SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in its charter)

6680 N. Highway 49, Lino Lakes, Minnesota 55014
(Address of principal executive offices) (Zip code)

Registrant’s telephone number, including area code: (651) 784-1250

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

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

None.

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

YES  [X] NO [   ]

     Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]

     The Registrant’s revenues for the fiscal year ended August 31, 2001 were $9,269,719.

     As of November 9, 2001, 3,689,551 shares of Common Stock of the Registrant were outstanding, and the aggregate market value of the Common Stock of the Registrant as of that date (based upon the closing price of the Common Stock at that date as reported on the American Stock Exchange) excluding outstanding shares beneficially owned by directors and executive officers, was approximately $11,522,838.

     Documents incorporated by reference: None.

     Transitional Small Business Disclosure Format (check one): YES  [   ] NO [X]

PART I

     This Form 10-KSB contains certain forward-looking statements. For this purpose, any statements contained in this Form 10-KSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, including those set forth in the section below entitled “Certain Important Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report.

Item 1.   DESCRIPTION OF BUSINESS.

(a)  Business Development

     Northern Instruments, Inc., a predecessor to Northern Technologies International Corporation, was incorporated in the State of Minnesota on August 4, 1970. In 1976, Northern Instruments, Inc. changed its name to Northern Instruments Corporation. In 1978, Northern Instruments Corporation, a Minnesota corporation, was merged with and into Northern Instruments Corporation, a newly formed Delaware corporation. In 1993, Northern Technologies International Corporation, a wholly owned subsidiary, was merged into Northern Instruments Corporation. As a result of such merger, Northern Instruments Corporation changed its name to Northern Technologies International Corporation, hereafter referred to as the “Company” or “NTIC.” In 1999, the Company organized Northern Instruments Corporation, LLC, an Ohio limited liability company (“NIC”); and the instruments operations of the Company were transferred into NIC. NIC is a wholly owned subsidiary of the Company. Effective March 4, 1999, Special Control Systems, Inc., an Ohio corporation 100% owned by the Company, was merged into NIC. The Company established a wholly owned subsidiary NTI Facilities, Inc. on January 1, 2000. The operating results and assets of NIC and NTI Facilities, Inc. are included in the consolidated financial statements of the Company.

(b)  Business of the Company

General

     The Company is a developer, manufacturer and marketer of materials science based industrial packaging products and systems and electronic sensing instruments. The Company’s corrosion inhibiting industrial packaging products and systems, marketed under the name ZERUST® (“ZERUST”), are utilized in protective packaging serving a wide variety of companies in industries such as transportation, fossil fuel power generation, electronics, on-and-off-road automotive equipment, machinery for agriculture and metal processing. The ZERUST product line accounted for approximately 97% of the Company’s sales during its fiscal year ended August 31, 2001. In a concerted effort to extend the Company’s technological grasp, however, the Company engages in scientific research and development programs in the areas of material science and corrosion protection in new applications.

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     The Company’s electronic sensing instruments include portable oil quality analyzers for on-site evaluation of various types of oils and fluids, instruments that provide for on-and-off-line measurement of fiber denier and other devices, which utilize microwave technology to measure moisture and the tempo of manufacturing process in metallurgical facilities.

International Joint Ventures and European Holding Company

     The Company participates in an expanding number of international joint venture arrangements that provide for the manufacturing, marketing and distribution of materials science based industrial packaging products based upon the Company’s technology. Both the Company and the Company’s corporate joint venture in Germany, Excor Korrosionsschutz – Technologien und Produkte GmbH (“Excor”), through Excor’s wholly owned subsidiary Excor Korrosionsforschung GmbH, manufacture and supply the proprietary ingredients, called Masterbatch, that make the Company’s material science based industrial packaging products functional, but the actual manufacturing of the finished product itself takes place in each country in which the Company has a joint venture or similar relationship. Manufacturing the product in foreign countries lowers shipping costs and improves on-time delivery to foreign customers. The international joint venture arrangements allow the Company to successfully market and sell its products in foreign countries through the marketing efforts of joint venture partners without the Company having to develop its own international sales force. The Company’s international joint venture partners are knowledgeable in the applicable environmental, labor, tax and other requisite regulations and laws of the respective foreign countries in which they operate, as well as the local customs and business practices, and have a vested interest in making each joint venture a success.

     The Company participates in various international corporate joint ventures in countries outside the United States and in similar non-contractual arrangements in various other countries. The international joint ventures provide for the manufacturing, marketing, and distribution of materials science based industrial packaging products. The Company also has a 50% ownership interest in NTI ASEAN, LLC, for its joint venture investments in the ASEAN region, other than Japan and South Korea where the Company has independent corporate joint ventures of long standing. Taiyo Petroleum Gas Co. Ltd., the Company’s existing joint venture partner in Japan, owns the remaining 50% ownership interest in NTI ASEAN, LLC subject to final capitalization of NTI ASEAN, LLC. The Company has an ownership interest either directly or indirectly in joint ventures in the following countries:

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     In addition to the Company’s investments in the international corporate joint ventures listed above, the Company acquired a 50% ownership interest in a European holding company during fiscal year 1997; however, to date, this entity has been inactive.

     While the Company is not aware of any specific potential risk beyond its initial investment and undistributed earnings of the international joint ventures, there can be no assurance that the Company will not be subject to lawsuits based on product liability claims or other claims arising out of the activities of each international joint venture. To protect against such an occurrence, the Company maintains liability insurance specifically applicable to its ownership positions in the international joint venture arrangements in excess of any insurance the joint ventures may maintain.

Products

     The Company operates in two businesses: materials science based industrial packaging products and systems and electronic sensing instruments. Materials science based industrial packaging products and systems accounted for approximately 97% of the Company’s sales in fiscal year 2001.

     Materials Science Based Industrial Packaging Products and Systems. Corrosion negatively affects products and components in the manufacturing industry. This applies to the rusting of ferrous (iron and steel) metals and the deterioration by oxidation of nonferrous (aluminum, copper, brass, etc.) metals. In combating corrosion, the traditional approach has been to apply oils and greases to protect metal parts. This approach commonly requires specialized application equipment. In addition, the oils and greases may pose unacceptable health and fire hazards and also may collect and trap dirt and debris that, in some cases, may actually initiate corrosion. For the removal of such oils and greases, chemical solvents and specialized safety equipment may be necessary that typically introduce additional health and hazardous waste disposal problems.

     ZERUST volatile corrosion inhibiting (“VCI”) products may entirely eliminate or reduce the use of oils and greases to inhibit corrosion; for ZERUST formulations contain proprietary chemical systems that emit a nontoxic vapor that is diffused throughout an enclosure. Electron scanning microscopy shows that the VCI-rich atmosphere causes VCI molecules to condense in a microscopic layer on all surfaces they reach. The corrosion-inhibiting layer is maintained so long as the metal product to be protected remains within the ZERUST package. Electron scanning further shows that once the contents are removed from the ZERUST package, the VCI layer revolatilizes from the contents’ surfaces within two hours, leaving a clean, dry and corrosion-free product. This mechanism of corrosion protection enables the Company’s customers to package and ship metal parts so that they arrive ready for use. Furthermore, by eliminating costly greasing and degreasing processes and/or significantly reducing the use of oils to inhibit corrosion, ZERUST VCI technology provides significant savings in labor, material and capital expenditures for equipment to apply, remove and dispose of oil and grease, as compared to traditional methods of corrosion prevention.

     In 1980, the Company developed a means of combining ZERUST VCI systems with polyethylene and polypropylene resins, and was granted a patent on this process on September 22, 1981. Subsequently, a line of flexible packaging products in the form of low and high density polyethylene bags and shroud film, stretch, shrink, skin and bubble cushioning film, woven scrim and foam sheeting was introduced to United States industry. This gave packaging engineers an opportunity to ship and store ferrous, nonferrous and mixed multi-metal products in a clean, dry and corrosion-free condition, with an attendant overall savings in total packaging cost.

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     The Company subsequently expanded the ZERUST product line to include a range of rigid plastic products in the form of profile and corrugated board, thermoformed dunnage trays and bins, injection and blow molded products and flat netting. The Company also has developed additives in liquid form to imbue corrugated cardboard, solid fiber and chipboard packaging materials with VCI corrosion protection properties.

     Electronic Sensing Instruments. The Company’s electronic sensing instruments accounted for approximately 3% of the Company’s sales in fiscal year 2001. The Company’s electronic sensing instruments include oil quality analyzers, fiber monitors and testers, and other instruments used primarily for process and quality control of materials in hostile environments, such as steel mills. Several of the Company’s electronic sensing instruments are based on the measurement of the change in dielectric properties of different liquids and fibers by means of capacitance sensors. The instrument product line, however, also includes measurement devices for materials and moisture testing based upon microwave technology.

Manufacturing

     The Company produces certain proprietary materials science based industrial packaging formulations and products at its facility in Lino Lakes, Minnesota and electronic sensing instruments at facilities in Forest Lake, Minnesota and Cleveland, Ohio. The Company’s materials science based industrial packaging end products include flexible and rigid packaging systems and other products that are produced to customer specification by selected contractors who are supplied with the necessary active ingredients by the Company, under a Trade Secrecy Agreement and/or License Agreement.

     The Company is ISO 9001 certified with respect to the manufacturing of its materials science based industrial packaging products. The Company believes that the process of ISO 9001 certification serves as an excellent tool for total quality management, enabling the Company to provide consistency and excellence in its products. Also, because potential customers may prefer or require manufacturers to have achieved ISO certification, such ISO certification may provide the Company with certain competitive advantages.

     The Company voluntarily became ISO 14000 certified as of August 2001 with respect to environmental management standards. The Company believes that the process of ISO 14000 certification serves as an excellent tool for the Company to continuously improve its environmental performance. Also, because existing and potential customers may prefer or require manufacturers to have achieved ISO certification, such ISO certification may provide the Company with certain competitive advantages in the future.

Sales and Marketing of Materials Science Based Industrial Packaging Products

     In the United States, the Company markets its materials science based industrial packaging products principally to industrial users by a direct sales force and through a network of distributors and sales representatives. The Company’s technical service representatives work directly with the end users of the Company’s products to analyze their specific needs and develop systems to meet their technical requirements.

     Internationally, the Company has entered into joint ventures and similar arrangements with foreign partners (either directly or through NTI ASEAN, LLC). Pursuant to these arrangements, the Company and/or Excor supply certain proprietary formulations to the foreign joint venture entities, which in turn provide for the international manufacture and marketing of ZERUST and others finished products. The Company receives fees for providing technical support and marketing assistance to the joint ventures in accordance with the terms of the joint venture arrangements.

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Competition

     The Company is aware of other organizations that manufacture and market corrosion inhibiting packaging products, which compete with the Company’s ZERUST products. The Company evaluates competing products on an ongoing basis and believes that none of the competing products on the market at this time are superior to the Company’s products.

     The Company is aware of competitors in the “Lubri-Sensor” oil quality analyzer area; however, the Company does not have any knowledge as to the business effectiveness of such competitors and believes that the Company’s products are competitive with all other products currently on the market. In the “Foodoil Sensor” oil quality analyzer area, the Company is aware of a competitor who does not provide an analysis instrument but instead provides a paper test strip. Although the Company believes that its product offers significant advantages over paper test strips, the Company believes that sales of the Foodoil Sensor have historically been limited by price sensitivity rather than differences in product capabilities.

     Some of the Company’s competitors, in both the materials science based industrial packaging area and the electronic instrument area, are established companies that may have financial and other resources greater than those of the Company. Additionally, some of these companies may have achieved significant market impact and brand recognition. The Company competes with such companies by providing high quality products and by attempting to provide the highest level of customer service, including real time direct technical support and applications engineering.

Significant Customers

     One customer accounted for approximately 10% and 14% of net sales for the fiscal years ended August 31, 2001 and 2000, respectively.

Research and Development

     The Company’s research and development activities are directed at the improvement of existing products, the development of new products and quality assurance through improved testing of the Company’s products. The Company’s research and development expenditures, including engineering and technical support, were $648,129, $587,434 and $578,231 in fiscal years 2001, 2000 and 1999, respectively. In 1997, the Company’s joint venture in Germany, Excor, established a wholly-owned subsidiary, Excor Korrosionsforschung GmbH, to conduct research into new fields of materials science based industrial packaging and the applications engineering thereof in conjunction with the Company’s domestic research and development operation. Today the Company’s internal research and development activities are conducted at its Minnesota headquarters, in Beachwood, Ohio, in Dresden, Germany; and at various international locations under the direction of internationally known scientists and research institutes under exclusive contract to the Company with respect to the subject of their respective research efforts. The conduct of the research and development activities outside Minnesota and Germany, like the results of the Company’s research and development efforts generally, invariably engenders certain proprietary rights for the Company.

Patents and Trademarks

     The Company is committed to the timely and continual upgrading of its product line and the introduction of new products, developed in-house or via exclusive technology agreements. The Company’s United States patent relating to its corrosion inhibiting products expired in 2000. The Company has not renewed or extended such patent because the Company believes that trade secrets and proprietary (albeit not patented) know-how are at least as important as patent protection in establishing and maintaining a competitive advantage; and that mere patent protection without close technical support and applications engineering will not serve to keep any given supplier in the forefront of any sophisticated technology based market.

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     The Company also has several registered trademarks in the United States and certain foreign countries. The registered trademarks in the U.S. are: the logo “NTI”, the word “ZERUST”, the words “THE ZERUST PEOPLE”, the word “PLASTABS”, the words “COR TAB” and the color “YELLOW” “for anticorrosive plastic film used for packaging metallic products, for industrial and consumer use”. The Company’s trademarks have a life, subject to periodic maintenance, of 10 to 20 years, which may be extended.

Backlog

     The Company did not have a significant order backlog as of August 31, 2001. Customers generally place orders on an “as needed” basis and expect delivery within a relatively short period of time.

Working Capital and Availability of Materials

     The Company does not carry excess quantities of raw materials or purchased parts because of widespread availability thereof from various suppliers. The Company has sufficient working capital to meet all obligations when due.

Employees

     As of August 31, 2001, the Company had 30 full-time direct employees located in the United States, consisting of four engaged in administration, eleven in sales and marketing, five in research and development, nine in operations and one person responsible for international coordination. There are no unions representing the Company’s employees and the Company believes that its relations with employees are good.

Certain Important Factors

     In addition to the influences identified above, there are several important factors that could cause the Company’s actual results to differ materially from those anticipated by the Company or which are reflected in any forward-looking statements of the Company. Such factors, which may impact on the success of the Company’s operations and its ability to achieve its goals, include the following:

     (1) The Company’s ability to make investments in existing and future joint ventures to generate a positive rate of return and demonstrate a pattern of growth consistent with past and current performance; and

     (2) The Company’s ability to continue to enter into international markets in a timely fashion; and

     (3) The Company’s ability to maintain gross margins at a level consistent with the technological advantages of its proprietary products.

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Item 2.  DESCRIPTION OF PROPERTY.

     The Company’s primary office, production facilities and domestic research and development operations are located at 6680 North Highway 49, Lino Lakes, Minnesota 55014. The Company owns approximately 3.5 acres at this site and three buildings thereon. The main building, consisting of approximately 15,300 square feet, is used for office space, production, research and development and shipping and receiving. A second building of approximately 7,200 square feet and a third building of approximately 4,800 square feet are used for warehouse space. In 1995, the Company acquired an approximately 10 acre parcel of land located in Forest Lake, Minnesota, approximately six miles from the Company’s offices. On this parcel, the Company built a warehouse of approximately 18,000 square feet that was completed in November 1996.

     A subsidiary of the Company, NTI Facilities, Inc., acquired a one-third ownership of Omni-Northern Ltd., an Ohio limited liability company, in contemplation of entering into a lease (as described below) for approximately 50% of the net rental space in the building itself. Omni-Northern Ltd. owns and operates a rental property located at 23205 Mercantile Road, Beachwood, Ohio, comprising approximately 1.989 acres of land and a building of approximately 33,877 square feet, having an approximate value of $2,205,000 based upon the cash — to mortgage acquisition price of the property paid in fiscal year 2000. The Company has guaranteed up to $339,235 of the Omni-Northern Ltd.’s $2,035,000 mortgage obligation with National City Bank, Cleveland, Ohio. NTI Facilities, Inc. has entered into a 15 year lease agreement for approximately 16,826 square feet of office, manufacturing, laboratory and warehouse space requiring monthly payments of $16,434, which can be adjusted annually according to the annual consumer price index through November 2014. By its ownership in Omni-Northern Ltd., NTI Facilities Inc. is entitled to one third of operating results of Omni-Northern Ltd. The building is now fully leased.

Item 3.  LEGAL PROCEEDINGS.

     There is no material pending or threatened legal, governmental, administrative or other proceeding to which the Company is a party or of which any of its property is the subject.

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Report.

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PART II

     Effective September 10, 1993, the Company’s Common Stock commenced trading on, and it continues to trade on, the American Stock Exchange under the symbol NTI.

     The Company declared Common Stock cash dividends of $.16 per share to shareholders of record on December 3, 1999; and $.17 per share to shareholders of record on December 1, 2000. The Company’s Board of Directors will continue to consider the payment of dividends annually, based on the Company’s net income and operating cash requirements.

     As of August 31, 2001, approximately 427 shareholders of record held the Company’s Common Stock.

Results of Operations

Fiscal Year 2001 Compared to Fiscal Year 2000

Northern Technologies International Corporation

     Net Sales and Cost of Sales. The Company had net sales originating in the United States of $9,269,719 in fiscal year 2001; a decrease of $1,790,310 or 16.2% from net sales of $11,060,029 in fiscal year 2000. The decrease in net sales was due primarily to a decrease in the volume of materials science based industrial packaging products sold to new and existing customers in North America. The decrease was due to the slow down in the industrial sector that the Company serves. One existing customer accounted for 10% of sales in fiscal year 2001 and 14% of sales in fiscal year 2000.

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     The cost of sales decreased as a percentage of sales to 49.7% in fiscal year 2001 from 50.5% in fiscal year 2000. The variation in the cost of sales percentage is attributable to the decrease in the market price for certain raw materials. The Company does not anticipate a significant further ongoing decrease in cost of sales in fiscal year 2002 as a percentage of sales.

     Selling Expenses. The Company’s selling expenses increased by $138,276 or 10.6% to $1,446,891 in fiscal year 2001 from $1,308,615 in fiscal year 2000. The increase in selling expenses in fiscal year 2001 was primarily related to increases in general insurance expense and travel related expenses. As a percentage of sales these costs increased to 15.6% in fiscal year 2001 from 11.8% in fiscal year 2000 due to the decreased level of net sales and the overall increase in selling expenses in fiscal year 2001. The Company anticipates that its selling expenses will increase in fiscal year 2002 due to planned increases in selling and marketing efforts.

     General and Administrative Expenses. The Company’s general and administrative expenses decreased by $9,301 or 0.4% to $2,088,690 in fiscal year 2001 from $2,097,991 in fiscal year 2000. As a percentage of sales general and administrative expenses increased to 22.5% in fiscal year 2001 from 19.0% in fiscal year 2000. The Company anticipates that its general and administrative expenses will increase in fiscal year 2002, due to planned support for increases in selling and marketing expenses.

     Research, Engineering, and Technical Support Expenses. The Company’s research, engineering, and technical support expenses increased by $60,695 or 10.3% to $648,129 in fiscal year 2001 from $587,434 in fiscal year 2000. As a result of the Company’s international research and development activities certain proprietary rights to new technology have been added to the Company. As a percentage of sales, research, engineering and technical support expenses increased to 7.0% in fiscal year 2001 from 5.3% in fiscal year 2000 due to the decreased level of net sales. The Company anticipates that in fiscal year 2002 research, engineering and technical support expenses will decrease compared to expenses incurred in fiscal year 2001.

Operations of International Joint Ventures

     Corporate Joint Ventures and European Holding Company. The Company continues its business program of establishing corporate joint venture arrangements in international markets directly or indirectly through NTI ASEAN, LLC (“NTI ASEAN”). The Company maintains a 50% ownership interest in NTI ASEAN, with the remaining 50% ownership interest owned by Taiyo Petroleum Gas Co. Ltd., which also owns the other 50% ownership interest in the Company’s corporate joint venture located in Japan.

     The Company and/or an existing corporate joint venture manufactures and supplies patented and/or proprietary ingredients, which make the finished products functional and enable manufacturing of the finished products to take place in the foreign countries. The corporate joint ventures then market the finished products in their respective territories, and the corporate joint ventures’profits are shared by the respective corporate joint venture shareholders in accordance with share ownership.

     Corporate joint venture sales were as follows:

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     The Company receives fees for technical and other support to the corporate joint ventures based on the revenues of the individual corporate joint ventures. The Company recognized fees for such support in the amounts of $2,527,795 and $2,749,578 for fiscal years 2001 and 2000, respectively. The decrease in fees for technical and other support to corporate joint ventures was primarily due to the decrease in sales volume at certain of the Company’s corporate joint ventures.

     The Company incurred direct expenses related to corporate joint ventures and the European holding company of $1,667,463 and $1,312,213 in fiscal years 2001 and 2000, respectively. These expenses include: technical and marketing services to existing joint ventures, legal fees regarding the establishment of new joint ventures, registration and promotion of worldwide trade marks and legal fees incurred in the filing of patent applications for new technologies to which the Company acquired certain rights. The Company anticipates that expenses relating to corporate joint ventures will continue to increase in the future due to the Company providing ongoing technical, marketing and other support to its joint ventures, to the development of new corporate joint ventures and to the development of new technologies and their concomitant intellectual property rights.

     The Company incurred expenses totaling $314,347 relating to the Joint Venture Conference held in Chennai, India. This conference is held approximately every three years as a means to discuss new products and technologies being offered and to evaluate current and future market and material science strategies for all joint ventures.

     The Company and NTI ASEAN anticipate that in the future they will enter into joint ventures in other foreign countries and in the ASEAN region.

     The Company’s investments in corporate joint ventures and the European holding company are accounted for using the equity method and resulted in income to the Company of $543,455 and $854,032 for fiscal years 2001 and 2000, respectively.

     The Company also has an investment in a European holding company, which is currently inactive.

Interest Income

     Interest Income. The Company’s interest income decreased to $143,452 in fiscal year 2001 from $238,858 in fiscal year 2000 due partially to the interest received in 2000 upon a full payment of a note from purchase of common stock.

Income Before Income Taxes

     Income Before Income Taxes. Income before income taxes decreased $2,298,359 to $1,707,446 in fiscal year 2001, compared to the income before income taxes of $4,005,805 in fiscal year 2000, a net decrease of 57.4% year to year.

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Income Taxes

     Income Taxes. The Company’s effective income tax rate was 32.5% and 34.3% for fiscal year 2001 and 2000, respectively. The effective income tax rate for the Company in fiscal year 2001 was lower than the statutory rate, since the Company’s equity in income of its international corporate joint ventures and in the European holding company are recognized based on after tax earnings of these entities, resulting in foreign tax credits. Thus, to the extent the corporate joint ventures’ and the foreign company’s undistributed earnings were distributed to the Company during fiscal years 2001 and 2000, such distributions did not result in material additional income tax liability after the application of foreign tax credits. The decrease in the Company’s effective income tax rate in fiscal year 2001 is primarily due to an increase in the percentage of equity in income of its international corporate joint ventures and European holding company to income before income taxes in fiscal year 2001 when compared to fiscal year 2000.

Fiscal Year 2000 Compared to Fiscal Year 1999

Northern Technologies International Corporation

     Net Sales and Cost of Sales. The Company had net sales originating in the United States of $11,060,029 in fiscal year 2000, an increase of $1,165,327 or 11.8% from net sales of $9,894,702 in fiscal year 1999. The increase in net sales was due primarily to an increase in the volume of materials science based industrial packaging products sold to new and existing customers in North America. One existing customer accounted for 14% of sales in fiscal year 2000 and 7% of sales in fiscal year 1999.

     The cost of sales increased as a percentage of sales to 50.5% in fiscal year 2000 from 48.0% in fiscal year 1999. The variation in the cost of sales percentage includes an obsolete inventory charge of $90,000 and the impact of the increase in the market price for certain raw materials and labor cost.

     Selling Expenses. The Company’s selling expenses decreased by $182,242 or 12.2% to $1,308,615 in fiscal year 2000 from $1,490,857 in fiscal year 1999. The decrease in selling expenses in fiscal year 2000 was primarily related to a decrease in external selling commissions and related expenses, which was partially offset with an increase in salaries. As a percentage of sales these costs decreased to 11.8% in fiscal year 2000 from 15.1% in fiscal year 1999 due to the increased level of net sales and the overall decrease in selling expenses in fiscal year 2000.

     General and Administrative Expenses. The Company’s general and administrative expenses increased by $433,055 or 26.0% to $2,097,991 in fiscal year 2000 from $1,664,936 in fiscal year 1999. The increase in general and administrative expenses in fiscal year 2000 was primarily due to increases in various professional fees (e.g. for the filing and defense of U.S. and foreign patents and trademarks), group insurance and development of the Company’s facilities, including technical equipment and a new laboratory. As a percentage of sales general and administrative expenses increased to 19.0% in fiscal year 2000 from 16.8% in fiscal year 1999.

     Research, Engineering, and Technical Support Expenses. The Company’s research, engineering, and technical support expenses increased by $9,203 or 1.6% to $587,434 in fiscal year 2000 from $578,231 in fiscal year 1999. As a result of the Company’s international research and development activities certain proprietary rights to new technology have been inured to the benefit of the Company. As a percentage of sales, research, engineering and technical support expenses decreased to 5.3% in fiscal year 2000 from 5.8% in fiscal year 1999 due to the increased level of net sales.

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Operations of International Joint Ventures

     Corporate Joint Ventures and European Holding Company. Corporate joint venture sales were as follows:

     The Company received fees for technical and other support to the corporate joint ventures based on the revenues of the individual corporate joint ventures. The Company recognized fees for such support in the amounts of $2,749,578 and $2,459,697 for fiscal years 2000 and 1999, respectively. The increase in fees for technical and other support to corporate joint ventures was primarily due to the greater efficacy of the Company’s service to its corporate joint ventures, which provided for increased sales volume at certain of the Company’s corporate joint ventures.

     The Company incurred direct expenses related to corporate joint ventures and the European holding company of $1,312,213 and $741,703 in fiscal years 2000 and 1999, respectively. These expenses include: technical and marketing services to existing joint ventures, legal fees regarding the establishment of new joint ventures, registration and promotion of worldwide trade marks and legal fees incurred in the filing of letters patent for new technologies to which the Company acquired certain rights.

     The Company’s investments in corporate joint ventures and the European holding company are accounted for using the equity method and resulted in income to the Company of $854,032 and $368,711 for fiscal years 2000 and 1999, respectively. Net income of the corporate joint ventures in fiscal year 2000 of $1,810,885 represents a 74.3% increase from fiscal year 1999.

Interest Income

     Interest Income. The Company’s interest income increased to $238,858 in fiscal year 2000 from $111,901 in fiscal year 1999 due partially to the interest received upon a full payment of a note from purchase of common stock.

Income Before Income Taxes

     Income Before Income Taxes. The comparison of the income before income taxes of the Company reveals an increase of $397,620 to $4,005,805 in fiscal year 2000, over the income before income taxes of $3,608,185 in fiscal year 1999, a net gain of 11.0% year to year.

Income Taxes

     Income Taxes. The Company’s effective income tax rates were 34.3% and 29.7% for fiscal years 2000 and 1999, respectively. The effective income tax rate for the Company in fiscal year 2000 was lower than the statutory rate, since the Company’s equity in income of its international corporate joint ventures and in the European holding company are recognized based on after tax earnings of these entities, resulting in foreign tax credits. Thus, to the extent the corporate joint ventures’and the foreign company’s undistributed earnings were distributed to the Company during fiscal years 2000 and 1999, such distributions did not result in material additional income tax liability after the application of foreign tax credits. The increase in the Company’s effective income tax rate in fiscal year 2000 is primarily due to the utilization of a net operating loss carry forward in fiscal year 1999, which was exhausted in that period.

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Liquidity and Capital Resources

     At August 31, 2001, the Company’s working capital was $5,579,475 including $3,238,283 in cash and cash equivalents, with a current ratio of 11.8:1. At August 31, 2000, the Company’s working capital was $6,078,694 including $3,840,057 in cash and cash equivalents, with a current ratio of 7.3:1. To date, net cash provided from operations has been sufficient to meet liquidity requirements, capital expenditures, research and development cost, and expansion of operations of the Company’s international joint ventures. Cash flow from operations totaled $1,134,997, $2,620,833 and $1,983,425 for the fiscal years 2001, 2000, and 1999, respectively. The net cash flow from operations for fiscal years 2001, 2000, and 1999 resulted principally from net income and international joint venture dividends offset by a non-cash component of net income identified as equity in income of international corporate joint ventures and European holding company.

     Net cash used in investing activities totaled $474,766, $429,420 and $641,317 for fiscal years 2001, 2000, and 1999, respectively. The primary uses of cash for investing activities in fiscal years 2001 and 2000 were investments in international corporate joint ventures, and additions to property, and an increase in other assets. In fiscal year 2000, the Company’s expenditures of cash for investing activities were offset by payment of the note receivable from purchase of common stock. The primary use of cash in fiscal years 1999 were investments in international corporate joint ventures and additions to property. In fiscal years 1999 the Company’s expenditures of cash for investing activities were offset by payment of the note receivable from purchase of common stock.

     Net cash used in financing activities was $1,262,005, $1,101,565, and $792,389 for fiscal years 2001, 2000, and 1999, respectively. The primary uses of cash in financing activities resulted from the payment of dividends and the repurchase of common stock. The primary source of cash provided by financing activities was proceeds from the exercise of stock options.

     The Company and its subsidiaries have no long-term debt and no material lease commitments as of August 31, 2001, except for an office, manufacturing, laboratory and warehouse lease requiring monthly payments of $16,434, which can be adjusted annually according to the annual consumer price index through November 2014.

     The Company has no postretirement benefit plan and does not anticipate establishing any postretirement benefit program.

     Inflation in the U.S. historically has had little effect on the Company.

Euro Currency Issue

     On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their respective existing currencies and the Euro and to adopt the Euro as their common legal currency on that date (the “Euro Conversion”). Following the Euro Conversion, however, the previously existing currencies of the participating countries were scheduled to remain legal tender in the participating countries from January 1, 1999 to January 2002. During this transition period, public and private parties may pay for goods and services using either the Euro or the previously existing currencies. Beginning January 1, 2002, the participating countries will issue new Euro-denominated bills and coins for use in cash transactions. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in the previously existing currencies making Euro Conversion complete.

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     The Company, its international corporate joint ventures and the European holding company have been evaluating the potential impact the Euro Conversion to the Euro Currency may have on their results of operations, liquidity or financial condition. The Company has determined that expected costs for compliance would not be material to its results of operations, liquidity, financial condition or capital expenditures. However, significant noncompliance by the Company’s international corporate joint ventures, and their customers or suppliers could adversely impact the Company’s results of operations, liquidity or financial condition. Accordingly, until the Company completes its assessment of the Euro Conversion impact, there can be no assurance that the Euro Conversion will not have a material impact on the overall business operations of the Company.

Recently Issued Accounting Pronouncements

     In June 1998 the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The Company adopted SFAS No. 133 in the first quarter of fiscal year 2001 which did not have a significant impact on the Company’s financial position or the results of its operations.

     In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” SAB 101 summarizes certain of the SEC’s views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B to defer the effective date of implementation of SAB 101 until the fourth quarter of fiscal year 2001. The implementation of SAB 101 did not have a material effect on our operations or financial position.

     In 2000, the Financial Accounting Standards Board issued Emerging Issues Task Force (EITF) 00-10, “Accounting for Shipping and Handling Costs”. EITF 00-10 requires all amounts billed to customers in a sales transaction related to shipping and handling to be classified as sales. The Company records costs related to shipping and handling in cost of goods sold. Prior period sales and cost of goods sold have been adjusted for this change, which had no effect on previously reported net income.

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Item 7.  FINANCIAL STATEMENTS.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following items are included herein:

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INDEPENDENT AUDITORS’ REPORT

To the Stockholders and Board of Directors
Northern Technologies International Corporation
Lino Lakes, Minnesota

We have audited the accompanying consolidated balance sheets of Northern Technologies International Corporation and Subsidiaries (the Company) as of August 31, 2001 and 2000 and the related consolidated statements of income, stockholders’ equity, and cash flows for the years ended August 2001, 2000, and 1999. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Northern Technologies International Corporation and Subsidiaries at August 31, 2001 and 2000 and the results of their operations and their cash flows for the years ended August 31, 2001, 2000, and 1999 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
November 9, 2001

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES

See notes to consolidated financial statements.

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NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
AND SUBSIDIARIES

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