<PAGE>
<PAGE>
                              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, 1998

                      Commission file number: 33-3362-D

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

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

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

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

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

The issuer  (1) has filed all reports required to be filed by Section 13 or
15 (d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
    Yes   [  ]        No   [X]

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

State issuer's revenues for its most recent fiscal year  - $0.

The aggregate market value of the voting stock  held by non-affiliates of
the registrant on November 29, 1999, was $757,977 based on the stock price
on that date. The number of shares outstanding of the registrant's common
stock on November 29, 1999, was 3,443,906 shares.


<PAGE>
<PAGE>
                                PART I

Item 1.  Description of Business

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

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

    Since acquiring the patent in 1995, the Company has been a
developmental stage Company and has worked towards the completion of the
development and testing of the NOxMaster(TM) technology. The Company has
not been involved in any bankruptcy, receivership or similar proceeding.

    In May 1997, the Company effected a one (1) for fifteen (15) reverse
split of its common outstanding shares leaving the par value at $.001 per
share. The number of issued and outstanding shares was reduced to 362,157
while its authorized shares remained unchanged at 50,000,000. The Series
1 Preferred Shares were similarly effected by the same 1 for 15 reverse
split and were reduced to 500,000 shares. Subsequently all but 112,333 of
these preferred shares have been converted into common shares at a ratio
of 1 common share for each share of Series 1 Preferred.

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

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

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

    In addition to cost effectively reducing the NOx from the exhaust,
the NOxMaster(TM) has the potential of aiding the enhancement of engine
performance. Controlled reduction of NOx could allow for the re-tuning of
the engine for increased efficiency which will increase fuel mileage
while continuing to maintain the government set NOx standard.

    The Company plans to complement its NOxMaster(TM) Ammonia Injection
System with a NOxMaster(TM) Diesel Catalytic Converter for the purpose of
applying its NOx reduction technology to diesel-fueled engines as well as
reducing CO, hydrocarbons and particulates emitted by such engines. It
will do so through both the development of specially formulated ceramic
wash-coats and the acquisition of plasma technology for the reduction of
particulates.

    Subsequent to the Year End the Company entered into an agreement
with Catalytic Solutions, Inc.(CSI) for the development of the specially
formulated ceramic to be used in the NOxMaster(TM) Diesel Catalytic
Converter. That agreement grants exclusive world-wide rights to the
Company for any such ceramic wash-coat formulations created by CSI that
are designed for use with ammonia injection exhaust systems.

    In order to conserve operating capital, the Company has no paid
employees but has retained the services of its officers and certain
consultants through the issuance of restricted Section 144 common stock.
This includes the services of investment banking and financial
consultants A & E Productions, Inc. who assisted in the creation of an
Offering Memorandum and subsequent to the Year End, Grade Check
Consulting, who have provided advice with regard to the Company's
business plan development.

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

    In December 1996, the Company, having no resources available for the
international commercial exploitation of its technology rights, and
having no business plan for such exploitation of rights outside of the
US, agreed to license to an officer of the Company, the European rights
to the technology for application to gasoline engines and for world-wide
rights for diesel engines. The Agreement called for the Company to
receive a 7% royalty plus 30% of a Company to be established in the UK
and to be called NOxMaster Ltd., which Company was formed subsequent to
the Year End. During 1998, the US exploitation rights for that portion of
the technology relating to diesel engines was transferred back to the
Company in exchange for restricted shares.

    As yet the Company has not begun distribution of its products and
does not expect to begin doing so until some time in the year 2000.

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

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

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

    During 1997 development expenses were $10,750 and during 1998 they
were $47,222.

    The Company has no full time employees and 4 part-time employees.

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


 Item 2.  Description of Property

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

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


Item 3.  Legal Proceedings.

     The Company is not currently involved in any litigation.


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

     A Special Meeting of the Shareholders was held on September 4,
1998 in Newport Beach, CA at which the following items were approved by
over 90% of the shareholders present in person or represented by proxy.
Total votes present were 574,376, representing 64.4% of the 889,986
common shares issued and outstanding as of the date of the meeting:

     a)   Approval of a plan to raise additional capital for the
     corporation. The plan involved hiring of a consultant to assist
     in formulating and implementing the plan, the engagement of
     others to assist in the raising the capital, the payment of
     commissions, fees (including stock), and costs in connection
     therewith, and the preparation and utilization of offering
     documents under Section 504 of Regulation "D" promulgated under
     the Securities Act of 1933, as amended. The motion was passed
     with 566,712 votes cast in favor 7,664 abstaining and none
     against.

     b)   Ratification of the voiding of Licensing Agreements previously
     entered into and valued on the Company books at close to
     $2,000,000, due to non-performance. The motion was passed with
     566,712 votes cast in favor 7,664 abstaining and none against.

     c)   Ratification of certain Licensing Agreements entered into
     through its Board of Directors, between the Company and its
     President, Lionel Simons, for certain corporate technology and
     with respect to the issuance of stock. The motion was passed
     with 566,712 votes cast in favor 6,530 abstaining and 1,134
     against.



                              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,
1997 and 1998 respectively. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commissions, and may not represent
actual transactions.

                               High                Low
                 1997
          1st Quarter         $0.47               $0.47
          2nd Quarter         $0.47               $0.47
          3rd Quarter         $1.125              $0.125
          4th Quarter         $0.125              $0.125

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

    Shareholders:     At October 31, 1999 there were 122 shareholders of
record with an additional 62 shareholders registered with firms reporting
to the Depository Trust Company.

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


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

    In addition to the original US Patent  # 5,224,346 acquired in April of
1995, US Patent # 5,609,026 "Engine NOx Reduction" has been issued after
successfully overturning a challenge in Patent Court. 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. International
patent rights have been granted for these patents and have been issued
for Europe (patent # 0 638 139 covering Germany, France and the UK) and
international coverage extends to certain Asian countries and Canada as
well as Brazil and certain other countries. 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 yet been assigned on the books to
this second patent.

    The Company filed US Patent Application S.N. 08/816,796 on March
19th, 1997 on"Ammonia Injection in NOx Control" and has been notified
that all claims have been approved, with the patent expected to issue
early in the year 2000. 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.

    The first product, the NOxMaster(TM) device is currently in the final
stages of refinement. Nitrogen oxides (NOx) are the most difficult auto
exhaust pollutants to control. They are not fuel based but are produced
by the oxidation of nitrogen in the combustion air and their formation
requires high temperature (2500 degrees F and above). The higher the
temperature, the more NOx is produced. Thus NOx is produced in proportion
to engine power output and efficiency. Meeting even the current minimum
standards requires sacrifice of performance and economy.

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

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

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

    The Company anticipates securing an Executive Order (EO) by the end of
the 1st Quarter of the year 2000 from the California Air Resources Board
(CARB). The EO states that the product does not increase NOx emissions
and will allow the Company to sell the product(s) in the state of
California. Once the production prototype is finalized the Company will
request formal testing by the CARB to validate the finding of CEE and
thereby certifying that the device does in fact reduce NOx in significant
amounts to qualify for emission credits.

Emission Credits.  The emphasis will be on NOx reduction products
which are not required by law or regulation, thereby satisfying the
mobile source emission reduction criteria for "emission credits". The
Guidelines for the Generation and Use of Mobile Source Emission Reduction
Credits, published by the California Environmental Protection Agency, Air
Resources Boards and Mobile Source Emission Reduction Credits were
approved by the ARB on February 19, 1993.

    The document states that NOx is the only pollutant considered in the
guidelines as a reasonable candidate for credit generation. These
emission credits are currently traded on a commodity-like exchange and
are valued in the range of $10,000 to $20,000 per ton. The Company
believes the value of these emission credits will be a very substantial
tool in the marketing of the NOxMaster(TM) products to fleet vehicle owners,
especially the diesel transportation industry.

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


Item 7.  Financial Statements

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


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

    None



                               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     74  Director/ VP-Research         2 years    Apr 1995
Lionel Simons       64  Director/President/Sec/Treas. 2 years    Dec 1995
William H. Ward Jr  60  Director/Consultant           2 years    Nov 1996


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

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

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


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 1998 the Company awarded the following non-cash stock
compensation for services rendered:

     (a)  SUMMARY COMPENSATION TABLE

                    Annual Compensation

Names and Principle     Year     Salary  Bonus   Other Annual      Market
Position                                         Compensation      Value

Lionel Simons           1998      -0-     -0-     50,000 shares   $18,750
President/Secretary

Lester Berriman         1998      -0 -    -0-     50,000 shares    18,750
Chairman/ VP-Research

William H. Ward Jr.     1998      -0-     -0-     10,000 shares     3,750*
Director/Consultant

John Zabsky
dba John Z Co.          1998      -0-     -0-     50,000 shares    18,750*
Consultant

* Compensation is provided to Mr. Ward and Mr. Zabsky as outside
consultants.

     (b)  OPTION/STOCK APPRECIATION RIGHTS

    No stock options were granted during 1998 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 1998 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 1998.

     (e)  COMPENSATION OF DIRECTORS

    No Directors of the Company are compensated for their services as
Director


     (f)  EMPLOYMENT CONTRACTS

The Company has no employment contracts.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

Title of    Name and Address of                    Shares of    Percent of
 Class       Beneficial Owner                        Record      of Class
--------    -------------------                    ---------    ----------
Common    Pollution Control Inc.                   2,400,000*     72.30%
          328 Bay street
          Nassau, Bahamas

Common    Lionel Simons, President/Director          115,338       3.50%
          36 Corniche Drive, Suite E
          Dana Point, CA 92629

Common    Lester Berriman,                           182,668       5.50%
          18871 Portofino Drive
          Irvine, CA 92715

Common    William H. Ward, Jr.                        10,000       0.03%
          273 Hanover Drive
          Costa Mesa, CA 92626

Common    All officers and directors as a group:   2,708,006      81.20%

Common    John Zabsky dba John Z Company             150,000       4.5%

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


Item 12.  Certain Relationships and Related Transactions

In July 1998, 400,000 shares of restricted shares were purchased by
Pollution Control, Inc. for the sum of $200,000.00. A financial
consultant received 1,000,000 shares of restricted common stock valued at
$62,500, for the provision of services to the Company. These were
assigned to Pollution Control in exchange for an equity interest in that
entity.

The exclusive marketing, distribution and manufacturing rights for
the US for NOxMaster(TM) technology, as applicable for diesel engines, was
acquired in July 1998 for 1,000,000 restricted shares, valued at
$62,500.00, from licensee Pollution Control, Inc., the controlling
shareholder of KleenAir Systems Inc.

Lionel Simons, President of KleenAir Systems, Inc. is also President
of, and a beneficial owner of Pollution Control Inc. through family
trusts. Mr. Simons has a Power of Attorney from Pollution Control, which
permits him to vote on its behalf.


Item 13.  Exhibits and Reports on Form 8-K

     None


                                SIGNATURES

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

                                        KLEENAIR SYSTEMS, INC.

Date:  November 30, 1999                  /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            November 30, 1999
Lionel Simons


/s/ LESTER BERRIMAN                Director            November 30, 1999
Lester Berriman


/s/ WILLIAM H. WARD                Director            November 30, 1999
William H. Ward, Jr.



<PAGE>
<PAGE>


                            KLEENAIR SYSTEMS, INC.
                        (A Development Stage Company)




                        INDEX TO FINANCIAL STATEMENTS



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

      Balance Sheets as of December 31, 1998 and 1997  .  .  .  .  .  .  F-3

      Statements of Operations for the fiscal years ended
      December 31, 1998 and 1997  .  .  .  .  .  .  .  .  .  .  .  .  .  F-4

      Statement of Stockholders' Equity for the fiscal years ended
      December 31, 1998 and 1997  .  .  .  .  .  .  .  .  .  .  .  .  .  F-5

      Statements of Cash Flows for the fiscal years ended
      December 31, 1998 and 1997  .  .  .  .  .  .  .  .  .  .  .  .  .  F-6

      Notes to Financial Statements  .  .  .  .  .  .  .  .  .  .  .  .  F-7



                                    F-1

<PAGE>
<PAGE>



              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



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


We have audited the accompanying balance sheets of KleenAir Systems, Inc.
(a develop ment stage Company) as of December 31, 1998 and 1997, and the
related statements of operations, stockholders' equity and cash flows for
the years then ended.  We have also audited the cumulative statements of
operations, stockholders' equity, and cash flows for the period from January
1, 1995 through December 31, 1998. These financial statements are the
responsibility of the Company's management.  Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion the financial statements referred to above present fairly,
in all material respects, the financial position of KleenAir Systems, Inc.
at December 31, 1998 and 1997, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial state ments, the Company is in the development stage and has no
operating revenues.  This situation raises substantial doubt as to the
Company's ability to continue as a going concern.  Management's plans in
regard to this situation are also described in Note 2.  The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.





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

November 24, 1999



                                    F-2

<PAGE>
<PAGE>
                             KLEENAIR SYSTEMS, INC.
                         (A Development Stage Company)
                                 BALANCE SHEETS
                        As of December 31, 1998 and 1997

                                   ASSETS


                                                       1998          1997
                                                  ----------      ----------
CURRENT ASSETS:
    Cash                                          $      443      $      557
    Prepaid expenses                                  90,000          18,056
                                                  ----------      ----------
       Total Current Assets                           90,443          18,613

    PROPERTY AND EQUIPMENT (net)                       1,595              -

OTHER ASSETS:
    Patent license                                 3,607,137       3,530,861
                                                  ----------      ----------
    TOTAL ASSETS                                  $3,699,175      $3,549,474
                                                  ==========      ==========


                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
    Accounts payable ($42,711 and $25,646
    due to related parties, respectively)         $   42,711      $   29,265


STOCKHOLDERS' EQUITY:
    Preferred stock, series A, $.001 par value
    (10,000,000 shares authorized, 112,333
    and 314,000 outstanding, respectively)               112             314
    Common stock, $.001 par value (50,000,000
    shares authorized, 3,293,906 and
    472,241 outstanding, respectively)                 3,294             472
    Additional paid-in capital                     5,211,375       4,797,120
    Unearned compensation                                 -          (24,941)
    Deficit accumulated during the
    development stage                             (1,558,317)     (1,252,756)
                                                  ----------      ----------
 Total Stockholder's Equity                        3,656,464       3,520,209
                                                  ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY        $3,699,175      $3,549,474
                                                  ==========      ==========


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

<PAGE>
<PAGE>
                         KLEENAIR SYSTEMS, INC.
                      (A Development Stage Company)
                        STATEMENTS OF OPERATIONS
               For Years Ended December 31, 1998 and 1997

                                                                   Cumulative
                                                                  During Devel-
                                            1998        1997      opment stage
                                         ----------   ---------   ------------
PRODUCT DEVELOPMENT COSTS                $   47,222   $  10,750    $   251,660

OPERATING EXPENSES:
  Personnel costs and director fees              -           -         135,625
  Consultants                               195,150      31,063        591,123
  Professional fees                          52,567       3,280         84,850
  Office expenses                               625       6,552         19,357
  Depreciation                                  145          -             145
  Advertising and promotion                      -           -         133,448
  Loss on cancellation of licensing
  agreements                                     -           -          19,860
  Other expenses                              9,852       3,793         22,940
  Unknown sources prior to current
  ownership                                      -           -         151,518
                                         ----------   ---------      ---------
      Total operating expenses              258,339      44,688      1,158,866
                                         ----------   ---------      ---------
(LOSS) FROM OPERATIONS                     (305,561)    (55,438)    (1,410,526)

OTHER INCOME AND (EXPENSES):
 Amortization of discount on receivables        -            -          20,259
                                         ---------    ---------    -----------
(Loss) Before Extraordinary Item           (305,561)    (55,438)    (1,390,267)

Extraordinary Item:
  Costs of terminated acquisition                -           -         168,050
                                         ----------   ---------    -----------
Net (Loss)                               $ (305,561)  $ (55,438)   $(1,558,317)
                                         ==========   =========    ===========

Earnings per share:
Basic:
Loss Per Share Before Extraordinary Item $    (0.19)  $    (0.12)  $     (2.36)
  Loss Per Share From Extraordinary Item         -            -          (0.29)
                                         ----------   ---------    -----------
Net Loss Per Share                       $    (0.19)  $    (0.12)  $     (2.65)
                                         ==========   ==========   ===========

Weighted Average Shares Outstanding       1,623,688      472,242       589,147
                                         ==========   ==========   ===========


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

<PAGE>
<PAGE>
<TABLE>
                                       KLEENAIR SYSTEMS, INC.
                                   (A Development Stage Company)
                                 STATEMENT OF STOCKHOLDERS' EQUITY
<S>                             <C>           <C>       <C>            <C>           <C>           <C>           <C>
                                                                                                                  Accumulated
                                                                                     Additional     Unearned     Deficit During
                                    Preferred Stock            Common Stock           Paid-In        Compen-       Development
                                  Shares       Amount       Shares      Amount        Capital        sation           Stage
                                ---------     -------    ---------     -------       ----------    ---------     -------------
BALANCES, 1/1/95                       -      $    -        37,066     $    37       $  151,481    $     -        $  (151,518)

Stock issued for cash                  -           -        13,667          14           66,995          -                 -
  For adjustment                       -           -           267           1               -           -                 -
  For consulting services              -           -        43,074          43          279,482          -                 -
  For professional services            -           -         2,333           2           12,748          -                 -
  For purchase of patent rights   466,667         466       30,000          30        3,507,003          -                 -
  For directors' compensation          -           -         2,000           2           22,498          -                 -
  For officers' compensation       16,667          17        4,667           5          194,978          -                 -
Other contributed capital              -           -            -           -             2,367          -                 -
Options compensation                   -           -            -           -            70,313     152,016)               -
Net loss                               -           -            -           -                -           -           (329,289)
                                ---------     -------    ---------     -------       ----------    --------       -----------
BALANCES, 12/31/95                483,334         483      133,074         134        4,307,865    (152,016)         (480,807)

Stock issued for services           6,666           6       12,333          12          201,857     (78,750)               -
  For officers' compensation       16,666          17           -           -            15,608     (15,625)               -
  For aborted acquisition              -           -        20,000          20          140,530          -                 -
Exercise of options                    -           -        37,500          37          112,462          -                 -
Conversion to common             (159,333)       (159)     159,334         159               -           -                 -
Net Loss                               -           -            -           -                -      187,346          (716,511)
                                ---------     -------    ---------     -------       ----------    --------       -----------
BALANCES, 12/31/96                347,333         347      362,241         362        4,778,322     (59,045)       (1,197,318)

Stock issued for cash                  -           -        60,000          60           14,940          -                 -
 For officers' compensation        16,667          17           -           -             3,858      (3,875)               -
Conversion to common              (50,000)        (50)      50,000          50               -           -                 -
Net loss                               -           -            -           -                -       37,979           (55,438)
                                ---------     -------    ---------     -------       ----------    --------       -----------
BALANCES, 12/31/97                314,000         314      472,241         472        4,797,120     (24,941)       (1,252,756)

Stock issued for cash                  -           -       400,000         400          199,600          -                 -
  For services                         -           -     1,060,000       1,060           93,315          -                 -
  To officers and developers           -           -       160,000         160           59,840          -                 -
  For diesel license                   -           -     1,000,000       1,000           61,500          -                 -
Conversion to common             (201,667)       (202)     201,665         202               -           -                 -
Net loss                               -           -            -           -                -       24,941          (305,561)
                                ---------     -------    ---------     -------       ----------    --------       -----------
BALANCES, 12/31/98                112,333     $   112    3,293,906     $ 3,294       $5,211,375    $     -        $(1,558,317)
                                =========     =======    =========     =======       ==========    ========       ===========


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

<PAGE>
<PAGE>
                            KLEENAIR SYSTEMS, INC.
                        (A Development Stage Company)
                           STATEMENTS OF CASH FLOWS
              Increases/(Decreases) in Cash and Cash Equivalents
                  For Years Ended December 31, 1998 and 1997

                                                                   Cumulative
                                                                  During Devel-
                                              1998       1997     opment Stage
                                           ---------   ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)                          $(305,561)  $  (55,438) $(1,558,317)
Adjustments to reconcile net income/(loss)
   to net cash provided by operations:
   Losses prior to current ownership              -            -       151,518
   Depreciation                                  145           -           145
   Amortization of:
     Prepaid expenses                        108,056       27,083      162,220
     Deferred services                        24,941       37,979      250,267
   Stock issued for services                 154,375           -       432,950
   Stock issued for extraordinary loss            -            -       140,550
Advances to consultants                           -            -        20,000
Prepaid expenses                            (180,000)          -      (180,000)
Trade accounts payable                        13,446      (12,805)      42,711
                                           ---------   ----------  -----------
NET CASH USED BY OPERATING ACTIVITIES       (184,598)      (3,181)    (537,956)
                                           ---------   ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment                      (1,740)          -        (1,740)
  Patent licensing costs                     (13,776)     (11,534)     (37,137)
                                           ---------   ----------  -----------
NET CASH USED IN INVESTING ACTIVITIES        (15,516)     (11,534)     (38,877)
                                           ---------   ----------  -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from stock subscribed                   -           -       180,400
  Proceeds from issuing stock                200,000       15,000      394,509
  Additional capital contributions                -            -         2,367
                                           ---------   ----------  -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES    200,000       15,000      577,276
                                           ---------   ----------  -----------
NET INCREASE/(DECREASE) IN CASH                 (114)         285          443

CASH AT BEGINNING OF YEAR                        557          272           -
                                           ---------   ----------  -----------
CASH AT END OF YEAR                        $     443    $     557  $       443
                                           =========    =========  ===========

SUPPLEMENTAL DISCLOSURES:
  Cash payments for:
     Interest                              $      -     $      -   $        -
     Income taxes                                 -            -            -
  Non-cash investing and financing
  transactions:
     Stock issued for:
       Compensation and directors fees        60,000           -       186,875
       Services and prepaid services          94,375        3,875      362,500
       Patent licensing                           -            -     3,507,500
       Repurchase of U.S. diesel license      62,500           -        62,500
       Acquisition of National Diversified
        Telecom, Inc.                             -            -       140,550
       Sale of marketing licenses for
        notes receivable                          -            -     1,736,558

The accompanying notes are an integral part of these fincancial statements.
                                    F-6

<PAGE>
<PAGE>
                            KLEENAIR SYSTEMS, INC.
                        (A Development Stage Company)
                        NOTES TO FINANCIAL STATEMENTS
                          December 31, 1998 and 1997


DESCRIPTION OF BUSINESS

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


NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

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

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

Patent License -- The Company purchased the rights to a patent and developed
others as discussed at Note 4 below.  The cost of the patent and licenses,
along with legal costs incurred to register and protect them, have been
capitalized and will be amortized once the Company commences sales of the
product.  Amortization will be charged on a straight-line basis over seven
years.  No amortization expense related to these rights has been charged to
operations because development of the underlying patented device has not
been completed.  Amortization is expected to begin in 2000 along with
anticipated initial sales of the device.

Property and Equipment -- Property and equipment are carried at depreciated
cost. Expenditures for major renewals and betterments which extend the
useful lives are capitalized.  Expenditures for maintenance and repairs are
charged to expense as incurred.  The cost of property and equipment is
depreciated over the estimated useful lives of the related asset.
Depreciation is computed on the straight-line method for financial reporting
purposes and on the applicable Modified Accelerated Cost Recovery System
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.

                                    F-7

<PAGE>
<PAGE>

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

Deferred tax assets and liabilities are the amounts by which the Company's
future income taxes are expected to be impacted by these differences as they
reverse. Deferred tax assets are expected to reduce future income taxes.
Correspondingly, deferred tax liabilities are expected to increase future
income taxes.  Note 3 below discusses the amounts of deferred tax benefits
and deferred tax liabilities. The Note also presents the impact of
significant differences between financial reporting income and taxable
income.

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

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

Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclo sure 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.

New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133).  This statement standardized the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value.  The statement generally provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of (a) the
changes in fair value of the hedged assets or liabilities that are
attributable to the hedged risk or, (b) the earnings effect of the hedged
transaction.  The statement is effective for all fiscal quarters of all

                                    F-8

<PAGE>
<PAGE>

fiscal years beginning after June 15, 1999, with earlier application
encouraged, and shall be applied retroactively to financial statements of
prior periods.  Adoption of SFAS 133 is expected to have no effect on the
Company's financial statements.


NOTE 2:   GOING CONCERN

These financial statements have been prepared assuming that the Company will
continue as a going concern.  The Company has neither sufficient operating
revenues or disposable assets to fund completion of its development program,
current level of expenses, or initial production stages.  In this situation,
the Company is reliant solely upon its ability to raise capital through
sales of its stock, debt financing, or acquisition of services through
issuances of the Company's stock.  There is no assurance that a market
exists for the sale of the Company's stock or that lenders could be found to
loan money to the Company. Should financing not be available, the Company
would, in all likelihood, be forced to stop development efforts and/or to
shut down its activities completely.

Management has had indications that investors are interested in the
technology being developed by the Company and that these investors have
capacity and will be willing to be available to provide financing for the
remaining cost of the development of the device.  As such, Management
anticipates that development activities being carried on by the Company will
be continued and that there should be no substantial difficul ties in
obtaining sufficient financing to carry its project through to completion
and subsequent distribution.  The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount of liabilities that might be necessary should
the Company be unable to continue in existence.


NOTE 3:   FEDERAL INCOME TAXES

Because of  timing, relative insignificance, and changes in control and
management, the Company believes that it cannot benefit from operating
losses prior to 1995 in calculating its income taxes.  Operating losses
reported for tax purposes vary from accumulated deficits in retained
earnings due to differences in tax treatment, deductibility,  or timing of
various items.   The tax loss carry-forwards are as follows:

                                            Amount of Net
                     Year of               Operating Loss
                    Expiration              Carry Forward
                    ----------             --------------
                       2010                   $  148,187
                       2011                      901,206
                       2012                       79,438
                       2018                      305,825
                                              -----------
                                              $1,434,656
                                              ===========

The Company has deferred tax assets (no liabilities) at December 31, 1998
and 1997. These assets have arisen from timing differences in depreciation

                                    F-9

<PAGE>
<PAGE>

and from tax loss carry-forwards.  These deferred tax assets total $487,714
and $383,486 at December 31, 1998 and 1997, 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, 1998 and 1997.  The following table sets forth
the reconciling items between income per books and taxable income.

                                         1998          1997
                                      ---------     ---------
    Book Income                       $(305,561)    $ (79,438)
    Depreciation                           (203)           -
                                      ---------     ---------
    Taxable income                    $(305,764)    $ (79.438)
                                      =========     =========

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


NOTE 4:   PATENTS, LICENSE, RESEARCH AND DEVELOPMENT

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

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

During 1997 and 1998, the Company has obtained additional patents to extend
and protect its original patent and has patented a similar emission control
system for diesel engines.  Legal costs to file these patents have been
capitalized.

During 1996, the Company entered into an agreement to grant the Company's
president an exclusive license for the worldwide rights to manufacture,
market, distribute, sell, etc. the NOXMASTER(TM)'s application to diesel

                                    F-10

<PAGE>
<PAGE>

engines.  In addition, the agree ment granted the same rights for the
NOXMASTER(TM)'s application to gasoline engines in Europe, the former Soviet
Union, the Middle East, and Africa.  In exchange for this transfer, the
Company's president has agreed to establish a publicly held entity, KleenAir
Systems (Europe), PLC (KSE), in the United Kingdom and to transfer this
license to it.  The Company will receive a 30% ownership interest in KSE and
is to receive a royalty of 8% of its gross revenue.  During 1998, the
Company repurchased the rights to the U.S. market by issuing 1,000,000
shares of common stock to Pollu tion Control, Inc., an entity controlled by
the Company's president.  This action was taken based on the advice of
financial consultants to the Company.

The Company and KSE also entered into an license agreement with Extengine,
LLC (EXT) which is in the business of commercialization of environmental
technologies and products.  This license is for the one-year, exclusive
California manufacturing, marketing rights, and distribution rights for
application of the NOXMASTER(TM) to gasoline engines and the ten-year,
non-exclusive worldwide manufacturing, marketing, and distribution rights
for application of the NOXMASTER(TM) to diesel engines. The California license
may be extended to ten years by mutual agreement.  These licenses set forth
per unit prices and specify minimum annual units for each application.


NOTE 5:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
1998 and 1997.

                                               1998          1997
                                            ---------     ---------
       Office equipment                     $   1,740     $      -
        Accumulated depreciation                 (145)           -
                                            ---------     ---------
       Net Property and Equipment           $   1,595     $      -
                                            =========     =========


Depreciation expense totaled $145 for 1998 with none for 1997.  The
equipment is being depreciated on a straight-line basis over three years.


NOTE 6:   COMPENSATORY STOCK BENEFIT PLANS AND VALUATION BASIS

During 1995, the Company adopted a Compensatory Stock Benefit Plan (the
Plan) for the furtherance of the Company by allowing the Company the option
of compensating officers, directors, consultants, and certain other service
providers who render bona fide services to the Company through the award of
the Company's free trading common shares.  Under the Plan, 33,333 shares
were approved by the Board of Directors.  Of the shares approved for the
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.


                                    F-11

<PAGE>
<PAGE>

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

As anticipated by these plans, the Company has acquired services with free
trading shares.  The Company has also issued restricted (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 transac tion.


NOTE 7:   STOCKHOLDERS'S EQUITY

During 1986, the Company completed an initial offering of 10,000,000 shares
of common stock with net proceeds (after commissions) of $110,233.  Between
that time and December 31, 1993, it is apparent that there were several
stock transactions, reverse splits, and other actions.  However, records
regarding this period of time are not available.  Additionally, no records
are available which would allow an analysis of the retained earnings balance
prior to 1994.  Due to this lack of records, management believes that losses
indicated by the negative  retained earnings would not yield tax benefits to
current operations.  Inception-to-date information required for develop ment
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.  Additionally, all share amounts in the financial
statements have been presented as though the reverse split had occurred
prior to the earliest presented information.

In April 1995, the Company issued 466,667 shares of convertible, non-voting
preferred stock and 30,000 common shares as consideration for the patent and
a facilitation fee to a consultant.  This transaction was valued at
$3,507,500.

During 1995, other consulting services not directly related to the patent
purchase were obtained through the issuance of 12,000 common shares valued
at total of $111,875.  Directors were issued a total of 2,000 shares valued
at $22,500. This stock-based compensation, as well as the transactions
described below, has been valued as described in Note 6.

The Company issued 13,667 common shares pursuant to a Regulation S offering.
Net proceeds to the Company after commissions were $66,804.  In addition,
$180,400 for 33,407 shares under the Regulation S offering was received
prior to December 31, 1995, with the shares being issued during 1996.

                                    F-12

<PAGE>
<PAGE>

During 1996, the Company issued 12,333 common shares and 6,667 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 37,500 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 due to reduction in payables.

At December 31, 1997, the Company had not issued 33,333, preferred shares to
its president in accordance with his employment contract.  These shares were
issued during 1998.  During December 1998, the Board approved the issuance
of 160,000 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.

As discussed in Note 10, the Company also issued both common and preferred
stock for consulting services and employment agreements.

During 1998, preferred stockholders exchanged 201,665 shares for 201,665
common shares.  The Company issued 1,000,000 shares to a financial and
public relations consultant for services; 1,000,000 and 400,000 shares to
Pollution Control, Inc. for license and cash as discussed at Note 11; and
50,000 shares to a development consul tant.  A director was issued 10,000
shares for his services.

The Company issued options to purchase common shares during 1996.  These
options arose from various transactions.  Among these were 105,000 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 37,500
shares.  Options were reduced by the 1 for 15 reverse split authorized by
the board of directors.  At December 31, 1997, options to purchase a total
of 51,668 common shares were outstanding as detailed in the following table.
No options were exercised during 1997 or 1998.  At December 31, 1998, all
options had expired.

                                            Number     Per Share
                                              of       Exercise
      Issued to/for                         Options      Price    Expires
    -----------------------                --------    ---------  -------
    Product development                      35,000       $3.00    9/98
    Public relations consultant               3,334        1.00    3/98
    Officers                                 13,334        3.00   12/98
                                           --------
  Total outstanding at December 31, 1997     51,668
                                           ========

  Total outstanding at December 31, 1998         -
                                           ========

Following is a summary of the status of the Company's stock options during
1998 and 1997.  All outstanding options were exercisable at the respective
year ends.

                                    F-13

<PAGE>
<PAGE>

                                                            Weighted
                                                  Number     Average
                                                    of       Exercise
                                                  Shares      Price
                                                 -------    ---------
Outstanding at January 1, 1997                   107,833      $ 1.83
   Forfeited                                     (56,165)       0.88
                                                 -------
Outstanding at December 31, 1997                  51,668      $ 2.87
    Forfeited                                    (51,668)       2.87
                                                 -------
Outstanding at December 31, 1998                      -       $ 0.00
                                                 =======

NOTE 8:   EARNINGS PER SHARE

Basic earnings per share has been calculated based on the weighted average
common shares outstanding.  All preferred shares outstanding (112,333 and
314,000 at December 31, 1998 and 1997) are eligible for conversion into
common shares. Diluted earnings per share have not been presented because
the presentation would prove antidilutive.


NOTE 9:   DEFERRED CONSULTING FEES

At the end of 1995, the Company had committed to certain fixed payments
under consulting contracts for marketing, financial, and managerial
services. Most of these contracts called for monthly payments with portions
being deferred for a period.  Certain obligations would survive termination
of the agreements. Addition ally, during 1995, the Company entered into
employment contracts with its Chief Executive Officer (CEO) and Director of
Engineering (DE) which called for fixed compensation, stock, and stock
options.  These contracts were for a three year term and called for base
annual compensation for the CEO and DE of $90,000 each in addition to an
initial grant of 2,667 and 2,000 free trading common shares, respec tively.
Each of these contracts also called for options to purchase 20,000 shares of
stock.  These options are included in the table at Note 7 above.  The CEO
also was granted rights to 50,000 shares of convertible preferred stock of
which one-third vested with the initiation of the agreement while the other
two-thirds vest on attaining the first and second anniversary of the
agreement.  The cost recognized under these agreements was amortized over
the term of the agreements.  The unamor tized cost was included in
stockholders' equity under Unearned Compensation.

Two of these consulting contracts called for additional stock commitments.
One received 6,667 shares of free-trading stock as a service incentive.
This was valued at $81,250 and is being amortized over the initial three
year term of the contract. The other contract called for the issuance of
2,667 shares of free-trading common shares along with 6,667 shares of
convertible preferred shares.  These commitments to issue stock were valued
at a total of $78,750 and are being amortized over the three year initial
term of the contract.  Recognition of the future issuance of the underlying
stock was included in Deferred Compensation pending actual issuance of the
shares.

In June 1996, the retainer fee agreements discussed above, along with the
cash portions of the employment agreements, were terminated by mutual

                                    F-14

<PAGE>
<PAGE>

agreement. In addition, all deferred liabilities under these contracts in
excess of an amount equal to the exercise of certain stock options were
waived.


NOTE 10:   RELATED PARTY TRANSACTIONS

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

Although the Company has no official office, the official address of the
Company has been the same as that of its vice-president of engineering.
Management believes that the value of the use of this address is minimal and
no expense has been recorded.

See also the discussion of the granting of a license for Europe to the
Company's President at Note 4 and the discussion at Note 11 regarding the
aborted acquisition of National Diversified Telecom, Inc.

During 1998, the Company sold 400,000 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 1,000,000
shares of restricted common stock which it assigned to Pollution Control in
exchange for an equity interest in that entity.  As discussed at Note 4, the
Company issued 1,000,000 shares of re stricted common stock to Pollution
Control to repurchase the U.S. marketing rights for its diesel product.
Pollution Control is controlled by the Company's President. Pollution
Control's voting rights are also held by the Company's President. These
transactions effectively transfer control of the Company to Pollution
Control and the Company's President through his control of that block of
voting stock.


NOTE 11:   EXTRAORDINARY LOSS ITEM

During February 1996, the Company entered into an agreement to acquire 100%
of the stock of National Diversified Telecom, Inc. (NDT).  The Company's
president was also a significant owner of NDT.  The acquisition required the
issuance of 20,000 shares of the Company's restricted common stock.  In
addition, the Company advanced $15,000 to NDT for operations.  It was
subsequently determined that the Company would not benefit from the
attributes of NDT which the Company had anticipated.  As a result of this
determination, the Company defaulted on its agreement to provide an addi
tional $5,000 to NDT and moved to "undo" the agreement.  In "undoing" the
agreement, the Company did not received back the $15,000 or the stock.  The
value of the shares, the $15,000, NDT audit fees paid by the Company and
certain other costs have been reported as an extraordinary item in the
Statement of Operations.






                                    F-15

<PAGE>
<PAGE>

NOTE 12:   SUBSEQUENT EVENTS

During 1999, the Company has issued 300,000 shares for outside services and
70,000 shares to insiders for cash.

The Company has also entered into a contract with a third party for the
modification of catalytic coatings to work specifically with the Company's
diesel emission control system.





                                    F-16