UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, DC  20549


                                FORM 10-KSB

               Annual Report Under Section 13 or 15(d) of the
                      Securities Exchange Act of 1934

                For the fiscal year ended December 31, 2004

                     Commission file number: 33-3362-D


                           KLEENAIR SYSTEMS, INC
               ----------------------------------------------
               (Name of small business issuer in its charter)


       State of Nevada                                      87-0431043
-------------------------------                          ----------------
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                           Identification #)


               27121 Aliso Creek Road, Aliso Viejo, CA  92656
           -----------------------------------------------------
           (Address of principal executive offices and zip code)


                Issuer's telephone number:   (949) 831-1045

      Securities registered under Section 12 (g) of the Exchange Act:
                         Common stock, no par value


Check whether the issuer (1) 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 (2) has been subject to such filing requirements for the
past 90 days.    Yes [X]  No [  ]

Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.    [X]

State issuer's revenues for its most recent fiscal year:     $151,940

The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 31, 2004, was $4,454,895 based on the closing stock
price on that date.

The number of shares outstanding of the registrant's common stock on
December 31, 2004, was 58,100,206 shares.

                                    1

                                   PART I

Item 1. Description of Business

The Company was incorporated under the laws of the State of Nevada on
February 4, 1986, under the name of Covington Capital Corporation.  In 1986,
the Company filed an S-18 and registered certain stock.  From 1989 through
1993, the Company underwent a series of name changes in order to explore
various business opportunities.  However, none of the business opportunities
was successfully completed.

In April, 1995, under the name Investment and Consulting International,
Inc., the Company acquired a patent for a proprietary device designed to
neutralize nitrogen oxide automobile emissions from a separate Company which
was then known as KleenAir Systems, Inc.  Simultaneously with the
acquisition of the patent, the Company acquired the right to use the
corporate name "KleenAir Systems, Inc.," and changed to its current name.

Since acquiring the patent in 1995, the Company has been a developmental
stage company and has worked towards the completion of the development and
testing of the NOxMaster(TM) technology.  The Company owns U.S. Patent
#5,224,346, Engine NOx Reduction System, issued in 1993, U.S. Patent
#5,609,026 Engine NOx Reduction System issued in 1997.  In 1999 the Company
was issued a third patent on Ammonia Injection in NOx Control, U.S. Patent
#5,992,141.  The Company has applied for and maintained patent protection
under the Patent Cooperation Treaty (PCT) to protect its intellectual
property in a variety of countries that are significant producers of
automotive products.

The Company has applied for additional patents related to its NOxMaster(TM)
technology.  In September 2002, U.S. patent # 6,446,940 B1 was issued for
the Sonic Flow Carburetor, a new emission control device that atomizes fuel
in gasoline powered engines.  This process enhances operating efficiency and
reduces emissions.  Another patent, U.S. # 6,499,463 B1 was issued in
December 2002 for a Diesel Fuel Atomizer.  This device facilitates improved
diesel combustion, lower fuel use, and lower emissions of particulates and
CO2.

An additional patent was issued in February 2005, being U.S. Patent #
6,852,292. This patent covers the use of aqueous ammonia, which is ammonia
dissolved in water, and which is typically used as household or industrial
cleaner. When injected into the exhaust, this liquid solution reduces NOx in
the same manner as anhydrous ammonia (a gas), the catalyst in the previous
NOxMaster(TM) versions.

Patent awards have now been confirmed for several European countries
including the U.K., Germany, France, Italy, Spain and Sweden, and are
anticipated soon for Japan, Brazil, and China.

In May 2002, the Company leased a 10,000 square foot R & D and office
facility at 1711 Langley, Irvine, CA 92614.  The Company has also acquired a
new chassis dynamometer in addition to its engine dynamometer to cope with
increasing levels of R & D engine and device testing programs as it prepares
for commercializing its technology.

In 2003, the Company successfully completed the final phase of its London
Taxi Program funded by a U.K. government grant.  This in-service test,

                                    2

involving several London taxicabs, started in January 2002.  The Company has
been notified that it's NOxMaster(TM) system has been approved for the
Cleanup Register making it eligible for U.K. governmental retrofit
subsidies.  There are approximately 40,000 such taxicabs in service that
represent the potential market opportunity should the system be endorsed as
the preferred retrofit product.

The Public Carriage Office (PCO) has mandated the retrofit upgrade of some
17,500 out of the current fleet of approximately 22,000 taxicabs in London.
These taxicabs will be required to upgrade to a Euro 3 level (the emissions
level currently required of new cabs) during the period between July 1, 2006
and June 2008.  The same system being placed on the cabs can also be adapted
as a retrofit or OEM product for general diesel-powered passenger vehicles,
which represents approximately 45% of the registered and new vehicle market
in Europe.

Installation of test systems consisting of a combination of KleenAir
System's SCR and Dinex's particulate reduction (DPF) products has resulted
in the creation of a new device category by the Energy Savings Trust (EST)
called SCRF, the combination of Selective Catalytic Reduction and a Filter.
This category receives the Trust's highest level of subsidy.  KleenAir's
NOxMaster(TM) System has also been approved for light, medium and heavy duty
applications including taxicabs, delivery vans, shuttle buses, single and
double-decker large buses, refuse collection vehicles, and trucks.  The
Company?s strategic partner, Dinex, has been asked by the Energy Savings
Trust to retrofit 20 test vehicles during the summer of 2005 for a 6 month
trial program of its latest combination SCRF system for reduction of both
NOx and Particulates.  The NOxMaster(TM) is an integral part of this
combination system.

These approvals open a broad spectrum of potential applications covering a
retrofit market opportunity of several hundred thousand vehicles in the U.K.
alone.  They also set precedents and demonstration opportunities leading to
similar applications in other European countries.  For example, in Denmark
several buses in Copenhagen have had KleenAir Systems successfully installed
and tested.

During 2004 a number of additional tests were conducted of a combination of
KleenAir's NOxMaster(TM) System and Adastra's Optimax-DPF fuel borne
catalyst system for particulate reduction.  Adastra, an Octel (NYSE) company
in the U.K., has already had its DPF system approved by the EST for a number
of vehicle applications and, on conclusion of the current tests, it is
anticipated that the KleenAir/Adastra system will secure entry into the SCRF
category.

Systems ordered by several other London Boroughs, and installed on both
refuse collection trucks and buses during 2002, have performed well.  As a
result, those systems have been added to the EST Cleanup Register.  As a
result, KleenAir and Dinex are now targeting the 100 Air Quality Management
Areas (AQMA) established by Local Authorities throughout Britain.  These
AQMAs have the authority to establish emission rules for their districts in
order to improve their local air quality.  It is believed that such AQMAs
will take actions leading to the need for vehicles in a variety of
categories to retrofit emission control devices such as the KleenAir/Dinex
products. Approximately 30 systems have been installed in a number of Local
Authority AQMA?s including Glasgow, Cardiff, and Edinburgh. Orders for an
additional several hundred systems have been received and are awaiting
funding authorization.

                                    3

U.S. testing continues of the NOxMaster(TM) Diesel Catalytic Converter
together with its NOxMaster(TM) Ammonia Injection System to present an
integrated system for the elimination of emissions from diesel powered
mobile sources.  In order to sell the Company's products in California an
Executive Order (EO) is required from the State of California.  The Company
must demonstrate under prescribed testing protocols that its products do not
increase the level of exhaust emissions.  The Company has received an EO
certification from the California Air Resources Board (CARB) for off-road
and stationary engine applications.  This allows for commencement of sales
of the Company's products related to these applications in California.  EO
certification for on-road applications is expected shortly.

The Company is preparing to meet CARB and EPA Retrofit Verification
requirements for heavy-duty vehicles on both its NOxMaster(TM) NOx reduction
system and its Oxidizing Particulate Trap (OPT).  It has applied for
Retrofit Verification of the combination package of the OPT with the
NOxMaster(TM) for both high particulate reduction as well as high NOx
reduction.  The EPA has now published its Selective Catalytic Reduction
Protocol (SCRP).  The absence of this protocol has previously prevented the
Company from commencing certification procedures.

In 2003, the Company acquired Carbon Cloth Technologies, Inc. (CCT) of
Malibu, California.  CCT is a manufacturer of automotive thermal management
systems.  Carbon Cloth has years of experience developing thermal solutions
for such motor sports industry leaders as Ferrari, Mercedes-Benz, and
Penske.  This experience has enabled development of the CarbonGuardTM, a
significant addition to the battle on pollution.

The CarbonGuard(TM) is currently installed on several hundred of New York
City Transit Authority buses as enhancements for the operating efficiency of
an installed base of particulate traps.  Multiple prototype variations have
been purchased by a number of automotive OEM manufacturers with a view to
their incorporating the CarbonGuard(TM) for a variety of thermal management
applications.

Carbon Cloth Technologies has applied for patents in automotive thermal
management systems.  At present, this system is used to enhance the
effectiveness of particulate filters that need to maintain 300 degrees
centigrade for 30% of a vehicle's operating time.  At lower temperatures,
the filters clog and create back pressure.  Wherever particulate filters are
currently installed, at present estimated to be at least 30,000 units, the
CarbonGuard(TM) can improve performance and save maintenance expense.
Filter technology has come to prominence recently as the Environmental
Protection Agency (EPA) and the California Air Resource Board (CARB) have
determined that particulate emissions from vehicles are a serious public
health problem.

The Company signed a marketing agreement in 2002 with ServoTech.  Under this
agreement, the Company earns a commission on any ServoTech's SOBRIS(TM)
system sales it may generate.  This system is a competing method of NOx
emission reduction that utilizes urea and aqueous ammonia in a system that
introduces these reductants into an exhaust system.  ServoTech is a licensee
of Ford Motor Company on SCR injection technology.  The SOBRIS(TM) product
is under test and evaluation by a number of automotive manufacturers in the
U.S. and Europe.


                                    4

Once production and sales of the NOxMaster(TM) and OPTs get to a consistent
phase, the Company anticipates employing initially 15 to 20 employees,
primarily in management, technical and administrative capacities.  The
Company is actively seeking sources of funding for its operating capital
requirements, both to complete its test and evaluation programs and to
support initial sales and production.

The Company has not been involved in any bankruptcy, receivership or similar
proceeding.

In May 1997, the Company undertook a one for fifteen reverse split of its
common outstanding shares leaving the par value at $.001 per share.  The
number of issued and outstanding shares was reduced to 362,157 while its
authorized shares remained unchanged at 50,000,000.  The Series 1 Preferred
Shares were similarly effected by the same 1 for 15 reverse split and were
reduced to 500,000 shares.  In January 2000, the last of the outstanding
preferred shares were converted into common shares at a ratio of 1 common
share for each share of Series 1 Preferred.  In February 2000, the Board of
Directors approved a 2 for 1 stock split effective March 20, 2000.

The NOxMaster(TM) is an electro-mechanical device that substantially reduces
the oxides of nitrogen (NOx) from the exhaust gases of cars and trucks
(mobile sources) fueled by gasoline, diesel or natural gas.

The purpose of the NOxMaster(TM) is to reduce NOx emissions to a level
substantially lower than the minimum requirements of even the most
restrictive state - California.  The NOxMaster(TM) is a one-of-a-kind
device, that can effectively accomplish this task and consists of: 1) an
ammonia injector located on the engine exhaust system upstream of the
catalytic converter; 2) a tank of minimally pressurized ammonia with
solenoid operated valves; 3) tubing, wiring, and an electronic controller
that senses engine parameters.

A timing pulse from the engine is used to determine certain parameters that
indicate NOx production and to trigger a solenoid causing the injection of
gaseous ammonia into the exhaust system upstream of the catalytic converter.
The chemical reaction that occurs causes the NOx to be reduced to harmless
constituents primarily at the initial mixing and secondarily at the
catalytic converter.  The ammonia injection is programmed to occur only when
the engine is operating at specific load and performance conditions.

In addition to a cost effective reduction of NOx emissions from the exhaust,
the NOxMaster(TM) has the potential of aiding the enhancement of engine
performance.  Controlled reduction of NOx emissions could allow for the re-
tuning of the engine for increased efficiency.  This would result in
increased fuel mileage while continuing to meet the government-set NOx
emission standard.

The Company has complemented its NOxMaster(TM) Ammonia Injection System with
a NOxMaster(TM) Diesel Catalytic Converter for the purpose of applying its
NOx reduction technology to diesel fueled engines while also reducing carbon
monoxide, hydrocarbon, and particulate emissions from such engines.  It has
done so through the development of specially formulated ceramic wash-coats
that allow for ammonia in the atmosphere and that provide a significant
particulate reduction for the retrofit market.  It is planning the
acquisition of plasma technology capable of much greater reductions of
particulate emissions, particularly ultra-fine particulates, the health
hazards of which are getting increasing attention by the EPA.  Such an

                                    5

integration of an ammonia-based NOx reduction system and a plasma
particulate reduction system will be well suited to both the OEM and
retrofit markets.

In order to conserve operating capital, the Company currently has two paid
full-time employees and.  It has retained the services of its management,
officers and certain consultants through the issuance of restricted Section
144 common stock.

In June 1996, five employment and consulting contracts with 30 months
remaining (and valued at over $1,000,000) were voluntarily terminated by the
parties concerned, with no future recourse or liability for the Company,
including the employment contracts of Lionel Simons, President and Lester
Berriman, Chairman.  Mr. Simons and Mr. Berriman agreed to continue managing
and directing the Company without cash compensation until such time as
adequate operating capital had been secured for the Company.  Peter Cahill
resigned from the Board at this time and William H. Ward, Jr. was appointed
to the Board to serve along with Mr. Simons and Mr. Berriman.

In December 1996, the Company, having no resources available for the
international commercial exploitation of its technology rights, and having
no business plan for such exploitation of rights outside of the U.S.,
entered into a licensee agreement with an officer of the Company.  This
license was for the exploitation of European rights to the technology for
application to gasoline engines and for exploitation of worldwide rights for
diesel engines.  The agreement called for the Company to receive an 8%
royalty plus 30% ownership of a Company to be established overseas.  This
Company was subsequently formed and called KleenAir Systems International,
Inc.  It established a wholly owned subsidiary in the U.K. called KleenAir
Systems Ltd.  During 1998, the U.S. exploitation rights for that portion of
the technology relating to diesel engines was transferred back to the
Company in exchange for an issuance of restricted shares.

The Company began distribution of its CarbonGuard(TM) thermal management
system during 2002 and has shipped its NOxMaster(TM) products since 2003.

Management believes that the NOxMaster(TM) system is unique, well protected
by patents, and that it will prove to be effective and marketable after
completion of testing.  Competition is anticipated from so-called urea
systems, such as the SOBRIS(TM) system, that are more complex and
significantly more costly, but whose end result is the creation of ammonia
to catalyze a chemical reaction with NOx in the exhaust system.

Development expenses were $172,682 during 2004.  During 2003 they were
$196,534.

The Company does not intend to deliver an annual report to security holders.
The public may read and copy any materials filed with the SEC such as this
10-KSB and 10-QSB reports. The Company is an electronic filer under the
SEC's EDGAR filing program. The SEC maintains an Internet site at
www.sec.gov that contains such reports and other information filed
electronically which is available to all security holders.


Item 2. Description of Property

In May 2002, the Company leased a 10,000 square foot R & D and office
facility at 1711 Langley, Irvine, CA 92614.  The Company has also acquired a

                                    6

new chassis dynamometer in addition to its engine dynamometer, computers and
other test equipment to cope with increasing levels of R & D engine and
device testing programs as it prepares for commercializing its technology.

The Company does not engage in mining operations, oil and gas producing
activities or real estate activities.


Item 3. Legal Proceedings.

The Company is not currently the subject of any litigation.


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

There were no submissions to a vote of security holders during 2002.



                                  PART II

Item 5. Market For Common Equity and Related Stockholder Matters.

Market Information: The principal trading market for the common equity
securities of the Company is the National Association of Securities Dealers
OTC Bulletin Board quotation system.  The following are the highs and lows
for each quarter for fiscal year ended December 31, 2004 and 2003,
respectively.  These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not represent actual
transactions.

                                     2004                   2003
                              ----------------       -----------------
                               High       Low         High        Low
                              -----      -----       -----       -----
         1st Quarter          $0.43      $0.20       $0.51       $0.22
         2nd Quarter           0.39       0.18        0.35        0.20
         3rd Quarter           0.22       0.10        0.35        0.16
         4th Quarter           0.16       0.09        0.34        0.20


Shareholders: At December 31, 2004, there were 549 shareholders of record
with an additional approximately 64 shareholders registered with firms
reporting to the Depository Trust Company.

Dividends: No dividends have been paid in the last two fiscal years.


Item 6.   Management's Discussion and Plan of Operation.

RESULTS OF OPERATIONS

Revenues for the year ended 2004 were $41,462 compared to $754,885 for 2003.
The Company experienced good sales of its NOxMasterTM product in 2003 before
funding in the U.K. was cut off.  Funding was expected to be reinstated in

                                    7

2004, but budget and management wrangling has delayed the renewal of funding
for product installations.  Cost of goods sold were $38,152 and $647,876,
respectively, for 2004 and 2003.  Revenue in 2004 was primarily related to
sales of products from our subsidiary, Carbon Cloth Technology, with more
units being installed on New York City Transit buses.

Gross profit for the year was $3,310 compared to $107,009 during the
previous year.

Operating expenses for 2004 were reduced down $816,402 from $2,040,535 in
2003 to $1,224,133 in 2004. The main areas of saving have been in personnel
costs, consultant fees, and bad debts.

The loss for the current year was down as a result of the lower operating
expenses.


LIQUIDITY AND SOURCES OF CAPITAL

The Company has continued to make private placements of stock to meet its
working capital needs and has arrangements in place to sell more stock as
and when needed. It also sold part of its stock in Langley Park Investment
Trust in London, the proceeds from which have been utilized to meet current
working capital requirements. In addition, various officers and directors
have made short-term loans to the company as needed. In 2004, private
placements plus the sale of the Company's investment in Jubilee Investment
Trust met the working capital requirement for the year in the absence of
cash generated from sales revenue.


OTHER INFORMATION

In addition to the original U.S. Patent # 5,224,346 acquired in April of
1995, U.S. Patent # 5,609,026 "Engine NOx Reduction" was issued in 1997
after successfully overturning a challenge in Patent Court.  International
patent rights have been granted for these patents and have been issued for
Europe (patent # 5 638 139 covering Germany, France and the U.K.)
International coverage extends to certain Asian countries and Canada as well
as Brazil and certain other countries.  On November 30, 1999 the Company was
issued a third patent on "Ammonia Injection in NOx Control", U.S. Patent #
5,992,141.  This patent deals with the NOxMaster(TM) ammonia injection
control system and chemical reaction enhancement techniques to ensure
optimum effectiveness of the system to achieve maximum NOx reduction.  In
the opinion of management, this patent significantly strengthens the
position of the Company in the exploitation of its technology and increases
the value of its future commercial utilization and licensing potential.
Management believes that its patent coverage in all the major automobile and
truck producing countries provides it with the patent protection necessary
to successfully exploit the technology world-wide.  Because of the way the
accounting rules work, the true value of the patents the Company owns has
not been reported in the financial statements.

As a subsequent event, an additional patent was issued in February 2005,
U.S. Patent # 6,852,292. This patent covers the use of aqueous ammonia,
which is ammonia dissolved in water, and which is typically used as
household or industrial cleaner.  When injected into the exhaust, this
liquid solution reduces NOx in a manner similar to that of anhydrous ammonia
(a gas).  With these two forms of Selective Catalytic Reductant (SCR), the

                                    8

Company believes it is well-positioned to compete with Urea systems.  Urea,
the other reductant, systems are the main alternative means of delivering
ammonia into the exhaust stream.

Other patents have been applied for that would improve the NOxMaster(TM)
device in specific relation to its reduction of particulate emissions. The
Company believes that a system that reduces particulate emissions as well as
oxides of nitrogen meets the two major mobile source pollutants of greatest
concern to the mandating authorities, such as the EPA and CARB.

The Company continued testing on its Sonic Flow Carburetor with a patent
granted in September 2002 (U.S. #6,446,940). This device significantly
improves fuel-burning efficiency and reduces emissions on gasoline engines
by more effectively atomizing the fuel into very fine particles that results
in an even and homogenous distribution throughout the engine cylinders.

The Company is positioning the Sonic Flow Carburetor as a low cost
alternative to a fuel injection system for the two-wheel vehicle markets in
China and India.  It offers more power, greater fuel economy, and lower
emissions at a significantly lower cost.  In China, some 12 million two-
wheel vehicles are manufactured annually.  The Company has a test and
evaluation agreement with a major manufacturer of some 2 million vehicles.
This agreement has the a view of replacing their existing carburetor systems
with the Sonic Flow Carburetor

A similar Sonic Flow concept is employed in the Company's new duel fuel
injector for which a patent was issued in December 2002.  This device is
designed to improve operating efficiency and reduce emissions on diesel
engines by using regular diesel fuel to commence fuel combustion and then
switching to atomized fuel.  These new products are the result of following
through on the Company's mission to develop technologies that significantly
reduce polluting emissions and improve operating efficiencies.

The original product, the NOxMaster(TM) device is currently being
commercialized in the U.K. and Denmark.  Retrofit Verification by the EPA
and the California Air Resource Board (CARB) has been applied for in the
U.S.

Nitrogen Oxides (NOx) are the most difficult auto exhaust pollutants to
control.  They are not sourced from the engine fuel, but are produced by the
oxidation of nitrogen in the combustion of air.  Their formation requires
high temperature (2500 degrees F and above). The higher the temperature, the
more NOx is produced.  Thus, NOx is produced in proportion to engine power
output and efficiency. Meeting even the current minimum standards requires
sacrifices in performance and economy.

The NOxMaster(TM) utilizes both the non-catalytic reaction that occurs at
high temperatures and the catalytic reaction occurring at lower
temperatures.  Tests have confirmed this approach.  Further test data has
shown that the desired reaction does occur in the presence of excess air
(oxygen) and might even be enhanced by the oxygen.  Thus the NOxMaster(TM)
device gives the manufacturer a method of control that is essentially
independent of engine operating parameters and provides new options for
economy and performance.

The NOxMaster(TM) Diesel Catalytic Converter has completed road trials and
production. Delivery to overseas customers commenced during the year 2003.

                                    9

The product can also be distributed in states other than California.  An
Executive Order (EO) is required in California before distribution can
commence.  The Company has received an EO from the CARB enabling it to sell
its product in the State of California.  The EO states that the product does
not increase NOx emissions and will allow the Company to sell the product(s)
in the state of California. However, the marketplace currently requires
qualification for Emission Trading Credits to commence commercialization at
this stage.

The Company needs to secure the recently introduced requirement for Retrofit
Verification approval from the CARB or EPA for SCR technology in order to
qualify for SIP and Emission Trading Credits.  These credits enable the user
to sell credits to cover the cost of equipment and operations.

The Company initially applied for EPA and CARB Retrofit Verification in the
fourth quarter of 2003.  This application is in line with the new protocols
for Selective Catalytic Reduction (SCR) that have been finalized by those
agencies.  However, modifications and clarifications of these protocols and
certification requirements have delayed the Retrofit Verification Program
which is now expected to be completed during the course of 2005.  These
verifications are necessary to permit sale of the Company's NOxMaster(TM)
system nationwide and to qualify its customers for emission credits.

The emphasis for emission trading credits is on NOx reduction products,
thereby satisfying the mobile source emission reduction criteria for
"emission credits".  The Guidelines for the Generation and Use of Mobile
Source Emission Reduction Credits, published by the California Environmental
Protection Agency, Air Resources Boards and Mobile Source Emission Reduction
Credits were approved by the ARB on February 19, 1993.

The document states that NOx is the only pollutant considered in the
guidelines as a reasonable candidate for credit generation.  These emission
credits are currently traded on a commodity-like exchange and are valued in
the range over $20,000 per ton.  The Company believes the value of these
emission credits will be a very substantial tool in the marketing of the
NOxMaster(TM) products to fleet vehicle owners, especially the diesel
transportation industry.

The Company?s licensee, ExtEngine Transport Systems LLC, has received
Retrofit Verification from the California Air Resource Board (CARB) for an
off-road system based on the Company?s technology.  This system has been
under test on some 35 vehicles in Houston for the past two years. With
qualification for SIP credits, it is expected that significant additional
installations will take place in Houston.

The Company has signed a distribution agreement with DINEX A/S of Denmark
and its U.K. subsidiary Dinex U.K. Ltd.  Under this agreement DINEX has a
non-exclusive right to sell the Company's products in its market area which
consists of Scandinavia, U.K., Germany, France, Italy, and Spain.

The Company has signed a Technical Services Agreement with ServoTech
Engineering, Inc. of Belleville, Michigan.  Under this Agreement, ServoTech
will perform hardware and software design and testing services for certain
components used in the Company?s NOxMaster(TM) NOx Reduction System.  The
system is being readied for multiple installations in the U.K. and for
Retrofit Verification in the U.S.


                                    10

ServoTech is a long-time supplier of engineering, prototyping and testing
services to Ford Motor Company and other major Detroit based and
international automotive manufacturers.

Once production and sales begin, the Company anticipates employing initially
15 to 20 employees, primarily in management, technical and administrative
capacities.  The Company is actively seeking sources of funding for its
operating capital requirements both to complete its test and evaluation
programs and to support initial production and sales.

On December 29, 1999 the Company signed a Letter of Intent with ExtEngine
Transport Systems, LLC regarding the awarding of licenses for commercial
exploitation of the Company's technology in China, India, California and the
U.S. Urban and School Bus markets.  This was subsequently followed by
completion of Licensing Agreements, the exclusive terms of which, if
fulfilled, would represent significant income to the Company over the
succeeding 10 years. As part of the Agreement, Extengine Transport Systems
LLC invested funds in the Company to cover the costs of research and
development to fulfill contracts requiring the demonstration of NOx
reduction capability with regard to a number of engines supplied by major
Chinese automotive companies.  Discussions have also been held with various
California Transportation Authorities with regard to the testing of the
Company's products on its buses as part of the Extengine drive to exploit
the Company's technologies in the Urban Bus market.

This license has now, by mutual agreement, been set aside.  Extengine no
longer has exclusive rights for India and China, but instead has been given
exclusive rights for Hong Kong, Korea, and Japan and retains an exclusive in
the U.S. Urban Bus market.  It also has non-exclusive rights to sale of
products utilizing the Company?s systems technology in the U.S. and certain
other limited territories overseas.

The Company occupies a 10,000 square foot Research and Development facility
in Irvine, California where it has expanded its R & D dynomometer testing
capabilities and broadened the range of engine types and sizes for which it
can customize its products.

Several NOxMaster(TM) units have been installed and are in service on a
number of London Taxicabs.  Systems have also been installed on a London
Borough 16 passenger Mercedes Sprinter bus and on a number of waste
collection trucks in the several other London Boroughs.

In December 2004, the Mayor of London issued a mandate requiring the upgrade
to Euro 3 emission standards of all on-road London taxis, a total number of
approximately 17,500 vehicles. The Company?s system is one of only two that
have been approved by the Public Carriage office and the Energy Savings
Trust. (The other system is the conversion of the diesel taxis to LPG fuel.)

The Low Emission Zone strategy announced by the Mayor requires that Heavy
Goods Vehicles and buses, as well as taxis, effectively meet Euro 3
standards by 2007.  This covers the entire area of the London Boroughs.  It
is estimated that this might affect some 250,000 vehicles of which at least
100,000 will actually be equipped with systems to meet the requirement.  The
Company expects its position on the EST Clean-up Register for products
suitable for this upgrade program will enable it to generate a significant
market share.

                                    11

In March 2004, the Jubilee Investment Trust of London, U.K. acquired $2.1
million of the Company?s common stock in exchange for its stock.  The
Jubilee stock was subsequently sold for $910,569 to meet working capital
requirements of the Company.

In September 2004, another investment valued at $1.6 million was made in the
Company by the London-based Langley Park Investment Trust in exchange for
Langley stock.  Subsequent to this transaction, the Company sold a portion
of the Langley shares for $104,860.

Disclosure Regarding Forward-Looking Statements

Where this Form 10-KSB includes "forward-looking" statements within the
meaning of Section 27A and Section 21E of the Securities Act, the Company
desires to take advantage of the "safe harbor" provisions thereof.
Therefore, the Company is including this statement for the express purpose
of availing itself of the protections of such safe harbor provisions with
respect to all of such forward-looking statements.  The forward-looking
statements in this Form 10-KSB reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ from those anticipated.  These risks include, but
are not limited to, economic conditions, changes in environmental
regulations, the market for venture capital, etc.  In this Form 10-KSB, the
words "anticipates," "believes," "expects," "intends," "future" and similar
expressions identify forward-looking statements.  The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that may arise after the date hereof.  All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section.


Item 7.  Financial Statements

See the Index to Financial Statements on page F-1 following the signature
page of this Form 10-KSB.


Item 8.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

None


Item 8A.   Controls and Procedures

(a)   Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
the end of the period covered by this Annual Report, we have carried out an
evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures.  This evaluation was carried out under
the supervision and with the participation of our management, including our
chief executive officer/chief financial officer.  Based upon this
evaluation, our chief executive officer/chief financial officer concluded
that our disclosure controls and procedures are effective as of the end of
the period covered by this report.  The Company is presently unable to

                                    12

provide segregation of duties within the Company as a means of internal
control.  As a result, the Company is presently relying on overriding
management short term review procedures until such time as additional
funding is provided to hire additional executives to segregate duties within
the Company.

During our most recently completed fiscal year ended December 31, 2004,
there were no changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to affect, our internal
control over financial reporting.

Disclosure controls and procedures and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time period specified in the Securities
and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934 is accumulated and communicated to
management including our president and secretary as appropriate, to allow
timely decisions regarding required disclosure.

The term "internal control over financial reporting" is defined as a process
designed by, or under the supervision of, the registrant's principal
executive and principal financial officers, or persons performing similar
functions, and effected by the registrant's board of directors, management
and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:

   (1) Pertain to the maintenance of records that in reasonable detail
   accurately and fairly reflect the transactions and dispositions of the
   assets of the registrant;

   (2) Provide reasonable assurance that transactions are recorded as
   necessary to permit preparation of financial statements in accordance
   with generally accepted accounting principles, and that receipts and
   expenditures of the registrant are being made only in accordance with
   authorizations of management and directors of the registrant; and

   (3) Provide reasonable assurance regarding prevention or timely detection
   of unauthorized acquisition, use or disposition of the registrant's
   assets that could have a material effect on the financial statements.

(b) Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting during
the period covered by this report that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.


Item 8B.   Other Information

None


                                    13


                                  PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons:
          Compliance With Section 16(a) of the Exchange Act


      Name           Age      Position/Office        Term     Served Since
------------------   ---  ------------------------  -------   ------------
 Lester Berriman      80   Director/ VP-Research    2 years    April 1995

 Lionel Simons        70   Director/President/      2 years     Dec. 1995
                           Secretary/Treasurer

 Hamid Servati        52   Director/Consultant      2 years     Nov. 2002

Lester Berriman, P.E., Chairman and VP-Research. A Professional Engineer
with a degree in Chemical Engineering, Mr. Berriman leads the Company in its
research and development. Mr. Berriman served 20 years as manager of
Chemical and Mechanical Engineering for the Southern California laboratories
of the Stanford research Institute and 17 years with Dresser Corporate
Advanced technology which included 2 years as their Director of the Advanced
Technology Center. Mr. Berriman has 21 United States patents and over 80
foreign patents to his credit and is one of the co-developers of the
NOxMaster(TM)technology. Mr. Berriman is also very closely aligned with the
California Air Resources Board (CARB) and the South Coast Air Quality
Management District (AQMD).

Lionel Simons, President and Secretary. Mr. Simons attended the London
School of Economics where he earned his Bachelor of Science in Economics and
was awarded one of 7 Leverhume Scholarships. He earned his Masters in
Business Administration, majoring in International Business and Marketing,
at the Columbia University Graduate School of Business. While Managing
Director of Denbyware Ltd. of England, a manufacturing Company with over
1,000 employees, he increased sales from $10 million to $25 million and took
the Company public via the London Stock Exchange. As President of Dunn
Systems, a medical imaging manufacturing Company with over 150 employees, he
increased OEM sales from $3 million to $15 million before merging with a
major NASDAQ Company. He spent 2 years with Thunder Engine Company,
developers of a 600 hp heavy duty multi- fuel light-weight aluminum engine,
and successfully concluded technology transfer agreements with companies in
China, Korea and Canada.

Hamid Servati, Vice Chairman.  Dr. Servati attended the University of
California at Santa Barbara where he earned his undergraduate degrees and
his Doctorate in Engineering. He then worked as a contract consulting
engineer to Ford Motor Company in Detroit from 1984 to 1987 when he founded
ServoTech, of which he is President and CEO. He became a tier one supplier
to Ford in 1989, providing a variety of consulting engineering services. He
also founded ServoTech Industries, Inc., a manufacturer of prototypes and
high precision components for the automotive and related industries.



                                    14

Item 10.   Executive Compensation

Mr. Berriman, Mr. Simons and Mr. Zabsky voluntarily terminated employment
and consulting contracts with the Company in mid-1996 and the Company, with
their consent, also terminated a stock option and compensation plan for
Directors. In 2001, the Company awarded the following non-cash stock
compensation for services rendered:

  (a) SUMMARY COMPENSATION TABLE

                        Annual Compensation
------------------------------------------------------------------------
   Names and                   Salary/            Other Annual     Market
Principle Position      Year     Fee     Bonus    Compensation     Value
---------------------   ----   -------   -----  ----------------  --------
Lionel Simons           2004   $34,347   $ -0-    500,000 shares  $ 33,000
President/Secretary     2003       -0-     -0-  5,000,000 shares   346,500
                        2002       -0-     -0-        None             -0-

Lester Berriman         2004   $   -0-   $ -0-    275,000 shares  $ 18,150
Chairman/ VP-Research   2003       -0-     -0-  1,000,000 shares    76,600
                        2002       -0-     -0-        None             -0-

Hamid Servati           2004   $   -0-   $ -0-    275,000 shares  $ 18,150
Director/Vice Chairman  2003       -0-     -0-        None             -0-
                        2002       -0-     -0-    500,000 shares    87,500 (2)

John Zabsky             2004   $24,000   $ -0-    150,000 shares  $  9,900 (1)
   dba. John Z Co.      2003    24,000     -0-    500,000 shares    34,650 (1)
Consultant              2002    24,000     -0-        None             -0- (1)

    (1) Compensation was provided to Mr. Zabsky an outside consultant.
    (2) Mr. Servati was issued 500,000 shares valued at $87,500 prior to
        becoming a director as part of an attempt to acquire 51% of two
        entities that he owns.

   (b)   OPTION/STOCK APPRECIATION RIGHTS

No stock options or free standing SARs to executive officers of the Company
were granted during 2004.

   (c)   AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR END OPTION/SAR
         VALUE TABLE

There was no exercise of stock options or free standing SARs by executive
officers of the Company during 2004.

   (d)   LONG TERM INCENTIVE PLAN ("LITP") AWARDS TABLE

The Company did not make any long-term incentive plan awards to any
executive officer in 2004.

   (e)   COMPENSATION OF DIRECTORS

No Directors of the Company received cash compensation for their services as
Director during 2004.

                                    15

   (f)   EMPLOYMENT CONTRACTS

The Company has no employment contracts with executive officers.


Item 11.   Security Ownership of Certain Beneficial Owners and Management

The following table sets forth a list of persons known to the Company to be
the beneficial owner of more than five percent of the Company's voting
stock.

Title of         Name and Address of         Shares of            Percent
 Class            Beneficial Owner           Record (1)          of Class
--------       ----------------------      ------------          --------
Common         Pollution Control, Inc.        9,993,877           17.20%
               328 Bay street
               Nassau, Bahamas

Common         Lionel Simons,                 1,214,808 (2)(3)     2.09%
               36 Corniche Drive
               Dana Point, CA 92629

Common         Lester Berriman                2,637,048            5.45%
               18871 Portofino Drive
               Irvine, CA 92715

Common         Prudent Bear Funds, Inc.       3,141,045            5.41%
               8140 Walnut Hill Lane
               Suite 405
               Dallas, TX 75231

Common         Jubilee Investment Trust Plc  10,026,666           17.26%
               1 Great Cumberland Place
               London
               W1H 7AL

Common         Langley Park Investment
                  Trust Plc                  10,000,000           17.21%
               30 Farrington Street
               London
               EC4A 4HJ

Common         John Zabsky                    1,830,432 (4)        3.15%
               3640 S Main St
               Santa Ana, CA 92707

  (1) All shares presented are common shares.  No preferred shares were
      outstanding at December 31, 2004.

  (2) Lionel Simons maintains an indirect controlling beneficial interest in
      Pollution Control, Inc. through a family trust. See item 12.

  (3) The total shares reported as held by Lionel Simons includes 20,000
      shares held by Kimberly Simons who is his daughter and 9,800 shares
      held by Barbara J. Simons who is his wife.

  (4) This total represents shares held by Mr. Zabsky in his own name, as
      well as shares held by John Z Company, a corporation wholly owned by
      Mr. Zabsky.

                                    16

The following table sets forth a list of the beneficial ownership in the
Company by officers and directors.

                                           Amount of
Title of        Name and Address of       Beneficial            Percent
 Class            Beneficial Owner         Ownership           of Class
--------       ---------------------      ----------           --------
Common   Lionel Simons  11,208,685  (2)(3)      19.29%
                           36 Corniche Drive
                           Dana Point, CA 92629

Common   Lester Berriman   2,637,048           4.54%
                           18871 Portofino Drive
                           Irvine, CA 92715

Common   Hamid Servati  1,925,000           3.31%
                           510 Savage Road
                           Belleville, Mi 48111

Common   All officers and directors
                               as a group:   15,770,733        27.14%

  (1) All shares presented are common shares.  No preferred shares were
      outstanding at December 31, 2004.

  (2) Lionel Simons maintains an indirect controlling beneficial interest in
      Pollution Control, Inc. through a family trust.  See item 12.

  (3) Total shares reported as held by Lionel Simons includes 20,000 shares
      held by Kimberly Simons who is his daughter and 9,800 shares held by
      Barbara J. Simons who is his wife and the shares held by Pollution
      Control have been attributed to him due to the controlling interest.


Item 12.   Certain Relationships and Related Transactions

Lionel Simons, President of KleenAir Systems, Inc. is also President and a
beneficial owner of Pollution Control Inc. through family trusts.  Mr.
Simons has a Power of Attorney from Pollution Control which permits him to
vote on its behalf.  In addition, Mr. Simons is on the Board of Directors
for and serving as President of KleenAir Systems PLC in the U.K.  The
Company owns a 23% interest in and sells all of its European products to
this entity for resell.

Hamid Servati is the President, CEO and controlling owner of ServoTech
Industries, Inc.  The Company has paid for services and products provided by
ServoTech.  It has also issued stock in payment of services and products
provided by ServoTech.

See also the discussion of related party transactions presented at Note 14
to the financial statements.



                                    17

Item 13.    Exhibits and Reports on Form 8-K

(a)  The following documents are filed as a part of this report or are
incorporated by reference.


  Financial Statements -- The following information has been included in
  response to Item 8.

                                    Page

    - Report of Independent Certified Public Accountants       F-2
    - Consolidated Balance Sheets                              F-3
    - Consolidated Statements of Operations                    F-4
    - Consolidated Statements of Shareholders' Equity          F-5
    - Consolidated Statements of Cash Flows                    F-8
    - Notes to Consolidated Financial Statements               F-9


  Exhibits - The following Exhibits are furnished as a part of this report:

       Exhibit No.                   Description
       -----------    ----------------------------------------------
          23.1        * Consent of Robert Early & Company, P.C.
          31          * Certification of Chief Financial Officer pursuant
                        to Section 302 of the Sarbanes-Oxley Act of 2002.
          32.1        * Certification of Chief Operating Officer pursuant
                        to Section 906 of Sarbanes Oxley Act
          32.2        * Certification of Chief Financial Officer pursuant
                        to Section 906 of Sarbanes-Oxley Act
     --------------
     * Filed herewith.


Item 14.  Principal Accountant Fees and Services

As of the date of this Report, the Company has not appointed members to an
audit committee and, therefore, the respective role of an audit committee
has been conducted by the board of directors of the Company.  When
established, the audit committee's primary function will be to provide
advice with respect to the Company's financial matters and to assist the
board of Directors in fulfilling its oversight responsibilities regarding
finance, accounting, tax and legal compliance. The audit committee's primary
duties and responsibilities will be to: (i) serve as an independent and
objective party to monitor the Company's financial reporting process and
internal control system; (ii) review and appraise the audit efforts of the
Company's independent accountant's; (iii) evaluate the Company's quarterly
financial performance as well as its compliance with laws and regulations;

(iv) oversee management's establishment and enforcement of financial
policies and business practices; and (v) provide an open avenue of
communication among the independent accountants, management and the board of
directors.

The firm of Robert Early & Company, P.C., served as the Company's
independent auditors for the years ended December 31, 2004 and 2003.  The
Board of Directors of the Company, in its discretion, may direct the
appointment of different public accountants at any time during the year, if

                                    18

the Board believes that a change would be in the best interests of the
stockholders.  The Board of Directors has considered the audit fees,
audit-related fees, tax fees and other fees paid to the Company's
accountants, as disclosed below, and had determined that the payment of such
fees is compatible with maintaining the independence of the accountants.

Audit and Audit-Related Fees:  The aggregate fees, including expenses,
billed by the Company's principal accountant in connection with the audit of
our consolidated financial statements for the most recent fiscal year
included in our Annual Report on Form 10-KSB; and for the review of our
financial information and our quarterly reports on Form 10-QSB during the
years ending December 31, 2004 and 2003 were $20,624 and $19,049,
respectively.  In addition, we incurred accounting review related fees
(primarily related to procedures our auditors were required to perform in
reviewing potential registration statements and our Form S-8 Registration
Statements) of $1,230 in 2004 and $1,384 in 2003, respectively.

Tax Fees:  The Company did not incur any fees for tax compliance, tax advice
and tax planning by the Company's principal accountant for 2004 and 2003.

All Other Fees:  The Company paid its principal accountant $1,700 and $2,500
in 2004 and 2003, respectively, for the services  of converting its SEC
filings to and filing them in EDGAR format.



                                 SIGNATURES

In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                   KLEENAIR SYSTEMS, INC.

Date:  April 14, 2005              /s/ LIONEL SIMONS
                                   ------------------------------------
                                   By: Lionel Simons
                                   President, Secretary, Principal
                                   Accounting Officer, & Principal
                                   Financial Officer

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated:

           Signature                     Title             Date
--------------------------             --------       --------------


 /s/ LIONEL SIMONS                     Director       April 14, 2005
----------------------
 Lionel Simons


 /s/ LESTER BERRIMAN                   Director       April 14, 2005
-----------------------
 Lester Berriman


 /s/ HAMID SERVATI                     Director       April 14, 2005
-----------------------
Hamid Servati











                                     19







                        KLEENAIR SYSTEMS, INC.
                    (A Development Stage Company)




                    INDEX TO FINANCIAL STATEMENTS







                                                                        Page
                                                                        ----


      Report of Independent Certified Public Accountants  .  .  .  .  .  F-2

      Consolidated Balance Sheets as of December 31, 2004 and 2003 .  .  F-3

      Consolidated Statements of Operations for the years
           ended December 31, 2004 and 2003.  .  .  .  .  .  .  .  .  .  F-4

      Consolidated Statement of Stockholders' Equity for the
           years ended December 31, 2004 and 2003.  .  .  .  .  .  .  .  F-5

      Consolidated Statements of Cash Flows for the years
           ended December 31, 2004 and 2003.  .  .  .  .  .  .  .  .  .  F-8

      Notes to Consolidated Financial Statements .  .  .  .  .  .  .  .  F-9















                                   F-1





             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
KleenAir Systems, Inc.
Irvine, California


We have audited the accompanying consolidated balance sheets of KleenAir
Systems, Inc. (a development stage Company) as of December 31, 2004 and
2003, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended.   We have also audited the
cumulative statements of operations, stockholders' equity, and cash flows
for the period from January 1, 1995 through December 31, 2004.  These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KleenAir Systems, Inc.
at December 31, 2004 and 2003, and the results of its operations and its
cash flows for the years and cumulative period then ended in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company is still in the development stage and has
not established sustained operating revenues.  This situation raises
substantial doubt as to the Company's ability to continue as a going
concern.  Management's plans in regard to this situation are also described
in Note 2.  The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.


/s/ ROBERT EARLY & COMPANY, P.C.
--------------------------------
Robert Early & Company, P.C.
Abilene, Texas

March 31, 2005


                                    F-2

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                        CONSOLIDATED BALANCE SHEETS
                      As of December 31, 2004 and 2003

                                ASSETS

                                                       2004            2003
                                                    ----------      ----------
CURRENT ASSETS:
  Cash                                              $   87,696      $   28,739
  Accounts receivable (net)                              2,970          15,699
  Accounts receivable from related parties             105,074          33,288
  Parts inventory (at cost)                             24,352          57,126
  Prepaid expenses                                      38,094          47,000
  Marketable securities (net)                          195,202              -
                                                    ----------      ----------
    Total Current Assets                               453,388         181,852

PROPERTY AND EQUIPMENT (net)                           112,296         155,611

OTHER ASSETS:
  Patent license (net)                               1,469,076       1,530,756
                                                    ----------      ----------
    TOTAL ASSETS                                    $2,034,760      $1,868,219
                                                    ==========      ==========



                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
  Accounts payable                                  $  136,853      $  402,817
  Accounts payable to related parties                  149,912         101,932
  Advances from directors                               76,000          96,584
  Capital lease liability                                   -              372
  Notes payable to related entities                    231,000         197,000
                                                    ----------      ----------
    Total Current Liabilities                          593,765         798,705
                                                    ----------      ----------

STOCKHOLDERS' EQUITY:
 Preferred stock, series A, $.001 par value
  (10,000,000 shares authorized, none outstanding)          -               -
 Common stock, $.001 par value (50,000,000 shares
  authorized, 58,100,206 and 31,422,161
   outstanding, respectively)                           58,100          31,422
  Additional paid-in capital                         9,955,716       8,006,296
  Deficit accumulated during the development stage  (8,572,821)     (6,968,204)
                                                    ----------      ----------
      Total Stockholder's Equity                     1,440,995       1,069,514
                                                    ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY          $2,034,760      $1,868,219
                                                    ==========      ==========



The accompanying notes are an integral part of these financial statements.
                                    F-3

<PAGE>
                         KLEENAIR SYSTEMS, INC.
                      (A Development Stage Company)
                  CONSOLIDATED STATEMENTS OF OPERATIONS
               For Years Ended December 31, 2004 and 2003

                                                                   Cumulative
                                                                  During Devel-
                                            2004         2003     opment Stage
                                        -----------  -----------  -----------
REVENUES
  Sales                                 $    35,937  $   734,993  $   945,953
  Royalties                                   5,525       19,892       25,417
                                        -----------  -----------  -----------
    Total revenues                           41,462      754,885      971,370

COST OF REVENUES                             38,152      647,876      736,489
                                        -----------  -----------  -----------
  Gross Profit                                3,310      107,009      234,881
                                        -----------  -----------  -----------

PRODUCT DEVELOPMENT COSTS                   172,682      196,534    1,411,687

OPERATING EXPENSES:
  Personnel costs                           192,465      570,445    1,430,209
  Consultants                               503,120      682,796    3,229,846
  Professional fees                          58,032      103,536      557,259
  Office expenses                             7,752        9,915       61,030
  Depreciation                               51,591       49,690      163,111
  Amortization of intangible assets         129,434      116,148      311,093
  Advertising and promotion                  33,781       19,177      264,722
  Rent                                      147,647       95,717      357,864
  Travel                                     50,312       96,575      346,885
  Other expenses                             48,999       76,536      216,156
  Bad debts                                   1,000      220,000      221,000
  Other                                          -            -       171,378
                                        -----------  -----------  -----------
    Total operating expenses              1,224,133    2,040,535    7,330,553
                                        -----------  -----------  -----------
(LOSS) FROM OPERATIONS                   (1,393,505)  (2,130,060)  (8,507,359)

OTHER INCOME AND (EXPENSES):
  Interest income                                -            11        2,526
  Management fees                           110,478           -       110,478
  Loss on sale of securities               (101,887)          -      (101,887)
  Unrealized loss on securities            (191,877)          -      (191,877)
  Interest expense                          (20,156)     (17,248)     (39,593)
  Loss on foreign exchange transactions      (7,670)          -        (7,670)
  Amortize discount on receivables               -            -        20,259
                                        -----------  -----------  -----------
(Loss) before income taxes               (1,604,617)  (2,147,297)  (8,715,123)
  Benefit from deferred taxes                    -            -       397,852
                                        -----------  -----------  -----------
(Loss) Before Extraordinary Item         (1,604,617)  (2,147,297)  (8,317,271)
Extraordinary Item:
  Costs of terminated acquisitions               -            -      (255,550)
                                        -----------  -----------  -----------
Net (Loss)                              $(1,604,617) $(2,147,297) $(8,572,821)
                                        ===========  ===========  ===========

Earnings per Share (Basic):
(Loss)/share before extraordinary item  $     (0.03) $     (0.10) $     (0.67)
(Loss)/share from extraordinary item             -            -         (0.02)
                                        -----------  -----------  -----------
Net (Loss) Per Share                    $     (0.03) $     (0.10) $     (0.69)
                                        ===========  ===========  ===========
Weighted Average Shares Outstanding
  Basic                                  47,375,811   22,392,964   12,421,112
                                        ===========  ===========  ===========

The accompanying notes are an integral part of these financial statements.
                                    F-4

<TABLE>
                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
               CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<CAPTION>
                                                                                                         Accumulated
                                                                                  Additional  Unearned  Deficit During
                                     Preferred Stock         Common  Stock         Paid-In     Compen-    Development
                                      Shares    Amount      Shares     Amount      Capital     sation       Stage
                                    ---------  --------   ---------  ----------   ---------   ---------   ----------
<S>                                 <C>        <C>        <C>        <C>          <C>         <C>         <C>
BALANCES, 1/1/95                           -   $     -       74,132  $       74   $ 151,444   $      -    $ (151,518)

Stock issued for cash                      -         -       27,334          27      66,982          -            -
  For adjustment                           -         -          534           1          -           -            -
  For consulting services                  -         -       86,148          86     279,439          -            -
  For professional services                -         -        4,666           5      12,745          -            -
  For purchase of patent rights       933,334       934      60,000          60      13,905          -            -
  For directors' compensation              -         -        4,000           4      22,496          -            -
  For officers' compensation           33,334        33       9,334           9     194,958          -            -
Other contributed capital                  -         -           -           -        2,367          -            -
Options compensation                       -         -           -           -       70,313    (152,016)          -
Net loss                                   -         -           -           -           -           -      (329,289)
                                    ---------  --------   ---------  ----------   ---------   ---------   ----------
BALANCES, 12/31/95                    966,668       967     266,148         266     814,649    (152,016)    (480,807)

Stock issued for services              13,332        13      24,666          25     201,837     (78,750)          -
  For officers' compensation           33,332        33          -           -       15,592     (15,625)          -
  For aborted acquisition                  -         -       40,000          40     140,510          -            -
Exercise of options                        -         -       75,000          75     112,424          -            -
Conversion to common                 (318,666)     (319)    318,666         319          -           -            -
Net Loss                                   -         -           -           -           -      187,346     (716,511)
                                    ---------  --------   ---------  ----------   ---------   ---------   ----------
BALANCES, 12/31/96                    694,666       694     724,480         725   1,285,012     (59,045)  (1,197,318)

Stock issued for cash                      -         -      120,000         120      14,880          -            -
  For officers' compensation           33,334        33          -           -        3,842      (3,875)          -
Conversion to common                 (100,000)     (100)    100,000         100          -           -            -
Net loss                                   -         -           -           -           -       37,979      (55,438)
                                    ---------  --------   ---------  ----------   ---------   ---------   ----------
BALANCES, 12/31/97                    628,000       627     944,480         945   1,303,734     (24,941)  (1,252,756)


(Continued on next page)


<FN>
The accompanying notes are an integral part of these financial statements.
                                     F-5
</FN>
</TABLE>

<TABLE>
                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                     STATEMENT OF STOCKHOLDERS' EQUITY
(Continued from previous page)
<CAPTION>
                                                                                                          Accumulated
                                                                                  Additional   Unearned  Deficit During
                                     Preferred Stock           Common Stock        Paid-In      Compen-   Development
                                      Shares    Amount      Shares     Amount      Capital      sation       Stage
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
<S>                                 <C>        <C>        <C>         <C>         <C>          <C>        <C>
Stock issued for cash                      -   $     -       800,000  $      800  $  199,200   $      -    $       -
  For services                             -         -     2,120,000       2,120      92,255          -            -
  For services-officers & directors        -         -       320,000         320      59,680
  For diesel license                       -         -     2,000,000       2,000      60,500          -            -
Conversion to common                 (403,334)     (403)     403,334         403          -           -            -
Net loss                                   -         -            -           -           -       24,941     (305,561)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
BALANCES, 12/31/98                    224,666       224    6,587,814       6,588   1,715,369          -    (1,558,317)

Stock issued for cash                      -         -       146,800         147      35,653          -            -
  For services                             -         -     1,103,334       1,103     247,179          -            -
  For equipment                            -         -        33,200          33       8,267          -            -
  For services-officers & directors        -         -     1,425,000       1,425     408,808          -            -
Conversion to common                  (61,334)      (61)      61,334          61          -           -            -
Net loss                                   -         -            -           -           -           -      (802,722)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
BALANCES, 12/31/99                    163,332       163    9,357,482       9,357   2,415,276          -    (2,361,039)

Stock issued for cash                      -         -     1,414,000       1,414     357,336          -            -
  For services                             -         -     1,642,666       1,643     600,024          -            -
  As promotion                             -         -         1,600           2       3,199          -            -
Conversion to common                 (163,332)     (163)     163,334         163          -           -            -
Net loss                                   -         -            -           -           -           -      (717,012)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
BALANCES, 12/31/00                         -         -    12,579,082      12,579   3,375,835          -    (3,078,051)

Stock issued for cash                      -         -       195,000         195     104,805          -            -
  For services                             -         -     1,749,487       1,749     293,087          -            -
  For services-officers & directors        -         -       850,000         850      77,690          -            -
  For rent                                 -         -        17,500          18       6,232          -            -
Net loss                                   -         -            -           -           -           -      (623,811)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
BALANCES, 12/31/01                         -         -    15,391,069      15,391   3,857,649          -    (3,701,862)


(Continued on next page)
<FN>
The accompanying notes are an integral part of these financial statements.
                                     F-6
</FN>
</TABLE>

<TABLE>
                                     KLEENAIR SYSTEMS, INC.
                                  (A Development Stage Company)
                         CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued from previous page)
<CAPTION>
                                                                                                          Accumulated
                                                                                  Additional   Unearned  Deficit During
                                     Preferred Stock           Common Stock        Paid-In      Compen-   Development
                                      Shares    Amount      Shares     Amount      Capital      sation       Stage
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
<S>                                 <C>        <C>        <C>         <C>         <C>          <C>        <C>

Stock issued:  For cash                    -   $     -     2,804,545  $    2,805  $1,717,195   $      -   $        -
  For services                             -         -     1,201,692       1,202     404,232          -            -
  For Acquisition of Carbon Cloth          -         -       873,250         873     968,434          -            -
Contributed inventory                      -         -            -           -       12,207          -            -
Net loss                                   -         -            -           -           -           -    (1,119,045)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
   BALANCES, 12/31/02                      -         -    20,270,556      20,271   6,959,717          -    (4,820,907)

Stock issued:
  For cash                                 -         -       750,000         750      74,250          -            -
  For services-officers & directors        -         -     7,600,000       7,600     511,490          -            -
  For services                             -         -     2,801,605       2,801     460,839          -            -
Net loss                                   -         -            -           -           -           -    (2,147,297)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------
   BALANCES, 12/31/03                      -         -    31,422,161      31,422   8,006,296          -   (6,968,204)

Stock issued:
  For cash                                 -         -       750,000         750      74,250          -           -
  For investments                          -         -    20,527,999      20,528   1,387,706          -           -
  For services-officers & directors        -         -     1,200,000       1,200      78,519          -           -
  For services                             -         -     4,200,046       4,200     408,945          -           -
Net loss                                   -         -            -           -           -           -    (1,604,617)
                                    ---------  --------   ----------  ----------  ----------   ---------  -----------

   BALANCES, 12/31/04                      -   $     -    58,100,206  $   58,100  $9,955,716   $      -   $(8,572,821)
                                    =========  ========   ==========  ==========  ==========   =========  ===========



<FN>
The accompanying notes are an integral part of these financial statements.
                                     F-7
</FN>
</TABLE>

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                 For Years Ended December 31, 2004 and 2003

                                                                   Cumulative
                                                                  During Devel-
                                              2004        2003    opment Stage
                                          -----------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss)                               $(1,604,617)$(2,147,297) $(8,572,821)
 Adjustments to reconcile net (loss) to
 net cash provided by operations:
  Losses prior to current ownership                -           -       151,518
  Loss and unrealized loss on securities      293,764          -       293,764
  Depreciation                                 51,591      49,690      163,111
  Bad debts                                     1,000     220,000      221,000
  Amortization of:
   Prepaid expenses                            28,906     136,042    1,253,643
   Intangibles                                129,434     116,148      311,093
  Stock issued for services                   492,864     921,230    3,254,736
  Stock issued for extraordinary loss              -           -       140,550
  Deferred income taxes                            -           -      (397,852)
 Changes in operating assets and liabilities:
  Accounts receivable                          11,729      65,555      (14,861)
  Inventory                                    32,774      56,950       (1,814)
  Advances to consultants                          -           -        20,000
  Prepaid expenses                            (20,000)         -      (267,000)
  Trade accounts payable                     (289,770)    354,573      118,835
                                          -----------  ----------  -----------
NET CASH USED BY OPERATING ACTIVITIES        (872,325)   (227,109)  (3,326,098)
                                          -----------  ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Property and equipment                        (8,276)     (9,681)    (265,714)
 Patent licensing costs                       (67,754)    (29,524)    (228,766)
 Proceeds from sale of securities             919,268          -       919,268
 Business acquisition                              -           -       (44,820)
 Notes receivable                                  -           -      (220,000)
                                          -----------  ----------  -----------
NET CASH USED IN INVESTING ACTIVITIES         843,238     (39,205)     159,968
                                          -----------  ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuing stock                   75,000      75,000    2,944,459
 Capital lease obligation                          -           -         7,765
 Payments on capital lease                       (372)     (4,439)      (7,765)
 Additional capital contributions                  -           -         2,367
 Advances and loans from related parties      138,015     147,734      431,599
 Repayments to related parties               (124,599)         -      (124,599)
                                          -----------  ----------  -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES      88,044     218,295    3,253,826
                                          -----------  ----------  -----------
NET INCREASE/(DECREASE) IN CASH                58,957     (48,019)      87,696

CASH AT BEGINNING OF YEAR                      28,739      76,758           -
                                          -----------  ----------  -----------
CASH AT END OF YEAR                       $    87,696  $   28,739  $    87,696
                                          ===========  ==========  ===========

  See Note 3 for Supplemental Cash Flow Disclosures

The accompanying notes are an integral part of these financial statements.
                                     F-8

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         December 31, 2004 and 2003


NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

NATURE OF BUSINESS

KleenAir Systems, Inc. (the Company) was originally incorporated in 1986 in
Nevada as Covington Capital Corporation.  Prior to its current name, the
Company had various names as various endeavors were attempted. None of these
proved fruitful.  In April 1995, the Company purchased a patent for a
proprietary device that had been shown to be capable of neutralizing the
environmental impact of nitrous oxide from the exhaust emissions from
internal combustion engines without significant modification to the engine
or the vehicle it was powering.  This device is known as the "NOxMASTERTM."
Soon after the acquisition of this patent along with the right to use of the
seller's name, the Company changed to its current name.  With the patent
acquisition in April 1995, the Company moved into the development stage and
has since worked toward the completion of tests, fine tuning, and clearance
of California Air Resources Board standards.  The product is currently being
sold and installed on commercial vehicles in England and has been tested for
applications in other parts of Europe and Asia.  Authorities which set
emission standards in the U.S. have continued to waver in the establishment
of a final set of criteria for certifying that a device will reduce
offending emissions.  This continued delay in criteria has prevented the
Company from initiate sales within the U.S.

During April 2002, the Company acquired Carbon Cloth Technologies, Inc.
(Carbon Cloth).  Carbon Cloth owns the exclusive rights to manufacture and
market automotive thermal management systems.  Certain applications of the
Company's NOxMasterTM are enhanced by the addition of the main product
offered by Carbon Cloth.  The sharing of Carbon Cloth's customer base and
contacts in connection with the compatibility and joint benefits of the
mutual products were expected to enhance sales of both products.

The Company's accounting and reporting policies conform with generally
accepted accounting principles.  Policies that materially affect the
determination of financial position, cash flows, and results of operations
are summarized as follows:

Development stage reporting -- Generally accepted accounting principles call
for certain presentations of cumulative financial statement information from
inception to the date of the financial statements.  Since the Company
restarted its operations (from a position of inactivity) in April 1995,
these statements present information from the inception of its development
stage.

Consolidation -- The accompanying consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, after
elimination of all material inter-company accounts, transactions, and
profits.

Accounts Receivable -- The Company uses the allowance method to account for
uncollectible accounts receivable. Accounts receivable are presented net of

                                   F-9

an allowance for doubtful accounts when applicable.  There was an allowance
of $1,000 at December 31, 2004, with none at December 31, 2003.  An
allowance is established whenever receivables are over 90 days old and the
customer has not responded to efforts to reconcile differences. Such
receivables are deemed to be uncollectible after 180 days.

Inventory -- Inventories are stated at the lower of cost or market (net
realizable value).

Investments -- The Company's securities investments are held principally for
the purpose of selling them in the near term and are all classified as
trading securities.  Trading securities are carried at fair value on the
balance sheet in current assets, with any change in fair value during the
period, i.e., net unrealized gains and losses, included in current
operations.  Costs associated with realized gains are recognized on the
first-in, first-out basis.

Investments in Closely Held Entities -- The equity method of accounting is
used when the Company has a 20% to 50% interest in other entities.  Under
the equity method, original investments are recorded at cost and adjusted by
the Company's share of undistributed earnings or losses of these entities,
but not below zero.  As discussed at Note 5, the Company owns a 23% interest
in KleenAir Systems International Plc in the U.K.

Property and Equipment -- Property and equipment are carried at depreciated
cost.  Expenditures for major renewals and betterments that extend the
useful lives are capitalized.  Expenditures for maintenance and repairs are
charged to expense as incurred.  The cost of property and equipment is
depreciated over the estimated useful lives of the related asset.
Depreciation is computed on the straight-line method for financial reporting
purposes and on the applicable Modified Accelerated Cost Recovery System
method for income tax purposes.  In addition, tax depreciation includes the
benefits of first year expensing under Internal Revenue Code Section 179
whenever it is advantageous to the Company make this election.

The Company reviews the carrying value of property, plant, and equipment for
impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash
flows expected to result from its use and eventual disposition.  In cases
where undiscounted expected future cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets.  The factors considered by
management in performing this assessment include current operating results,
trends, and prospects, as well as the effects of obsolescence, demand,
competition, and other economic factors.

Research and Development Costs -- Research, development, and engineering
costs are treated as expenses during the year incurred.  Costs incurred are
as disclosed in the income statement.

Patent and Licensing Costs -- Only the direct costs of obtaining license or
patents and costs of extending or perfecting the patents are eligible for
capitalization.   These capitalized costs are amortized over the estimated
useful life of the patent, generally five to fifteen years, using the
straight-line method. The cost of patent applications in process for new
products is not amortized until the patents are issued.  Costs of patent
applications for products that extend the use of existing products are
amortized with the cost of the existing product.  In the event that a patent
is superseded, the unamortized costs are written off immediately.

The Company purchased the rights to the patent for its NOxMASTERTM and has
developed other patents as discussed at Note 9 below.  The costs of the
patent and licenses, along with legal costs incurred to register and protect
them, have been capitalized and are being amortized now that sales of the
product have commenced. Amortization is being charged on a straight-line
basis over the ten years beginning April 2003.  Amortization expense of
$31,166 and $17,881 related to these rights has been charged to operations
during the years ended December 31, 2004 and 2003.

                                   F-10

The acquisition cost allocated to the CarbonGuardTM (Carbon Cloth's
intangible asset) is being amortized over the fifteen years beginning May
2002.  Amortization expense for this asset of $98,268 and $98,267 has been
charged to operations during the years ended December 31, 2004 and 2003.

The Company reviews the carrying value of its patent and licensing costs in
a manner consistent with that described above for its property and
equipment.  The factors considered by management in assessing impairment of
patent and license costs include remaining patent life, demand for the
products, status of environmental developments and legislation, competition,
capability for future product enhancements, etc.

Revenue Recognition -- Sales are recorded when products are shipped to
customers.  Provisions for discounts and rebates to customers, estimated
returns and allowances, and other adjustments are provided for in the same
period the related sales are recorded.  In instances where products are
configured to customer requirements, revenue is recorded upon the successful
completion of the Company's final test procedures.

Stock-Based Compensation -- The Company accounts for services acquired (and
other expenses paid) using stock as compensation (or payment) based on the
fair value of the shares issued.  Compensation is made both to employees and
non-employees.  Valuation methods are the same for either group.  Fair value
of shares issued  is determined based on the closing price of the stock on
the date the Company becomes obligated to issue the shares.  Due to thin
trading volume of the Company's stock, the value of most stock issuances are
calculated as a discount to the trading price because of the practical and
effective limitations on disposal by the recipient of the shares.
Restricted shares issued for services are valued based on a greater discount
because of the added time limitation on the tradability of the restricted
shares.  The limitations on tradability (the discounts in value) were
considered when determining the number of shares to be issued.  Such
discounts result in lower costs than would have been recorded had market
trading price been used as the value of the issued shares, however, such
value are not be indicative of the fair value of the services received.

Income Taxes -- The Company accounts for income taxes in accordance with
FASB Statement No. 109, "Accounting for Income Taxes."  Under FAS 109,
deferred income tax assets and liabilities are recorded for the income tax
effects of differences between the bases of assets and liabilities for
financial reporting purposes and their bases for income tax reporting.  The
Company's differences arise principally from the use of accelerated and
modified accelerated cost recovery system for income tax purposes versus
straight line depreciation and from utilization of net operating loss
carry-forwards.

Deferred tax assets and liabilities are the amounts by which the Company's
future income taxes are expected to be impacted by these differences as they
reverse.  Deferred tax assets are based on differences that are expected to
increase future income taxes as they reverse.  Correspondingly, deferred tax
liabilities are based on differences that are expected to increase future
income taxes as they reverse.  Note 8 below discusses the amounts of
deferred tax benefits and deferred tax liabilities.  The Note also presents
the impact of significant differences between financial reporting income and
taxable income.

Earnings Per Share -- In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 128
"Earnings Per Share," which requires the Company to present basic and
diluted earnings per share, instead of the primary and fully diluted earning
per share.  The computation of basic earning per share is based on the
weighted average number of common shares outstanding during the periods
presented.  The computation of diluted earnings per shares is based on the
weighted average number of outstanding common shares during the year plus,
when their effect is dilutive, additional issuable shares, assuming the
exercise of certain vested and non-vested stock options and warrants and
conversion rights, reduced by the number of shares that could be purchased
from any proceeds generated.

Cash Flows -- The Company considers cash to be its only cash equivalent for
purposes of presenting its Statements of Cash Flows.

                                   F-11

Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.  Actual results could differ from
those estimates.

Financial Instruments -- Unless otherwise specified, Management believes the
carrying value of its financial instruments approximates their fair value
due to the short term to maturity.  Investments in marketable securities are
carried at market value.


NOTE 2:   GOING CONCERN

These financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has neither sufficient operating
revenues nor disposable assets to fund completion of its development
program, current level of expenses, or initial production stages.  In this
situation, the Company is reliant solely upon its ability to raise capital
through sales of its stock, debt financing, or acquisition of services
through issuances of the Company's stock.  There is no assurance that a
market exists for the sale of the Company's stock or that lenders could be
found to lend money to the Company.  Should financing not be available, the
Company would, in all likelihood, be forced to stop development efforts
and/or to shut down its activities completely.

Management has been in contact with various parties who are interested in
providing funding for the completion of testing and trials to obtain
certifications from the State of California and the EPA regarding the
product's ability to function as an emission control device.  Because of
these contacts, Management anticipates that efforts to obtain certification
will be continued and that there should be no substantial difficulties in
obtaining sufficient financing to obtain such certifications and subsequent
distribution.  Additionally, testing in England resulted in product sales
and installations during the second and third quarters of 2003 through the
Company's U.K. affiliate. Sales/installations were halted for the fourth
quarter of 2003 and all of 2004 due to budgetary limitations under the U.K.
trust that is administering the governmental cost sharing program.  These
sales are expected to resume in 2005 with the advent of a new budget period
and final resolution of methods and practices by the trust.

These financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amount of
liabilities that might be incurred should the Company be unable to continue
in existence.


NOTE 3:   SUPPLEMENTAL CASH FLOW DISCLOSURES:

                                                                   Cumulative
                                                                  During Devel-
                                              2004        2003    opment Stage
                                          -----------  ----------  -----------
Cash payments for:
 Interest                                 $     5,613  $    2,189  $    13,895
 Income taxes                                      -           -            -

                                   F-12


                                                                   Cumulative
                                                                  During Devel-
                                              2004        2003    opment Stage
                                          -----------  ----------  -----------
Non-cash investing and financing transactions
 Stock has been issued for:
   Compensation and directors' fees       $    79,200  $   92,912  $ 1,417,850
   Consultants and prepaid services           413,664     225,022    3,156,400
   Equipment                                       -           -         8,300
   Patent licensing                                -           -        14,900
   Repurchase of U.S. diesel license               -           -        62,500
   Acquisition of National Diversified
     Telecom, Inc.                                 -           -       140,550
   Acquisition of Carbon Cloth
     Technologies, Inc.                            -      981,514      981,514
   Uncompleted business acquisition                -       87,500       87,500
   Purchase of marketable securities        1,408,234          -     1,408,234
 Sale of marketing licenses for
   notes receivable                                -           -     1,736,558


NOTE 4:   MARKETABLE SECURITIES

During 2004, the Company acquired investments in Jubilee Investments Trust
Plc and Langley Park Investments Trust in England in exchange for issuances
of large blocks of its stock.  (See Note 13.)  The Jubilee investment was
privately placed almost immediately for cash.  The Langley Park investment
was partially sold and partially held at the end of the year.

The following table presents information regarding the Company's investments
in marketable securities at December 31, 2004.  None were held during 2003.
This security is being held as a trading security.

      Aggregate cost basis                            $    387,079
      Unrealized gain/(loss)                              (191,877)
                                                      ------------
      Aggregate fair value (carrying value)           $    195,202
                                                      ============


NOTE 5:   EQUITY METHOD INVESTEE

At December 31, 2003, the Company held a 30% interest in KleenAir Systems
International, Inc. (KASI), a Bahamas-based entity.  KASI owned 100% of
KleenAir Systems, Ltd. (KSL), a British entity.  The Company received its
interest in KASI pursuant to a licensing agreement with its President for
European marketing rights for its products.  As such, the Company has no
cost in this investment.  To date, KASI has not generated any net profit.
Accounting rules do not provide for recording negative investments under the
equity method accounting.

During 2004, a new entity was formed in the U.K., KleenAir Systems
International Plc (KSIP).  This entity exchanged its stock for all of the
outstanding shares of KASI, which became its wholly owned subsidiary.
Subsequently, KSIP offered shares publicly to raise funds for operations.
As a result of that offering, the Company's interest has been diluted to

                                   F-13

23%.  No amounts have been recorded on the Company's books because the
investment would still be negative.

The Company's President currently serves as a principal officer for KSIP.


NOTE 6:   RECEIVABLES

Over the years, the Company has advanced funds to KSL for expenses incurred
in the testing of the product on London taxicabs and buses and for operating
expenses.  In addition, there have been royalties accrued and invoicing for
products delivered.  During 2004, there were additional advances and,
subsequent to the KSIP offering,  repayments.  In 2004, the Company billed
KSL for management fees of $110,478 to offset the costs incurred by the
Company's president during time devoted to assisting KSIP with its offering
and working on the resumption of sales of the products.  Effectively, an
amount owed to KASI ($3,921) has been netted with the amounts receivable
from KSL.  Net receivables from these related entities were $105,074 and
$33,288 at December 31, 2004 and 2003.

At December 31, 2004, receivables from unrelated parties were not material,
however, an allowance of $1,000 was established due to questionable
collectability from one customer.  The carrying value of receivables is
believed to approximate their fair values.


NOTE 7:   PREPAID EXPENSES

The Company follows a practice of employing consultants for advisory
services.  Typically, these agreements often are for a one-year period and
generally call for the bulk of the compensation to be paid with stock at the
initiation of the services.  The stock compensation under these contracts is
valued at its estimated fair value, in accordance with the Company's
accounting policies, and recorded as prepaid services.  This prepaid cost is
then amortized to consulting fees over the period of the contract.

In 2002, the Company started contracts with a combination of unrestricted
and restricted stock valued at a total of $125,750.  In 2003, the Company
prepaid $61,500 with unrestricted stock.  All consulting agreements had
fully amortized before December 31, 2003.  Amortization of these costs
during 2003 was $170,270.

The balances for items making up prepaid expenses at December 31, 2004 and
2003 were as follows:

                                                    2004            2003
                                                 ----------      ----------
    Insurance                                    $    4,493      $       -
    Rent                                             32,801          46,200
    Taxes                                               800             800
                                                 ----------      ----------
      Totals                                     $   38,094      $   47,000
                                                 ==========      ==========

NOTE 8:   INCOME TAXES

Because of  timing, relative insignificance, and changes in control and
management, the Company believes that it cannot benefit from operating

                                   F-14


losses before 1995 in calculating its income taxes.  Operating losses
reported for tax purposes vary from accumulated deficits in retained
earnings due to differences in tax treatment, deductibility, or timing of
various items.   The tax loss carry-forwards are as follows:

                                          Amount of Net
                   Year of               Operating Loss
                  Expiration              Carry Forward
                 ------------             -------------
                     2010                 $     148,187
                     2011                       901,206
                     2012                        79,438
                     2018                       305,825
                     2019                       804,046
                     2020                       720,022
                     2021                       626,785
                     2022                     1,460,856
                     2023                     2,282,759
                     2024                     1,682,588
                                          -------------
                                          $   9,011,712
                                          =============

The Company has deferred tax assets and liabilities at December 31, 2004 and
2003.  These have arisen from the difference in the depreciation deduction
for book and tax purposes, from operating loss carry-forwards, from the
difference between the tax and book bases for patent acquisition, and from
the acquisition of Carbon Cloth. These result in net deferred tax assets
totaling $4,475,224 and $3,838,980 at December 31, 2004 and 2003,
respectively.  However, because management is unable to determine when these
deferred assets might be utilized, or that it is more likely than not that
the Company will be able to utilize these deductions against future
revenues, a valuation allowance has been recorded to completely offset the
assets.  There is no current income tax benefit or expense to be reported
for the periods ended December 31, 2004 and 2003.  The following table sets
forth the reconciling items between income per books and taxable income.

                                                    2004            2003
                                                -----------     -----------
    Book loss                                   $(1,604,617)    $(2,147,297)
    Non deductible expenses                           5,031           9,658
    Depreciation                                      4,851             876
    Amortization of intangibles                    (281,243)       (145,996)
    Unrealized loss on securities                   191,877              -
                                                -----------     -----------
    Taxable loss                                $(1,684,101)    $(2,282,759)
                                                ===========     ===========

Deferred tax liabilities arise primarily from the use of accelerated methods
of depreciation of property and equipment for tax purposes and from
differences in the tax and book bases for the patents (including the Carbon
Cloth acquisition).  The Company's deferred tax liabilities and assets are
as set out below:


                                   F-15

                                                    2004            2003
                                                 ----------      ----------
    Deferred tax assets:
      Patent costs                               $1,135,040      $1,286,124
      Marketable securities                          76,386              -
      Net operating losses                        3,588,165       2,918,217
                                                 ----------      ----------
           Total                                  4,799,591       4,204,341
                                                 ----------      ----------
    Deferred tax liabilities:
      Property and equipment                            272           2,204
      Investment in Carbon Cloth                    324,095         363,216
                                                 ----------      ----------
           Total                                    324,367         365,420
                                                 ----------      ----------
    Net deferred tax asset                        4,474,224       3,838,921

    Valuation allowance                          (4,475,224)     (3,838,921)
                                                 ----------      ----------
      Amount reported on Balance Sheet           $       -       $       -
                                                 ==========      ==========


NOTE 9:   PATENTS, LICENSE, RESEARCH AND DEVELOPMENT

During April 1995, the Company acquired a patent for a proprietary device
(the "NOxMASTERTM") that had been shown to reduce the pollutant content of
emissions from internal combustion engines, primarily automobile engines.
The cost of acquiring this patent was capitalized under the caption "Patent
license" on the balance sheet. Since the acquisition of this patent, the
Company has continued to refine the device and expand its applicability to a
wider range of engines and has determined that diesel engines are a more
optimal target.  Also, the Company has been  performing tests aimed at
obtaining California and EPA certifications to be able to advertise and sell
the device as a pollution reduction system.  The Company obtained a ruling
by the California Air Resource Board in 2001 that the diesel device does not
increase pollutants.  Obtaining the ruling and certification greatly expands
the markets for the device.  The Company's rights to the patent are subject
to royalties totaling 7% of wholesale sales. The royalties do not require
the Company to make minimum payments.  Management has estimated that
additional costs required to obtain U.S. and California governmental
certifications should be in the $250,000 to $400,000 range.

During 2002, the Company acquired Carbon Cloth Technologies, Inc. in order
to obtain rights to its CarbonGuardTM technology.  This product is currently
being marketed and the Company expects to be able to increase the product's
market penetration.  The CarbonGuardTM is a product that provides innovative
insulation capabilities for stationary and high-performance engines.

Besides the tests toward certification in California, the products have been
tested in England for their application to pollution control on diesel
taxicabs and buses.  This testing is being carried on by KSL, (See the
discussion about related parties at Note 15.) an entity in which the Company
owns an indirect equity interest.

The Company has continued to obtain additional patents that extend and
protect its primary patent.  A device for emission control on small engines
has also been patented.  Legal costs to file these patents are being
capitalized.

                                   F-16

During 1996, the Company entered into an agreement to grant the Company's
president an exclusive license for the worldwide rights to manufacture,
market, distribute, and sell the NOxMASTERTM's application to diesel
engines. In addition, the agreement granted the same rights for the
application of the NOxMASTERTM to gasoline engines in Europe, the former
Soviet Union, the Middle East, and Africa.  In exchange for this transfer,
the Company's president has established, KleenAir Systems International,
Inc. (KASI), in the United Kingdom and transferred this license to it.
KleenAir Systems, Ltd. of the U.K. is a wholly owned subsidiary of KASI.
The Company received a 30% ownership interest in KASI and is to receive a
royalty of 8% of its gross revenue from sales of the product.

During 1998, the Company repurchased the rights to the diesel system in the
U.S. market by issuing 1,000,000 shares of common stock to Pollution
Control, Inc., an entity controlled by the Company's president.  This action
was taken based on the advice of financial consultants to the Company.

The Company and KASI also entered into a license agreement with Extengine
Transport Systems, LLC (ETS) which is in the business of commercialization
of environmental technologies and products.  This is a ten-year,
nonexclusive, worldwide manufacturing, marketing, and selling license for
NOxMASTERTM devices.  The Company has also entered into an exclusive
ten-year California manufacturing, marketing rights, and distribution rights
agreement for application of the NOxMASTERTM to gasoline engines and a
ten-year, exclusive manufacturing, marketing, and distribution rights
agreement for application of the NOxMASTERTM devices in China and India and
to school and urban buses.  These licenses set out per-unit prices and
specify minimum annual units for each application once the Company has
produced a commercially viable device and demonstrates manufacturing
capability.  During 2002, the Company moved to eliminate ETS's exclusivity
in certain markets.  This action was undertaken because of certain actions
and certain inactions on the part of ETS.  During 2004, Management
negotiated a settlement with ETS for its release of the exclusivity portions
of its agreements.  This allows the Company to pursue sales of the products
in these markets.


NOTE 10:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
2004 and 2003.

                                                 2004            2003
                                              ----------      ----------
   Office furniture and equipment             $   62,072      $   61,497
   Test vehicles                                  28,928          28,928
   Analysis equipment                            174,840         167,139
   Leasehold improvements                         11,682          11,682
                                              ----------      ----------
   Totals                                        277,522         269,246

        Accumulated depreciation                (165,226)       (113,635)
                                              ----------      ----------
   Net Property and Equipment                 $  112,296      $  155,611
                                              ==========      ==========

Depreciation expense totaled $51,591 and $49,690 for 2004 and 2003.  The
office furniture and equipment, the analysis equipment, and the test
vehicles are being depreciated on a straight-line basis over five years.
Leasehold improvements are being depreciated on a straight-line basis over
39 years.

                                   F-17


NOTE 11:   COMPENSATORY STOCK BENEFIT PLANS AND VALUATION BASIS

During 1995, the Company adopted a Compensatory Stock Benefit Plan (the 1995
Plan) for the furtherance of the Company by allowing the Company the option
of compensating officers, directors, consultants, and certain other service
providers who render bona fide services to the Company through the award of
the Company's free trading common shares.  Under the Plan, 33,333 shares
were approved by the Board of Directors.  Of the shares approved for the
Plan, 13,000 shares were issued, 4,667 were committed in agreements with
officers, and 2,667 were committed to a consultant during 1995.  During
1996, 9,667 shares were issued under this plan for directors' fees and
officer compensation. These shares have been issued primarily for marketing
and promotion services, directors' fees, and services to facilitate of the
purchase of the patent.

The 1995 Plan was terminated with the adoption of a "1996 Consultant and
Employee Stock Compensation Plan" (the 1996 Plan).  The 1996 Plan authorized
the issuance of up to 500,000 freely tradable shares.  These shares were to
be used to further the growth through compensation of officers, directors,
consultants, and other service providers.  The board was given the authority
to increase the number of shares as it deemed advisable and to file any
necessary registration statements required for such increases.  Under the
1996 Plan, the Company issued 5,333 during 1996, but did not issue any
shares under this plan in 1997 or 1998.  During 1999, the Company issued
300,000 shares under this plan for consulting services.

In July 2000, the Company filed an S-8 registration (the S-8) to register
1,200,000 shares for compensation under five consulting agreements and
reserved 750,000 shares for the future exercise of options under an Employee
Stock Option Plan, discussed at Note 12.  The shares for the consultants
were issued in July 2002 in order to obtain those services.  Subsequent to
this filing, the board has issued 550,000 of the shares reserved for the
ESOP.  Directors/officers and a key engineering consultant were issued
300,000 of these shares for unpaid services and a consultant who had
previously been issued 250,000 restricted shares for his services requested
that he be allowed to exchange those shares for S-8 shares and was allowed
to do so under the advice of legal counsel.  During 2002, the Company issued
an additional 76,800 shares under this plan.

In September 2001, the Company filed an amendment to the S-8 to register an
additional 2,200,000 shares.  Of these shares, 1,270,000 were issued in
October to consultants for services to be provided over the next year.
Another 21,687 of these shares were issued to product development
consultants.  During 2002, the Company issued (or contracted to issue)
576,192 shares to consultants and employees.

In September 2004, the Company filed a second amendment to its S-8 to
register another 1,250,000 shares.  All of these shares were issued to
consultants for services provided during the last quarter of the year.

As anticipated by these plans, the Company has acquired services with free
trading shares.  The Company has also issued unregistered restricted (Rule
144) stock in exchange for services.  These transactions have been valued in
accordance with the Company's accounting policy regarding stock
compensation.


                                   F-18

NOTE 12:   EMPLOYEE STOCK OPTION PLAN

The Employee Stock Option Plan (ESOP) was established in July 2000 in
coincidence with the S-8 registration and is to provide incentives for the
attraction and retention of personnel.  Its terms call for an exercise price
of 100% of the closing price of the Company's stock on the date of the grant
of the options. No shares have been set aside to be available for this plan
and no grants have been made under this plan.


NOTE 13:   STOCKHOLDERS' EQUITY

During 1986, the Company completed an initial offering of 10,000,000 shares
of common stock with net proceeds (after commissions) of $110,233.  Between
that time and December 31, 1993, it is apparent that there were many stock
transactions, reverse splits, and other actions.  However, records regarding
this period of time are not available.  Additionally, no records are
available which would allow an analysis of the retained earnings balance
prior to 1995.  Due to this lack of records, management believes that losses
indicated by the negative retained earnings would not yield tax benefits to
current operations.  Inception-to-date information required for development
stage companies is also unavailable for this period.

In March 1995, the Company's Board approved a measure (ratified at a
subsequent shareholders' meeting) whereby the Company's outstanding common
shares were reverse split on the basis of one new share for ten shares held.
In May 1997, the Board approved another reverse split.  This time the
reverse split was on the basis of one new share for 15 shares held.  In the
following discussion, the share amounts have been restated to reflect the 1
for 15 reverse split.  In February 2000, the Board approved a 2 for 1 split
of shares effective March 20, 2000 in accordance with advice from marketing
and investment consultants.  All share amounts in the financial statements
as well as share amounts presented below have been adjusted as though all of
these changes in stock had occurred prior to the earliest presented
information.

In April 1995, the Company issued 933,334 shares of convertible, non-voting
preferred stock and 60,000 common shares as consideration for the patent and
a facilitation fee to a consultant.  This transaction was recorded at the
par value of the stock issued, $7,400.

During 1995, other consulting services not directly related to the patent
purchase were obtained through the issuance of 24,000 common shares valued
at total of $111,875.  Directors were issued a total of 4,000 shares valued
at $22,500.  This stock-based compensation and the transactions described
below have been valued as described in Note 1.  The Company also issued
27,334 common shares pursuant to a Regulation S offering.  Net proceeds to
the Company after commissions were $66,804.  In addition, $180,400 was
received for 66,814 shares under the Regulation S offering prior to
December 31, 1995, with the shares being issued during 1996.

During 1996, the Company issued 24,666 common shares and 13,334 preferred
shares primarily to officers and directors pursuant to agreements and
directors' resolutions for services rendered.  These shares were valued at
$201,875.  Holders of options also exercised 75,000 options to acquire a
like number of common shares during March 1996 by trading amounts owed them
by the Company for the exercise price.  This action effectively brought
$112,500 to the Company through the reduction in payables.

                                   F-19

During 1997, the Company issued 66,666 preferred shares to its president in
accordance with his employment contract.  During December 1998, the Board
approved the issuance of 320,000 shares of stock to themselves and key
consultants as compensation for services rendered during 1998.  Both of
these sets of shares have been included as outstanding shares and the costs
have been recognized as expenses in the relevant periods.  The shares were
issued during 1999.

During 1998, preferred stockholders exchanged 403,330 preferred shares for a
like number of common shares. The Company issued 2,000,000 common shares to
a financial and public relations consultant for services; 2,000,000 and
800,000 shares to Pollution Control, Inc. for license and cash as discussed
at Note 15; and 100,000 shares to a development consultant.  A director was
issued 20,000 shares for his services.

During March 1999, the Company issued 600,000 shares under its S-8 plan
discussed at Note 11 for investment guidance.  These shares were valued at
$75,000.  Public relations/financial services were obtained during 1999
through the issuance of 508,334 shares valued at $175,079.  Analysis and
test equipment was acquired in exchange for 33,200 shares valued at $8,300.
The Company also issued 146,800 shares for $35,800 cash and exchanged 61,334
common shares for the retirement of a like number of preferred shares.

During 2000, the Company issued 1,400,000 shares to Ecologic, LLC (an
affiliate of ETS) for $350,000 under an agreement to provide funds for
product testing.  The Company issued 300,000 shares valued at $51,000 to
officers/directors and a key engineering consultant in lieu of cash payments
for their services to the Company. Outside consulting services were obtained
in exchange for 1,344,266 shares valued at $553,868.  (See discussion at
Note 11 regarding 1,200,000 of these shares.) The Company also retired the
last of its outstanding preferred shares through their conversion to 163,334
common shares.  One of the issuances of shares for services included
warrants (discussed below).  The holders exercised 14,000 of these warrants
for proceeds of $8,750.

As discussed in Note 13, the Company also issued both common and preferred
stock for consulting services and employment agreements.

The Company issued options to purchase common shares during 1996.  These
options arose from various transactions.  Among these were 210,000 options
granted as incentives for enhanced product development efforts. Other
options were granted as incentives to sign service contracts.  All options
issued were to purchase one share for each option held.  There was no market
for these options.  During 1996, options were exercised to purchase 75,000
shares.  Options were reduced by the 1 for 15 reverse split authorized by
the board of directors.  No options were exercised during 1997 or 1998.  At
December 31, 1998, all options had expired.

As mentioned above, during 2000, the Company issued warrants in conjunction
with a stock issuance.  These consisted of 138,000 warrants to buy one
restricted share at $0.625 per warrant and expired on November 30, 2001.  Of
these, 14,000 were exercised during 2000 and the rest expired.  The Company
also issued two warrants to Ecologic.  The first warrant which expired
January 31, 2001, was for the purchase of 1,000,000 shares at $.25 per
share.  Ecologic purchased 900,000 shares under this warrant during 2000,
leaving a balance of 100,000 that were allowed to expire. The second
warrant, which expired January 31, 2002, was to purchase 1,000,000 shares at
the greater of $1 or one-half the average thirty-day bid price per share.
This warrant expired without exercise.

                                   F-20

During 2001, the Company issued 218,500 restricted shares valued at $120,436
to consultants.  Another 850,000 restricted shares valued at $78,540 were
issued to directors and a key research person for services over the last
year.  Cash of $105,000 was received for the issuance of 375,000 restricted
shares.  Consultants were issued 1,368,487 unrestricted S-8 shares valued at
$180,650.

During 2002, the Company issued the following restricted shares:  15,500
valued at $3,500 for product development, 50,000 valued at $16,250 for legal
services, 100,000 valued at $32,500 for contract settlement, 500,000 valued
at $87,500 for uncompleted acquisition, and 833,250 valued at $924,908 for
Carbon Cloth acquisition.  Another 2,804,545 restricted shares were issued
for cash totaling $1,720,000.  In addition to restricted shares, the Company
issued free-trading shares as follows:   524,192 valued at $257,342 for
consulting services, 40,000 valued at $44,400 for Carbon Cloth acquisition,
and 12,000 valued at $8,340 for product development.

During 2003, the Company issued the following restricted shares as follows:
750,000 for a total of  $75,000; 215,000 valued at $46,850 for consulting
services; 50,000 valued at $8,250 for legal services; 7,600,000 valued at
$519,090 to directors and a key research person for services; and 82,500
valued at $12,788 for settlement of claims relating to marketing licenses.
The Company also issued unrestricted shares as follows:  2,100,673 valued at
$317,003 for consulting services; 22,500 valued at $4,534 for product
development efforts; 50,000 valued at $11,625 for settlement of claims
related to marketing licenses; 228,932 valued at $55,053 for legal and other
professional services; and 52,000 valued at $7,537 for office and clerical
services.

In 2004, restricted shares issued by the Company were as follows: 750,000
for $75,000; 2,509,483 valued at $183,842 for consulting services; 1,200,000
valued at $79,719 for directors and management services; and 20,026,666
valued at $1,315,487 for marketable securities.  Unrestricted shares issued
were as follows: 1,690,563 valued at $229,303 for advisory services and
501,333 valued at $75,200 directly related to acquiring marketable
securities.  A total of 501,333 warrants (discussed below) valued at $17,547
were also issued related to acquiring the marketable securities.

The 501,333 warrants issued during 2004 (and outstanding at December 31,
2004) are exercisable at any time before June 4, 2007.  As an exercise
option, the holder may elect to take only the number of shares equal to the
increase in the price of the Company's stock after the date of the grant
without having to pay the exercise price.  Option pricing formulas do not
indicate recordable value for these warrants.

The Company issued an option to a consultant to purchase $250,000 worth of
stock at a 33% discount off the average bid price for the 10-day period
before exercise.  This option may be settled by an existing stockholder
selling shares rather than by the Company issuing shares.  Again, option
formulas do not indicate a recordable value for this option.


NOTE 14:   EARNINGS PER SHARE

Basic earnings per share has been calculated based on the weighted average
common shares outstanding.  A warrant to purchase 240,000 shares was
outstanding at December 31, 2003.  This warrant expired during 2004. As
discussed above, a warrant to purchase 501,333 shares was outstanding, as

                                   F-21

well as the option to purchase $250,000 worth of stock.  The shares
underlying these options have not been added to outstanding common shares in
a presentation of diluted earnings per share because the presentation would
prove to be anti-dilutive.


NOTE 15:   RELATED PARTY TRANSACTIONS

Many of the Company's consultants have, historically, also been stockholders
of the Company.  This includes engineering services, marketing and financial
promotion, and management and stockholder services.  As mentioned above,
when the Company purchased the patent, it did so with preferred stock (later
converted to common).  Those stockholders continued many of the development
and other services that they were providing before the Company made its
acquisition.

See the discussion of the granting of a license for Europe to the Company's
President at Note 9 and the discussion at Note 16 regarding the aborted
acquisition of National Diversified Telecom, Inc.

During 1998, the Company sold 800,000 shares of common stock to Pollution
Control, Inc. for $200,000.  These funds were used to prepay financial and
public relations services.  The service provider also received 2,000,000
shares of restricted common stock that it assigned to Pollution Control in
exchange for an equity interest in that entity.  As discussed at Note 9, the
Company issued 2,000,000 shares of restricted common stock to Pollution
Control to repurchase the U.S. marketing rights for its diesel product.
Pollution Control is controlled indirectly by the Company's President.
Pollution Control's voting rights are held by the Company's President. These
transactions effectively transferred control of the Company to Pollution
Control and to the Company's President through his control of that block of
voting stock.

During July 1999, the Board approved the issuance of 420,000 shares of
restricted stock to themselves and an engineering consultant for loans
provided to the Company during 1998.  In October 1999, the Board approved
the issuance of 1,000,000 shares to themselves and the consultant in lieu of
cash compensation in recognition of services provided to the Company during
1999.

In December 2000, the Board approved the issuance of 300,000 free-trading
S-8 shares to themselves and an engineering consultant in lieu of cash
payment for services rendered to the Company during 2000.

In July 2001, the Board approved the issuance of 850,000 restricted shares
to themselves and an engineering consultant in lieu of cash payment for
services rendered to the Company during 2001.  Additionally, the Board
approved allowing the Board to purchase restricted shares to obtain cash.
One member of the Board and an entity related to a member fo the Board paid
$85,000 for 325,000 shares.

During December 2002, members of the Board purchased 350,000 shares of
restricted stock for $70,000. Additionally, Pollution Control loaned the
Company $50,000 documented in a demand note bearing interest at the rate of
7% compounded monthly until repaid.

During 2003, the Board approved the issuance of 7,600,000 restricted shares
to themselves and an engineering consultant as compensation for their

                                   F-22

services in lieu of cash payments.   Loans from related parties totaled
$147,000 during 2003.  These loans were documented in demand notes and bear
interest at the rate of 7% compounded monthly until repaid.

In 2003, the Company generated a significant portion ($202,544) of its
revenues from sales of its NOxMASTERTM product to KASI which, in turn, sold
them to KSL.  KSL resold the products to a third party for installation on
taxicabs and buses in the U.K.  The Company recognized its revenues at the
first level, i.e., sales to KASI.  At this point, there has been no
inclusion of KASI's results of operations in the Company's financials due to
cumulative losses incurred by that entity.  No eliminations have taken
place.  This sales structure exists because of licensing arrangements
discussed at Note 9.

During 2004, the Company borrowed an additional $138,015 on the same 7%
compounded terms set out above. It also repaid $104,015 of these loans.  The
Board approved the issuance of 1,200,000 to themselves and an engineering
consultant as compensation for their services in lieu of cash payments.

The Company's president is also serving as a principal officer for KleenAir
Systems International Plc. in England and spends significant portions of his
time pursuing the activities of those related entities.


NOTE 16:   EXTRAORDINARY LOSS ITEMS

During February 1996, the Company entered into an agreement to acquire 100%
of the stock of National Diversified Telecom, Inc. (NDT).  The Company's
president was also a significant owner of NDT.  The acquisition required the
issuance of 40,000 shares of the Company's restricted common stock.  In
addition, the Company advanced $15,000 to NDT for operations.  It was
subsequently determined that the Company would not benefit from the
attributes of NDT that the Company had anticipated.  As a result of this
determination, the Company defaulted on its agreement to provide an
additional $5,000 to NDT and moved to "undo" the agreement.  In "undoing"
the agreement, the Company did not receive back the $15,000 or the stock.
The value of the shares, the $15,000, NDT audit fees paid by the Company and
certain other costs have been reported as an extraordinary item in the
Statement of Operations.

In 2002, the Company initiated an acquisition agreement.  By the terms of
the agreement, the Company issued 500,000 restricted shares to the owner of
the target as a discussion incentive.  Additional shares and cash were due
on consummation.  This deal has placed on hold for at least the time being.
The shares, valued at $87,500, have been recorded as an extraordinary
expense.


NOTE 17:   ACQUISITION OF CARBON CLOTH TECHNOLOGIES, INC.

Effective April 30, 2002, the Company acquired Carbon Cloth Technologies,
Inc. (Carbon Cloth), a California corporation.  Carbon Cloth is a
manufacturer of automotive thermal management systems.  Its CarbonGuardTM
product is currently installed on a number of New York City Transit
Authority buses as enhancements for the operating efficiency of particulate
traps.  This product generated revenues during 2003 and 2004.  Its primary
market at this time is environmentally mandated retrofit applications which

                                   F-23

are largely funded by governmental agencies.  These agencies operate under
strict annual budgets which limit the size of any given project and cause
deferral of work from year to year.  As the product continues to prove its
viability, sales are expected to grow.  It is also anticipated that there
will be a synergy of sales from the combination of the Company's emission
control device and Carbon Cloth's products.

This acquisition was accomplished through the issuance of common stock in
exchange for all of the stock of Carbon Cloth.  The results of Carbon
Cloth's operations have been included in the Company's consolidated
financial statements since the date of acquisition.  The Company issued
833,250 restricted shares for this acquisition along with 40,000
unrestricted S-8 shares issued for services provided in the acquisition
process.  A portion of the acquisition agreement created an employment
agreement that called for the issuance of an additional 146,750 shares as
incentive commissions based on achievement of product sales.  These
additional shares were paid as compensation.

The purchase price was allocated to the individual assets acquired
(primarily the CarbonGuardTM product) and liabilities assumed based upon
their respective fair values at the date of acquisition as set forth below.
Accounting rules require the recognition of deferred taxes for difference
between the tax bases of the assets acquired and the amounts recorded in the
consolidated books. The acquisition resulted in the addition of the
following balance sheet elements as of April 30, 2002:

             Accounts receivable              $   22,397
             Inventory                            10,331
             Fixed assets (net)                    1,392
             Patent license                    1,474,003
             Payables                            (96,144)
             Deferred tax liability             (397,853)
             Equity                           (1,014,126)


NOTE 18:   LEASE

During May 2002, the Company leased a facility containing office space and
space for continuing product development and testing.  This facility
combined the Company's offices and testing at the same facility.  The lease
is a three-year noncancellable lease.  The Company was required to deposit
$46,200 (the last six months lease payments) with the landlord as security
for the lease.  The monthly lease is $7,700 plus utilities.  Future minimum
payments under this noncancellable lease are $30,800 at December 31, 2004.
This amount includes the deposit which represents a prepayment of the rent.

NOTE 19:   CONCENTRATIONS

As mentioned in other places above, a majority of the Company's NOxMASTERTM
sales have been for installation in England.  In addition, during 2003, the
Company sold $287,200 worth of particulate traps directly to KASI
(ultimately to the Dinex Group, the entity purchasing and installing the
NOxMASTERTM equipment in the U.K.). Sales of the CarbonGuardTM were also
concentrated with $187,435 being sales to Johnson Mathey, Inc. during 2003.
Essentially all of the sales revenue reported for 2004 were to Johnson
Mathey.  These concentrations are expected to continue for at least the near
future until such time as the Company can obtain certifications from the
CARB and EPA.


                                   F-24

NOTE 20:   SUBSEQUENT EVENTS

In February 2005, the Company received a patent for the use of aqueous
ammonia as a catalyst to reduce NOx emissions.  This is an extension of its
main NOxMASTERTM product.













                                   F-25