SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2002

Commission File No. 0-20101

Urecoats Industries Inc.

(Exact name of Registrant as Specified in its Charter)

Delaware

13-3545304

(State of Incorporation)

 (I.R.S. Employer Identification No.)

718 South Military Trail

33442

Deerfield Beach, Florida  33442

(Zip Code)

(Address of principal executive offices)

(954) 428-8686

(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Act:  None

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

Title of each class

Name of each exchange on which each class registered

Common Stock, $0.01 par value

American Stock Exchange

                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, and (2) has been subject to such filing requirements for the past 90 days.  Yes [ X ]   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 an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes [ X ]   No [    ].

                The aggregate market value of the registrant's common equity held by non-affiliates based on the price at which the common equity was last sold as of the last business day of the registrant's most recently completed second fiscal quarter was $26,853,654.

                Common Stock outstanding as of March 24, 2003 - 14,071,254 shares.

DOCUMENTS INCORPORATED BY REFERENCE

                Part III incorporates certain information by reference from the registrant's proxy statement for the annual meeting of stockholders to be held on May 23, 2002, which proxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the close of the registrant's fiscal year ended December 31, 2002.

TABLE OF CONTENTS

Page

PART I

Item 1.

Business

3

Item 2.

Properties

8

Item 3.

Legal Proceedings

8

Item 4.

Submission of Matters to a Vote of Security Holders

9

Item 4A.

Executive Officers

9

PART II

Item 5.

Market for Registrant's Common Equity and Related Stockholder Matters

Item 6.

Selected Financial Data

11

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

17

Item 8.

Financial Statements and Supplementary Data

18

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III

Item 10.

Directors and Executive Officers of the Registrant

50

Item 11.

Executive Compensation

50

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

50

Item 13.

Certain Relationships and Related Transactions

50

Item 14.

Controls and Procedures

50

PART IV

Item 15.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

51

SIGNATURES

52

CERTIFICATIONS

54

REPORT OF MANAGEMENT

48

EXHIBITS

57

INDEPENDENT AUDITORS' REPORT

49

INDEX OF EXHIBIT

56

PART I

                As used in this report, "Urecoats" and the "Company" or "Us" or "We" refer to Urecoats Industries Inc. and its subsidiaries, unless the context otherwise requires.

Item 1.   Business.

Our Business

Urecoats Industries Inc. is a manufacturing, sales, marketing, and technology-driven product company, engaged, through its subsidiaries, in the sales, marketing, development, manufacturing, acquisition, and distribution of specialty sealant and coating products for the building products and construction industries.

Our Internet website address is www.urecoats.com. We make our periodic and current reports, together with amendments to these reports, available on our website, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission.  We have also adopted a Code of Ethics applicable to all officers, directors, and employees, which is posted on our website.

We installed a new executive team in 2001 to build an infrastructure for facilitating our exit from a four-year period largely characterized by research and development.  We added seasoned and accomplished executives in 2002 and 2003 to strengthen our overall organization.  We introduced our first Urecoats™ brand, RSM Series™ products, UrecoatsRSM-100™ and BlueMAX™ spray application system ("Flagship Products"), in the Southeast United States during the last quarter of 2001, nationally during the first quarter of 2002, and focused on the Southeast United States throughout the remainder of 2002, to roofing contractors.  In September 2001, we acquired additional products known as our Infiniti™ brand, Infiniti Series™ products, for roofing, waterproofing, and painting contractors.  We are currently penetrating our target markets in the building products and construction industries with our Urecoats™ and Infiniti™ brands, and other produ cts.

The following table sets forth, for the periods indicated, the net revenues from our continuing operations:

Comprehensive Product Line

With our Urecoats™ and Infiniti™ brands, and other goods, we offer a comprehensive line of products as follows:

   Urecoats™ Brands

          RSM Series™.  We acquired all right, title and interest in two formulas, including certain technologies for their manufacture and application in 1997, and spent four years completing their development ("RSM Technologies™"). These RSM Technologies™ form the foundation of our exceptional RSM Series™ products incorporating recycled material in their composition, which provide cost-effective and eco-useful weatherproofing solutions for a variety of applications in many industries within the building products and construction industries, such as roofing, waterproofing, pipeline, and bridge decks.  We differentiate the various products created from our RSM Technologies™ in series for different markets.  See Research and Development for current developments.

          UrecoatsRSM-100™, a plural component interpenetrating polymer network composition made for the roofing markets, creates a seamless water resistant elastomeric membrane that fully adheres to a variety of roofing surfaces, substrates and structures ("RSM-100"). Utilizing crumb rubber from recycled tires in its formula, RSM-100™ exhibits exceptional physical and adhesion properties, and is a durable high performance roof sealant and coating.

          UrecoatsRSM-200™, a plural component interpenetrating polymer network composition made for the waterproofing markets, creates a seamless water resistant elastomeric membrane that fully adheres to a variety of waterproofing surfaces and substrates ("RSM-200™").  Utilizing crumb rubber from recycled tires in its formula, RSM-200™ exhibits exceptional physical and adhesion properties, and is a durable high performance waterproofing sealant.

          UrecoatsRSM-550™, a plural component corrosion inhibiting interpenetrating polymer network composition, creates a monolithic barrier that fully adheres to a variety of steel surfaces ("RSM-550"). Utilizing crumb rubber from recycled tires in its formula, RSM-550™ exhibits exceptional physical and adhesion properties, and, like the RSM-550™, is a durable high performance pipeline coating.  We entered into a strategic partnership with a leading pipeline manufacturer and are marketing a jointly branded product known as "Reillycoat™" described elsewhere in this report.  See Sales and Marketing.

          UrecoatsRSM-700™, a plural component corrosion inhibiting interpenetrating polymer network composition, creates a monolithic barrier that fully adheres to a variety of concrete and steel bridge deck structures and surfaces ("RSM-700"). Utilizing crumb rubber from recycled tires in its formula, RSM-700™ exhibits exceptional physical and adhesion properties and is a durable high performance bridge deck sealant.

          BlueMAX™ is a proprietary and patent pending plural component hot spray system developed and required for creating and applying the RSM Series™ plural component interpenetrating polymer network composition products on-site.  Our first BlueMAX™ model is referred to as "Model 230". The BlueMAX™, Model 230™ application system mixes and meters the plural components of the RSM Series™ formulae, and the resulting product is spray applied hot ("BlueMAX™").

     Infiniti™ Brands

           Infiniti Series™.  We acquired all right, title and interest in certain intellectual property and formulas, including certain technologies for their manufacture, when we purchased Infiniti. These technologies form the foundation of our Infiniti™ brand products, which we refer to as our "Infiniti Series™".  The Infiniti Series™ products provide cost-effective weatherproofing solutions to roofing, waterproofing, and painting contractors.

     Other Goods

     We also sell other products and equipment supplied from manufacturers and suppliers, including spray polyurethane foam, paints, clear sealers, spray equipment, and supplies, to roofing, waterproofing, painting, and general contractors.

Discontinued Products

We developed a flexible, high quality, single component thermoplastic elastomeric compound as part of our URX-300 Series™ product line in 2001, which was discontinued in 2002.  No sales occurred for this product series.

Subsidiaries

We formed a wholly-owned subsidiary, Urecoats Manufacturing, Inc. in 2001, for manufacturing, marketing, and sales of our RSM Series™ products, and for further research on our core RSM Technologies™ for existing and cross-over industry applications, as well as development of new products that complement these technologies.  We acquired Infiniti Products, Inc. (f/k/a Infiniti Paint Company, Inc.) in 2001, a Florida based adhesives, sealants, coatings, paints, and foam distributor, which provided us with a local South Florida presence to begin penetration of the roofing and waterproofing markets with our Flagship Products direct to our targeted customers, while Infiniti continued to market, sell, and distribute products to its targeted customers, which now includes one of North America's largest retail paint chains. We began our strategic plans to develop a proprietary distribution channel serving the Southeast and Northeast United States upon consummation of our acquisition of I nfiniti and opened our second distribution location in Orlando, Florida using the Infiniti model at the end of 2001.  In 2002, we fortunately established a strategic relationship with Bradco Supply Corp., a Forbes Private 500, roofing material supplier with over 105 locations at this time covering the Southeast and Northeast United States serving our target markets and customers and subsequently abandoned any further activities and plans related to developing our own proprietary distribution channel through Infiniti.

Manufacturing

We continue to perform light manufacturing at present for Infiniti and plan to increase manufacturing for select products to improve profit margins.  Where appropriate, we use high volume, quality oriented, and reputable outside vendors in multiple locations across the United States to meet our Comprehensive Product Line's manufacturing needs.  This strategy facilitates cost-effective manufacturing and optimizes our material, transportation, and delivery costs. We use a variety of specialty and other chemicals in our products. The materials required for manufacturing our Comprehensive Product Line are in large supply and available around the globe. Our current suppliers can meet and exceed all of our present expected sales volumes for 2003.

Distribution

We developed a strategic affiliation with Bradco Supply Corp., a Forbes Private 500 roofing material supplier with more than 105 locations throughout the Eastern United States at this time, for handling distribution of our RSM-100™ to roofing contractors throughout the Eastern United States.  We are currently negotiating with distributors to handle our RSM-200™ warehousing, delivery, and servicing requirements.  We have entered into a strategic partnership with Reilly Industries, Inc., which will handle distribution of our jointly branded Reillycoat™ to pipeline participants.  We are still exploring distribution for anticipated RSM-700™ sales based upon information received from the Federal Highway Administration Office of Infrastructure Research and Development for the bridge deck industry.  We handle distribution of our Infiniti Series™ and other products locally in South Florida, through our Infiniti location.  Our ultimate aim is to market and sell our Comprehensive Product Line, and new products currently under development now or acquired hereafter by us, in major geographic markets in the United States and abroad.

Sales and Marketing

Marketing and sales efforts during the first half of 2002 were promising and we kept pace with our anticipated growth. However, the continued fallout of the United States financial markets from the terrorists attacks of September 11, 2001 and the decline in consumer confidence impacting the overall macro economic environment resulted in a downward trend within the overall roofing industry (for the first time in this industry in many years).  During the second half of 2002, roofing contractors, including our roofing contractor customer base, began experiencing significant revenue decreases almost without exception.  The original selling prices for our BlueMAX™ therefore became a serious barrier to entry to roofing contractors which found it increasingly difficult to justify making a significant capital expenditure for the BlueMAX™ during a time when business was soft.  During the second half of 2002, to adapt to the changing market conditions, we increased our research and development activities on our core RSM Technologies™ and began development of our next generation RSM Series™ products.  These new technologically advanced products are expected to complement our existing technologies when completed, and should thereby reduce our barriers to entry in our targeted markets. See Research and Development below.  In addition, our sales and marketing efforts drew significant attention from our competitors in the roofing industry which sought, and continue to seek, to discredit us based on the recent entry of our Flagship Products in our targeted markets (in terms of years in the marketplace and jobs completed by our contractor base).  Although our primary focus for 2003 remains on the commercial low-slope part of the roofing industry with  our Flagship Products, we are also implementing our strategy to diversify our exposure by offering additional RSM Series™ products to additional industries, such as waterproofing, pipeline, a nd bridge deck. We supplement our sales and marketing activities by participation in industry trade shows and conferences, literature, direct mail, website and advertising in local industry publications.

     Roofing Industry.  We believe we have successfully created brand awareness about our RSM-100™, which has excellent characteristics for the roofing industry.  We continue to target the commercial and industrial roofing industry as our initial market segment. According to the National Roofing Contractors Association's 2001-2002 Annual Market Survey, roofing contractors participating in the survey predicted total industry roofing sales at $31.42 billion in 2002.  We believe these statistics are markedly less for 2002 based on the decline in the roofing industry during the latter of 2002.  The months of November through April tend to be slow for a majority of roofing contractors throughout the nation due to cold temperatures and precipitation.  Urecoats maintains a regional sales and marketing team with our sales efforts and promotional activities primarily aimed at roofing contractors for our Flagship Products and general con tractors for our Comprehensive Product Line. We advertise in professional journals, trade publications, and maintain a direct mail program.  We participate in regional and national trade shows to maintain our existing brand awareness and for introducing our various RSM Series™ products to roofing, waterproofing and other targeted contractors throughout the United States and abroad. We use independent sales representatives, in conjunction with our regional sales and marketing team, for sales and marketing purposes, and generally target: (a) Building Owners; (b) Architects; (c) Engineers; (d) Roofing Consultants; (e) Specifiers; and (f) Contractors. We are implementing a comprehensive marketing campaign, which includes a wide variety of video, audio and print mediums.  We emphasize a strong commitment to complete customer satisfaction, technologically advanced products, use of recycled material, and state-of-the-art application systems.  In anticipation of our new technology roll-out and af ter extensive strategic discussion and negotiation sessions with our existing raw material suppliers which resulted in significant reductions in our raw material costs for our existing three part formula, we decided to reposition the existing RSM-100™ product and associated BlueMAX™ at a low rather than the current medium pricing level, which has made our Flagship Products much more competitive and stimulated sales activity.

     Waterproofing Industry.  We have found that a different approach is required for penetrating the ultimate waterproofing customer than that which we use for the roofing customer.  Although we use the same sales, marketing, and brand awareness program that we use for penetrating the roofing industry, we are in the process of building an independent sales representative network separate and apart from our roofing network for getting access to the decision makers in the waterproofing industry.  We have initiated negotiations with regional waterproofing distributors in the Southeast United States and expect to increase our penetration of this industry throughout the 2003 year.  Of the $5.9 billion United States construction chemical industry, approximately $2.5 billion will be spent on waterproofing, weatherproofing and damp-proofing products.  This includes vertical and horizontal waterproofing, above grade, below grade, positive side, nega tive side, and blind side applications in both the commercial and residential markets.  Within this industry, annual gains are expected to accrue from increased chemical use per project and a shift toward higher value formulations offering more eco-friendly products and greater ease of use. Protective coatings and sealers will remain the largest category within this market.  Industry market analysis for the Construction Chemicals market anticipates the demand for construction chemicals used in on-site applications will advance 5.8 percent per year to $7.8 billion in 2004, despite a slowdown in new construction.  Protective coatings and sealers will remain by far the largest product category in the market segment, accounting for well over 40 percent of overall demand in 2004, due to their nearly universal use in construction applications. The fastest growing outlet for construction chemicals is the nonbuilding segment, due in large part to substantial increases in federal outlays for road and b ridge construction.

     Pipeline Industry.  In order to ensure our entry into this industry, we signed an exclusive five-year market preparation and distribution agreement with 106 year-old privately-held Reilly Industries, Inc., which is widely recognized as a worldwide leader in the manufacturing and distribution of coatings and chemicals to the pipeline industry.  We are building upon the relationship with Reilly to develop market awareness through association membership and technical committee participation, joint tradeshow participation and direct customer presentations.  Reilly and Urecoats recently introduced "Reillycoat" at the National Alliance of Corrosion Engineers ("NACE") convention in San Diego, California, and believe pipeline participants are beginning to take notice and interest is increasing. Urecoats contributes its advanced RSM Technologies™ while Reilly adds its 106 year old depth of understanding regarding the best methods of market e ntry in the pipeline industry.  With exceptional adhesion properties, zero cathodic disbondment, low moisture penetration rates, and attractive mechanical and corrosion protection characteristics, Reillycoat™ products are suitable as barrier coatings, providing cathodic and corrosion protection to buried and submerged steel pipelines, for serving the oil, gas and water pipeline industry. A recently released two-year study conducted by NACE estimates the annual direct cost of corrosion in the United States to be $276 billion, equal to 3.1% of the Gross Domestic Product. It has been estimated that 25-30%, or $70-80 billion could be saved by using state-of-the-art corrosion management practices. Gas & Liquid Transmission Pipelines fall into the Infrastructure market segment of the corrosion industry that comprises $22.6 billion, or 16.4% of the total corrosion industry. Gas & Liquid Transmission Pipelines comprise $7 billion, or 34% of the Infrastructure market segment.

     Bridge Deck Industry.  We have initiated testing, which included an actual application on a bridge deck for the New Jersey Department of Transportation during the latter part of 2002.  We are continuing our testing, and have plans to perform additional applications in 2003, to prove the effectiveness of our RSM Technologies™ in meeting this industry's problems.  As of 1998, there were 583,000 bridges in the United States. Of this total, 200,000 bridges were steel, 235,000 were conventional reinforced concrete, 108,000 bridges were constructed using pre-stressed concrete, and the balance were made using other construction materials. Approximately 15% of the bridges are structurally deficient, primarily due to corrosion of steel and steel reinforcement. The annual direct cost of corrosion for highway bridges is estimated to be $8.3 billion, consisting of $3.8 billion to replace structurally deficient bridges over the next ten years, $ 2 billion for maintenance and cost of capital for concrete bridge decks, $2 billion for maintenance and cost of capital for concrete substructures (minus decks), and $500 million for maintenance painting of steel bridges. Life-cycle analysis estimates indirect costs to the user due to traffic delays and lost productivity at more than ten times the direct cost of corrosion maintenance, repair, and rehabilitation. In many states, the Department of Transportation (DOT) is looking for preventative maintenance coatings on the horizontal surfaces of bridge decks to significantly reduce the life cycle cost of the bridge. Consequently, there is presently a low barrier to introducing new technologies and new products to this market.

Training

We place a high priority on various training programs, which are required to effectively manage our business.  We perform sales training for our own sales personnel on a regular basis and to support our developing independent manufacturing representative networks based on the technical nature of our RSM Series™ products.  Our operations personnel require specialized training relating to mechanical, repair, maintenance, spray application techniques, and contractor training to provide customer support for our RSM Series™ products.  We also require our contractors/end-users who purchase the BlueMAX™ ("Applicators") to undergo extensive training through our multi-faceted certified contractor training program. The Applicator is thoroughly trained in the technical aspects of the BlueMAX™ and application of the RSM Series™ product and receives hands-on field experience on both. We offer on-site technical support and refresher courses on a regular basis for cus tomer service.

Research and New Product Development

We continue to place a high priority on research and new product and process development and our goal is to develop a continuous flow of new products. There is no assurance that any of the research projects will result in new products that we can commercialize.

     RSM Series™.  We acquired our RSM Technologies™, which comprised two formulas, one manufactured in three parts and the other in two parts, in 1997.  Our current RSM Series™ products are comprised of three components.  In response to changing market conditions, difficulties experienced in gaining market share in the roofing industry based on the high selling price of our commercial size BlueMAX™, and feedback from our existing and potential customers in the roofing industry, we focused our research and development activities towards further development of our existing RSM Series™ products in 2002 (the "Next Generation RSM Series™).  We completed preliminary development of our two part RSM™ formula and a smaller less expensive lesser output two part spray application system.  We are currently in the final phases of product testing and have built our first two prototypes, which will undergo extensive fiel d testing during the first half of 2003 by a select few of our Urecoats Certified Contractors.  Once research and development is completed on the Next Generation RSM Series™ products, we plan to market the material components using a "thousand" series (e.g. UrecoatsRSM-1000™ for Roofing, UrecoatsRSM-2000™ for Waterproofing, etc.) and smaller spray application system under the name "BlueWARRIOR™" in order to maintain similarity in brands.

     Infiniti Series™.  We acquired certain sealant and coating intellectual property and formulas through our acquisition of Infiniti. Infiniti is continuing to develop additional sealant and coating products using its own technology, and through outside materials manufacturers, for Infiniti™ Brand products, including topcoats for use on our RSM Series™ products.

We spent approximately $581,665, $1.21 million, and $1 million, respectively, on research and development expenditures in 2002, 2001, and 2000, respectively.

Competition

The United States adhesives, sealants and coatings industry is highly fragmented with over 500 manufacturing companies. Future growth is expected to result from the trend of the industry to create new design and manufacture, lower costs, improve product characteristics, reduce weight and corrosion in new applications. Additional industry growth is expected to occur as a result of the increased use of adhesives, sealants and coatings in international markets. Competition is generally regional and is based on product quality, technical service for specialized customer requirements, breadth of product line, brand name recognition, price, service, and warranty. Due to the uniqueness of our technologies, ease of application, cost savings, and the environmental marketing component, we believe we can achieve significant market share in the industries which we are targeting. We believe based on our patented RSM™ formula that we do not have direct competition. We have found no other product like our RSM™ that combines the characteristics of an adhesive, sealant and coating in one composition and capable of being used for our various applications.  In addition, our RSM™ can only be created through our proprietary and patent pending BlueMAX™. Nonetheless, Urecoats faces strong indirect competition. Numerous companies are engaged in the development, manufacture and marketing of sealant and coating products that compete with us. These competitors have equivalent or, in most cases, greater availability to resources than we do. In marketing our products to roofing, waterproofing, pipeline, bridge deck, and general contractors, we compete primarily on the basis of product technology, value-added services, product performance, and installed price. Our future success will depend on our ability to successfully market our products and create awareness in industry and the public regarding the value of our products as with any new product. We are facing increased competition as we penetrate o ur existing target markets and build greater Urecoats™ brand identity through our sales and marketing efforts. The Urecoats™ logo and identifying Urecoats™ product marks are featured on our products, marketing materials and advertising.  We are posturing for distribution worldwide and for multiple product lines for various industries.

International

We are committed to limited international expansion.  We entered into an exclusive license agreement with a reputable Italian construction company for sales in Italy in December 2002 and signed a license agreement with a local non-affiliated Florida company for sales in Turkey and Saudi Arabia in March 2003, of our RSM Technologies™.

Patents and Trademarks

Urecoats has a limited number of patents and patent applications, including a patent issued and patents applied for in the United States and in various foreign countries. Principal reliance is placed upon our RSM™ formula, proprietary BlueMAX™, and MilMAX™ spray wand.  These products, as well as some of our other products, are identified by trademarks, some of which are pending throughout their respective marketing area.

     RSM™ Formula

     We have one issued patent for the RSM™ formula, namely, U.S. Patent No. 6,271,305, issued August 7, 2001, entitled: "Bituminous Polyurethane Interpenetrating Elastomeric Network Composition and Method of Manufacturing the Same". A continuation application seeking broader coverage for the composition was filed in the United States Patent and Trademark Office on June 27, 2001 and was assigned U.S. Application Serial No. 09/893,242, which patent will be issued on March 25, 2003.  We filed corresponding international applications for our RSM™ formula in Europe, Application No. 99942335.3, filed August 19, 1999; Brazil, Application No. P19913081-5, filed August 19, 1999; Mexico, Application No. PA/a/2001/001705, filed August 19, 1999 and Canada, Application No. 2,341,202, filed August 19, 1999; which are pending.

     BlueMAX™ Applicator

     We filed one patent application for our spray application technology, U.S. Patent Application Serial No. 09/970,126, on October 3, 2001, entitled: "Applicator Assembly for Application of Adhesives, Sealants and Coatings".  We filed corresponding international applications in Canada, Application No. 2,379,458, on March 28, 2002; China, Application 02142719.4 on September 16, 2002; and an international PCT Application, PCT/US02/31529 on October 2, 2002; which are pending.

     MilMAX™ Spray Wand Apparatus

     We filed one patent application for our spray wand apparatus technology, namely, U.S. Patent Application Serial No. 10/072,325, on February 7, 2002, entitled: "Spray Gun/Applicator"; and corresponding international applications in China, Application No. 02142720.8, on September 16, 2002; and an international PCT Application, PCT/US03/03698 on February 7, 2003; which are pending.

Employees

At December 31, 2002, the Company employed 39 people.

Historical Information

The Company was incorporated in the state of Delaware on October 20, 1989 as Natural Child Collection, Inc. and changed its name to Natural Child Care, Inc., on January 14, 1991. In 1993, the Company underwent a recapitalization, reverse merger, discontinued its pre-merger NCC operations, changed its name to Winners All International, Inc., and began post-merger random lottery operations. On February 8, 1999, the Company changed its name to Urecoats Industries Inc. We acquired Rainguard Roofing Corporation, a Florida corporation organized on May 28, 1997, effective January 1, 2001, which had minimal assets and liabilities, so we could enter the roofing and waterproofing business. The Board of Directors divested these operations, effective December 31, 2001.

Forward-Looking Statements

Certain statements made by the Company in this report and in other reports and statements released by the Company constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as comments which express the Company's opinions about trends and factors which may impact future operating results. Disclosures that use words such as the Company "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by the Company about its operations.

Item 2.   Properties.

Our operations are conducted in leased facilities located throughout Florida. Our headquarters and primary administrative and research facilities are located in Deerfield Beach, Florida. We have additional facilities in Deerfield Beach, Florida, for manufacturing, sales, marketing, distribution, and warehousing. We have a secondary research facility in Apopka, Florida. These facilities are adequate and provide sufficient space for our present operational requirements. See Notes to Consolidated Financial Statements.

Item 3.   Legal Proceedings.

Ponswamy Rajalingam and Umarani Rajalingam, Plaintiffs vs. Urecoats International, Inc. et al, Defendants.

The material features of this litigation have been previously disclosed in our Form 8-K dated May 15, 2002 (Item 5.  Other Events) and Form 10-Qs dated June 30, 2002 (Item 3. Legal Proceedings) and September 30, 2002 (Item 5. Other Information), which information is incorporated its entirety herein from all of these reports by this reference.  Since the date of our last report, a material development occurred, which was the filing of our motion to consolidate the two cases into one based on similar underlying factual bases between the two, which motion was granted by the Court.  The outcome of this litigation cannot be determined at this time. See Notes to Consolidated Financial Statements.

Item 4.   Submission of Matters to a Vote of Security Holders.

The Company did not submit any matter during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.

Item 4(A).   Executive Officers of Our Company.

Set forth below is a brief summary of the executive officers of the Company:

Timothy M. Kardok
   Chief Executive Officer,
   President and Director

45

Mr. Kardok joined Urecoats on March 1, 2001 as President and Chief Operating Officer of a former subsidiary, and Director.  Mr. Kardok was appointed President of Urecoats on March 19, 2001 and Chief Executive Officer on October 9, 2001. He also served as Chief Operating Officer from March 19, 2001 to December 31, 2001 and Treasurer from March 19, 2001 until May 18, 2001.  Previously, Mr. Kardok was senior vice president, Centimark Corporation, Canonsburg, PA, from October 1997 to February 2000.

Michael T. Adams
   Executive Vice President
   and Corporate Secretary

37

Mr. Adams was appointed as Executive Vice President and Corporate Secretary on March 1, 1999. He also served in various executive and other capacities in the Company since January 1, 1997.

John G. Barbar
   Senior Vice President of
   Finance, Chief Financial
   Officer, and Corporate
   Treasurer

41

Mr. Barbar joined Urecoats on March 19, 2001 as Interim Chief Financial Officer and was appointed Senior Vice President of Finance, Chief Financial Officer, and Treasurer on May 19, 2001. Previously, Mr. Barbar was vice president of finance, Pinnacle Healthcare Technologies, Inc., Boca Raton, FL, from September 2000 to March 2001; vice president and treasurer, General Roofing Services, Fort Lauderdale, FL, from February 1999 to September 2000; and chief financial officer, R & J Roofing of Florida Inc., Boca Raton, FL, from November 1996 to August 1998.

Arthur K. Guyton, Ph.D.
   Senior Vice President of
   Marketing

46

Dr. Guyton joined Urecoats on August 17, 2001 as Senior Vice President of Special Projects and was appointed Senior Vice President of Marketing on January 1, 2002.  Previously, Dr. Guyton was a senior manager, Arthur Andersen Business Consulting, Miami, FL, from January 1999 to August 2001; national director of training, Centimark Corporation, Pittsburgh, PA, from January 1998 to December 1998; and national training director, Uniforce Staffing Services, Inc., Boca Raton, FL, from January 1997 to December 1997.

Ronald E. Clark
   Senior Vice President of
   Operations and Chief
   Operating Officer

52

Mr. Clark joined Urecoats on September 1, 2001 as Senior Vice President of Operations and was appointed Chief Operating Officer on January 1, 2002. Previously, Mr. Clark was vice president of human resources and administration, Centimark Corporation, Pittsburgh, PA, from August 1998 to August 2001 and director of human resources, Port Authority of Allegheny County, Pittsburgh, PA, from March 1995 to August 1998.

Dale L. Epperson
   Senior Vice President of
   Market Development

51

Mr. Epperson joined Urecoats on September 1, 2002 as Senior Vice President of Market Development.  Previously, Mr. Epperson was director of corporate national accounts, GAF Materials Corporation, Wayne, NJ from May 2001 to August 2002 and executive vice president of sales and other capacities, Centimark Corporation, Pittsburgh, PA, from September 1993 to April 2001.

David E. Dana, Ph.D.
   Vice President of Research
   and Development -
   Urecoats Manufacturing,   Inc. 

50

Dr. Dana joined Urecoats Industries Inc. as the Director of Research and Development and Urecoats Manufacturing, Inc. as Vice President of Research and Development on January 14, 2002.  Previously, Dr. Dana worked for PPG Industries, Inc. from September 1981 to January 2002, in various positions with his last position as technology manager in PPG's Fiberglass Division.

Kenneth D. Latiolais
   Vice President of
   Operations - Urecoats
   Manufacturing, Inc.

56

Mr. Latiolais joined Urecoats Manufacturing, Inc. as Vice President of Operations on January 1, 2003.  Previously, Mr. Latiolais was group plant manager, Johns-Manville Corporation, Denver, CO, from December 1996 to October 2002, a board of director and vice president of U.S. Intec, Port Arthur, TX, from January 1982 to August 1996, and maintenance supervisor, Gulf Oil Corporation, Orange, TX, from January 1967 to January 1982.

PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.

Market Information

Calendar

2002(*)

2001

Quarter

High

Low

High

Low

First

$

6.70

$

6.30

$

1.00

$

.38

Second

3.25

3.20

.90

.31

Third

1.45

1.40

.70

.21

Fourth

.90

.75

.48

.25

(*)  These amounts have been adjusted to reflect a 1-for-10 share consolidation approved by the shareholders on May 28, 2002 and effective after the close of business on May 30, 2002.

Holders and Dividends

As of October 18, 2002, there were approximately 7,041 holders of record of our common stock. We did not declare any dividends during the past two years.

Securities Authorized for Issuance under Equity Compensation Plans

The following table sets forth information with respect to our compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance on an aggregated basis as of December 31, 2002.

(i)  Refer to our Consolidated Financial Statements beginning on page 18 of this report and related footnotes 15, 18, and 19 for more information on all of these plans.

(ii)  This amount includes 1,600,000 shares of restricted common stock under the 2002 Non-Employee Director Restricted Stock Plan (See footnote (i) above) and 500,000 securities under the 2002 Executive Incentive Plan (See footnote (i) above).

(iii)  This amount includes 410,000 shares of restricted common stock pursuant to Long-Term Executive Employment Agreements (See footnote (i) above).

Recent Sales of Unregistered Securities

During the quarterly period ended December 31, 2002, the Company issued securities, for certain private transactions, in reliance on Section 4(2) of the Act, as described below:

     Common Stock

     (1)  On October 31, 2002, we issued 470,000 shares of restricted common stock in a private transaction, for $470,000 in cash.

     (2)  On November 11, 2002, we issued an aggregate of 26,950 shares of restricted common stock pursuant to conversion of 3,500 shares of our Series C Convertible Preferred Stock, valued and recorded at $70,000.

     (3)  On December 31, 2002, we issued 100,000 shares of restricted common stock pursuant to a legal settlement, valued and recorded at $45,000.

     (4)  During December 2002, we issued 100,000 shares of restricted common stock pursuant to an exercise of a restricted stock option, valued and recorded at $100,000.

     (5)  On December 31, 2002, we issued an aggregate of 33,500 shares of restricted common stock to officers and an officer/director, as other compensation pursuant to employment agreements, valued and recorded in the aggregate at $15,075.

     Preferred Stock

     On December 31, 2002, Richard J. Kurtz, the Chairman of the Board and principal stockholder of the Company, exchanged $1,616,560 of indebtedness (short-term loans bearing interest at 9% per annum) due him for 80,828 shares of the Company’s Series C Convertible Preferred Stock pursuant to a partial exercise of his Series C Preferred Stock Option Agreement.  As previously reported, the Company entered into a Series C Preferred Stock Option Agreement with Mr. Kurtz on January 8, 2002, which granted to him, the right and option to purchase at $20.00 per share on the terms and conditions stated therein all or any part of an aggregate of 250,000 shares of the Company’s currently authorized and unissued Series C Preferred Stock, par value $1.00 per share, which Series C Preferred Stock purchased thereby is convertible into restricted common stock of the Company at a price of $2.20 per share, as adjusted based on the Company’s reverse split and share conso lidation during 2002.

Item 6.   Selected Financial Data.

(a)  This amount does not include revenue from our contracting services of $1,352,463, which was discontinued, effective December 31, 2001. The combined revenue of application systems, coatings, sealants and other products, and contracting services totaled $2,607,755. See Consolidated Financial Statements and related Notes for complete information. 

(b)  These amounts have been adjusted to reflect a 1-for-10 share consolidation approved by the shareholders in 2002.

Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three-Year Period Ended December 31, 2002

Overview

This financial review presents the operating results for Urecoats Industries Inc. and its subsidiaries for each of the three years in the period ended December 31, 2002, and its financial condition at December 31, 2002. This review should be read in connection with the information presented in the Consolidated Financial Statements and the related Notes to the Consolidated Financial Statements.

Business

As used in this report, "Urecoats" and the "Company" or "Us" or "We" refer to Urecoats Industries Inc. and its subsidiaries, unless the context otherwise requires.

Urecoats Industries Inc. is a manufacturing, sales, marketing, and technology-driven product development company, engaged, through its subsidiaries, in the sales, marketing, development, manufacturing, acquisition, and distribution of specialty sealant and coating products for the building products and construction industries.

We installed a new executive team in 2001 to build an infrastructure for facilitating our exit from a four-year period largely characterized by research and development.  We added seasoned and accomplished executives in 2002 and 2003 to strengthen our overall organization.  We introduced our first Urecoats™ brand, RSM Series™ products, UrecoatsRSM-100™ and BlueMAX™ spray application system (“Flagship Products”), regionally in the Southeast United States during the last quarter of 2001, nationally during the first quarter of 2002, and focused on the Southeast United States throughout the remainder of 2002, to roofing contractors.  In September 2001, we acquired additional products known as our Infiniti™ brand, Infiniti Series™ products, for roofing, waterproofing, and painting contractors.  We are currently penetrating our target markets in the building products and construction industries with our Urecoats™ and Infiniti™ br ands, and other products.

Our Urecoats™ brand is comprised of different series for marketing purposes and collectively referred to as our “RSM Series™” products.  UrecoatsRSM-100™ is for the roofing markets (“RSM-100™”); UrecoatsRSM-200™ is for the waterproofing markets (“RSM-200™”); UrecoatsRSM-550™ and “Reillycoat” are for the corrosion and pipeline markets; and UrecoatsRSM-700™ is for the bridge deck markets (“RSM-700™”); and the spray system required for application of these products is the “BlueMAX™”.  Our Infiniti™ brand is comprised of products owned or controlled by Infiniti (“Infiniti Series™”) and other products made by manufacturers for sale and distribution through Infiniti.  We refer to our RSM Series ™ products, excluding the BlueMAX™, and Infiniti Series™ and other products, as “Coatings, Sealants and Other Products” and our BlueMAX 3; as “Application Systems” in this section.  We sometimes refer to our entire product offering as our “Comprehensive Product Line”.

We use high volume, quality oriented, and reputable outside vendors in multiple locations across the United States for most of our Comprehensive Product Line's manufacturing needs.  Infiniti performs light manufacturing to serve some of its customers and plans to increase these operations in 2003 for select products to improve profit margins.  This strategy reduces our capital requirements and optimizes raw material, transportation, and delivery costs.

Our Flagship Products are distributed to roofing contractors throughout the Eastern United States by a Forbes Private 500 roofing materials supplier with over 105 locations and Infiniti Series™ products locally throughout South Florida by Infiniti.  We are in negotiations with distributors for our RSM-200™ to the waterproofing industry.  We entered into a strategic partnership with Reilly Industries, Inc., which will handle distribution of our jointly branded Reillycoat™ product to the pipeline industry.  We are still exploring distribution for anticipated RSM-700™ sales based upon information received from the Federal Highway Administration Office of Infrastructure Research and Development for the bridge deck industry.

Marketing and sales efforts during the first half of 2002 were promising and we kept pace with our anticipated growth. However, the continued fallout of the United States financial markets from the terrorists attacks of September 11, 2001 and the decline in consumer confidence impacting the overall macro economic environment resulted in a downward trend within the overall roofing industry (for the first time in this industry in many years).  During the second half of 2002, roofing contractors, including our roofing contractor customer base, began experiencing significant revenue decreases almost without exception.  The original selling prices for our BlueMAX™ therefore became a serious barrier to entry to roofing contractors which found it increasingly difficult to justify making a significant capital expenditure for the BlueMAX™ during a time when business was soft.  During the second half of 2002, to adapt to the changing market conditions, we increased our research and development activities on our core RSM Technologies™ and began development of our next generation RSM Series™ products. 

These new technologically advanced products are expected to complement our existing technologies when completed, and should thereby reduce our barriers to entry in our targeted markets.  In addition, our sales and marketing efforts drew significant attention from our competitors in the roofing industry which sought, and continue to seek, to discredit us based on the recent entry of our Flagship Products in our targeted markets (in terms of years in the marketplace and jobs completed by our contractor base).  Although our primary focus for 2003 remains on the commercial low-slope part of the roofing industry with  our Flagship Products, we are also implementing our strategy to diversify our exposure by offering additional RSM Series™ products to additional industries, such as waterproofing, pipeline, and bridge deck.

We place a high priority on research and new product and process development and our goal is to develop a continuous flow of new products.  We acquired our RSM Technologies™, which comprised two formulas, one manufactured in three parts and the other in two parts, in 1997.  Our current RSM Series™ products are comprised of three components.  In response to changing market conditions, difficulties experienced in gaining market share in the roofing industry based on the high selling price of our commercial size BlueMAX™, and feedback from our existing and potential customers in the roofing industry, we focused our research and development activities towards further development of our existing RSM Series™ products in 2002.  We completed preliminary development of our two part RSM™ formula and a smaller less expensive lesser output two part spray application system.  We are currently in the final phases of product testing and have built our first prototypes, which will undergo extensive field testing during the first half of 2003 by select Urecoats Certified Contractors (the “Next Generation RSM Series™”).  We also acquired certain sealant and coating intellectual property and formulas through our acquisition of Infiniti. Infiniti is continuing to develop additional sealant and coating products using its own technology, and through outside materials manufacturers, for Infiniti™ brand products, including topcoats for use on our RSM Series™ products.

We perform sales training for our own sales personnel on a regular basis and to support our developing independent manufacturing representative networks based on the technical nature of our RSM Series™ products.  Our operations personnel require specialized training relating to mechanical, repair, maintenance, spray application techniques, and contractor training to provide customer support for our RSM Series™ products.  We also require our contractors/end-users who purchase the BlueMAX™ (“Applicators”) to undergo extensive training through our multi-faceted certified contractor training program. The Applicator is thoroughly trained in the technical aspects of the BlueMAX™ and application of the RSM Series™ product and receives hands-on field experience on both. We offer on-site technical support and refresher courses on a regular basis for customer service.

We are committed to limited international expansion.  We entered into an exclusive licenses agreement with a reputable Italian construction company for sales in Italy in December 2002 and signed a license agreement with a local company for sales in Turkey and Saudi Arabia, of our RSM Technologies™ in March 2003.

Results of Operations

Year Ended December 31, 2002 as Compared to Year Ended December 31, 2001

Revenues

The following is a summary of revenues for the years ending December 31,

2002

2001

Development
Stage
Operations
2000

Revenue:

Application Systems

$

1,314,515

$

490,000

$

---

Coatings, Sealants and Other Products

3,701,130

765,292

---

Total Revenue

$

5,015,645

$

1,255,292

$

---

We reported record revenue for the year ended December 31, 2002 of $5,015,645 as compared to $1,255,292 for the year ended December 31, 2001. The revenue generated from sales of our Application Systems was $1,314,515, which represented 26% of our revenue, as compared to $490,000 in 2001, which was 39% of our revenue, while sales from Coatings, Sealants and Other Products was $3,701,130, which represented 74% of our revenue, as compared to $765,292 in 2001, which was 61% of our revenue.

The increase of $824,515 from Application Systems was primarily due to having a full year of selling this product as compared to a partial year in 2001.  The increase of $2,935,838 from Coatings, Sealants and Other Products is broken out as follows: a) $1,764,869 is related to a full year of revenue being reflected from our acquisition of Infiniti Products, Inc. (f/k/a Infiniti Paints, Inc.) as compared to four months in 2001 (See Note 4: Acquisition in the Notes to Consolidated Financial Statements for pro forma information); and b) $1,170,969 is related to a full year of selling our RSM-100™ as compared to a few months in 2001.

In response to certain market and economic conditions we have refined our pricing strategy for our Flagship Products for 2003.  This will impact our revenue per unit and gross profit for these products, but we anticipate that new products planned for a 2003 introduction will provide additional revenue and improved margins.  During the fourth quarter we sold five (5) new Application Systems for a total of $357,500.  This amount was offset by $280,000 for Application Systems returned, $70,000 for an Application System that was originally recorded as a sale, but due to additional commitments made to the customer, this sale had to be deferred, and additional selling adjustments for $33,936.

As a result of successfully field testing our Flagship Products and in response to our future customers, who are roofing contractors, we decided to discontinue providing roof contracting services through our Rainguard Roofing Corporation subsidiary and divested these operations, effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations.

Cost and Expenses

Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. These total costs and expenses increased from $7,697,640 for the year ended December 31, 2001 to $16,458,981 for the year ended December 31, 2002 for an increase of $8,761,341. The increase is due to the Company having a full year of sales and distribution of its Application Systems and Coatings, Sealants and Other Products.

Cost of Sales: Our cost of sales for the year ended December 31, 2001 was $1,060,890 and is comprised of $1,035,311 of direct product costs and $25,579 of warranty costs, freight and other cost of sales.  Direct cost for Application Systems was $426,606 or 87% as a percent of related revenue, and $608,705 for Coatings, Sealants and Other Products or 80% of related revenue.  This is compared to $4,182,220 for the year ended December 31, 2002 and is comprised of $3,958,828 of direct product costs, which includes introductory offers and customer service, support, and training costs, and $223,392 of warranty costs, freight and other costs of sales.  Direct cost for the Application Systems was $1,324,948, which includes an $117,000 adjustment to inventory relating to the new pricing strategy for 2003, and $2,633,880 for Coatings, Sealants and Other Products.  The cost of sales as a percent of revenue for the Application Systems, excluding the inventory adjustment, is 92% and 71% for the Coatings, Sealants and Other Products.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2002 was $9,733,105 as compared to $2,899,297 for the year ended December 31, 2001. The increase of $6,833,808 is attributable to us introducing our Flagship Products to the market place. This required an increase of personnel and personnel related costs of $2,811,682 for production, testing, technical support, and sales; $862,823 for insurance, communications, shareholder relations, and listing fees; $883,421 for products provided to complete key projects, reserve against notes issued on internally financed Application Systems, and bad debt reserve and expense; $772,784 for other overhead expenses; and $1,503,098 for marketing, advertising, travel, conventions, show booth and related materials required to build brand awareness, and distribution. In addition, we updated our comprehensive sales and marketing program, including our web site, product brochures, li terature pieces, and corporate video.

Professional Fees: Our professional fees increased $313,385 from $268,029 for the year ended December 31, 2001 to $581,414 for the year ended December 31, 2002. This increase related to services that were outsourced during the year that had previously been handled internally.  Additional legal, including litigation, accounting and professional services were also required for major issues we dealt with during the year such as private placement documentation.

Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2002 was $389,809 as compared to $402,240 for the year ended December 31, 2001 for a decrease of $12,431. The decrease is attributable to the disposal of certain property and equipment which was partially offset by amortization of patent development costs.

Research and Development: Our research and development costs decreased $668,548 from $1,250,213 for the year ended December 31, 2001 to $581,665 for the year ended December 31, 2002. This reflects our transition to full sales and production and reallocation of resources for the entire calendar year. We remain committed to the continual development of new products and technology.

Consulting Fees: Our consulting fees for the year ended December 31, 2001 was $734,273 as compared to $830,657 for the year ended December 31, 2002 for an increase of $96,384. This includes fees paid to related parties for professional advice and services.

Interest Expense: Our interest expense decreased $105,394 from $169,208 for the year ended December 31, 2001 to $63,814 for the year ended December 31, 2002. The decrease is due to the reduction of total liabilities over the year. 

Loss on Disposal of and Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Urecoats International, Inc., in 1997. Management evaluated the fair market value of this asset as required and determined that there was no value at December 31, 2001. Therefore, a charge of $913,490 for the impairment of the asset was recorded and is reflected on the Consolidated Statement of Operations. We also had a loss on the disposal of obsolete property and equipment in the amount of $96,297 in 2002.

Discontinued Operations: During 2001, we acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our Flagship Products, and to generate revenues. As a result of the successful field testing of these products and in response to our future customers who are roofing contractors, management decided to discontinue these operations, effective for the year ended December 31, 2001. The total net activity is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations in the amount of $(1,662,183).

Liquidity and Capital Resources

We had $41,520 of cash on hand at December 31, 2002 reflecting a decrease of $477,705 when compared to the $519,225 of cash on hand at December 31, 2001. The cash on hand at December 31, 2000 was $16,998.

The cash required by operations for 2002 was $9,462,026 which was primarily attributable to our net loss for the year, purchase of inventory, which was offset by increases in accounts payable and accrued expenses, and elimination of non-cash expenses for consulting, legal fees, settlements and employee compensation. The cash required by operations for 2001 and 2000 was $5,437,184 and $2,898,088 respectively and was a result of our net loss offset by an increase in the elimination of non-cash expenses primarily for consultants, legal fees, settlements, and employee compensation.

The cash used in investing activities was $996,430 for the year ended December 31, 2002 as compared to $1,438,731 for the year ended December 31, 2001 reflecting a decrease of $512,618. The net cash required for capital expenditures in the current year was $794,632 for the purchase of vehicles, machinery and equipment for demonstration and support of our customers. We also invested in computer systems, both hardware and software, which is enabling us to more effectively manage our business. The net capital expenditures were $652,645 in 2001 and $686,617 in 2000.

We also used $728,903 of cash in the acquisition of our wholly owned subsidiary, Infiniti Paint Co., Inc. in 2001. This acquisition expanded our product line to include a broader base of proprietary products and other products in addition to providing an initial internal distribution source for our Flagship Products.

The cash provided from financing activities was $9,980,751 for the year ended December 31, 2002 as compared to $7,378,142 for the year ended December 31, 2001 and $3,641,700 for 2000. The primary source of cash each year is attributable to the issuance of common and preferred stock, and proceeds of loans from the Chairman of the Board.

We currently do not have the liquidity or capital resources to fund our operations without raising capital either from borrowing or from the sale of additional shares of stock. We anticipate further financing through short-term loans and/or the private sale of our common and preferred stock to accredited sophisticated investors.

Year Ended December 31, 2001 as Compared to Year Ended December 31, 2000

Revenues

The following is a summary of revenues for the years ending December 31,

2001

Development
Stage
Operations
2000

Development
Stage
Operations
1999

Revenue:

Application Systems

$

490,000

$

---

$

---

Coatings, Sealants and Other Products

765,292

---

---

$

1,255,292

*

$

---

$

---

We reported record revenue for the year ended December 31, 2001 of $1,255,292. The revenue generated from sales of our Application Systems was $490,000 and represented 39% of our revenue, while sales from Coatings, Sealants and Other Products was $765,292, which represented 61% of our total revenue. This was the first year we are reporting revenue, therefore, prior year comparisons are not possible.

* During the year we acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our Flagship Products, and to generate revenue. The revenue generated by this subsidiary was $1,352,463. The revenue earned by this subsidiary was previously reported as part of our total revenue.  This amount does not include revenue from our contracting services of $1,352,463, which was discontinued, effective December 31, 2001. The combined revenue of Application Systems, Coatings, Sealants and Other Products, and contracting services totaled $2,607,755.  As a result of successfully field testing our products and in response to our future customers, who are roofing contractors, management decided to discontinue operations of Rainguard Roofing effective for the year ended December 31, 2001. The total net activity of these discontinued operations is reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations.

Cost and Expenses

Our total cost and expenses are comprised of cost of sales, selling, general and administrative expenses, professional fees, depreciation and amortization, research and development, consulting fees, and interest expense. Our total costs and expenses increased from $4,207,332 for the year ended December 31, 2000 to $7,697,640 for the year ended December 31, 2001 for an increase of $3,490,308. The increase was due to the Company exiting its development stage and beginning sales and distribution of its Application Systems, Coatings, Sealants and Other Products, and asset impairment.

Cost of Sales: Our cost of sales for the year ended December 31, 2001 was $1,060,890 and is comprised of $1,035,311 of direct product costs and $25,579 of freight and other cost of sales. Direct cost for the Application Systems was $426,606 or 87% as a percent of related revenue, and $608,705 for Coatings, Sealants and Other Products or 80% as a percent of related revenue. This was the first year that we had cost of sales relating to revenue generated, therefore, prior year comparisons were not possible.

Selling, General and Administrative Expenses: Our selling, general and administrative expenses for the year ended December 31, 2001 was $2,899,297 as compared to $1,268,441 for the year ended December 31, 2000. The increase of $1,630,856 is attributable to us introducing our Flagship Products to the market place. This required an increase of personnel for production, testing, technical support, sales, advertising, show booth and related materials, marketing and distribution. In addition a comprehensive sales and marketing program was established, which included updating our web site, creating product brochures, literature pieces and a corporate video.

Professional Fees: Our professional fees increased $113,980 from $154,049 for the year ended December 31, 2000 to $268,029 for the year ended December 31, 2001. This increase related to the additional legal, accounting and professional services required for major issues we dealt with during the year such as a patent application on our proprietary BlueMAX™ and private placement documentation.

Depreciation and Amortization: Our depreciation and amortization expense for the year ended December 31, 2001 was $402,240 as compared to $261,435 for the year ended December 31, 2000 for an increase of $140,805. The increase was attributable to depreciation on vehicles, machinery and equipment acquired to establish production, and field testing our Flagship Products.

Research and Development: Our research and development costs increased $33,201 from $1,217,012 for the year ended December 31, 2000 to $1,250,213 for the year ended December 31, 2001. This reflects our transition from development stage to full sales and production. We are introducing our Flagship Products to the roofing industry in the Southeastern region of the United States. We remain committed to the continual development of new products and technology.

Consulting Fees: Our consulting fees for the year ended December 31, 2001 was $734,273 as compared to $1,108,888 for the year ended December 31, 2000 for a decrease of $374,615. We outsourced certain projects and functions during the year relating to the development of technical, operations, sales, and distribution programs. Some of these functions were being handled internally, which explains the decrease for the period.

Interest Expense: Our interest expense decreased $28,299 from $197,507 for the year ended December 31, 2000 to $169,208 for the year ended December 31, 2001. This decrease was due to the reduction of total liabilities over the year.

Discontinued Operations: During 2001, we acquired a roofing contracting company, Rainguard Roofing, primarily to field-test our Flagship Products, and to generate revenues. As a result of the successful field testing of these products and in response to our future customers who are roofing contractors, management decided to discontinue these operations, effective for the year ended December 31, 2001. The total net activity was reflected in the (Loss) From Discontinued Operations on the Consolidated Statement of Operations in the amount of $(1,662,183).

Asset Impairment: We had Goodwill relating to the acquisition of a subsidiary, Urecoats International, Inc., in 1997. Management evaluated the fair market value of this asset as required and determined that there was no value at December 31, 2001. Therefore, a charge of $913,490 for the impairment of the asset was recorded and reflected as such.

Contractual Obligations

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes. Our operations are conducted presently in the United States, and, as such, we are not subject to material foreign currency exchange risks. Although we have outstanding debt and related interest expense, market risk in interest rate exposure in the United States is currently not material to our operations.

Forward Looking Statements

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain disclosures made by the Company in this report and in other reports and statements released by the Company are and will be forward-looking in nature, such as comments that express the Company's opinions about trends and factors that may impact future operating results. Disclosures that use words such as the Company "believes," "anticipates," "expects" and similar expressions are intended to identify forward looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the Company's disclosures about its businesses made in the Company's press releases and in the Company's Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission.

Item 8.   Financial Statements and Supplementary Data.

URECOATS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS

As of December 31,

2002

2001

Assets

Current Assets:

Cash

$

41,520

$

519,225

Accounts Receivable

604,945

1,054,592

Inventory (Note 4)

1,416,674

343,446

Prepaid Expenses and Other Current Assets

204,526

225,267

Total Current Assets

2,267,665

2,142,530

Property, Plant & Equipment, Net (Note 5)

$

1,514,063

$

1,215,668

Other Assets:

Intangibles, Net (Note 6)

1,879,433

1,798,490

Notes Receivable

348,412

28,475

Deposits and Other Non-Current Assets

139,211

---

Total Other Assets

2,367,056

1,826,965

Total Assets

$

6,148,784

$

5,185,163

See accompanying notes to consolidated financial statements

URECOATS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(CONTINUED)

As of December 31,

2002

2001

Liabilities and Stockholders' Equity

Current Liabilities:

Accounts Payable and Accrued Expenses (Note 7)

$

3,187,449

$

1,566,874

Current Maturities of Long-Term Debt (Note 8)

105,257

205,975

Short-Term Notes and Loans Payable (Note 9)

739,027

232,260

Deferred Income (Note 11)

70,000

---

Total Current Liabilities

4,101,733

2,005,109

Long-Term Debt (Note 8)

45,427

219,296

Capital Leases

---

1,017

Commitments and Contingencies (Notes 2, 12)

---

600,622

Total Liabilities

4,147,160

2,826,044

Stockholders' Equity:

Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of

which Designations: (Notes 10, 14, 18)

Series A Convertible, 750,000 Shares Authorized; 62,500 Issued

and Outstanding (Less Offering Costs of $7,465)

55,035

55,035

Series B Convertible, 500,000 Shares Authorized, Issued and

Outstanding

500,000

500,000

Series C Convertible, 750,000 Shares Authorized; 414,781 Issued and

Outstanding

414,781

---

Common Stock, $.01 Par Value; 25,000,000 Shares Authorized;

14,071,254 and 131,402,830 (Pre-Split-See Note 14) Issued and

Outstanding at December 31, 2002 and 2001, respectively

140,713

1,314,028

Additional Paid-In Capital

44,696,841

34,392,433

Subscriptions Receivable

---

(1,200,000

)

Accumulated (Deficit)

(43,805,746

)

(32,702,377

)

Total Stockholders' Equity

2,001,624

2,359,119

---

---

Total Liabilities and Stockholders' Equity

$

6,148,784

$

5,185,163

See accompanying notes to consolidated financial statements

URECOATS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31

2002

2001

Development
Stage
Operations
2000

Revenue:

Application Systems

$

1,314,515

$

490,000

$

---

Coatings, Sealants and Other Products

3,701,130

765,292

---

Total Revenue

5,015,645

1,255,292

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Cost of Sales:

Application Systems

1,324,948

426,606

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Coatings, Sealants and Other Products

2,633,880

608,705

---

Warranty Costs, Freight and Other Cost of Sales

223,392

25,579

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