of ~~March~~June 2928, 2009, ~~was not effective for the following reasons which initially arose in fiscal 2008 and~~ continued to ~~affect~~be ~~our~~ineffective ~~internal controls~~for ~~through~~ the ~~second~~following ~~quarter of fiscal 2009 until the investigation of the alleged fraudulent transactions was completed in late April 2009~~reason:

• ~~During~~Changes in internal controls over the financial reporting process ofhave ~~closing~~been ~~the~~implemented, ~~fourth~~but ~~quarter~~testing ~~books~~and verification by an outside party to ensure that they are functioning properly has been initiated but has not yet been completed. Specifically, the communication and ~~records~~implementation of a revised ethics policy that provides for an independent resource to facilitate employee reporting of perceived inappropriate conduct or accounting (a whistleblower hotline) was made during the ~~fiscal~~third ~~year~~quarter ~~ended~~of ~~September~~fiscal 282009, ~~2008,~~but itthe ~~became~~receipt ~~apparent~~and acknowledgement of that policy, and the ~~former~~functionality ~~Chief~~of ~~Executive~~the ~~Officer~~hotline had ~~overridden~~not ~~policies~~been ~~and~~tested. ~~procedures~~Additionally, toperformance ~~direct~~expectations ~~unauthorized~~for ~~payments~~accounting ~~and~~personnel tohave ~~obtain~~been ~~reimbursements~~communicated, ~~for~~and ~~certain~~performance ~~expenses~~evaluations ~~that~~will ~~could~~be ~~not~~conducted beduring ~~substantiated~~the asfourth toquarter ~~validity~~of orcalendar ~~Company~~year ~~purpose~~2009.

• The Company made improper and undocumented reimbursements and thereby failed to follow control policies with respect to documentation and approval of disbursements.

• The Company did not maintain timely and accurate internal reporting of results of operations with the result that senior management and Board monitoring controls could not be fully executed. Specifically, monthly reporting, operational analyses and analysis of inventory variances and other key accounts were not timely and complete, comparisons to budgets were not maintained and the closing process did not include necessary timelines, checklists and sign-offs.

• The Company failed to file, on a timely basis, its Form 10-Q for the quarter ended March 29, 2009 as it had failed to file on a timely basis its Form 10-K and Form 10-Q for the two previous reporting periods. The delay in each of these filings arose from management override of certain controls, the failure to execute certain disbursement controls, the breakdown in the monthly closing process and the inability to provide necessary documentation to complete its financial statements for the two previous periods as well as for the period ended March 29, 2009. This weakness also arose from the failure to maintain a sufficient complement of accounting personnel with the appropriate level of experience and training. Only upon completion of the investigation of alleged fraudulent transactions in late April 2009 could our financial statements be completed and the reports for these periods be filed.

The four items above, in the aggregate, indicate an additional material weakness in the Company’s control environment. Specifically, certain pre-hiring verifications were not performed, certain authorities were not clearly and formally documented and others not strictly complied with, performance evaluations of accounting personnel were not conducted, the Company did not adequately communicate its ethics policy, and the policy did not provide for an independent resource to facilitate employee reporting of perceived inappropriate conduct or accounting such as a whistleblower hotline.

Changes in Internal Controls over Financial Reporting

As a result of our evaluation described above, the Company has made, or is in the process of initiating, the changes described below in our internal control over financial reporting:

• We ~~hired~~continue ~~new~~to ~~personnel~~improve ~~with~~the ~~appropriate~~utilization ~~levels~~of the Company’s enterprise reporting system to replace complex spreadsheet accounting calculations, and to increase the efficiency and standardization of ~~experience~~transaction processing, all of which resulted in better utilization of our enterprise reporting system.

21• We have revised, communicated to our employees and directors, and implemented our code of ethics to provide for, among other things, a third party to receive calls from and handle whistleblower matters.

•

We developed new procedures to improve controls covering the reimbursement of expenses for purchases made by the chief executive officer.

• We ~~continued~~developed todocumentation ~~utilize~~regarding aappropriate ~~systems~~identifications ~~consultant~~of ~~experienced in the Company’s enterprise reporting system to assist us in utilizing the system to replace complex spreadsheet accounting calculations~~authority, ~~increase standardization,~~ and ~~improve~~transaction ~~end-user~~approval ~~training, which resulted in better utilization of our enterprise reporting system~~processes.

• We ~~have~~implemented ~~revised~~a ~~our~~review ~~code~~and ofapproval ~~ethics~~process toof ~~provide~~transactions for awhich ~~third~~we ~~party~~have toan ~~receive~~insufficient ~~calls~~number ~~from~~of ~~and~~personnel ~~handle~~to ~~whistleblower~~allow ~~matters~~for total segregation of duties.

• We ~~have~~ developed ~~new~~a ~~procedures~~report toof ~~improve~~key ~~controls~~accounting ~~covering~~and operational performance metrics which is sent to the ~~reimbursement~~board of ~~expenses~~directors ~~for~~and ~~purchases~~key ~~made~~management byon a weekly basis to enhance their ability to monitor the ~~chief~~Company’s ~~executive~~ongoing ~~officer~~business activities.

• We ~~have~~established ~~developed~~more ~~documentation~~formal ~~regarding~~closing ~~appropriate~~time ~~identifications~~lines, ofcheck ~~authority,~~lists and ~~transaction~~review ~~approval~~procedures ~~processes~~to enable timely closing procedures.

•Our Wemanagement ~~have~~believes ~~implemented~~that athe ~~review~~foregoing ~~and~~actions ~~approval~~have ~~process~~improved ofour ~~transactions~~internal ~~for~~control ~~which~~over wefinancial ~~have~~reporting anand, ~~insufficient~~as ~~number~~a ofresult, ~~personnel~~we are be able to ~~allow~~file our Form 10-Q for ~~total~~the ~~segregation~~third ofquarter ~~duties~~ended June 28, 2009 on a timely basis.

• We are establishing more formal closing time lines, check lists and review procedures to enable timely closing procedures.

Our management believes that the foregoing actions will improve our internal control over financial reporting, and we will be able to file our Form 10-Q for the third quarter ended June 28, 2009 on a timely basis.

Limitations

Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

2224

PART II: OTHER INFORMATION

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

In ~~January~~April 2009, the Company issued a total of ~~175~~400,~~239~~000 shares of its Common Stock with respect to interest of $6160,~~333~~000 related to the 8% Convertible Debentures.

These securities were offered and sold in private transactions in accordance with Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, based on the investment representation and positions as informed, accredited investors of the recipients thereof. The sales were made without the use of an underwriter or selling agent, and no commissions or underwriting discounts were paid in connection with such sales.

Item 6: Exhibits



31		Certification of D. Patrick Long, President and Chief Executive Officer, and principal financial officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of D. Patrick Long, President and Chief Executive Officer, and principal financial officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Signatures

Pursuant to the requirements 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.~~	NORTH AMERICAN TECHNOLOGIES GROUP, INC.
Date: July 2, 2009	/s/ D. Patrick Long
Date: August 12, 2009		/s/ D. Patrick Long
	~~D. Patrick Long~~	D. Patrick Long
	~~Chief Executive Officer Chief Accounting Officer, Principal Financial Officer~~	Chief Executive Officer Chief Accounting Officer, Principal Financial Officer

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EXHIBIT INDEX



31		Certification of D. Patrick Long, President and Chief Executive Officer, and principal financial officer of the Company, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of D. Patrick Long, President and Chief Executive Officer, and principal financial officer of the Company, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Filing Compare · NORTH AMERICAN TECHNOLOGIES GROUP INC /TX/