SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

Quarterly Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

NORTHERN TECHNOLOGIES INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

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

(651) 784-1250
(Registrant’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 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  [_]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

PART I — FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

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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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

The consolidated financial statements include accounts of the Company and all wholly owned subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Revenue Recognition

Revenues are recognized when the Company receives a valid bill of lading from the shipping agent when the shipping terms are FOB Destination. At this time, ownership and risk of loss is transferred to the customer. Revenues are recognized when the Company ships an order when the shipping terms are FOB Shipping Point. At this time, title and risk of loss is transferred to the customer. There are no provisions for returns recorded as all products are quality tested and most are made to order.

Allowance for Doubtful Accounts

Accounts receivable are reduced by an allowance for amounts that may become uncollectable in the future. The majority of the Company’s receivables are due from manufacturing facilities located in the United States. The estimated allowance for doubtful accounts is based upon the age of the outstanding receivables and the payment history and credit worthiness of each customer. Management on a quarterly basis evaluates adequacy of the reserve for doubtful accounts.

Inventories

Inventories are valued at the lower of cost or market. On a quarterly basis, management assesses the inventory quantities on hand to estimated future usage and sales and, if necessary, writes down the value of inventory deemed obsolete or excess to market.

International Corporate Joint Ventures

International Corporate Joint Ventures are recorded on the equity basis of accounting. The Company records income from the International Corporate Joint Ventures relating to fees for technical support and other services provided by the Company to the International Corporate Joint Ventures. Management reviews the historical and planned future operations of each joint venture on a quarterly basis to determine if the Company’s investment in the Joint Venture is recoverable.

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RESULTS OF OPERATIONS

General—The Company conducts all foreign transactions based on the U.S. dollar, except for its investments in foreign joint ventures. The exchange rate differential relating to investments in foreign joint ventures is accounted for under the requirements of SFAS No. 52.

Sales Originating in North America—Sales decreased by $526,270 or 25.2% during the second quarter of 2002 from those of the second quarter of 2001. Net sales decreased by $989,739 or 21.5% during the six months ended February 28, 2002 compared to the six months ended February 28, 2001. These changes in sales are due to a decrease in demand for materials science based industrial packaging products. The decrease was due to the slow down in the industrial sector we serve.

Cost of Sales—Cost of goods sold as a percentage of net sales was 51.0% and 50.8% for the second quarter of 2002 and 2001, respectively. The cost of goods sold percentage of net sales was 47.7% and 51.2% for the six months ended February 28, 2002 and February 28, 2001. Variations are due primarily to the mix of product sales and changes in the price of resin.

Operating Expenses—As a percentage of net sales, total operating expenses were 67.8% in the second quarter of fiscal 2002 and 52.3% in the second quarter of fiscal 2001. Operating expenses were 55.1% and 47.8% of net sales for the six months ended February 28, 2002 and for the six months ended February 28, 2001.

Operating expense classification percentages of net sales were as follows:

Selling expense increased during the second quarter of fiscal 2002 as compared to the same period in fiscal 2001. This is primarily due to the increase in salaries associated with adding additional employees to the existing sales staff and related commission and travel expenses. Selling expense for the six months ended February 28, 2002 decreased over the same period in fiscal 2001 due to a reduction in spending in the first quarter of fiscal 2002 related to trade show attendance and related travel expenses. Selling expense for the three and six months ended February 28, 2002 as a percentage of net sales increased over the same periods in fiscal 2001 due to selling expense not decreasing proportionately with the decrease in sales levels.

General and administrative expenses decreased during the three and six months ended February 28, 2002 as compared to the same periods in fiscal 2001 due primarily to decreases in consulting expense and expenses related to the operation of Northern Instruments Corporation (a 100% owned Subsidiary). General and administrative expenses as a percentage of net sales increased slightly for the three and six months ended February 28, 2002, as compared to the same periods in fiscal 2001 due to the decrease in sales during fiscal 2002.

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Research, engineering, and technical support expenses increased during the three and six months ended February 28, 2002 as compared to the same periods in fiscal 2001. This is primarily due to an increase in travel and consulting services for product development and product support. Such expenses as a percentage of sales were significantly increased for the three months and six months ended February 28, 2002 as compared to the same period in fiscal 2001 due to research, engineering, and technical support expense not decreasing proportionately with the decrease in sales levels.

International Corporate Joint Ventures and European Holding Company — Net earnings from international corporate joint ventures and European holding company were $221,069 and $679,622 for the three and six months ended February 28, 2002, respectively, compared to $271,648 and $779,719 for the three and the six months ended February 28, 2001. This net decrease is due to decreased sales volume at certain of the Company’s joint ventures and an increase in expenses incurred in support of international corporate joint ventures.

Income Taxes — Income tax benefit (expense) for the three and six months ended February 28, 2002 and February 28, 2001 was calculated based on management’s estimate of the Company’s annual effective income tax rate. The Company’s annual effective income tax rate for fiscal 2002 was lower than the statutory rate primarily due to the Company’s equity in income of international corporate joint ventures and European holding company being recognized based on after-tax earnings of these entities. To the extent joint ventures’ undistributed earnings are distributed to the Company, it does not result in any material additional income tax liability after the application of foreign tax credits.

LIQUIDITY AND CAPITAL RESOURCES

At November 30, 2001, the Company’s working capital was $5,599,846, including $3,152,570 in cash and cash equivalents, compared to working capital of $5,579,475 including $3,238,283 in cash and cash equivalents as of August 31, 2001.

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 flows provided by operations for the six months ended February 28, 2002 and 2001 was $214,991 and $182,597, respectively. The net cash provided by operations for the six months ended February 28, 2002 resulted principally from net income, receivables, dividends and depreciation, offset by equity income of international corporate joint ventures and European holding company and increases in prepaid expenses and other. The net cash provided by operations for the six months ended February 28, 2001 was principally from net income, depreciation, dividends received from international corporate joint ventures and a decrease in accounts receivable. This was offset by income tax payments, an increase prepaid expenses and other decreases in current liabilities.

Net cash used in investing activities for the six months ended February 28, 2002 was $198,607, which resulted from an increase in other assets and additions to property and equipment partially offset by a partial return of the Company’s original investment in European holding company. Net cash used in investing activities for the six months ended February 28, 2001 was $316,479, which resulted from investments in international corporate joint ventures, additions to property and increases in other assets.

Net cash used in financing activities for the six months ended February 28, 2002 was $102,097, which resulted from the repurchase of common stock. Net cash used in financing activities for the six months ended February 28, 2001 was $983,026, which resulted from the repurchase of common stock of $358,053 and dividends paid of $644,972 offset by proceeds from the exercise of stock options of $19,999.

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The Company expects to meet future liquidity requirements with its existing cash and cash equivalents and from cash flows of future operating earnings and distributions of earnings and technical assistance fees from the international corporate joint venture investments.

The Company has no long-term debt and no material capital lease commitments at February 28, 2002; however, the Company’s subsidiary has entered into a 15-year lease agreement for 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.

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

Euro Currency Issue

On January 1, 1999, twelve of the fifteen member countries of the European Union established fixed conversion rates between their respective existing currencies and the Euro and elected 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 will remain legal tender in the participating countries through January 2002. During the transition period, public and private parties have been paying for goods and services using both the Euro and the previously existing currencies. The participating countries were issued 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. The Euro Conversion has not impacted on the overall business operations of the Company or its international corporate joint ventures.

Recently Issued Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets (the Statements). The Company does not currently have any goodwill or intangible assets relating to business acquisitions. Therefore, the adoption of the statement does not impact the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company expects to adopt SFAS No. 143 in fiscal year 2003. The Company has not yet determined the impact of SFAS No. 143 on its financial position and results of operations.

In September 2001, the FASB also issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets. SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposal Of. The FASB issued SFAS No. 144 to establish a single accounting model, based on the framework established in SFAS No. 121, as SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation under Accounting Principle Board Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequent Occurring Events and Transactions. SFAS No. 144 also resolves significant implementation issues related to SFAS No. 121. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The Company expects to adopt SFAS No. 144 in fiscal year 2003. The Company has not yet determined the impact of SFAS No. 144 on its financial position and results of operations.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

None

ITEM 2 – CHANGES IN SECURITIES

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company (Annual Meeting) was held on February 15, 2002. The following matters were voted on and approved by the Company’s stockholders at the Annual Meeting. There were 3,689,551 shares of common stock entitled to vote at the meeting and a total of 3,310,126 shares or 89.72% were represented at the meeting. The tabulation of votes with respect to each of the following matters voted on at the Annual Meeting is set forth as follows:

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K

None

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.