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                             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, 1999

                   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 #)


   828 Production Place, Newport Beach, CA                      92663
  (Address of principal executive offices)                  (Zip code)

              Issuer's telephone number:   (949) 574-1600


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


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:     $0.


The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 2000, was $28,969,547 based on the closing stock
price on that date. The number of shares outstanding of the registrant's
common stock on March 21, 2000, was 10,123,482 shares.

                                     1

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

    In May 1997, the Company effected a one (1) for fifteen (15) 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. Subsequent to December 31, 1999 the last
of  the outstanding preferred shares have been 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 stock split effective
March 20, 2000.

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

    The purpose of the NOxMaster(TM) is to reduce the NOx 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 which senses engine
parameters. The ammonia injection is programmed to occur only when the
engine is operating at a specific load and performance conditions.

    A timing pulse from the engine is used to determine certain parameters
indicating 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.

                                     2

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    In addition to cost effectively reducing the NOx from the exhaust, the
NOxMaster(TM) has the potential of aiding the enhancement of engine
performance. Controlled reduction of NOx could allow for the re-tuning of
the engine for increased efficiency which will increase fuel mileage while
continuing to maintain the government set NOx 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 as well as reducing
CO, hydrocarbons and particulates emitted by such engines. It has done so
through the development of specially formulated ceramic wash-coats that
allow for ammonia in the atmosphere and which provides a significant
particulate reduction for the retrofit market. It is planning the
acquisition of plasma technology capable of much greater reductions of
particulates, particularly ultra-fine particulates the health hazards of
which are getting increasing attention by the EPA. Such an integrated
ammonia NOx reduction system and plasma particulate reduction system will be
suited to both the OEM and retrofit markets.

    In order to conserve operating capital, the Company has no paid
employees but has retained the services of its officers and certain
consultants through the issuance of restricted Section 144 common stock.
This includes the services of investment banking and financial consultants
Centex Securities, Inc. who have provided advice with regard to the
Company's investor relations and business plan development.

    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, in June of
1996, including the employment contracts of Mr. Lionel Simons, President and
Mr. 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.
Mr. Peter Cahill resigned from the Board at this time and Mr. William H.
Ward, Jr. was appointed 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 US, agreed
to license to an officer of the Company, the European rights to the
technology for application to gasoline engines and for world-wide rights for
diesel engines. The Agreement called for the Company to receive a 7% royalty
plus 30% of a Company to be established in the UK and to be called NOxMaster
Ltd., which Company was formed subsequent to the Year End. During 1998, the
US exploitation rights for that portion of the technology relating to diesel
engines was transferred back to the Company in exchange for restricted
shares.

    As yet the Company has not begun distribution of its products and does
not expect to begin doing so until some time in the year 2001.

    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

                                     3

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systems that are more complex and significantly more costly but whose end
result is the creation of ammonia and a chemical reaction with NOx in the
exhaust system. Such systems are not currently available and are expected to
emerge at around the same time as the Company's system.

    In order to sell the Company's products in California an Executive Order
is required from the State of California. The Company needs to demonstrate
that its products do not increase the level of exhaust emissions.

    While the Company anticipates applying for and receiving an Executive
Order, failure to do so would have a significant impact on its business in
the State of California.

    During 1998 development expenses were $47,222 and during 1999 they were
$82,170

    The Company has no full time employees and 5 part-time employees.

    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 order to conserve operating capital, the President, Lionel Simons,
has allowed the use of his home as the corporate headquarters until such
time as additional funding and activity require the use of additional space.
During 1999, the Company moved into R & D facilities at 828 Production
Place, Newport Beach, CA 92663, occupying approximately 2,000 sq. ft. The
Company also acquired appropriate computers and test equipment to advance
its development and testing activity and acquired a diesel vehicle for
testing its products. In addition, the Company continues to use the CARB
approved testing facilities of California Environmental Engineering of Santa
Ana, CA for state testing requirements.

    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 involved in any litigation.


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

     There were no submissions to a vote of security holders during 1999.

                                     4

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                              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, 1998 and 1999
respectively. These quotations reflect inter-dealer prices, without retail
mark-up, mark- down or commissions, and may not represent actual
transactions.

                           High                 Low
                          ------              ------
1998
        1st Quarter       $0.125              $0.125
        2nd Quarter        0.125               0.125
        3rd Quarter        1. 25               0.125
        4th Quarter        1. 31               0.75

1999
        1st Quarter       $0.625              $0.25
        2nd Quarter        1.125               0.25
        3rd Quarter        2.25                0.615
        4th Quarter        2.0625              0.96875

Shareholders:   At December 31, 1999 there were 123 shareholders of record
with an additional 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.

     In addition to the original US Patent  # 5,224,346 acquired in April of
1995, US 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 # 0 638 139 covering Germany, France and the UK) and international
coverage extends to certain Asian countries and Canada as well as Brazil and
certain other countries. On November 30th, 1999 the Company was issued a
third patent on "Ammonia Injection in NOx Control", US 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 exploitation 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. No value has been capitalized on the
books for the second and third patents.

                                     5

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    The first product, the NOxMaster(TM) device is currently in the final
stages of refinement. Nitrogen Oxides (NOx) are the most difficult auto
exhaust pollutants to control. They are not fuel based but are produced by
the oxidation of nitrogen in the combustion air and 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
sacrifice of performance and economy.

    The NOxMaster(TM) utilizes both the non-catalytic reaction that occurs
at high temperature, and the catalytic reaction at lower temperature. Tests
have confirmed this approach. Further test data has shown 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, which is essentially independent of engine operating
parameters and provides new options for economy and performance.

    As of this filing, the NOxMaster(TM) Diesel Catalytic Converter is
undergoing road trials and is expected to be available for production and
delivery during the third quarter of the year 2000 to potential overseas
customers with whom distribution negotiations are underway. This product can
also be distributed in states other than California where an Executive Order
is required before distribution can commence.

    The Company is planning a Beta Test and Evaluation program with major
fleet operators in Southern California who are required to submit pollution
control plans to the Southern California Air Quality Management District
(SCQMD). The testing laboratory of California Environmental Engineering
(CEE) in Santa Ana, California has been certified by the California Air
Resources Board (CARB) and is the Company's laboratory of choice for the
continued testing of the product. CEE is used extensively by CARB for its
own testing programs.

    The Company anticipates securing an Executive Order (EO) by the end of
the 3rd Quarter of the year 2000 from the California Air Resources Board
(CARB). 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.
Once the production prototype is finalized the Company will request formal
testing by the CARB to validate the finding of CEE and thereby certifying
that the device does in fact reduce NOx in significant amounts to qualify
for emission credits.

    Emission Credits.   The emphasis will be on NOx reduction products,
which are not required by law or regulation, thereby satisfying the mobile

                                     6

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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 of $10,000 to $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.

    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 sales and production.

    On December 29th, 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 US 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 has 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. In addition, Extengine and the Company have
jointly applied to the California Energy Commission for funding under the
Carl Moyer Heavy-Duty NOx Reduction Advanced Technology Development Program.
The subject for this funding was the proposed integrated NOxMaster/ AEA
Electrocat System. Discussions have also been held with the Metropolitan
Transportation Authority of Los Angeles 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.

    Engine and vehicle testing equipment has been purchased and installed at
the Company's new R & D facilities in Newport Beach, CA. Highly qualified
full-time employees are being hired effective the beginning of the 2nd
Quarter of 2000.


Item 7.    Financial Statements

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


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

       None
                                     7

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                                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      75   Director/ VP-Research     2 years    April 1995

Lionel Simons        65   Director/President/
                          Secretary/Treasurer       2 years     Dec. 1995

William H. Ward Jr   60   Director/Consultant       2 years     Nov. 1996

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.

William H. Ward Jr., B.S. (Chemistry), Director/ Consultant. As an expert in
electronic control systems and instrumentation, Mr. Ward has contributed to
the controller technology for the NOxMaster(TM) for which a patent has been
applied. While his degree is in chemistry, contributing to his understanding
of the Company's underlying technology, most of his career has been spent in
electronic engineering and design. for example he established and managed
the electronics and instrumentation lab at UC Irvine School of Physical
Sciences. As Vice President for R & D and a founder of General Monitors,
Inc., he designed a successful line of combustible and toxic gas detectors.
The Company became the sole source for Mr. Ward's hydrogen detectors for the
NASA Apollo mission. Mr. Ward holds 8 patents for various types of sensor
and instrumentation devices. 8 
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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 1999 the Company awarded the following non-cash stock
compensation for services rendered:

      (a) SUMMARY COMPENSATION TABLE

                     Annual Compensation

   Names and                                    Other Annual    Market
Principle Position      Year   Salary   Bonus   Compensation    Value
---------------------   ----   ------   -----  --------------  --------
Lionel Simons           1999     -0-     -0-   340,000 shares  $ 96,563
President/Secretary

Lester Berriman         1999     -0 -    -0-   340,000 shares  $ 96,563
Chairman/ VP-Research

William H. Ward Jr.     1999     -0-     -0-   400,000 shares  $118,750 (1)
Director/Consultant

John Zabsky d.b.a.
 John Z Co.             1999     -0-     -0-   340,000 shares  $ 96,563 (1)
Consultant

(1) Compensation is provided to Mr. Ward and Mr. Zabsky as outside
    consultants.
(2) All share amounts have been revised to reflect the 2 for 1 split
    authorized and effective March 20, 2000.
(3) All shares presented are common shares.  No preferred shares were held
    by members of Management.

      (b) OPTION/STOCK APPRECIATION RIGHTS

    No stock options were granted during 1999 or free standing SARs to
executive officers of the Company.

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

    There was no exercise during 1999 of stock options and free standing
SARs by executive officers of the Company.

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

    The Company did not make any long-term incentive plan awards to any
executive officer in 1999.

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      (e) COMPENSATION OF DIRECTORS

    No Directors of the Company received cash compensation for their
 services as Director during 1999.

      (f) EMPLOYMENT CONTRACTS

    The Company has no employment contracts.


Item 11.   Security Ownership of Certain Beneficial Owners and Management

Title of     Name and Address of       Shares of        Percent
 Class        Beneficial Owner         Record (1)       of Class
--------   ----------------------     ------------      --------
Common     Pollution Control Inc.       5,140,000         54.0%
           328 Bay street
           Nassau, Bahamas

Common     Lionel Simons,                 169,008 (2)(3)   1.8%
           President/Director
           36 Corniche Drive, Suite E
           Dana Point, CA 92629

Common     Lester Berriman                645,048          6.8%
           18871 Portofino Drive
           Irvine, CA 92715

Common     William H. Ward, Jr.           440,000          4.6%
           273 Hanover Drive
           Costa Mesa, CA 92626

Common     All officers and directors
           as a group:                  6,394,056 (4)     67.2%

Common     John Zabsky d.b.a.
           John Z Company                 508,000          5.3%

(1) All shares presented are common shares.  No preferred shares were held
    by members of Management at December 31, 1999.
(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.
(4) Due to the controlling interest in Pollution Control, Inc. held by
    Lionel Simons, shares held by Pollution Control have been attributed
    to him for purposes of this total.
(5) All share amounts have been revised to reflect the 2 for 1 split
    authorized and effective March 20, 2000.






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Item 12.    Certain Relationships and Related Transactions

Lionel Simons, President of KleenAir Systems, Inc. is also President of, 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.

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


Item 13.    Exhibits and Reports on Form 8-K

    None

                                  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 5, 2000                  _/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 5, 2000
Lionel Simons


 /s/ LESTER BERRIMAN                   Director         April 5, 2000
Lester Berriman


 /s/ WILLIAM H.  WARD, Jr.             Director         April 5, 2000
William H. Ward, Jr.




                                     11

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                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)




                       INDEX TO FINANCIAL STATEMENTS



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

  Balance Sheets as of December 31, 1999 and 1998   .  .  .  .  .  .    F-3

  Statements of Operations for the fiscal years ended
                December 31, 1999 and 1998  .  .  .  .  .  .  .  .  .   F-4

  Statement of Stockholders' Equity for the fiscal years ended
                December 31, 1999 and 1998  .  .  .  .  .  .  .  .  .   F-5

  Statements of Cash Flows for the fiscal years ended
                December 31, 1999 and 1998  .  .  .  .  .  .  .  .  .   F-6

  Notes to Financial Statements    .  .  .  .  .  .  .  .  .  .  .  .   F-8






                                     F-1

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              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
KleenAir Systems, Inc.
Dana Point, California


We have audited the accompanying balance sheets of KleenAir Systems, Inc. (a
development stage Company) as of December 31, 1999 and 1998, and the related
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, 1998.  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 generally accepted auditing
standards. 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, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

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 in the development stage and has no
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

April 3, 2000



                                     F-2

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                            KLEENAIR SYSTEMS, INC.
                        (A Development Stage Company)
                                BALANCE SHEETS
                       As of December 31, 1999 and 1998

                                ASSETS


                                                      1999             1998
                                                  -----------      -----------
CURRENT ASSETS:
    Cash                                          $    25,980        $     443
    Prepaid expenses                                      800           90,000
                                                  -----------      -----------
                Total Current Assets                   26,780           90,443
                                                  -----------      -----------

PROPERTY AND EQUIPMENT (net)                           14,815            1,595

OTHER ASSETS:
    Patent license                                  3,611,558        3,607,137
                                                  -----------      -----------
    TOTAL ASSETS                                  $ 3,653,153      $ 3,699,175
                                                  ===========      ===========


                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
    Accounts payable ($52,805 and $40,511 due
        to related parties, respectively)          $   71,796       $   40,511
    Advances from directors                            25,000            2,200
                                                   ----------       ----------
           Total Current Liabilities                   96,796           42,711
                                                   ----------       ----------

STOCKHOLDERS' EQUITY:
    Preferred stock, series A, $.001 par value
     (10,000,000 shares authorized, 163,332 and
     224,666 outstanding, respectively)                   163              225
    Common stock, $.001 par value (50,000,000
     shares authorized, 9,357,480 and 6,587,812
     outstanding, respectively)                         9,357            6,588
    Additional paid-in capital                      5,907,876        5,207,968
    Deficit accumulated during the
     development stage                             (2,361,039)      (1,558,317)
                                                  -----------      -----------
         Total Stockholder's Equity                 3,556,357        3,656,464
                                                  -----------      -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY        $ 3,653,153      $ 3,699,175
                                                  ===========      ===========

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

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                            KLEENAIR SYSTEMS, INC.
                      (A Development Stage Company)
                        STATEMENTS OF OPERATIONS
               For Years Ended December 31, 1999 and 1998

                                                                  Cumulative
                                                                 During Devel-
                                              1999        1998    opment Stage
                                         ----------   ---------   ------------
PRODUCT DEVELOPMENT COSTS                $   82,170   $  47,222   $    333,830

OPERATING EXPENSES
  Personnel costs and director fees         335,649          -         471,274
  Consultants                               296,992     195,150        890,115
  Professional fees                          67,527      52,567        152,377
  Office expenses                             1,347         625         20,704
  Depreciation                                2,346         145          2,491
  Advertising and promotion                   1,581          -         135,029
  Loss on cancellation of licensing
     agreements                                  -           -          19,860
  Rent                                        5,000          -           5,000
  Other expenses                              8,110       9,852         31,050
  Unknown sources prior to current
     ownership                                   -           -         151,518
                                         ----------   ---------   ------------
      Total operating expenses              720,552     258,339      1,879,418
                                         ----------   ---------   ------------

(LOSS) FROM OPERATIONS                     (802,722)   (305,561)    (2,213,248)

OTHER INCOME AND (EXPENSES):
  Amortization of discount on receivables        -           -          20,259
                                         ----------   ---------   ------------

(Loss) Before Extraordinary Item           (802,722)   (305,561)    (2,192,989)

Extraordinary Item:
  Costs of terminated acquisition                -           -        (168,050)
                                        -----------   ---------   ------------

Net (Loss)                              $  (802,722)  $(305,561)  $ (2,361,039)
                                        ===========   =========   ============
Earnings per Share:
Basic:
(Loss) Per Share Before Extraordinary
  Item                                   $    (0.11)  $   (0.05)  $      (0.89)
(Loss) Per Share From Extraordinary
  Item                                           -           -           (0.07)
                                         ----------   ---------   ------------
Net (Loss) Per Share                     $    (0.11)  $   (0.05)  $      (0.96)
                                         ==========   =========   ============

Weighted Average Shares Outstanding
  Basic                                   7,557,444   6,494,752      2,453,426
                                         ==========   =========   ============

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


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

<S>                                 <C>        <C>        <C>        <C>          <C>         <C>         <C>
                                                                                                           Accumulated
                                                                                  Additional  Unearned    Deficit During
                                     Preferred Stock         Common  Stock         Paid-In     Compen-    Development
                                      Shares    Amount      Shares     Amount      Capital     sation       Stage
                                    ---------  --------   ---------  ----------   ---------   ---------   ----------

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   3,506,505          -            -
  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   4,307,249    (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   4,777,612     (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   4,796,334     (24,941)  (1,252,756)

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

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

Stock issued for cash                      -   $     -       800,000  $      800  $  199,200   $      -    $       -
  For services                             -         -     2,120,000       2,120      92,255          -            -
  To officers and 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   5,207,969          -    (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          -            -
  To officers and 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  $5,907,876   $      -   $(2,361,039)
                                    =========  ========  ===========  ==========  ==========   =========  ===========







</TABLE>
The accompanying notes are an integral part of these financial statements.
                                     F-6

<PAGE>
<PAGE>
                         KLEENAIR SYSTEMS, INC.
                     (A Development Stage Company)
                        STATEMENTS OF CASH FLOWS
           Increases/(Decreases) in Cash and Cash Equivalents
               For Years Ended December 31, 1999 and 1998

                                                                  Cumulative
                                                                 During Devel-
                                              1999        1998    opment Stage
                                         -----------   ---------   -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)                        $  (802,722)  $(305,561)  $(2,361,039)
Adjustments to reconcile net loss
  to net cash provided by operations:
  Losses prior to current ownership               -           -        151,518
  Depreciation                                 2,346         145         2,491
  Amortization of:
  Prepaid expenses                            90,000     108,056       252,220
  Deferred services                               -       24,941       250,267
  Stock issued for services                  658,515     154,375     1,091,465
  Stock issued for extraordinary loss             -           -        140,550
  Advances to consultants                         -           -         20,000
  Prepaid expenses                              (800)   (180,000)     (180,800)
  Trade accounts payable                      31,285      11,246        71,796
  Advances from directors                     22,800       2,200        25,000
                                         -----------   ---------   -----------
NET CASH USED BY OPERATING ACTIVITIES          1,424    (184,598)     (536,532)
                                         -----------   ---------   -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment                      (7,266)     (1,740)       (9,006)
  Patent licensing costs                      (4,421)    (13,776)      (41,558)
                                         -----------   ---------   -----------
NET CASH USED IN INVESTING ACTIVITIES        (11,687)    (15,516)      (50,564)
                                         -----------   ---------   -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuing stock                 35,800     200,000       610,709
  Additional capital contributions                -           -          2,367
                                         -----------   ---------   -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES:    35,800     200,000       613,076
                                         -----------   ---------   -----------

NET INCREASE/(DECREASE) IN CASH               25,537        (114)       25,980

CASH AT BEGINNING OF YEAR                        443         557            -
                                         -----------   ---------   -----------

CASH AT END OF YEAR                      $    25,980   $     443   $    25,980
                                         ===========   =========   ===========

SUPPLEMENTAL DISCLOSURES:
Cash payments for:
  Interest                               $        -    $      -    $        -
  Income taxes                                    -           -             -
Non-cash investing and financing
transactions:
  Stock issued for:
  Compensation and directors fees            410,233      60,000       597,108
  Services and prepaid services              248,582      94,375       610,782
  Equipment                                    8,300          -          8,300
  Patent licensing                                -           -      3,507,500
  Repurchase of U.S. diesel license               -       62,500        62,500
  Acquisition of National Diversified
    Telecom, Inc.                                 -           -        140,550
  Sale of marketing licenses for
    notes receivable                              -           -      1,736,558



The accompanying notes are an integral part of these financial statements.
                                     F-7

<PAGE>
<PAGE>
                        KLEENAIR SYSTEMS, INC.
                    (A Development Stage Company)
                    NOTES TO FINANCIAL STATEMENTS
                      December 31, 1999 and 1998


DESCRIPTION OF BUSINESS

KleenAir Systems, Inc. (the Company) was originally incorporated in 1986 in
Nevada as Covington Capital Corporation.  The Company has had various names
during its existence as various endeavors were attempted.  None of these
actually became fruitful.  The Company was most recently known as Investment
& Consulting International, Inc. until April 1995.  At that time, the
Company purchased a patent for a proprietary device shown to be capable of
neutralizing the environmental impact of nitrous oxide from automobile
exhaust emissions without significant modification to the vehicle.  This
device is known as the "NOXMASTER ".  Soon after the acquisition of this
patent and 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.


NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

The Company's accounting and reporting policies conform with generally
accepted accounting principles.  Policies which 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 inception of its development
stage.

Patent License -- The Company purchased the rights to a patent and developed
others as discussed at Note 4 below.  The cost of the patent and licenses,
along with legal costs incurred to register and protect them, have been
capitalized and will be amortized once the Company commences sales of the
product.  Amortization will be charged on a straight-line basis over seven
years.  No amortization expense related to these rights has been charged to
operations because development of the underlying patented device has not
been completed.  Amortization will begin when sales of the device are
initiated.

Property and Equipment -- Property and equipment are carried at depreciated
cost. Expenditures for major renewals and betterments which 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

                                     F-8

<PAGE>
<PAGE>

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 for the Company to make this election.

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 expected to reduce future income taxes.
Correspondingly, deferred tax liabilities are expected to increase future
income taxes.  Note 3 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 which 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.

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.


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 or disposable assets to fund completion of its development program,
current level of expenses, or initial production stages.  In this situation,

                                     F-9

<PAGE>
<PAGE>

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
loan 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 entered into certain agreements that are designed to provide
funding for the completion of testing and trials to obtain evidence to
support claims regarding the technology's capabilities and to obtain
Executive Orders from the State of California regarding their approval of
the technology as a emission control device.  As such, Management
anticipates that development activities being carried on by the Company will
be continued and that there should be no substantial difficulties in
obtaining sufficient financing to carry its project through to completion
and subsequent distribution.  The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount of liabilities that might be necessary should
the Company be unable to continue in existence.


NOTE 3:   FEDERAL INCOME TAXES

Because of  timing, relative insignificance, and changes in control and
management, the Company believes that it cannot benefit from operating
losses prior to 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
                                            -----------
                                            $ 2,238,702
                                            ===========

The Company has deferred tax assets (no liabilities) at December 31, 1999
and 1998. These assets have arisen from timing differences in depreciation
and from tax loss carry-forwards.   These deferred tax assets total $877,515
and $487,714 at December 31, 1999 and 1998, respectively.  However, because
management is unable to determine at this point 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 offset the assets.
There is no current income tax benefit or expense to be reported for the
periods ended December 31, 1999 and 1998.  The following table sets forth
the reconciling items between income per books and taxable income.

                                     F-10

<PAGE>
<PAGE>

                                         1999            1998
                                     -----------     ----------
    Book income                      $  (802,722)    $ (305,561)
    Depreciation                          (1,324)          (203)
                                     -----------     ----------
    Taxable income                   $  (804,046)    $ (305,764)
                                     ===========     ==========

Deferred tax liabilities arise primarily from the use of accelerated methods
of depreciation of property and equipment for tax purposes.


NOTE 4:   PATENTS, LICENSE, RESEARCH AND DEVELOPMENT

During April 1995, the Company acquired a patent for a proprietary device
(the "NOXMASTER") shown to reduce the pollutant content of automobile
emissions. The cost of acquiring this patent has been capitalized and
included under the caption Patent license on the balance sheet.  Subsequent
to the acquisition of this patent, the Company has continued to refine the
device and expand its applicability to a wider range of vehicles.  Also, the
Company has been in the process of performing tests aimed at obtaining
minimum state approvals to be able to advertise and sell the device
initially as not causing an increase in pollution.  Subsequent testing and
completion of the specified procedures are expected to allow the Company to
obtain a ruling by the California Air Resource Board that the device does
not increase pollutants.  This ruling would greatly expand the markets for
the device.  The Company's rights to the patent are subject to royalties
totaling seven percent of wholesale sales. The royalties do not require the
Company to make minimum payments.

Only the direct costs of acquisition of the license and costs of extending
or perfecting the patents are available for capitalization.  All payments
for the development and production thereof are charged to operations as
development costs when incurred and are included in results of operations.
Management has estimated that additional costs required to obtain executive
orders and additional approvals should be in the $150,000 to $250,000 range.
Management has also estimated that the Company should be able to obtain the
executive orders during 2000, based on agreements in place to provide
funding.

During 1998 and 1999, the Company has obtained additional patents to extend
and protect its original patent and has patented a similar emission control
system for diesel engines.  Legal costs to file these patents have been
capitalized.

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, sell, etc. the NOXMASTER 's application to diesel
engines.  In addition, the agreement granted the same rights for the
NOXMASTER 's application to gasoline engines in Europe, the former Soviet
Union, the Middle East, and Africa.  In exchange for this transfer, the
Company's president has agreed to establish a publicly held entity, KleenAir
Systems (Europe), PLC (KSE), in the United Kingdom and to transfer this
license to it.  The Company will receive a 30% ownership interest in KSE and

                                     F-11

<PAGE>
<PAGE>

is to receive a royalty of 8% of its gross revenue.  During 1998, the
Company repurchased the rights to 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 KSE also entered into an license agreement with Extengine
Transport Systems, LLC (ETS) which is in the business of commercialization
of environmental technologies and products.  This license is for a ten-year,
non-exclusive worldwide manufacturing, marketing, and selling license for
NOXMASTER  devices.  The Company has also entered into an exclusive ten-year
California manufacturing, marketing rights, and distribution rights for
application of the NOXMASTER  to gasoline engines and a ten-year, exclusive
manufacturing, marketing, and distribution rights for application of the
NOXMASTER  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.


NOTE 5:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
1999 and 1998.

                                               1999        1998
                                         -----------     ----------
   Office equipment                      $     4,006     $    1,740
   Test vehicle                                5,000             -
   Analysis equipment                          8,300             -
                                         -----------     ----------

   Totals                                     17,306          1,740

        Accumulated depreciation              (2,491)          (145)
                                         -----------     ----------

   Net Property and Equipment            $    14,815     $    1,595
                                         ===========     ==========

Depreciation expense totaled $2,346 and $145 for 1999 and 1998.  The office
and analysis equipment is being depreciated on a straight-line basis over
five years and the test auto is being depreciated on a three-year
straight-line basis.


NOTE 6:   COMPENSATORY STOCK BENEFIT PLANS AND VALUATION BASIS

During 1995, the Company adopted a Compensatory Stock Benefit Plan (the
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

                                     F-12

<PAGE>
<PAGE>

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 facilitation 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.

As anticipated by these plans, the Company has acquired services with free
trading shares.  The Company has also issued restricted (Rule 144) stock in
exchange for services.  Transactions utilizing free trading stock have been
valued at the trading price for market shares on the date of the
transaction. Transactions utilizing restricted stock have been valued at
one-half of the trading price on the date of the transaction.


NOTE 7:   STOCKHOLDERS'S 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 several
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 1994. 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 current marketing and
investment advice.  All share amounts in the financial state ments as well
as share amounts presented below have been presented 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 valued at
$3,507,500.

                                     F-13

<PAGE>
<PAGE>


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, as well as the transactions
described below, has been valued as described in Note 6.  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.

At December 31, 1997, the Company had not issued 66,666, preferred shares to
its president in accordance with his employment contract.  These shares were
issued during 1998.  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 shares for a like
number of common shares.  The Company issued 2,000,000 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 11; 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 6 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.

As discussed in Note 10, 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.  At December 31, 1997, options to purchase a total

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of 103,336 common shares were outstanding.  No options were exercised during
1997 or 1998.  At December 31, 1998, all options had expired.


NOTE 8:   EARNINGS PER SHARE

Basic earnings per share has been calculated based on the weighted average
common shares outstanding.  All preferred shares outstanding (163,332 and
224,666 at December 31, 1999 and 1998) are eligible for conversion into
common shares.  Diluted earnings per share have not been presented because
the presentation would prove antidilutive.


NOTE 9:   DEFERRED CONSULTING FEES

At the end of 1995, the Company had committed to certain fixed payments
under consulting contracts for marketing, financial, and managerial
services.  Most of these contracts called for monthly payments with portions
being deferred for a period.  Certain obligations would survive termination
of the agreements.  Additionally, during 1995, the Company entered into
employment contracts with its Chief Executive Officer (CEO) and Director of
Engineering (DE) which called for fixed compensation, stock, and stock
options.  These contracts were for a three year term and called for base
annual compensation for the CEO and DE of $90,000 each in addition to an
initial grant of 5,334 and 4,000 free trading common shares, respectively.
Each of these contracts also called for options to purchase 40,000 shares of
stock.  The CEO also was granted rights to 100,000 shares of convertible
preferred stock of which one-third vested with the initiation of the
agreement while the other two-thirds vest on attaining the first and second
anniversary of the agreement.  The cost recognized under these agreements
was amortized over the term of the agreements.  The unamortized cost was
included in stockholders' equity under Unearned Compensation.

Two of these consulting contracts called for additional stock commitments.
One received 13,334 shares of free-trading stock as a service incentive.
This was valued at $81,250 and is being amortized over the initial three
year term of the contract. The other contract called for the issuance of
5,334 shares of free-trading common shares along with 13,334 shares of
convertible preferred shares.  These commitments to issue stock were valued
at a total of $78,750 and are being amortized over the three year initial
term of the contract.  Recognition of the future issuance of the underlying
stock was included in Deferred Compensation pending actual issuance of the
shares.

In June 1996, the retainer fee agreements discussed above, along with the
cash portions of the employment agreements, were terminated by mutual
agreement.  In addition, all deferred liabilities under these contracts in
excess of an amount equal to the exercise of certain stock options were
waived.




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NOTE 10:   RELATED PARTY TRANSACTIONS

Most of the Company's consultants are also stockholders of the Company. This
includes engineering services, marketing and financial promotion, and
management and stockholder services.  As mentioned above, upon the purchase
of the patent, the previous owners became preferred stockholders.
Individuals involved with the previous owner have also continued many of the
development and other services which they were previously providing.

Although the Company has no official office, the official address of the
Company has been the same as that of its vice-president of engineering until
the last quarter of 1999.  Management believes that the value of the use of
this address is minimal and no expense has been recorded.  In the last
quarter of 1999, the Company began leasing office and laboratory space from
third parties.

See also the discussion of the granting of a license for Europe to the
Company's President at Note 4 and the discussion at Note 11 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 which it assigned to Pollution Control in
exchange for an equity interest in that entity.  As discussed at Note 4, 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 by the Company's President. Pollution
Control's voting rights are also held by the Company's President.  These
transactions effectively transfer control of the Company to Pollution
Control and 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  1999.  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.


NOTE 11:   EXTRAORDINARY LOSS ITEM

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 which the Company had anticipated.  As a result of this
determination, the Company defaulted on its agreement to provide an addi-
tional $5,000 to NDT and moved to "undo" the agreement.  In "undoing" the
agreement, the Company did not received 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.

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NOTE 12:   SUBSEQUENT EVENTS

In January 2000, the Company reaffirmed and updated its license and funding
agree ments with Extengine Transport Systems, LLC. and its affiliate,
EcoLogic, LLC.  The terms of the agreements with ETS are summarized at Note
4. Concurrently with the revisions to the license agreements with ETS,
EcoLogic has agreed to provide  the Company with $250,000 in exchange for
the issuance of 1,000,000 shares of restricted stock and warrants to
purchase 1,000,000 shares at an exercise price of $0.50 expiring January
2001 and 1,000,000 shares at an exercise price of the greater of $1.00 or
50% of the average quoted bid price of the Company's stock for a thirty day
period before the exercise expiring in January 2002.  One-half of these
funds are budgeted for use in funding engine testing in conjunction with ETS
for development of engine specific devices for sale to a Chinese vehicle
manufacturer.

The Company also entered into an agreement with a capital raising consultant
to pay them up to 500,000 free-trading shares in exchange for their efforts
in solicitation of the return of up to 500,000 existing free-trading shares
to the Company in exchange for units of one restricted share plus a warrant
to buy one restricted share at $0.625.



















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