Mark One
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

For the transition period from ______ to _______

Commission File No.: 000-50367

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

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 $26,988,708

The registrant had 35,945,506 common stock outstanding as of April 6, 2011.

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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 file annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the SEC at the SEC's Public Reference Room, 100 F Street, N.E., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC's website at http://www.sec.gov.

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.

Our wholly-owned subsidiaries are as follows:

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CRAiLAR^(R) Fiber Technologies Inc.

Our wholly owned subsidiary CRAiLAR^(R) Fiber Technologies Inc. ("CRAiLAR^(R)") 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^(R) 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. As such, we intend to let the registration of this company lapse.

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 could be accomplished daily without currency valuations and fluctuations, as well as to provide an American base inventory control to customers.

Naturally Advanced Technologies US Inc. was incorporated under the laws of the State of Nevada on August 24, 2010, to manage our U.S. business operations. This company was also issued a Certificate of Authorization by the State of South Carolina to transact business on October 21, 2010.

Our principal offices are located at 402-1008 Homer Street, Vancouver, British Columbia V6B 2X1, our telephone number is (604) 683-8582, and our web site address is www.naturallyadvanced.com.

We are a Green Tech company focused on providing environmentally friendly textile, composite, biomass and pulping solutions through the cost effective process of converting industrial hemp, flax and other bast fiber crops via our patented CRAiLAR and CRAiLEX technologies . We are 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^(R) and CRAiLEX^TM technology, which are bast fiber processing technologies targeted at the textile, pulping, composite and plastics industries.

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Bast fiber from flax and 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 these crops: 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 bast 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 discourage hemp cultivation.

We believe that we have dismantled the second barrier. In concert with our key technology partners, Alberta Innovates -- Technology Futures (formerly the Alberta Research Council) and the National Research Council, we have developed proprietary technologies (the CRAiLAR^(R) 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 Alberta Innovates -- Technology Futures, the CRAiLAR and CRAiLEX biomass technology platforms offer cost-effective and environmentally friendly processing and production of industrial flax and 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 sources are environmentally efficient bast fibers such as flax and industrial hemp. 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^(R) 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 its CRAiLAR Organic Fibers with both commercialization partners over the course of the next several months, with a view to arriving at commercialization terms at the successful conclusion of those trials.

We are organized into two brand platforms to best develop, test and commercialize our technology platforms. These include:

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On September 20, 2010, we announced that we have created a sustainable, commercially viable complement to cotton using flax as a raw material. After successfully transforming hemp fibers into yarns and fabrics with the desirable qualities of cotton, we are now engaged in a strategic shift to use flax fibers as the foundation for the next phase of our proprietary CRAiLAR Fiber technology.

We believe that compared to current cotton prices, flax is a cost-effective raw material for fiber production. The CRAiLAR process can also be used with the stalk portion of the oilseed flax plant -- traditionally cultivated for food and industrial applications -- which would normally be discarded during processing. We believe that making use of this byproduct, in addition to processing fiber-variety flax, enhances CRAiLAR's sustainability factor.

The all-natural CRAiLAR process removes the binding agents from flax that contribute to its stiff texture. The process bathes bast fibers in a proprietary enzyme wash that transforms them into soft, yet strong and durable textile fibers, which can be used in both fashion and industrial applications. We believe that fibers made through the CRAiLAR process have the comfort and breathability of cotton, with the strength, moisture-wicking properties and shrink-resistance of sturdy bast fibers. Our recent trials have shown that flax can be spun on existing machinery to produce a yarn that can be used alone or blended with other fibers.

On January 18, 2011, we announced that we have joined forces with Hanesbrands Inc. and the U.S. Department of Agriculture's Agricultural Research Service (USDA-ARS) in a cooperative research project designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR technology. The project takes place in South Carolina and has an initial term of one year with a renewal option for two additional years.

On March 17, 2011, we announced that we signed a ten-year CRAiLAR(R) fiber supply agreement with Hanesbrands Inc. to commercialize the Company's proprietary fibers.

In October 2007, we entered into a joint collaboration agreement with the National Research Counsel of Canada (the "NRC") to continue to develop a patentable enzyme technology for the processing of hemp fibres. The agreement was for three years and was set to expire on May 9, 2010. On February 19, 2010, we signed an amendment to the agreement which will now expire on May 9, 2012. We will continue our 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, we will pay the NRC a total of $280,536 divided into nine payments up to May 9, 2012.

On November 1, 2006, we entered into a technology license agreement with the NRC. The License Agreement provides us with a worldwide license to use and sublicense the NRC technology called CRAILAR(R). We 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(R) process to

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the NRC with a minimum annual payment set at $14,190 (CDN$15,000) per year. During the year ended December 31, 2010 we paid $7,280 (CDN$7,500) and accrued $7,280 (CDN$7,500) of the minimum annual royalty.

In June 2007, we entered into a Master Agreement for Technology Development with the Alberta Innovates - Technology Futures ("AITF", formerly Alberta Research Counsel) (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 AITF under different Project Agreements. Under the terms of the Technology Agreement, commencing July 1, 2007, we will pay $20,525 (CDN $25,000 ) per quarter to AITF and can terminate the agreement with 90 days notice, unless there are Project Agreements in effect, in which case the 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 we paid ARC for specific tasks to further the development of AITF's Technology, the amount paid was $7,991 (CDN - $8,230). Under the terms of the Technology Agreement we 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.

During fiscal year 2007, CRAiLAR^(R) completed proof of concept testing on three separate bast fiber processing techniques with the NRC in Ottawa and the AITF in Edmonton. Proof of concept testing at the NRC included the completion of the first CRAiLAR^(R) 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^(R) enzymatic processes, with early test fibers meeting the requirements of the textile producing industry.

During the fourth quarter of 2007, and first three quarters of 2008, we began scaling CRAiLAR^(R) 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, AITF filed two provisional patent applications related to decortication and degumming technologies for which we have secured exclusive worldwide licensing rights from the AITF. We completed the installation of proprietary decortication equipment at the AITF. 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^(R) Fibers were 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^(R) fibers. The spinning trials were sponsored by Hanesbrands Inc. at North Carolina State University. We carded and spun a blended CRAiLAR^(R) yarn on a cotton ring spinning system with no modifications using CRAiLAR^(R) 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.

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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 AITF 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, 2010 totaled $596,212 (2009 - $482,052), all of which was attributable to the CRAiLAR^(R) and CRAiLEX^TM technology development.

In September 2005, we trademarked the term CRAiLAR^(R) 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^(R) 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 AITF 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^(R) 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^(R) and CRAiLEX^TM Technologies and confidently move forward in seeking an appropriate development and commercialization partner.

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^(R) 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

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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^(R) 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^(R) and CRAiLEX^TM processes will entice those in North America to ramp up flax and 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 AITF 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^(R) process will be competitively priced vis-a-vis current natural and synthetic fibers and allow us to realize significant margins. Add to that, a transparent and certifiable sustainability platform, and we believe that CRAiLAR^(R) has the potential to establish a new industry standard.

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^(R) and CRAiLEX^TM. More than just an enzyme or pulping technology, we believe that CRAiLAR^(R) 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

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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 ten employees, seven 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 $2,773,536 and $1,965,653, respectively, for fiscal years ended December 31, 2010 and 2009. As of December 31, 2010, we had accumulated deficits of $4,453,381. As at December 31, 2010 we had cash and cash equivalents of $18,493 and working capital deficit of $2,006,434. 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^(R) 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^(R) and CRAiLEX^TM Technologies and Hemp Products.

Our success depends upon our achieving significant market acceptance of our CRAiLAR^(R) and CRAiLEX^TM Technology and demand for hemp products. Acceptance of our CRAiLAR^(R) 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

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fail to develop an awareness of our CRAiLAR^(R) 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^(R) and CRAiLEX^TM Technology increases, we may not be able to produce enough product to meet demand.

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 maintain "key person" life insurance on our 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^(R) 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^(R) 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.

The loss of or inability to enforce our trademark CRAiLAR^(R) and other proprietary know-how, including our CRAiLAR^(R) 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,

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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, 2010, there were 35,313,202 shares of our common stock issued and outstanding. (As of April 6, 2011, there were 35,945,506 shares of our common stock issued and outstanding). Further, as of December 31, 2010 there were an aggregate of 5,339,877 Stock Options and 1,928,918 share purchase warrants outstanding that are exercisable into 5,339,877 shares of common stock (at a weighted average exercise price of $1.08) and 1,928,918 shares of common stock (at a weighted average exercise price of $1.54), 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, 2010, our common stock has traded as low as $0.63 and as high as $1.35. 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.

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

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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.

As of the date of this Annual Report, there are no unresolved comments pending from either the SEC or the British Columbia Securities Commission.

In Vancouver, we occupy approximately 2,000 square feet for office space. The lease expires December 1, 2011. We pay monthly rent of CDN$5,500 (US$5,470, based on the exchange rate on December31, 2010 of US$1.00 = CDN$0.9946).

Effective August 9, 2010, we signed a ten-month sublease of a facility at 164 County Camp Road, Kingstree, SC, 29556, at a rental cost of $4,400 per month. We attained the space for use as an initial scale-up flax fiber facility to conduct the decortication process of CRAiLAR(R) Organic Fibers. The property is housed near 300 acres of flax crops that we intend to use to conduct our flax fiber growing trials.

Management is not aware of any legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is a party adverse to us in any legal proceeding, or has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.

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Board. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.

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 6, 2011, 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.

We have one equity compensation plan: our 2010 Fixed Share Option Plan. As described below, the 2010 Plan adopted all options outstanding under our previous stock option plans, including our 2006 Stock Option Plan (the "2006 Plan") and our 2008 Fixed Share Option Plan (the "2008 Plan"). The table set forth below presents information relating to our equity compensation plans as of December 31, 2010.

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Prior to the adoption of the 2010 Plan, we had a stock option plan outstanding, the 2008 Fixed Share Option Plan (the "Previous Option Plan"). Under the Previous Option Plan, a maximum of 6,068,266 options were reserved for issuance. As of August 16, 2010, 6,044,000 options were issued and outstanding under the Previous Option Plan. All outstanding options under the Previous Option Plan were rolled into the 2010 Plan and are counted against the number of common shares available for option under the 2010 Plan.

The purpose of the 2010 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 2010 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 2010 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 2010 Plan.

Based on the terms of the individual option grants, options granted under the 2010 Plan generally expire three to ten years after the grant date (with a maximum exercise period of 10 years from grant) and become exercisable over a period of one year based on continued employment, either with monthly vesting or upon achievement of pre-determined deliverable.

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On March 22, 2011, we filed a registration statement on Form S-8 relating to a maximum of 7,057,640 shares of common stock, without par value, issuable directly by us under our 2010 Plan or pursuant to the exercise of options that have been or may be granted under the 2010 Plan (including options granted under our Previous Stock Option Plan as described above).

On May 19, 2010, we issued 1,424,739 units pursuant to a private placement to 16 subscribers at $1.00 per unit, for proceeds of $1,424,739. Each unit consists of one common share and one-half of one non-transferable common stock purchase warrant, with each whole warrant exercisable to purchase one additional share at $1.25 per share, expiring on May 19, 2013. The units issued to eight of the subscribers under an exemption from the registration requirements of the U.S. Securities Act pursuant to Regulation S and to the remaining eight subscribers under an exemption from the registration requirements of the U.S. Securities Act pursuant to Rule 506 for accredited investors, in each case based on representations and warranties made by the subscribers in their respective subscription agreements with the Company. One of the subscribers is an officer and director of the Company, and another subscriber is a director of the Company. We paid a total $62,152 for agent commissions and other expenses which have been recorded as share issue costs.

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

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.

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During the twelve-month period ended December 31, 2010, we recorded operating expenses of $3,308,769 compared to operating expenses of $3,118,988 for the same period in 2009. Operating expenses consisted of:

• $216,937 (2009: $228,763) in advertising and promotion, a decrease of 5%
• $34,486 (2009: $28,447) in amortization and depreciation, an increase of 21%;
• $682,796(2009: $693,923) in consulting and contract labour, a decrease of 2%;
• $352,996 (2009: $396,839) in general and administrative, a decrease of 11%;
• $161,990 (2009: $139,115) in interest, an increase of 16%;
• $226,985 (2009: $318,586) in professional fees, a decrease of 29%;
• $596,212 (2009: $482,052) in research and development, an increase of 24%; and
• $1,036,367 (2009: $831,263) in salaries and benefits, an increase of 25%

Consulting and contract labor expenses decreased to $682,796 for the twelve-month period ended December 31, 2010, from $693,923 compared to the same period in 2009 due the Company having less contractor employees.

General and administrative expenses decreased to $352,996 for the twelve-month period ended December 31, 2010, compared to $396,839 for the same period in 2009. The decrease in general and administrative expenses was primarily due to lower office costs.

Interest expenses increased to $161,990 for the twelve-month period ended December 31, 2010, compared to $139,115 for the same period in 2009. The increase is mostly attributable to the increase in the loan from a director.

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Professional fees were $226,985 for the twelve month period ended December 31, 2010, compared to $318,586 for the same twelve month period in 2009. 

Research and development costs were $596,212 for the twelve-month period ended December 31, 2010, compared to $482,052 for the same twelve-month period in 2009. During the second half of the year the Company began running a facility in Kingstree for research and development purposes.

Salaries and benefits expenses increased to $1,036,367 for the twelve-month period ended December 31, 2010, compared with $831,263 for the same period in 2009. This increase was caused by an increase in stock based compensation.

During the year ended December 31, 2010 we also incurred a further write down of equipment of $94,486 compared with $163,371 for the same period in 2009. This write down was with respect to equipment used in the CRAILAR^(R) pilot plant. It was originally thought the equipment could be used in future Organic Fiber production, however, the process continued to evolve and the equipment was deemed obsolete.

Discontinued operations produced a gain of $11,475 for the twelve month period ended December 31, 2010, compared to a loss of ($659,946) for the same period in 2009.

Our net loss during the twelve-month period ended December 31, 2010, was ($3,293,439, or $0.10 per share) compared to ($3,051,240, or $0.09 per share) during the twelve-month period ended December 31, 2009, which represents an increase in net loss of 8%. This increase in net loss was primarily due to the decrease in the gain from the fair value adjustment of a derivative liability. For the twelve-month period ended December 31, 2010, the weighted average number of shares outstanding was 34,584,288 compared to 32,939,968 at December 31, 2009.

For the twelve-month period ended December 31, 2010, our current assets were $126,611 (2009 - $523,589) and our current liabilities were $2,133,045 (2009 - $581,276) which resulted in a working capital deficit of $2,006,434 (2009 - working capital deficit of $57,687). As at December 31, 2010, total assets were $258,894, consisting of:

• $18,493 in cash and cash equivalents;
• $30,826 in accounts receivable;
• $74,946 in prepaid expenses and other;
• $2,346 in current assets of discontinued operations;
• $58,783 in property and equipment; and
• $73,500 in intangible assets.

As at December 31, 2010, total liabilities were $2,773,536 and were comprised of:

• $526,239 in accounts payable;
• $125,000 in customer deposits
• $324,861 in accrued liabilities;
• $956,945 in due to related party;
• $200,000 in note payable; and
• $640,491 in derivative liabilities

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Stockholders' Equity decreased by $1,289,834 from ($1,224,808), at December 31, 2009, to $(2,514,642) at December 31, 2010.

The cash flows used in operations of continuing operations for the twelve-month period ended December 31, 2010, were ($2,038,060) compared with ($2,022,795) for the same period in 2009. Cash flows used in operations for the twelve-month period ended December 31, 2010, consisted primarily of a net loss of ($3,304,756) from continuing operations, offset by certain items, including a write down of equipment of $94,486 (2009 - $163,371), stock based compensation of $930,644 (2009 - $816,865), loss on foreign exchange on loans ($71,990) (2009 -$nil), fair value adjustment of derivative liability ($98,449) (2009 - $889,888); increase in accounts payable of $291,926 (2009 - ($21,744)), an increase in customer deposits of $125,000 (2009- $Nil); and a decrease in accrued liabilities of ($22,102) (2009 - $129,318).

The cash flows used in investing activities for the twelve-month period ended December 31, 2010, were ($43,999) compared to ($75,496) for the same period in 2009. Cash flows used in investing activities consisted of a purchase of property and equipment totalling ($31,084) in 2010 (2009 - ($28,938)) and the acquisition of trademarks and licenses totalling ($12,915) in 2010 (2009 - ($46,558)).

Cash flows provided by financing activities for the year ended December 31, 2010, totaled $1,668,235 versus $1,877,931 during the same period in 2009. The primary source of cash flows from financing activities during these two periods was the issuance of capital stock. The Company issued $1,668,235 of capital stock in 2010 (2009 - $1,704,521).

The effect of exchange rates on cash resulted in an unrealized loss of ($40,324) for the twelve months ended December 31, 2010, as compared with an unrealized gain of $109,434 in the same period of 2009.

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^(R) 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.

Management expects to continue expanding its business platform through the development and commercialization of CRAiLAR(R) Fibers and CRAiLEX 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(R) Fibers technology developed with the National Research Council (NRC) of Canada is a clean, sustainable, environmentally responsible fiber replacement that grows naturally, without excessive water and pesticide usage. CRAiLAR(R) will be used in union with cotton, and when blended together, will create a much better performing fiber than

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cotton alone, taking on some of the characteristics of CRAiLAR(R), which are moisture management, durability, superior dye characteristics, and less shrinkage.

The all-natural, CRAiLAR process is the first to successfully remove the binding agents from flax that contribute to its stiff texture. The process bathes bast fibers in a proprietary enzyme wash that transforms them into soft, yet strong and durable textile fibers, which can be used in both fashion and industrial applications. CRAiLAR will be blended with cotton which will create a fiber that will have improved durability, superior dye characteristics and less shrinkage than a cotton only fiber.

CRAiLEX Advanced Materials technology was developed with Alberta Innovates -- Technology Futures (formerly the Alberta Research Council). The unique pulping process does not require the numerous harsh chemicals or expensive pressurized equipment used in the traditional kraft pulping industry. The result is a superior dissolving pulp from the hemp and flax plants to be used in performance yarns, industrial additives and absorbent pulp and paper products.

Naturally Advanced Technologies holds the exclusive worldwide license to these patented technologies and is working with several large corporations to commercialize these technologies.

Our technology was developed to work on all bast fiber crops including hemp and flax. Hemp was the initial focus as it is an emerging industry in Canada. As flax is also a bast fiber crop, the CRAiLAR(R) process works very well without any modification. CRAiLAR(R) is a versatile technology and also performs well on jute, kenaf, and other similar crops. At the end of April 2010, we announced that we had successfully spun not only a hemp-cotton combination but we'd also successfully spun a flax-cotton combination. We found the CRAiLAR(R) flax to be of very high quality and ideally suited for fine knit items such as T-shirts. While hemp is also well suited for knit garments, the legal issues surrounding the crop in the USA combined with the farming learning curve that will be necessary to begin the agricultural supply chain, make commercialization of this fiber more difficult than flax. Hemp grows larger and its fibers are coarser. Hemp is currently not able to be grown in the US while flax has no such restrictions. Flax has very similar properties to hemp but produces finer fibers and is well suited to be grown in the US. The environmental sustainability of flax is virtually identical to hemp with the exception that hemp produces more biomass per acre than flax. However, the flax plant generates a higher percentage of bast fiber per plant than hemp. Our testing on CRAiLAR(R) Flax has shown that performance benefits are the same or similar to CRAiLAR(R) Hemp.

Flax has been used for textile applications for thousands of years but when processed using traditional techniques, it is labor intensive, costly to process and has a rougher hand feel than cotton and polyester. Traditionally processed flax must also be spun on specialty linen machinery making it unviable for mass production.

Unlike hemp, flax may be legally grown in the USA. This presents some unique opportunities from a supply-chain perspective which can help accelerate the steps towards commercialization.

With cotton prices currently over $1.90 per pound, flax is a cost-effective raw material for fiber production. Flax is easy to grow with minimal use of herbicides, pesticides and engineered irrigation, which significantly reduces costs as compared to other natural fibers.

The CRAiLAR(R) process can also be used with the stalk portion of the oilseed flax plant --- traditionally cultivated for food and industrial applications --- which would normally be discarded during processing. Making use of this byproduct, in addition to processing fiber-variety flax, further enhances CRAiLAR(R)'s sustainability factor. Potential uses for this fiber include coarser count yarns (such as denim), nonwovens, medical and composite material applications.

The Company is currently working with a number of "big brand" customers in an effort to create "pull through" demand for our products and technology. The company believes that this is the fastest and most effective path to meaningful commercialization with the marketing support that large brand name companies are able to offer.

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In July of 2009 we announced Joint Development Agreements with Hanesbrands Inc., and Georgia Pacific Consumer Products, for our CRAiLAR(R) 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.

On December 1, 2010, the Company, announced that it has entered into a short-term supply agreement with Hanesbrands Inc. starting in December 2010 for the continued development of CRAiLAR Flax fiber. 

The companies recently completed spinning trials using the CRAiLAR flax fibers, and the supply agreement allows for Hanesbrands to pre-purchase CRAiLAR Flax fiber from Naturally Advanced Technologies for additional product testing.  The agreement calls for Hanesbrands to purchase up to $375,000 of CRAiLAR Flax fiber between December 1, 2010 and early 2011.

In March 2011 we announced the signing of a Fiber Supply Agreement with Hanesbrands Inc which defines how Hanesbrands will purchase, brand and determine joint pricing models for CRAiLAR(R) fiber. The term of the commercialization agreement is for ten years and gives Hanesbrands exclusivity in certain clothing categories, for defined time periods.

In March 2011 we announced the signing of a short term Fiber Supply Agreement with Georgia Pacific LLC which allows GP to purchase quantities of Crailar Flax Fiber for the further evaluation of formed substrate applications. The companies recently completed successful trials using Crailar Flax Fiber in formed substrates, and this additional evaluation will allow the companies to identify additional opportunities for the use of Crailar Flax Fiber.

The Kingstree area of South Carolina has been identified by the Company as an ideal region for growing winter flax crops.

As a result of identifying this geographical area as an ideal growing region, NAT incorporated a wholly-owned subsidiary, Naturally Advanced Technologies, US Inc. The purpose of this subsidiary is to develop a US based flax fiber industry based around our CRAiLAR fiber technology; from the contracting of crops through to the processing of the fiber.

Our first commercialization partner, Hanesbrands, is headquartered in North Carolina. Hanesbrands uses contract spinners located throughout the states of North and South Carolina. Therefore, being able to grow textile grade fiber in this region allows the Company to take advantage of strategic logistical opportunities.

We entered into a sub lease of a mid volume decortication facility located in Kingstree, South Carolina, in early August of 2010. The facility was originally established under a USDA flax initiative that failed to reach commercial viability. The equipment in this facility is designed to mechanically separate the flax fiber from the rest of the plant. This is the first step of our process before it goes through our patented CRAiLAR wet process. We intend to use this facility to prove out the viability of flax farming in this region, perfect our decortication process and to commence early volumes of CRAiLAR fiber to our commercial partners.

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(R) 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(R) Organic Fiber yarns, Patrick Yarns of Kings Mountain, North Carolina. To date Patrick Yarns have shown CRAiLAR(R) Organic Fiber at the Outdoor Retail Show, and are sampling fiber to customers in the denim, carpeting and

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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.

NAT announced in January of 2011 that it had entered into growing trials with Hanesbrands and the USDA-ARS, further developing the company's agronomic know-how and its ability to produce fiber capable of being spun into finer-gauge yarns suitable for undergarments, shirting and finer-knit garments. These trials will enable NAT to move to an unprecedented level of flax-fiber refinement by allowing the company to develop flax strains capable of accessing all sectors of the industry. The research project has resulted in 200 acres of flax being planted in the Kingstree region this past winter, which will be ready for harvesting this spring, adding to the company's production capabilities in the upcoming year. The company expects to contract significantly higher acreage for the 2011/2012 growing season. The Company has also identified other suitable North American growing regions.

Finally, the testing and evaluation of our CRAiLEX Advanced Materials pulping technology continues with a North American pulping technology 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.

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 is 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 2010 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 January 22, 2011 has been granted to May 22, 2011. As at December 31, 2010, accrued interest on the loan

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was $151,631, which was included in accrued liabilities. The security granted to Rana is 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.

As at December 31, 2010, the Company owed $956,945, (2009 - $928,347) to a director of the Company. The loan bears interest at 12% per annum. The loan was originally due on February 16, 2011 but has been extended until July 12, 2011. The loan is secured by a subordinated charge on the assets of the Company. As at December 31, 2010 $56,945 (2009 - $28,347) of interest was accrued on this loan.

The Company is committed to current annual lease payments totaling $60,326 for premises under lease. The leases expire in 2011. Approximate minimum lease payments over the remainder of the leases are as follows:

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(R). 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(R) process to the NRC with a minimum annual payment set at $14,190 (CDN$15,000) per year. During the year ended December 31, 2010 the Company paid $7,280 (CDN$7,500) and accrued $7,280 (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

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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 2010 the Company paid ARC for specific tasks to further the development of ARC's Technology, the amount paid was $7,991(CDN - $8,230. 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.

On August 24, 2010, the Company signed an agreement with its CEO who will receive $16,000 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, 2010, none of the options had vested.

On August 9, 2010, the Company hired an unrelated firm to perform investor relations activities. The agreement term is one year with ninety days notice of termination by either party. The monthly retainer is $10,000 with 125,000 stock options exercisable at $1.01 expiring August 9, 2015.

As of the date of this Annual Report, we do have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest; or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

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

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Report of Independent Registered Public Accounting Firm Dated March 30, 2011.

Consolidated Balance Sheets as at December 31, 2010 and December 31, 2009.

Consolidated Statements of Operations For Fiscal Years Ended December 31, 2010, December 31, 2009 and For the Period Ended October 1, 2009 (date of re-entry into the development stage) to December 31, 2010.

Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2010, December 31, 2009 and For the Period Ended October 1, 2009 (date of re-entry into the development stage) to December 31, 2010.

Consolidated Statement of Stockholders' Equity (Deficits).

Notes to the Consolidated Financial Statements.

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