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, 2003

                 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 #)


     1711 Langley Avenue, Irvine, CA                          92714
----------------------------------------                    ----------
(Address of principal executive offices)                    (Zip code)


Issuer's telephone number:   (949) 955-3492


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:  $754,885

The aggregate market value of the voting stock held by non-affiliates of
the registrant on March 31, 2004, was $9,269,071 based on the closing
stock price on that date.

The number of shares outstanding of the registrant's common stock on March
31, 2004, was 42,158,827 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, a patent U.S. # 6,446,940 B1
was issued for the Sonic Flow Carburetor, a new emission control device
that atomizes fuel on gasoline powered engines.  This 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.

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,
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. government 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.


                                    2

It is believed that the Public Carriage Office (PCO) will mandate the
retrofit upgrade of some 17,500 out of the current fleet of approximately
22,000 taxicabs in London.  It is expected that these taxicabs will be
required to upgrade to a Euro 3 level, the emissions level currently
required of new cabs.  The same system can also be adapted as a retrofit
and OEM product for the general diesel-powered passenger automotive
market, 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.

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 had KleenAir Systems successfully
installed and tested and more systems will be installed on buses during
2004.

During 2003 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 be the second 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 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.

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.

                                    3

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 its 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 a number of New York City
Transit Authority buses as enhancements for the operating efficiency of an
installed base of particulate traps.  A further several hundred buses were
upgraded with the CarbonGuard(TM) during 2003.  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.

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.


                                    4

In May 1997, the Company undertook 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.  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 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 one paid
full-time employee and 4 paid part-time employees.  It has retained the
services of its management, officers and certain consultants through the
issuance of restricted Section 144 common stock.

                                    5

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 in 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 $196,534 during 2003.  During 2002 they were
$337,773.

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 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.

                                    6

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, 2003 and
2002, respectively.  These quotations reflect inter-dealer prices, without
retail mark-up, mark- down or commissions, and may not represent actual
transactions.

                                     2002                   2001
                              ----------------       -----------------
                               High       Low         High        Low
                              -----      -----       -----       -----
      1st Quarter             $0.51      $0.22       $2.45       $1.10
      2nd Quarter              0.35       0.20        1.80        0.75
      3rd Quarter              0.35       0.16        1.01        0.47
      4th Quarter              0.34       0.20        0.75        0.30

Shareholders: At December 31, 2003, there were 541 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.

During 2003, the Company started delivering its patented NOxMaster(TM) NOx
Reduction System.  Sales for the year topped $750,000 as compared to
approximately $50,000 in 2002.

This consisted mainly of shipments of components to Dinex A/S in Denmark
who then manufactured completed systems which have been installed on
buses, taxis, shuttles and refuse collection vehicles in test quantities.
It is expected that field demonstrations of the system will lead to
significant orders during the course of the current year and into the
future.

The Company is positioning itself to be a leading provider of Selective
Catalytic Reduction (SCR) systems in the European market where it has
achieved certification status with the Energy Savings Trust (EST) in the
U.K. and meets all the retrofit standards for the other EU countries.


                                    7

The Company owns a number of significant patents which it believes gives
it special advantage in the SCR market worldwide and has applied for
patents on systems that combine particulate and NOx reduction systems
which will further extend its market value.

The Company's original U.S. Patent # 5,224,346 was 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.) and
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 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.

Two additional patents were applied for during 2001 that 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 effectively atomizing the fuel into very fine particles for 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 market in China
and India, It offers more power, greater fuel economy and lower emissions
at 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 with the a
view to replacing their carburetor systems with the Sonic Flow Carburetor

A similar Sonic Flow concept is employed in the Company's new duel fuel
injector on 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
switch 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.


                                    8

The original product, the NOxMaster(TM) device is currently being prepared
for commercialization in the U.K. and Denmark.  Also, 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 from the engines 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 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 NOxMasterTM 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 product can also be distributed in states other than California where
an Executive Order (EO) is required before distribution can commence.  The
Company has received an EO from the CARB in 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.

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

The Company applied for EPA and CARB Retrofit Verification in the fourth
quarter of 2003 in line with new protocols for Selective Catalytic
Reduction (SCR) now finalized by those agencies.  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 has established an limited liability partnership in
partnership with Emission Credit Brokers of Houston, TX for the purpose of
facilitating the use of credits to self-finance the application of the
Company's emission reduction products to commercial vehicle fleets in
those areas of the country where such trading credits are available.

                                    9

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
(Scandinavia, U.K., Germany, France, Italy and Spain).

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 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.  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.  It also retains
an exclusive right in the U.S. Urban Bus market and non-exclusive rights
to sales of products utilizing KleenAir Systems technology in the U.S. and
certain other limited territories overseas.

The Company has moved into 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 where they are continuing field tests.  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.

A subsequent event in March 2004, was the acquisition by the Jubilee
Investment Trust of London, U.K. of $2.1 million worth of the Company's
common stock.  This was accomplished by the issuance of 10,026,666
restricted shares of the Company in exchange for 910,569 shares of
Jubilee.  Jubilee is a British entity listed on the London Stock Exchange.

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

                                    10

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 and 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.

Under the supervision and with the participation of our President and
Chief Financial Officer, we conducted an evaluation of the effectiveness
of the design and operations of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as of December 31, 2003.  Based on this evaluation, our President
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective such that the material information required to
be included in our Securities and Exchange Commission ("SEC") reports is
recorded, processed, summarized and reported within the time periods
specified in applicable SEC rules and forms relating to our reporting
obligations, and was made known to them by others within the Company,
particularly during the period when this report was being prepared.

(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.






                                    11

                              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      79   Director/ VP-Research    2 years    April 1995

 Lionel Simons        69   Director/President/      2 years     Dec. 1995
                           Secretary/Treasurer

 Hamid Servati        51   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.


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:

                                    12

   (a)   SUMMARY COMPENSATION TABLE

                        Annual Compensation
------------------------------------------------------------------------
   Names and                   Salary/            Other Annual     Market
Principle Position      Year     Fee     Bonus    Compensation     Value
---------------------   ----   -------   -----  ----------------  --------
Lionel Simons           2003   $   -0-   $ -0-  5,000,000 shares  $346,500
President/Secretary     2002       -0-     -0-       None              -0-
                        2001       -0-     -0-    300,000 shares    27,720

Lester Berriman         2003   $   -0-   $ -0-  1,000,000 shares  $ 76,600
Chairman/ VP-Research   2002       -0-     -0-       None              -0-
                        2001       -0-     -0-    300,000 shares    27,720

William H. Ward, Jr.    2003     N/A      N/A         N/A
Director/Consultant     2002     N/A      N/A         N/A
                        2001       -0-     -0-    300,000 shares  $ 27,720 (1)

Hamid Servati           2003   $   -0-   $ -0-       None         $    -0-
Director/Vice Chairman  2002       -0-     -0-    500,000 shares    87,500 (2)
                        2001     N/A      N/A         N/A

John Zabsky             2003   $10,000   $ -0-    500,000 shares  $ 34,650 (1)
d.b.a. John Z Co.       2002    24,000     -0-       None              -0- (1)
Consultant              2001    24,000     -0-    200,000 shares    18,480 (1)

(1) Compensation was provided to Mr. Zabsky and Mr. Ward as 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 were granted during 2003 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 2003 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 2003.


   (e)   COMPENSATION OF DIRECTORS

     No Directors of the Company received cash compensation for their
services as Director during 2003.


                                    13

(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           23.71%
               328 Bay street
               Nassau, Bahamas

Common         Lionel Simons,                   714,808 (2)(3)     1.70%
               36 Corniche Drive
               Dana Point, CA 92629

Common         Lester Berriman                2,362,048            5.60%
               18871 Portofino Drive
               Irvine, CA 92715

Common         Prudent Bear Funds, Inc.       3,141,045            7.45%
               8140 Walnut Hill Lane
               Suite 405
               Dallas, TX 75231

Common         John Zabsky                    1,680,432 (4)        3.99%
               3640 S Main St
               Santa Ana, CA 92707

    (1)  All shares presented are common shares.  No preferred shares were
         outstanding at December 31, 2003.
    (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.
    (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.

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              10,708,685 (2)(3)     25.40%
               36 Corniche Drive                     (4)
               Dana Point, CA 92629


                                    14

Common         Lester Berriman             2,362,048             5.60%
               18871 Portofino Drive
               Irvine, CA 92715

Common         Hamid Servati               1,000,000             2.37%
               510 Savage Road
               Belleville, Mi 48111

Common         All officers and directors
                 as a group:              14,070,733 (5)        33.38%


    (1)  All shares presented are common shares.  No preferred shares were
         outstanding at December 31, 2003.
    (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.
    (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)  At December 31, 2002, Mr. Ward was no longer a director.  His
         shares have been excluded from the total presented for all
         officers and directors as of that date.


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.

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


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



                                    15

  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.


 (b)  Reports on Form 8-K

        None


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, 2003 and 2002.  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 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, 2003 and 2002 were $19,049 and $12,191,
respectively.  In addition, we incurred accounting review related fees

                                    16

(primarily related to procedures our auditors were required to perform in
reviewing potential registration statements and our Form S-8 Registration
Statements) of $1,384 in 2003 and $1,640 in 2002, 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 2003 and
2002.

All Other Fees:  The Company paid its principal accountant $2,500 and
$3,255 in 2003 and 2002, 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, 2004                   /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, 2004
 Lionel Simons


  /s/ LESTER BERRIMAN                 Director      April 14, 2004
 Lester Berriman


  /s/ HAMID SERVATI                   Director      April 14, 2004
 Hamid Servati





                                    17







                          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, 2003 and 2002 .  .  F-3

      Consolidated Statements of Operations for the years
           ended December 31, 2003 and 2002.  .  .  .  .  .  .  .  .  .  F-4

      Consolidated Statement of Stockholders' Equity for the
           years ended December 31, 2003 and 2002.  .  .  .  .  .  .  .  F-5

      Consolidated Statements of Cash Flows for the years
           ended December 31, 2003 and 2002.  .  .  .  .  .  .  .  .  .  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, 2003 and
2002, and the related consolidated statements of operations, stockhold
ers' 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, 2003.
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 auditing standards generally
accepted in the United States of America.  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, 2003 and 2002, 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 22, 2004

                                   F-2

                          KLEENAIR SYSTEMS, INC.
                      (A Development Stage Company)
                       CONSOLIDATED BALANCE SHEETS
                     As of December 31, 2003 and 2002


                                ASSETS

                                                      2003             2002
                                                    ----------      ----------
CURRENT ASSETS:
  Cash                                              $   28,739      $   76,758
  Accounts receivable                                   15,699          12,542
  Accounts receivable from related parties              33,288          50,000
  Advances                                                  -           52,000
  Parts inventory (at cost)                             57,126         114,076
  Prepaid expenses                                      47,000         121,542
  Loans to licensee                                         -          220,000
                                                    ----------      ----------
    Total Current Assets                               181,852         646,918

PROPERTY AND EQUIPMENT (net)                           155,611         195,620

OTHER ASSETS:
  Patent license (net)                               1,530,756       1,617,380
                                                    ----------      ----------
    TOTAL ASSETS                                    $1,868,219      $2,459,918
                                                    ==========      ==========


                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
  Accounts payable ($84,358 and $69,534 due to
    related parties, respectively)                  $  504,749      $ 150,176
  Advances from directors                               96,584         95,850
  Capital lease liability                                  372          4,811
  Note payable to related entity                       197,000         50,000
                                                    ----------      ----------
    Total Current Liabilities                          798,705        300,837
                                                    ----------      ----------

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, 31,422,161 and 20,270,556 outstanding,
  respectively)                                         31,422          20,271
 Additional paid-in capital                          8,006,296       6,959,717
 Deficit accumulated during the development stage   (6,968,204)     (4,820,907)
                                                    ----------      ----------
   Total Stockholder's Equity                        1,069,514       2,159,081
                                                    ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY          $1,868,219      $2,459,918
                                                    ==========      ==========


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

                          KLEENAIR SYSTEMS, INC.
                      (A Development Stage Company)
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                For Years Ended December 31, 2003 and 2002

                                                                   Cumulative
                                                                  During Devel-
                                               2003        2002   opment Stage
                                           ----------  ----------  -----------
REVENUES
  Sales                                    $  734,993  $   51,235  $   910,016
  Royalties                                    19,892          -        19,892
                                           ----------  ----------  -----------
    Total revenues                            754,885      51,235      929,908

COST OF REVENUES                              647,876      50,461      698,337
                                           ----------  ----------  -----------
  Gross Profit                                107,009         774      231,571

PRODUCT DEVELOPMENT COSTS                     196,534     337,773    1,239,005

OPERATING EXPENSES:
 Personnel costs                              570,445      84,697    1,237,744
 Consultants                                  682,796     439,185    2,726,726
 Professional fees                            103,536     162,276      499,227
 Office expenses                                9,915      17,738       53,278
 Depreciation                                  49,690      33,579      111,520
 Amortization of intangible assets            116,148      65,511      181,659
 Advertising and promotion                     19,177      57,552      230,941
 Loss on cancellation of licensing agreements      -           -        19,860
 Rent                                          95,717      63,250      210,217
 Travel                                        96,575      94,874      296,573
 Other expenses                                76,536      71,562      167,157
 Bad debts                                    220,000          -       220,000
 Unknown losses under prior ownership              -           -       151,518
                                           ----------  ----------  -----------
    Total operating expenses                2,040,535   1,090,224    6,106,420
                                           ----------  ----------  -----------
(LOSS) FROM OPERATIONS                      (2,130,060) (1,427,223) (7,113,854)

OTHER INCOME AND (EXPENSES):
  Interest income                                  11          15        2,526
  Interest expense                            (17,248)     (2,189)     (19,437)
  Amortize discount on receivables                 -           -        20,259
                                           ----------  ----------  -----------
(Loss) before income taxes                 (2,147,297) (1,429,397)  (7,110,506)

  Benefit from Deferred taxes                      -      397,852      397,852
                                           ----------  ----------  -----------
(Loss) Before Extraordinary Item           (2,147,297) (1,031,545)  (6,712,654)

Extraordinary Item:
  Costs of terminated acquisitions                 -      (87,500)    (255,550)
                                           ----------  ----------  -----------
Net (Loss)                                 $(2,147,297)$(1,119,045)$(6,968,204)
                                           ===========  ========== ===========
Earnings per Share (Basic):
(Loss) Per Share Before Extraordinary Item  $    (0.10) $    (0.06) $    (0.79)
(Loss) Per Share From Extraordinary Item            -           -        (0.03)
                                            ----------  ----------  ----------
Net (Loss) Per Share                        $    (0.10) $    (0.06) $    (0.82)
                                            ==========  ==========  ==========
Basic Weighted Average Shares Outstanding   22,392,964  17,729,544   8,528,986
                                            ==========  ==========  ==========

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

<TABLE>
                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                     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          -            -
  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   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          -            -
  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   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          -            -
  To officers and 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          -            -
  To officers and 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)
                                    =========  ========   ==========  ==========  ==========   =========  ===========



<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, 2003 and 2002

                                                                   Cumulative
                                                                  During Devel-
                                              2003        2002    opment Stage
                                          -----------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net (loss)                               $(2,147,297) $(1,119,045)$(6,968,204)
 Adjustments to reconcile net (loss) to
 net cash provided by operations:
   Losses prior to current ownership               -           -       151,518
   Depreciation                                49,690      33,579      111,520
   Bad debts                                  220,000          -       220,000
   Amortization of:
     Prepaid expenses                          74,542     170,270    1,163,237
     Intangibles                              116,148      65,511      181,659
   Stock issued for services                  982,730     192,184    2,823,372
   Stock issued for extraordinary loss             -       87,500      140,550
   Deferred income taxes                           -     (397,852)    (397,852)
Changes in operating assets and liabilities:
   Accounts receivable                         65,555     (90,545)     (26,590)
   Inventory                                   56,950     (91,538)     (34,588)
   Advances to consultants                         -           -        20,000
   Prepaid expenses                                -      (46,200)    (247,000)
   Trade accounts payable                     354,573     (41,899)     408,605
                                          -----------  ----------  -----------
NET CASH USED BY OPERATING ACTIVITIES        (227,109) (1,238,035)  (2,453,773)
                                          -----------  ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Property and equipment                        (9,681)   (172,570)    (257,438)
 Patent licensing costs                       (29,524)    (56,107)    (161,012)
 Business acquisition                               -     (44,820)     (44,820)
 Notes receivable                                   -    (220,000)    (220,000)
                                          -----------  ----------  -----------
NET CASH USED IN INVESTING ACTIVITIES         (39,205)   (493,497)    (683,270)
                                          -----------  ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuing stock                   75,000   1,720,000    2,869,459
 Capital lease obligation                          -        7,765        7,765
 Payments on capital lease                     (4,439)     (2,954)      (7,393)
 Additional capital contributions                  -           -         2,367
 Advances and loans from related parties      147,734      50,000      293,584
                                          -----------  ----------  -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES     218,295   1,774,811    3,165,782
                                          -----------  ----------  -----------
NET INCREASE/(DECREASE) IN CASH               (48,019)     43,279       28,739

CASH AT BEGINNING OF YEAR                      76,758      33,479           -
                                          -----------  ----------  -----------
CASH AT END OF YEAR                       $    28,739  $   76,758  $    28,739
                                          ===========  ==========  ===========

  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, 2003 and 2002


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.  The Company has had various
names during its existence as various endeavors were attempted. None of
these proved 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 the emissions
from automobile exhaust without significant modification to the vehicle.
This device is known as the "NOxMaster(TM)."  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.

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 NOxMaster(TM) 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 are 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 intercompany accounts, transactions, and
profits.

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.

                                     F-9

Accounts Receivable -- The Company uses the allowance method to account
for uncollectible accounts receiv able.  Accounts receivable are presented
net of an allowance for doubtful accounts when applicable.  There were no
allowances at December 31, 2003 or 2002.

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

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.

Patent and Licensing Costs -- Only the direct costs of obtaining license
or patents and costs of extending or perfecting the patents are available
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
is not amortized until patents are issued.  In the event of a patent being
superseded, the unamortized costs are written off immediately.  All costs
of research and development are charged to operations as development costs
when incurred and are included in results of operations.

The Company purchased the rights to the patent for its NOxMaster(TM) and
developed other patents as discussed at Note 7 below.  The cost 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 ten years beginning April 2003.  Amortization
expense of $17,881 related to these rights has been charged to operations.

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

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.

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

Stock-Based Compensation -- The Company accounts for services acquired
using stock as compensation based on the fair value of the shares issued.
Fair value is determined based on the closing price of the stock on the

                                     F-10

date the Company becomes obligated to issue the shares.  Due to thin
trading volume of the Company's stock, most stock issuances are recorded
at a discount to the market price due to effective limitations on disposal
by the recipient of the shares.  Restricted shares issued for services are
discounted at a greater discount due to the added limitation of the
holding period for the restricted shares.

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 6
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.

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 nor disposable assets to fund completion of its develop

                                     F-11

ment 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 has resulted in product sales and installations during the second
and third quarters of 2003 through the Company's UK affiliate.
Sales/installations were halted for the fourth quarter of 2003 and the
first quarter of 2004 due to budgetary limitations under the UK trust
administering the government cost sharing program.  These sales are
expected to resume in April with the advent of a new budget period.
Additionally, subsequent to year end, the Company has executed an exchange
of its newly issued restricted shares for free trading shares of a UK
investment fund.  The sale of these shares should provide much needed
funds to pursue California testing while also resuming sales in the UK.

These 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:   SUPPLEMENTAL CASH FLOW DISCLOSURES:

                                                                   Cumulative
                                                                  During Devel-
                                              2003        2002    opment Stage
                                          -----------  ----------  -----------
Cash payments for:
 Interest                                 $     6,075  $    2,189  $     8,264
 Income taxes                                      -           -            -

Non-cash investing and financing transactions
(Stock has been issued for the following):
  Compensation and directors' fees        $   519,090  $   92,912  $ 1,338,650
  Consultants and prepaid services            463,640     225,022    2,154,397
  Equipment                                        -           -         8,300
  Patent licensing                                 -           -        14,900
  Repurchase of U.S. diesel license                -           -        62,500
  Acquisition of National Diversified
     Telecom, Inc.                                 -           -       140,550
  Sale of marketing licenses for notes
     receivable                                    -           -     1,736,558
  Acquisition of Carbon Cloth
     Technologies, Inc.                            -      981,514      981,514
  Uncompleted business acquisition                 -       87,500       87,500

                                     F-12

NOTE 4:   EQUITY METHOD INVESTEE

The Company holds a 30% interest in KleenAir Systems International, Inc.
(KASI), a Bahamas based entity.  KASI owns 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.


NOTE 5:   RECEIVABLES

During 2002, the Company advanced $45,000 to KSL for expenses incurred in
the testing of the product on London taxicabs and buses.  KSL was awarded
a portion of a U.K. government-funded grant for this testing. During 2003,
KSL paid a consultant the equivalent of $7,791 for consulting services
related to countries other than Great Britain.  As agreed by Management,
this payment was offset against the outstanding receivable, leaving an
outstanding balance due of $37,209.  The Company owes KASI $3,921 due to
funds collected directly from KSL for product sales in excess of amounts
due from KASI.

A consultant was advanced $5,000 during 2002.  This advance was offset
against compensation due the consultant in 2003.

An advance of $52,000 was provided to one of the principles of Carbon
Cloth during 2002 against stock to be issued to him under his employment
agreement.  This receivable was offset against compensation during 2003.

During the first quarter of 2002, the Company loaned $120,000 to a
licensee.  This loan is secured by 100,000 shares of the Company's stock
and was expected to be satisfied before the end of the year.  During the
third quarter of 2002, the Company loaned this same entity another
$100,000 secured by 120,000 shares of the Company's stock.  The first loan
and the related stock were later assigned to a third party by the
licensee.  No date has been set for repayment by the third party.

During 2003, the Company negotiated a settlement with the licensee for
them to relinquish exclusivity to certain geographical areas and types of
customers in exchange for the Company releasing its claim for repayment of
the loans or return of the stock.  As a result, these loans were written
off.


NOTE 6:   PREPAID EXPENSES

The Company follows a practice of employing consultants for advisory
services.  Typically, these agreements are for one year periods and
generally call for the bulk of their 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 based on the trading price
at the start of the contract and recorded as prepaid services.  This
prepaid cost is then amortized to consulting fees over the period of the
contract.


                                     F-13

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 and 2002 was $170,270 and $39,688, respectively.  Balances of
items making up prepaid expenses at December 31, 2003 and 2002 were as
follows:

                                                 2003            2002
                                              ----------      ----------
    Consulting agreements                     $       -       $   74,542
    Rent                                          46,200          46,200
    Taxes                                            800             800
                                              ----------      ----------
      Totals                                  $   47,000      $  121,542
                                              ==========      ==========

NOTE 7:   FEDERAL INCOME TAXES

Because of  timing, relative insignificance, and changes in control and
management, the Company believes that it cannot benefit from operating
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
                                          -------------
                                          $   7,329,124
                                          =============

The Company has deferred tax assets and liabilities at December 31, 2003
and 2002.  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 the patent
acquisition, and from the acquisition of Carbon Cloth. These result in net
deferred tax assets totaling $3,838,980 and $2,987,430 at December 31,
2003 and 2002, 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, 2003 and 2002.  The following table sets forth the
reconciling items between income per books and taxable income.


                                     F-14

                                                 2003          2002
                                             -----------    -----------
    Book loss                                $(2,147,297)   $(1,119,045)
    Deferred tax benefit                              -        (397,852)
    Non deductible expenses                        9,658          7,116
    Depreciation                                     876          1,098
    Amortization of intangibles                 (145,996)        47,829
                                             -----------    -----------
    Taxable loss                             $(2,282,759)   $(1,460,854)
                                             ===========    ===========

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:

                                                  2003          2002
                                              -----------    -----------
    Deferred tax assets:
      Patent costs                            $ 1,286,124    $ 1,390,404
      Net operating losses                      2,918,217      2,008,958
                                              -----------    -----------
           Total                                4,204,341      3,399,362
                                              -----------    -----------

    Deferred tax liabilities:
      Property and equipment                        2,204          2,553
      Investment in Carbon Cloth                  363,216        409,375
                                              -----------    -----------
           Total                                  365,420        411,928
                                              -----------    -----------
    Net deferred tax asset                      3,838,921      2,987,434

    Valuation allowance                        (3,838,921)    (2,987,434)
                                              -----------    -----------
      Amount reported on Balance Sheet        $        -     $        -
                                              ===========    ===========

In 2002, the Company acquired Carbon Cloth Technologies, Inc. in an
exchange of stock.  In recording that acquisition, the Company was
required to recognize a deferred tax liability for the difference in the
book basis (acquisition cost) of Carbon Cloth and its tax basis.  The same
rules for deferred taxes require that the liability be offset by deferred
tax assets if they exist.  When this was done, a benefit was realized
because the Company has previously (and prospectively) maintained a
valuation allowance against its deferred tax assets because of its
inability to foresee the timing of their utilization.


NOTE 8:   PATENTS, LICENSE, RESEARCH AND DEVELOPMENT

During April 1995, the Company acquired a patent for a proprietary device
(the "NOxMaster(TM)") shown to reduce the pollutant content of automobile
emissions.  The cost of acquiring this patent was capitalized under the
caption "Patent license" on the balance sheet.  After the acquisition of
this patent, the Company has continued to refine the device and expand its

                                     F-15

applicability to a wider range of vehicles.  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 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 CarbonGuard(TM) technology.  This product is
currently being marketed and the Company expects to be able to increase
the product's market penetration.  The CarbonGuard(TM) 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, an
entity in which the Company owns an indirect equity interest as discussed
elsewhere.

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.

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 NOxMaster(TM)'s application to diesel
engines.  In addition, the agreement granted the same rights for the
application of the NOxMaster(TM)' 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 UK 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 license is for a ten-
year, nonexclusive, worldwide manufacturing, marketing, and selling
license for NOxMaster(TM) devices.  The Company has also entered into an
exclusive ten-year California manufacturing, marketing rights, and
distribution rights agreement for application of the NOxMaster(TM) to
gasoline engines and a ten-year, exclusive manufactur ing, marketing, and

                                     F-16

distribution rights agreement for application of the NOxMaster(TM) 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
Extengine's exclusivity in certain markets.  This action was undertaken
because of certain actions and certain inactions on the part of Extengine.
During 2003, Manage ment 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 9:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December
31, 2003 and 2002.

                                                    2003          2002
                                                -----------    -----------
   Office furniture and equipment               $    61,497    $    61,497
   Test vehicles                                     28,928         28,028
   Analysis equipment                               167,139        158,358
   Leasehold improvements                            11,682         11,682
                                                -----------    -----------
   Totals                                           269,246        259,565

        Accumulated depreciation                   (113,635)       (63,945)
                                                -----------    -----------
   Net Property and Equipment                   $   155,611    $   195,620
                                                ===========    ===========

Depreciation expense totaled $49,690 and $33,579 for 2003 and 2002.  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.


NOTE 10:   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
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

                                     F-17

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 to register 1,200,000
shares for the compensation under five consulting agreements and reserved
750,000 shares for the future exercise of options under an Employee Stock
Option Plan, discussed below.  The shares for the consultants were issued
in July 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 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 its 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 2003, the Company filed an additional 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 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 11:   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 such grants have been made under this plan.


NOTE 12:   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
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

                                     F-18

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 statements 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
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, as well as the
transactions described below, has been valued as described in Note 9.  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.

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 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 13; and 100,000 shares to a development consultant.  A
director was issued 20,000 shares for his services.


                                     F-19

During March 1999, the Company issued 600,000 shares under its S-8 plan
discussed at Note 9 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 Extengine, Inc.) for $350,000 under an agreement to provide
funds for product testing.  The Company issued 300,000 shares valued at
$51,000 to officers and directors and 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 9 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 issuance of
shares for services included warrants (discussed below).  The holders
exercised a 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 and 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

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 develop ment, 50,000 valued at $16,250 for
legal services, 100,000 valued at $32,500 for contract settlement, 500,000

                                     F-20

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 cash totaling  $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.


NOTE 13:   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 and an
option to purchase 200,000 shares at $0.625 per share were outstanding at
December 31,2002.  Both of these were to expire in 2004.  The option for
200,000 shares was canceled during 2003, leaving a balance of 240,000
options outstanding at December 31, 2003.  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 anti-
dilutive.


NOTE 14:   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, upon the purchase of the patent, the
previous owners became preferred stockholders. Individuals involved with
the previous owner continued many of the development and other services
that they were previously providing.

See also the discussion of the granting of a license for Europe to the
Company's President at Note 8 and the discussion at Note 15 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 8,
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

                                     F-21

President.  These transactions effectively transferred 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.

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, Inc. lent
the Company $50,000 documented in a demand note.

During 2003, the Board approved the issuance of 7,600,000 restricted
shares to themselves and an engineering consultant as compensation for
their 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% with interest compounded monthly if
not paid.

In 2003, the Company generated a significant portion ($202,544) of its
revenues from sales of its NOxMaster(TM) product to KASI (discussed at
Note 3) which, in turn, sold them to KSL.  KSL sold the products to a
third party for installation on UK taxicabs and buses.  The Company
recognized its revenues at the first level, i.e., sales to KASI. At this
point, there has been no inclusion of KASI 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 8.


NOTE 15:   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

                                     F-22

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 16:   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
CarbonGuard(TM) 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 is
expected to generate additional revenues in the future.  Its primary
market at this time is environmentally mandated retrofit applications
which 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 operations
of Carbon Cloth 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
compensation and were contingent upon the achievement of certain sales
levels.

The purchase price was allocated to the individual assets acquired
(primarily the CarbonGuard(TM) 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)



                                     F-23

NOTE 17:   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.  Future minimum
payments under this noncancellable lease totals $123,200 at December 31,
2003.  This amount includes the deposit which will represent a prepayment
of the final six months rental.


NOTE 18:   CONCENTRATIONS

As mentioned in other places above, a majority of the Company's
NOxMaster(TM) sales have been for installation in England.  In addition,
the Company sold $287,200 worth of particulate traps directly to Dinex,
the entity purchasing and installing the NOxMaster(TM) equipment in the
U.K.  Sales of the CarbonGuard(TM) were also concentrated with $187,435
being sales to Johnson Mather, Inc.  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.


NOTE 19:   SUBSEQUENT EVENTS

During the first quarter of 2004, the Company has sold 250,000 restricted
shares for $25,000 and entered into an option for this purchaser to
acquire an additional 500,000 shares in April 2004.  It has also entered
into consulting contracts requiring the issuance of 460,000 unrestricted
shares.

In March 2004, the Company entered into a transaction whereby it exchanged
10,026,666 restricted shares for 910,569 shares of Jubilee Investment
Trust, PLC.  Jubilee is a British entity listed on the London Stock
Exchange.

The Company announced an agreement with Beijing Luchuang Environmental
Protection Group in China to evaluate the Company's technologies with
regard to utilization and manufacturing in China.  Tests of these
technologies is currently being conducted at two university testing
facilities in Beijing.  The Company also announced that the Energy Savings
Trust in the UK has restructured their emission control funding grants to
include a new category for a 75% cost subsidy.  This new category
currently contains only KleenAir's products. The funding grants are
government's cost subsidy program for its emission control retrofit
programs.








                                     F-24