Mark One

For the fiscal year ended December 31, 2009

For the transition period from ______ to _______

Commission File No.: 0-50367

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.        [    ] Yes    [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.       [    ] Yes    [X] No

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.        [X] Yes    [    ] No

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [   ] Yes   [   ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.   [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter, was $17,905,155.

The registrant had 33,456,840 common stock outstanding as of April 8, 2010.

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Statements made in this Form 10-K that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate" or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbors for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

We were incorporated under the laws of British Columbia, Canada, on October 6, 1998, under the name "Hemptown Clothing Inc." The current corporate structure is a single public company, incorporated under the Business Corporations Act (British Columbia). On February 22, 2006, our Board of Directors authorized and approved the change in our corporate name to "Naturally Advanced Technologies Inc." and the subsequent filing of the Amendment with the Registrar of Companies for the Province of British Columbia. This name change to Naturally Advanced Technologies Inc. became effective March 21, 2006, and our trading symbol for our shares of common stock trading on the OTC Bulletin Board has been changed to "NADVF:OB". Our shares of common stock commenced trading under the symbol "NAT.V" on the TSX Venture Exchange (the "TSX-V") at the opening of market on July 8, 2008.

We were founded in response to the growing demand for environmentally friendly, socially responsible clothing, and we adhere to a "triple bottom line" philosophy, respecting the human rights of employees, the environmental impact of our operations and fiscal responsibility to our shareholders. Please note that throughout this Annual Report, and unless otherwise noted, the words "we," "our," "us," or the "Company" refer to Naturally Advanced Technologies Inc. and our subsidiaries, unless the context otherwise requires.

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CRAiLAR^® Fiber Technologies Inc.

Our wholly owned subsidiary CRAiLAR^® Fiber Technologies Inc. ("CRAiLAR^®") was incorporated on April 5, 2005. It was incorporated for the purpose of developing Bast Fiber Technology for uses in textiles, cellulose pulp, paper, and composites.

HTnaturals Apparel Corp. ("HTnaturals") was incorporated under the laws of the Province of British Columbia on December 7, 2007, for the purpose of carrying out the natural and sustainable apparel portion of our business. We, through our wholly owned subsidiary HTnaturals, were also a provider of environmentally sustainable hemp, bamboo, organic cotton and soy blended apparel.

During our fiscal year ended December 31, 2009 we discontinued our apparel division in order to focus our resources on our CRAiLAR^® technology.

Our wholly-owned subsidiary, 0697872 B.C. Ltd., was incorporated under the laws of the Province of British Columbia on June 18, 2004, and held the title to real property located in Craik, Saskatchewan. We decided against proceeding with the intended use of the property and returned all rights to the town of Craik.

Our wholly-owned subsidiary, Hemptown USA, Inc., was incorporated under the laws of the State of Nevada on November 22, 2004, for factoring purposes so that business dealings can be accomplished daily without currency valuations and fluctuations, as well as to provide an American base inventory control to customers.

We are a Cleantech company focused on providing environmentally friendly textile, composite, biomass and pulping solutions through the cost effective process of industrial hemp and other bast fiber crops. We are committed to bringing sustainable bast fiber-based products to market, providing environmentally friendly natural fiber alternatives for a broad range of existing and emerging product applications, with equivalent or superior performance characteristics to cotton, wood or fossil-fuel based competitors. As of the date of this Annual Report, our business operations consist of the development and execution of our proprietary processing platforms called CRAILAR® and CRAiLEX^TM technologies, which are bast fiber processing technologies targeted at the textile, pulping, composite and plastics industries.

We are organized into four product silos to best develop, test and commercialize our various technology platforms. These include:

1. CRAiLEX^TM Advanced Materials: (near term development/commercialization) Focused on applications for our eco-friendly cellulosic pulp, the Advanced Materials division develops technologies for the processing of these cellulose-based fibers in Pulp and Paper, Bioplastics and Performance Apparel industries.
2. CRAiLAR^® Organic Fibers: (near term development/ commercialization) The Organic Fibers division is responsible for CRAILAR® applications in the apparel and textile industries. Using the core fiber from the bast fiber crop, CRAILAR® Organic Fibers can be spun into a traditional yarn.

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3. Bio-fuels: (long term development/commercialization) This division will be developing third generation biofuels that can be made from hempseed as well as cellulosic sources like residual fibers.
4. Agriculture: (long term development/commercialization) The Agriculture division is concerned with developing the most optimal plants for each type of CRAILAR^® application.

Bast fiber from hemp is known to combine attractive performance characteristics with superior agronomic properties, providing sustainable, natural product solutions for a vast range of market applications.

However, two factors have created a barrier to the exploitation of this crop: 1) until recently industrial hemp cultivation was prohibited in much of the developed world, and 2) the technologies had not been developed to transform raw hemp fiber into the quality of products that was demanded.

The first barrier is no longer an issue, with commercial hemp cultivation legalized in Canada in 1998. The U.S. is one of the last countries that still actively discourages hemp cultivation.

We have dismantled the second barrier. In concert with our key technology partners the Alberta Research Council and the National Research Council of Canada, We have developed proprietary technologies (the CRAiLAR^® and CRAiLEX^TM platforms) to process hemp fiber into superior decorticated bast fiber, organic bast fiber, dissolving pulp and fluff pulp; all environmentally friendly products that are fully fungible with traditional pulp and cotton processing lines. These products offer the comfort apparel, absorbent pulp and paper, and performance apparel sectors the ability to substitute superior natural fiber alternatives into their existing production lines, while unlocking a host of additional commercial opportunities in existing and emerging markets.

We are developing proprietary technology for the engineering, processing and production of textile fibers, composite materials, cellulose pulp, and their resulting byproducts. Developed in collaboration with the National Research Council of Canada and the Alberta Research Council, the CRAILAR^® and CRAiLEX^TM biomass technology platforms offer cost-effective and environmentally friendly processing and production of industrial hemp for global textile, composite material, pulp and paper and energy markets. We have the global exclusive rights to any new intellectual property developed under these collaborations. The technology developed is expected to displace some cotton and organic cotton use in textiles, some polyester and nylon use in performance textiles, some fiberglass use in composite materials, some wood pulp use in pulp and paper applications and some oil and gas use in energy markets. The feedstock source is environmentally efficient industrial hemp, however, the feedstock source can also be from other environmentally efficient bast fibers, such as flax. During the third quarter of 2008, fiber was spun and then knitted into fabric suitable for T-shirt or other knit garments using the CRAiLAR^® Organic Fibers technology.

As a result of testing of CRAiLAR Organic Fibers at NC State University during the third quarter of 2008, we entered into joint development agreements with Hanesbrands, and Georgia Pacific Consumer Products. We will be conducting further evaluation of our CRAiLAR Organic Fibers with both commercialization partners over the course of the next four months, with a view to arriving at commercialization terms at the successful conclusion of those trials.

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Initial Agreement. We entered into a collaboration agreement dated May 7, 2004, (the "Collaboration Agreement") with the NRC for an initial three-year term, pursuant to which we have developed the CRAiLAR^® Technology patentable enzymatic process for extracting and cleaning hemp fiber and converting it into a proprietary fiber called CRAiLAR^®. This entails researching and developing an environmentally-friendly and economically viable system based on industry-grade (or NRC-designed) enzymes for the extraction of clean fibers from industrial hemp, including the removal of dirt and the residual pectin from the sought-after hemp fibers and the separation of fine fibers in a manner that is environmentally acceptable while maintaining characteristics suitable for the textile industry.

Pursuant to the terms and provisions of the Collaboration Agreement:

• NRC shall provide certain expertise and know-how for the process and engineering of enzymes beneficial to the textile industry;
• NRC shall contribute to the project work valued at approximately $661,184 (CDN$671,498); and
• (iii) we shall contribute research and development to the project valued at approximately $544,998 (CDN$553,500).

Under the terms of the Collaboration Agreement, we paid NRC $277,668 (CDN$282,000) in cash. In addition to cash payments, we contributed research and development valued at approximately $544,998 (CDN$553,500). All amounts payable pursuant to the terms of the Collaboration Agreement have been paid.

Renewal. On approximately December 7, 2007, we entered into a three-year renewal of the terms and provisions of the Collaboration Agreement with NRC concerning the continued scientific research and development of the advanced enzyme technology for the extraction and cleaning of industrial hemp fiber for the textile sector. The project commenced approximately May 10, 2007, and the Collaboration Agreement expires on May 9, 2010. We believe that the extended Collaboration Agreement will assist us with continued work on patentable enzyme technology for the processing of hemp fibers and ensure the continuing of the original research team to facilitate ongoing collaboration. We believe that further research and development of the CRAiLAR^® Technology is consistent with the NRC's mandate to contribute to the global competitiveness of Canadian industry and the NRC National Program in Bioproducts announced in March 2007.

Pursuant to the terms and provisions of the Collaboration Agreement as renewed:

• NRC shall provide to the Project certain expertise and know-how for the process and engineering of enzymes beneficial to the textile industry;
• NRC shall contribute to the project work valued at approximately $2,264,671 (CDN$2,300,000);
• we shall contribute research and development to the project valued at approximately $879,316 (CDN$893,033); and
• we shall pay to NRC an aggregate of $360,378 (CDN$366,000) over the three-year term in accordance with an established schedule.

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Modified Collaboration Agreement. In recognition of the pending completion of the research phase for the enzyme processing of hemp fibres under the renewed Collaboration Agreement, we and the NRC sought to refocus our research efforts towards the development of cellulose technology for the production of lignocellulostic ethanol. Accordingly, on approximately February 19, 2010, pursuant to the terms of an amending agreement between us and the NRC (the "Modified Collaboration Agreement"), the parties agreed to modify the terms of the renewed Collaboration Agreement as follows:

• the estimated total cost of the project was amended to $6,442,776 (CDN$6,771,358) , representing the $3,388,233 (CDN$3,561,033) cost of the renewed Collaboration Agreement plus $3,054,543 (CDN$3,210,325) for the new work contained in the Modified Collaboration Agreement;

• the amount that we will pay to NRC in cash was amended to $598,725 (CDN$629,260), $348,240 (CDN$366,000) of which was the contribution owing under the renewed Collaboration Agreement, plus $250,485 (CDN$263,260) for new work contributions under the Modified Collaboration Agreement;
• the estimated amount that we will contribute to the project was amended to 3,472,883 (CDN$3,650,000), which represents the $2,188,392 (CDN$2,300,000) owed under the renewed Collaboration Agreement plus $1,284,491 (CDN$1,350,000) for new work contributions under the Modified Collaboration Agreement;
• the estimated amount that the NRC will contribute to the project was amended to be $2,369,265 (CDN$2,409,098), which represents the $849,698 (CDN$893,033) from the renewed Collaboration Agreement plus $1,519,567 (CDN$1,597,065) for new work contributions under the Modified Collaboration Agreement; and
• the expiration date of the Collaboration Agreement was amended to be May 9, 2012. With respect to all other terms, the parties confirmed the terms of the renewed Collaboration Agreement.

On November 1, 2006, we entered into a technology license agreement with NRC (the "License Agreement"). In accordance with the terms and provisions License Agreement:

• NRC granted to us a worldwide license to use the NRC Technology to reproduce, make, use, import, export and sell any products and to engage contractors to use the NRC Technology to reproduce or make any products to be used or sold by us;
• we shall pay to NRC a lump sum upon execution of the License Agreement and an annual maintenance fee payable on the anniversary of the execution date of this License Agreement;
• we shall pay to NRC a minimum royalty and an ongoing royalty on sales revenue for products and services;
• we shall also pay to NRC a royalty on other revenue as received by us; and
• the rights granted by NRC to us are exclusive relating to certain components underlying the NRC Technology and non-exclusive thereafter, and non-exclusive with respect to the remaining components underlying the NRC Technology.

As of the date of this Annual Report, we have paid an initial $20,525 (CDN$25,000) to NRC and will pay an ongoing royalty percentage on sales of products derived from the CRAiLAR^® process of 3% to NRC with a minimum annual payment set at $14,190 (CDN$15,000). During our fiscal year ended December 31, 2009, we paid $7,095 (CDN$7,500) and accrued $7,095 (CDN$7,500) of the minimum annual royalty.

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On approximately June 13, 2007, we entered into a master agreement for technology development dated effective as of January 1, 2007, (the "Technology Development Agreement") with ARC. The purpose of the Technology Development Agreement is to further develop the CRAiLEX^® Technology for use in textile, composite and pulp applications. The Technology Development Agreement is an umbrella agreement for the development of the CRAiLEX^TM Advanced Materials products. Under the terms of the Technology Development Agreement, we are entitled to the option of an exclusive, worldwide royalty bearing license to use any new intellectual property developed pursuant to a project agreement.

We entered into the Technology Development Agreement with ARC to formalize the collaboration and licensing duties of each party regarding development of the technology related to our CRAiLEX^TM Advanced Materials; for the identification of associated potential opportunities, applications and projects related to the development of CRAiLEX^TM; and the subsequent manufacture, marketing, distribution and sale of CRAiLAR^® Series Fiber products (collectively, the "Project Agreements").

In accordance with the terms and provisions of the Technology Development Agreement:

• we shall initially pay to ARC US$9,846 (CDN$10,000) on April 1, 2007, (which has been paid) and subsequently $24,616 (CDN$25,000) per calendar quarter on the first day of each calendar quarter commencing July 1, 2007, which sums shall be used exclusively for the purpose of our contributions required pursuant to the Project Agreements all of which were paid in 2007;
• we shall provide work-in-kind of a value of CDN$25,000 per calendar quarter commencing April 1, 2007, as part of our contributions to the Project Agreements, which are contingent upon there being in effect one or more Project Agreements requiring financial contributions from and services by us;
• we shall pay to ARC the fees and expenses set out in each Project Agreement;
• with respect to all Project Agreements, we shall be entitled to an option for an exclusive worldwide royalty-bearing license to use the intellectual property developed pursuant to such Project Agreement; and
• we shall pay to ARC a royalty of 3% of the gross sales for the first $49,231,981(CDN$50,000,000) of gross sales and 1.5% of gross sales for all gross sales in excess of $49,231,981(CDN$50,000,000).

As at December 31, 2009, we accrued $55,000 for projects that completed in 2009. Since the signing of the Technology Development Agreement, we have paid $Nil to ARC relating to the 3% royalty fee. The Technology Development Agreement is in effect as long as there is an active Project Agreement.

During fiscal year 2007, CRAiLAR^® completed proof of concept testing on three separate bast fiber processing techniques with the NRC in Ottawa and the ARC in Edmonton. Proof of concept testing at the NRC included the completion of the first CRAiLAR^® Organic Fiber processing equipment which was constructed in Montreal and installed at the NRC facility in Ottawa. Ongoing tests with this equipment continue to establish the efficacy of CRAiLAR^® enzymatic processes, with early test fibers meeting the requirements of the textile producing industry.

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During the fourth quarter of 2007, and first three quarters of 2008, we began scaling CRAiLAR^® Organic Fiber processing equipment at a pilot plant facility in Montreal. The equipment became operational during the second quarter of 2008. During the third and fourth quarters of 2008, the pilot plant facility processed 1000kgs of fiber, a portion of which was sent to North Carolina State's Textile College, where it was spun and then knitted into a fabric suitable for T-shirt or other knit garments.

In May 2007, the ARC filed two provisional patent applications related to decortication and degumming technologies for which we have secured exclusive worldwide licensing rights from the ARC. We completed the installation of proprietary decortication equipment at the ARC. We completed proof of concept testing on the proprietary degumming technology at the NRC's Industrial Materials Institute in Montreal. Test results were in line with expectations and suitable for industrial use.

During 2009, our research and development efforts for CRAiLAR^® Organic Fibers was concentrated on producing fiber for spinning trials. Different variations of our enzymatic process, drying, carding and equipment was tested to optimize the fiber for spinning using traditional cotton spinning equipment. These research and development efforts led to the successful initial spinning trials of CRAiLAR^® organic fibers. The spinning trials were sponsored by Hanesbrands Inc. at North Carolina State University. We carded and spun a blended CRAiLAR^® yarn on a cotton ring spinning system with no modifications using CRAiLAR^® organic fibers technology. The resulting 20/1 Ne* ring spun yarn was knitted into a 5-ounces per square yard jersey fabric. Management believes that this was the first time hemp was processed on conventional cotton spinning equipment.

Through CRAiLEX^TM Advanced Materials we concentrated our research and development to refining our decortication technology and producing enough decorticated fiber for tests using our proprietary pulp. We engaged an independent testing company to verify the quality of our dissolving pulp and their test results confirmed our ARC lab results and showed the CRAiLEX^TM dissolving pulp has qualities far in excess of standard soft or hardwood pulps on the market. We also began commercial trials at a leading North American consumer paper products company where paper products made from our pulp were successfully made and further market applications for CRAiLEX^TM pulp were determined.

We have invested a considerable amount of time and effort into product research and development. Our research and development costs for our fiscal year ended December 31, 2009 totaled $482,052 (2008 - $548,231), of which approximately $ 476,763 was attributable to the CRAiLAR^® and CRAiLEX^TM technology development (2008 - $ 516,656).

In September 2005, we trademarked the term CRAiLAR^® to identify our proprietary technology platform relating to the engineering, processing and production of bast fibers including technology co-developed with and licensed from the NRC. Under the CRAiLAR^® Technology platform, we have secured the exclusive worldwide licensing rights to intellectual property arising from our collaborative research agreements. In May 2007, the NRC filed a patent application for intellectual property related to the extraction of hemp fibers, under the Patent Cooperation Treaty simultaneously seeking protection in up to 117 countries worldwide. We have secured the exclusive worldwide licensing rights from ARC related to the CRAiLEX^TM Technology for use in textile, composite and pulp applications.

We are currently evaluating partnering opportunities for multiple product development and commercialization of our proprietary CRAiLAR^® and CRAiLEX^TM Technologies for environmentally sustainable bast fiber processing and production. Exclusive international licensing rights to these patent applications allow us to protect our investment to date in the development of CRAiLAR^® and CRAiLEX^TM Technologies and confidently move forward in seeking an appropriate development and commercialization partner.

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We also own the web sites www.naturallyadvanced.com ,www.crailar.com and www.crailex.com.

Our primary target markets are the natural yarn, the cellulose pulp and composites markets. We believe that our technologies have the potential to redefine the platform of sustainable yarns, delivering a complete solution from a consumer's perspective. This implies market relevant performance attributes that are also cost benefit relevant, in a delivery that is sustainable and transparent. The current areas of focus, from a comparison and proof of concept perspective, are the cotton, high performance yarn and pulping industries. Each have entrenched market plays that are either toxic, resource limited, or potentially offensive to informed consumers. Our technologies provide enhanced performance solutions to these industries, whilst delivering a triple bottom line philosophy, respecting the human rights of employees, the environmental impact of our operations and fiscal responsibility to our shareholders. We believe that we offer two key opportunities for development:

• CRAiLAR^® Organic Fiber for textiles, which fiber will be 100% hemp (or other sustainable bast fiber) or a hemp blend available in a variety of weaves, textures, colors and applications; and
• CRAiLEX^TM Advanced Materials, which develops technologies for the processing of these cellulose-based fibers in pulp and paper, bioplastics and performance apparel industries.

We believe that our marketing model will drive a pull-through marketing strategy, which draws from detailed brand building and delivers that promise directly to consumers. Brand building strategies imply a strong direct to consumer platform, which will allow us to build equity in a consumer focused model ultimately allowing transfer of that equity to establishing branding partnerships with some of the worlds leading consumer brands. A secondary target market exists for the enzyme among hemp processors. We believe that the CRAiLAR^® enzymatic process will be very attractive for those currently processing via traditional costly methods with the largest source of these customers coming from India and China. We further believe that the CRAiLAR^® and CRAiLEX^TM processes will entice those in North America to ramp up hemp farming and/or processing as it is expected to create significant margins. Another target market will be partners. We believe that the creation of partnerships is an important strategy for a small company, and our public partnerships with NRC and ARC have been very important to us. We believe additional partnerships with consumer brands will also be important for the branding opportunities that these global brands will provide.

In November 2009 we hired a public relations firm to convey our compelling environmentally beneficial message.

It is expected that fibers and yarns produced with the CRAiLAR^® process will be competitively priced vis-a-vis current organic fibers and allow us to realize significant margins. Add to that, a transparent and certifiable sustainability platform, and we believe that CRAiLAR^® has the potential to establish a new industry standard.

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We recognize that our patented technologies have global, multi industry applications, and as such represents a significant opportunity for companies currently in those industries. Additionally, speed to market and being first to establish new industry standards is a crucial and strategic marketing advantage. With that understanding in mind, we are evaluating potential strategic partnerships with global leaders in the pulp and paper, yarn, fabric, carpeting, upholstery and composites industries.

In addition, we believe that the opportunity exists to partner with global brands, which we believe will allow us to leverage the considerable branding and marketing talent of global brands to increase the brand power of CRAiLAR^® and CRAiLEX^TM More than just an enzyme or pulping technology, we believe that CRAiLAR^® and CRAiLEX^TM can be consumer recognized performance brands that are valued and demanded by an informed public.

Our operations are subject to the effects of international treaties and regulations such as the North American Free Trade Agreement (NAFTA). We are also subject to the effects of international trade agreements and embargoes by entities such as the World Trade Organization. Generally, these international trade agreements benefit our business rather than burden it because they tend to reduce trade quotas, duties, taxes and similar impositions. However, these trade agreements may also impose restrictions that could have an adverse impact on our business, by limiting the countries from whom we can purchase our fabric or other component materials, or limiting the countries where we may market and sell our products.

Our operations are subject to various environmental and occupational health and safety laws and regulations. We believe that we are in compliance with the regulatory requirements of British Columbia. We will continue to make expenditures to comply with these requirements, and we do not believe that compliance will have a material adverse effect on our business. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal locations, or if contamination from prior activities is discovered at any of our properties, we may be held liable. While the amount of such liability could be material, we endeavor to conduct our operations in a manner that reduces such risks.

We currently employ seven employees, five are full-time employees and two are part-time.

Our transfer agent is Computershare Investor Services Inc., 510 Burrard Street, 2nd Floor, Vancouver, B.C. V6C 3B9.

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.

We have a history of operating losses, expect to continue to incur losses, may never be profitable, and must be considered to be in the development stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred losses totaling approximately $3,941,128 and $3,382,718, respectively, for fiscal years ended December 31, 2009 and 2008. As of December 31, 2009, we had accumulated deficits of $13,410,947. As at December 31, 2009 we had cash and cash equivalents of $421,452 and working capital deficit of $57,687. Further, we do not expect positive cash flow from operations in the near term. There is no assurance that actual cash requirements will not exceed our estimates.

Based upon our historical losses from operations, we will require additional funding in the future. If we cannot obtain capital through financings or otherwise, our ability to execute our development plans and achieve profitable operational levels will be greatly limited. Historically, we have funded our operations through the issuance of equity and short-term debt financing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including demand for CRAiLAR^® and CRAiLEX^TM technologies. Further, debt financing could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds, it would have a material adverse effect upon our operations.

Our Success is Dependent Upon the Acceptance of Our CRAiLAR^® and CRAiLEX^TM Technologies and Hemp Products.

Our success depends upon our achieving significant market acceptance of our CRAiLAR^® and CRAiLEX^TM Technology and demand for hemp products. Acceptance of our CRAiLAR^® and CRAiLEX^TM Technology will depend on the success of our promotional and marketing efforts and our ability to attract customers or partners. To date, we have not spent significant funds on marketing and promotional efforts, although in order to increase awareness of our hemp and other eco products we expect to spend a significant amount on promotion, marketing and advertising in the future. If these expenses fail to develop an awareness of our CRAiLAR^® and CRAiLEX^TM Technology and hemp products, these expenses may never be recovered and we may never be able to generate any significant future revenues. In addition, even if awareness of our CRAiLAR^® and CRAiLEX^TM Technology increases, we may not be able to produce enough product to meet demand.

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The loss of Messrs. Jason Finnis, Kenneth Barker, Guy Prevost or any of our key management personnel would have an adverse impact on our future development and could impair our ability to succeed. Our performance is substantially dependent upon the expertise of our Chief Operating Officer, Mr. Jason Finnis, and our Chief Executive Officer, Mr. Kenneth Barker, and other key management personnel and our ability to continue to hire and retain such personnel. Messrs. Finnis, Barker and Prevost spend substantially all, or most, of their working time with us and our subsidiaries. It may be difficult to find sufficiently qualified individuals to replace Mr. Finnis, Mr. Barker, Mr. Prevost or other key management personnel if we were to lose any one or more of them. The loss of Mr. Finnis, Mr. Barker or Mr. Prevost, or any of our other key management personnel could have a material adverse effect on our business, development, financial condition, and operating results. We do not maintain "key person" life insurance on any of our directors or senior executive officers.

Certain of our officers and directors may be subject to conflicts of interest. Certain of our directors devote part of their working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to other entities. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, certain of our directors may be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest. However, such directors have acknowledged their fiduciary duty to perform their duties in our best interest and those of our shareholders.

Governments or special interest groups may attempt to protect existing industries through the use of duties, tariffs or public relations campaigns. These efforts may adversely affect interest in and demand for our CRAiLAR^® and CRAiLEX^TM Technology.

Moreover, any negative changes to international treaties and regulations such as NAFTA and to the effects of international trade agreements and embargoes imposed by such entities such as the World Trade Organization which could result in a rise in trade quotas, duties, taxes and similar impositions or which could limit the countries from whom we can purchase component materials, or which could limit the countries where we or our customers might market and sell products created using CRAiLAR^® Technology, which could have an adverse effect on our business.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

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The loss of or inability to enforce our trademark CRAiLAR^® and other proprietary know-how, including our CRAiLAR^® and CRAiLEX^TM process, and trade secrets could adversely affect our business. We depend heavily on trade secrets and the design expertise of our employees. If any of our competitors copies or otherwise gains access to our trade secrets or develops similar technologies or processes independently, we would not be able to compete as effectively. The measures we take to protect our trade secrets and design expertise may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversions of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse affect on our business.

A significant portion of our expenses are incurred in Canadian dollars. As a result, appreciation in the value of these currencies relative to the United States dollar could adversely affect our operating results. Foreign currency translation gains and losses arising from normal business operations are credited to or charged against other income for the period incurred. Fluctuations in the value of Canadian dollars relative to United States dollars may cause currency translation gains and losses.

As of December 31, 2009, there were 33,354,215 shares of our common stock issued and outstanding. (As of April 8, 2010, there were 33,456,840 shares of our common stock issued and outstanding). Further, as of December 31, 2009 there were an aggregate of 4,724,125 Stock Options and 1,319,790 share purchase warrants outstanding that are exercisable into 4,724,125 shares of common stock (at a weighted average exercise price of $1.01) and 1,319,790 shares of common stock (at a weighted average exercise price of $1.70), respectively.

Any significant downward pressure on the price of our common stock as certain stockholders sell their shares of our common stock may encourage short sales. Any such short sales could place further downward pressure on the price of our common stock.

During our fiscal year ended December 31, 2009, our common stock has traded as low as $0.52 and as high as $1.75. In addition to volatility associated with Bulletin Board securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

• changes in the demand for hemp and other eco-friendly products;
• disappointing results from our marketing and sales efforts;
• failure to meet our revenue or profit goals or operating budget;
• decline in demand for our common stock;
• downward revisions in securities analysts' estimates or changes in general market conditions;
• lack of funding generated for operations;
• investor perception of our industry or our business prospects; and
• general economic trends.

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In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment.

Our Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control.

We are not authorized to issue shares of preferred stock. However, there are provisions of British Columbia law that permit a company's board of directors, without shareholder approval, to issue shares of preferred stock with rights superior to the rights of the holders of shares of common stock. As a result, shares of preferred stock could be issued quickly and easily, adversely affecting the rights of holders of shares of common stock and could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Although we have no present plans to issue any shares of preferred stock, the issuance of preferred stock in the future could adversely affect the rights of the holders of common stock and reduce the value of the common stock.

Because our stock is not traded on the NASDAQ National Market or the NASDAQ Small Cap Market, and because the market price of the common stock is less than $5 per share, the common stock is classified as a "penny stock." Our stock has not traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an "established customer" or an "accredited investor." This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our common stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid.

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We are a company incorporated under the laws of the Province of British Columbia, Canada and a majority of our directors and officers reside in Canada. Therefore, it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers. All or a substantial portion of such persons' assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. We have been advised by our Canadian counsel that there is doubt as to the enforceability, in original actions in Canadian courts, of liability based upon the U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or any of our directors or officers.

A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

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In addition, shares of our common stock have been listed on the TSX-V under the symbol "NAT.V") since July 8, 2008. The following table sets forth the high and low sales prices of our common stock on a quarterly basis for the periods indicated as quoted by the TSX-V.

As of April 8, 2010, there were approximately 66 shareholders of record of our common shares as reported by our transfer agent, Computershare Investor Services Inc. which does not include shareholders who shares are held in street or nominee names. We believe that there are approximately 300 beneficial owners of our common stock. There are no other classes of shares issued or outstanding.

No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not indicate the intention of paying cash dividends either on our common stock in the foreseeable future.

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We have one equity compensation plan: our 2008 Fixed Share Option Plan (the "2008 Plan"). As described below, the 2008 Plan adopted all options outstanding under our previous stock option plans, including our 2006 Stock Option Plan (the "2006 Plan"). The table set forth below presents information relating to our equity compensation plans as of December 31, 2009.

Effective September 24, 2008, our Board of Directors authorized and approved the adoption of our 2008 Fixed Share Option Plan (the "2008 Plan") as of such date, under which an aggregate of 6,058,766 of our shares, representing 20% of the issued and outstanding common share capital of the Company as of September 24, 2008, may be issued. As described below, all options issued under our Previous Option Plans (as defined below) are covered by our 2008 Plan.

Pursuant to certain consent resolutions of our Board of Directors dated for reference effective on each of July 9, 2004, May 10, 2005, and September 4, 2006, respectively, our Board of Directors had thereby adopted each of a certain "2004 Stock Option Plan", a then "Amended 2004 Stock Option Plan" and, finally, a then "2006 Stock Option Plan" (collectively, the "Previous Stock Option Plans") for the Company and, in conjunction therewith, and in accordance with the form of stock-based compensation agreements utilized with the Previous Stock Option Plans, an aggregate of 3,826,000 common shares of the common stock of the Company had been allotted, reserved for issuance, authorized to be issued and, when fully paid for and non-assessable, issuable to certain eligible participants under certain stock options (collectively, the "Previous Options") in and to the Company which have been granted and as of September 24, 2008 were outstanding under our Previous Stock Option Plans.

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In accordance with the Company's application for and listing of the Company's common shares on the TSX-V and the various policies of the TSX-V applicable to the Company resulting therefrom, our Board of Directors determined, in accordance with the policies of and subject to the prior approval of the TSX-V, to replace, in their entirety, each of our Previous Stock Option Plans and to substitute therefore and adopt our new 2008 Plan for the Company and, in conjunction therewith, to adopt all Previous Options of the Company under the 2008 Plan consequent upon the adoption of the same. As indicated above, our Board of Directors adopted the 2008 Plan effective as of September 24, 2008. Our shareholders approved the 2008 Plan at our annual general meeting held on August 5, 2009.

The purpose of the 2008 Plan is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain stock ownership in order to give these persons the opportunity to participate in our growth and success, and to encourage them to remain in our service.

The 2008 Plan is to be administered by our Board of Directors or a committee appointed by the Board of Directors, which shall determine, among other things:

• the persons to be granted options under the 2008 Plan;
• the number of options to be granted; and
• the terms and conditions of the options granted.

An option may not be exercised after the termination date of the option and may be exercised following the termination of an eligible participant's continuous service only to the extent provided by the terms of the 2008 Plan.

Based on the terms of the individual option grants, options granted under the 2008 Plan generally expire three to ten years after the grant date and become exercisable over a period of one year based on continued employment, either with monthly vesting or upon achievement of pre-determined deliverable.

On October 10, 2008, we filed a registration statement on Form S-8 relating to a maximum of 6,058,766 shares of common stock, without par value, issuable directly by us under our 2008 Plan or pursuant to the exercise of options that have been or may be granted under the 2008 Plan (including options granted under our Previous Stock Option Plans as described above).

Effective on September 21, 2009, we closed a non-brokered private placement offering for gross proceeds of approximately $916,366 (collectively, the "Private Placement Offering") with certain United States and non-United States residents (collectively, the "Investors"). In accordance with the terms and provisions of the Private Placement Offering, we issued to the Investors an aggregate of 833,060 units at a per unit price of $1.10 (the "Unit") in our capital. Each Unit was comprised of one share of restricted common stock and one-half of one non-transferrable share purchase warrant (the "Warrant"). Each whole Warrant is exercisable at $1.38 per share until September 21, 2012.

The Units under the Private Placement were sold to approximately 8 United States Investors and 25 non-United States Investors in reliance on Regulation S promulgated under the Securities Act. The Private Placement Offering has not been registered under the Securities Act or under any state securities laws and may not be offered or sold without registration with the SEC or an applicable exemption from the registration requirements. The per share price of the Units was arbitrarily determined by our Board of Directors based upon analysis of certain factors including, but not limited to, the listing of our shares on the TSX-V, our stage of development, industry status, investment climate, perceived investment risks, our assets and net estimated worth. The Investors executed subscription agreements and acknowledged that the securities to be issued have not been registered under the Securities Act, that they understood the economic risk of an investment in the securities, and that they had the opportunity to ask questions of and receive answers from our management concerning any and all matters related to acquisition of the securities.

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In connection with the non-brokered Private Placement Offering, we paid Canaccord Capital Corporation a finder's fee of $25,820 (CDN$25,679) and 28,833 finder's warrants and Security Research Associates Inc. $42,083 (CDN$41,852) and 34,962 finder's warrants. Each finder's warrant is exercisable for a Unit at a price of $1.10 expiring September 21, 2012. Each unit consists of one share of restricted common stock and one-half of one non-transferrable Warrant. Each full Warrant entitled the agent to purchase an additional share of common stock at $1.38 until September 21, 2012.

The following discussion and analysis of our results of operations and financial position should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Report. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts in this section are in U.S. dollars unless expressly stated otherwise.

The matters discussed in these sections that are not historical or current facts deal with potential future circumstances and developments. Such forward-looking statements include, but are not limited to, the development plans for the Company's growth, trends in the results of the Company's development, anticipated development plans, operating expenses and the Company's anticipated capital requirements and capital resources. As such, these forward-looking statements may include words such as "plans", "intends", "anticipates", "should", "estimates", "expects", "believes", "indicates", "targeting", "suggests" and similar expressions. The actual results are expected to differ from these forward-looking statements and these differences may be material.

During fiscal 2009, we closed our apparel business, which operated under the brand name "HTnaturals". The apparel business is classified as discontinued operations in our consolidated financial statements. We decided to close our apparel division to focus on our CRAiLAR^® and CRAiLEX^TM technology. The warehouse lease was not renewed, the sales team was terminated and all other elements of our apparel division were discontinued.

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Our net operational loss from continuing operations during the twelve-month period ended December 31, 2009, was ($3,281,182) compared to ($3,130,580) during the twelve-month period ended December 31, 2008 (an increase in loss of $150,602). The increase in loss was due to a write down of equipment and an increase in stock based compensation expense.

During the twelve-month period ended December 31, 2009, we recorded operating expenses of $3,118,988 compared to operating expenses of $3,130,580 for the same period in 2008. Operating expenses consisted of:

• $228,763 (2008: $228,509) in advertising and promotion,
• $28,447 (2008: $14,990) in amortization and depreciation, an increase of 89.8%;
• $693,923 (2008: $633,239) in consulting and contract labour, an increase of 9.6%;
• $396,839 (2008: $342,613) in general and administrative, an increase of 15.8%;
• $139,115 (2008: $105,456) in interest, an increase of 31.9%;
• $318,586 (2008: $434,599) in professional fees, a decrease of 26.7%;
• $482,052 (2008: $548,231) in research and development, a decrease of 122%; and
• $831,263 (2008: $822,943) in salaries and benefits, an increase of 1.0%.

Consulting and contract labor expenses increased to $693,923 for the twelve-month period ended December 31, 2009, from $633,239 compared to the same period in 2008 due to an increase in stock based compensation.

General and administrative expenses increased to $396,839 for the twelve-month period ended December 31, 2009, compared to $342,613 for the same period in 2008. The increase in general and administrative expenses was primarily due to increased travel costs and realized currency exchange losses.

Interest expenses increased to $139,115 for the twelve-month period ended December 31, 2009, compared to $105,456 for the same period in 2008. The increase is mostly attributable to the increase in the loan from a director.

Professional fees were $318,586 for the twelve month period ended December 31, 2009, compared to $434,599 for the same twelve month period in 2008. This decrease in 2009 was primarily due to the fact that the we had incurred certain one-time legal and accounting fees in 2008 related to our listing on the TSX-V which were not applicable in 2009.

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Research and development costs were $482,052 for the twelve-month period ended December 31, 2009, compared to $548,231 for the same twelve-month period in 2008. During these two years, research and development was mainly focused on the refinement of the CRAILAR^® Organic Fiber process, and substantial up-front costs were incurred in 2008 which were not applicable in 2009.

Salaries and benefits expenses increased to $831,263 for the twelve-month period ended December 31, 2009, compared with $822,943 for the same period in 2008. Although there was a reduction in the number of staff, there was an increase in stock based compensation which is the cause of this increase in expense.

During the year ended December 31, 2009 we had other income of $(1,177) compared to $nil for the same period in 2008. During the year ended December 31, 2009 we also incurred a write down of equipment of $163,371 compared with $nil for the same period in 2008. This write down was with respect to equipment used in the CRAILAR^® pilot plant. It was originally thought the equipment could be used in future Organic Fiber production, however, the process changed during the year and the equipment was deemed obsolete.

Discontinued operations loss increased to ($659,946) for the twelve month period ended December 31, 2009, compared with ($252,138) for the same period in 2008 as we wound up our apparel business.

Our net loss during the twelve-month period ended December 31, 2009, was ($3,941,128, or $0.12 per share) compared to ($3,382,718, or $0.12 per share) during the twelve-month period ended December 31, 2008, which represents an overall increased net loss of 16.5%. This increase in net loss was primarily due to increased travel, stock based compensation and general and administrative expenses and the write-down of equipment, as described above. For the twelve-month period ended December 31, 2009, the weighted average number of shares outstanding was 32,939,968 compared to 29,378,370 at December 31, 2008.

For the twelve-month period ended December 31, 2009, our current assets were $523,589 (2008 - $1,452,860) and our current liabilities were $581,276 (2008 - $1,466,722) which resulted in a working capital deficit of $57,687 (2008 - working capital deficit of 13,862). As at December 31, 2009, total assets were $740,845, consisting of:

• $421,452 in cash and cash equivalents;
• $11,552 in accounts receivable;
• $48,367 in prepaid expenses and other;
• $42,218 in current assets of discontinued operations;
• $132,185 in property and equipment; and
• $85,071 in intangible assets.

As at December 31, 2009, total liabilities were $1,709,623 and were comprised of:

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• $234,313 in accounts payable;
• $346,963 in accrued liabilities;
• $928,347 in due to related party; and
• $200,000 in note payable.

Stockholders' Equity decreased by $1,288,494 from $319,716, at December 31, 2008, to $(968,778) at December 31, 2009.

The cash flows used in operations of continuing operations for the twelve-month period ended December 31, 2009, were ($2,022,795) compared with ($2,493,880) for the same period in 2008. Cash flows used in operations for the twelve-month period ended December 31, 2009, consisted primarily of a net loss of ($3,281,182) from continuing operations, offset by certain items, including a write down of equipment of $163,371 (2008 - $Nil), decrease in accounts receivable of $102,236 (2008 - $6,051), stock based compensation of $816,865 (2008 - $672,062), and an increase in accrued liabilities of $129,318 (2008 - $106,762).

The cash flows used in investing activities for the twelve-month period ended December 31, 2009, were ($75,496) compared to ($215,274) for the same period in 2008. Cash flows used in investing activities consisted of a purchase of property and equipment totalling $28,938 in 2009 (2008 - $209,660) and the acquisition of trademarks and licenses totalling $46,558 in 2009 (2008 - $5,614).

Cash flows provided by financing activities for the year ended December 31, 2009, totalled $1,877,931 versus $2,637,477 during the same period in 2008. The primary source of cash flows from financing activities during these two periods was the issuance f capital stock. The Company issued $1,704,521 of capital stock in 2009 (2008 - $2,553,558).

The effect of exchange rates on cash resulted in an unrealized gain of $109,434 for the twelve months ended December 31, 2009, as compared with an unrealized loss of $298,322 in the same period of 2008.

Management expects to continue expanding its business platform through the development and commercialization of CRAiLAR^® Organic Fibers and CRAiLEX^TM Advanced Materials technology for bast fiber processing and production, with resulting textile, composite, pulp and fiber products expected to address inherent environmental problems currently affecting these industries.

CRAiLAR^® Organic Fibers technology developed with the National Research Council (NRC) of Canada is a clean, sustainable, environmentally responsible organic fiber replacement that grows naturally, without excessive water and pesticide usage. CRAiLAR^® will be used in union with cotton, and when blended together, will create a much better performing fiber than cotton alone, taking on some of the characteristics of CRAiLAR^®, which are durability, superior dye characteristics, and less shrinkage.

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CRAiLEX^TM Advanced Materials technology, developed with the Alberta Research Council, creates a superior dissolving pulp from the hemp plant to be used in performance yarns, industrial filters and absorbent pulp and paper products.

Through our innovative CRAiLAR^® and CRAiLEX^TM processes, the vast potential benefits locked up in hemp and other bast fiber crops will finally be realized after years of unnecessary stigma and regulations. Industrial hemp, which is grown specifically for commercial use in the textile and other industries, has none of the negative aspects of the plant's infamous cousin, and is loaded with environmental and performance benefits.

Management recognizes the disruptive potential that the CRAiLAR^® and CRAiLEX^TM technology platform's possesses for global textile, composite material, pulp and paper, and energy markets. As such, management is focusing on our growth through the commercialization of CRAILAR^® and CRAiLEX^TM. Management believes that an ongoing relationship in the form of joint ventures with established market leaders in both the CRAiLAR^® Organic Fibers division and the CRAiLEX Advanced Materials division would be the optimum commercialization strategy. Currently, testing and further development of fiber is taking place in conjunction with leading global brands. Last year we reported that at the date of our Annual Report for our year ended December 31, 2008, no agreements had been signed with any potential partner. We are pleased to report the following.

In July of 2009 we announced Joint Development Agreements with Hanesbrands Inc., and Georgia Pacific Consumer Products, for our CRAiLAR^® Organic Fiber technology evaluation, and commercial scale up capability. Since then, we have conducted increasingly larger bulk commercial trials in both partners' facilities, to provide evidence of our ability to seamlessly integrate into existing natural fiber operations, and to validate the performance attributes of our organic fiber, over the materials they would be replacing. We are in the final stages of our fiber evaluation, and expect to proceed to discussions with regard to commercialization, once our partners have completed their internal analysis and planning.

In addition to signing our joint development agreements with Hanesbrands and Georgia Pacific, we licensed a third party processor of natural fibers, Littlewoods Inc. of Philadelphia, to run interim scale quantities of up to 40,000 pounds per week of CRAiLAR^® Organic Fiber, to feed our commercialization scale up and additional market development plans, in denim, work wear, carpeting and home furnishings. To support that strategy, we also licensed our first commercial spinner of CRAiLAR^® Organic Fiber yarns, Patrick Yarns of Kings Mountain, North Carolina. To date Patrick Yarns have shown CRAiLAR^® Organic Fiber at the Outdoor Retail Show, and are sampling fiber to customers in the denim, carpeting and home furnishings industries. In addition, they are capable of supporting our development partners with scale up quantities to commercialization, should they be called upon to do so.

Finally, the testing and evaluation of our CRAiLEX^TM Advanced Materials pulping technology continues with a leading North American pulp and paper company, having produced commercial grade results. We expect to move to commercialization in this division, once our partner has completed their evaluation and go to market plans.

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As a result, we closed our HTnaturals business at the end of the third quarter of 2009, and continued to sell off our remaining inventory over the balance of the year. We have now fully transitioned to a "Green Tech" organic fiber company, with industry changing technologies in the natural fiber and forest pulping industries.

While the Company expects that profitable operations will be achieved in the future, there can be no assurance that revenue, margins, and profitability will increase, or be sufficient to support operations over the long term. Management expects that the Company will need to raise additional capital to meet short and long-term operating requirements. Management believes that private placements of equity capital and debt financing may be adequate to fund the Company's long-term operating requirements. Management may also encounter business endeavors that require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash. If the Company raises additional funds through the issuance of equity or convertible debt securities other than to current shareholders, the percentage ownership of current shareholders would be reduced, and such securities might have rights, preferences or privileges senior to the Company's common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict business operations. Management are continuing to pursue external financing alternatives to improve the Company's working capital position and to grow the business to the greatest possible extent.

A significant commitment for us during fiscal year 2009 is the principal amount of $200,000 due and owing pursuant to a secured and subordinated loan agreement with Rana Corp. ("Rana"). The term of the loan is from July 21, 2007, until April 22, 2009, at 12% per annum, calculated semi-annually, with payments due semi-annually. An extension of the amount due on July 22, 2009 has been granted to January 22, 2011. As at December 31, 2009, accrued interest on the loan was $102,169, which was included in accrued liabilities. The security granted to Rana is: (i) a fixed charge and a security interest in our existing accounts receivable insurance policy obtained through Export Development Canada and St. Paul Guarantee Insurance Company respecting losses sustained by us; and (ii) a floating charge and a security interest in all of our assets, subject and subordinate to any borrowing by us with banks and lending institutions.

Another significant commitment for us in fiscal year 2008 is the amount of $700,000 advanced by a director to facilitate the production of the new apparel designs. The loan has an interest rate of 12% with a 1% charge for each advance. The loan matured on February 28, 2009. On February 16, 2009 the director advanced the Company an additional $200,000 for a total amount due to the director, of $900,000. A new secured loan agreement, with an interest rate of 12% is due in February, 2011 and is for the total amount outstanding ($900,000).

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In October 2007, the Company entered into a new joint collaboration agreement with the NRC to continue to develop a patentable enzyme technology for the processing of hemp fibres. The agreement is for three years and expires on May 9, 2010. On February 19, 2010, the Company signed an amendment to the agreement which will now expire on May 9, 2012. The Company will continue its joint collaboration of enzyme technology with the NRC, however the research will refocus on cellulose technology for the production of lignocellulosic ethanol. The NRC is to be paid as it conducts work on the joint collaboration. There are no further costs or other off-balance sheet liabilities associated with the NRC agreement.

Over the term of the amended agreement, the Company will pay the NRC a total of $280,536 divided into nine payments up to May 9, 2012.

On November 1, 2006, the Company entered into a technology license agreement with the NRC. The License Agreement provides the Company a worldwide license to use and sublicense the NRC technology called CRAILAR®. The Company paid an initial $20,525 (CDN $25,000) fee and will pay an ongoing royalty of 3% on sales of products derived from the CRAILAR® process to the NRC with a minimum annual payment set at $14,190 (CDN$15,000) per year. During the year ended December 31, 2009 the Company paid $7,095 (CDN$7,500) and accrued $7,095 (CDN$7,500) of the minimum annual royalty.

In June 2007, the Company entered into a Master Agreement For Technology Development with the Alberta Research Council ("ARC") (the "Technology Agreement") to further develop and commercialize bast fiber technology. The Technology Agreement is intended to act as an umbrella agreement for further bast fiber development planned to be performed by ARC under different Project Agreements. Under the terms of the Technology Agreement, commencing July 1, 2007, the Company will pay $20,525 (CDN $25,000 ) per quarter to ARC and can terminate the agreement with 90 days notice, unless there are Project Agreements in effect, in which case this Technology Agreement shall expire when there are no longer any Project Agreements in effect. In addition to the above payments, we will be responsible for providing work-in-kind with a value of $20,525 (CDN $25,000) per calendar quarter commencing with the first Project Agreement. During 2009 the Company paid ARC for specific tasks to further the development of ARC's Technology, the amount paid was $8,987 (CDN - $9,000). Under the terms of the Technology Agreement the Company will be entitled to an option for an exclusive, worldwide, royalty-bearing license to use any new intellectual property developed pursuant to a Project Agreement. The royalty based on this option will be 3% of gross sales for the first $50,000,000 and 1.5% of gross sales on excess of $50,000,000. The Technology Agreement is in effect as long as there is an active Project Agreement.

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On November 25, 2009, the Company signed a service agreement with a company to provide public relations services. Pursuant to the agreement, the Company agreed to pay $7,500 per month for a period of one year ending October, 2010. Either party may terminate the agreement with 30 days notice.

On August 24, 2009, the Company signed an agreement with its CEO who will receive $15,000 a month for the period of one year and 500,000 options that will not vest until certain conditions are met. The agreement can be cancelled by either party with 30 days notice. As at December 31, 2009, none of the options had vested.

On September 2, 2008, our Board of Directors authorized the execution of a twelve-month agreement with Lippert/Heilshorn & Associates, Inc. ("LHA"), to augment our shareholder and investor relations activities. This agreement came into effect with approval from the TSX-V on October 2, 2008. In accordance with the further terms and provisions of this agreement, we shall:

• pay to LHA a monthly retainer in the amount of $15,000 for the first two months of the agreement;
• pay to LHA a monthly retainer in the amount of $9,000 for the remainder of the contract; and
• grant to LHA stock options to acquire up to an aggregate of 100,000 shares of our common stock for a period of three years from the date of grant at an exercise option price of $1.25 per share and vesting as to exercise equally over 18 months from the date of grant.

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In June 2009, the FASB issued the Accounting Standards Codification, which establishes a sole source of U.S. authoritative GAAP. The Codification is meant to simplify user access to all authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into approximately ninety accounting topics within a consistent structure; its purpose is not to create new accounting and reporting guidance. The adoption of this guidance did not have an effect on the Company's consolidated results of operations, financial position or cash flows.

Because we are a smaller reporting company, we are not required to provide the information required by this Item.

Report of Independent Registered Public Accounting Firm Dated April 7, 2010.

Consolidated Balance Sheets as at December 31, 2009 and December 31, 2008.

Consolidated Statements of Operations For Fiscal Years Ended December 31, 2009, December 31, 2008 and For the Period Ended October 1, 2009 (date of re-entry into the development stage) to December 31, 2009.

Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2009, December 31, 2008 and For the Period Ended October 1, 2009 (date of re-entry into the development stage) to December 31, 2009.

Consolidated Statement of Stockholders' Equity (Deficits).

Notes to the Consolidated Financial Statements.

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