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, 2002

                 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:     $51,235.

The aggregate market value of the voting stock held by non-affiliates of
the registrant on February 5, 2003, was $4,469,922 based on the closing
stock price on that date.

The number of shares outstanding of the registrant's common stock on
December 31, 2002, was 20,270,556 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 US Patent #
5,224,346 Engine NOx Reduction System issued in 1993, US Patent #
5,609,026 Engine NOx Reduction issued in 1997. In 1999 the Company was
issued a third patent on Ammonia Injection in NOx Control, US 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 NOxMasterTM
technology. In September 2002, a patent US # 6,446,940 B1  was issued for
a new emission control device, the Sonic Flow Carburetor, which atomizes
fuel on gasoline powered engines, enhancing operating efficiency and
reducing emissions. Another patent, US # 6,499,463 B1 was issued in
December 2002 for a Diesel Fuel Atomizer, which facilitates improved
diesel combustion, lower fuel use, and lower emissions of particulates and
CO2.

In May 2002, the Company leased new 10,000 square foot R & D facilities
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.

The Company successfully completed the final phase of its London Taxi
Program funded by a UK government grant. This in-service test involving
several London taxicabs started in January 2002. Emissions testing at
Millbrook Proving grounds have now been and results have been forwarded
to the Energy Savings Trust. The Company has been notified that it's
NOxMaster(TM) system has been approved for the Cleanup Register making it
eligible for UK government subsidies.  There are approximately 40,000
such taxicabs in service and that represents the potential market
opportunity should the system be endorsed as the preferred retrofit
product. The same system can then be adapted as a retrofit and OEM
product for the general diesel-powered passenger automotive market,
which represents approximately 40% of the registered and new vehicle
market in Europe.

                                   2

Test systems have been installed on a Dennis refuse collection truck, a
Dennis London Transport bus and a Mercedes-Benz Sprinter 16 passenger
bus operated by the Borough of Hounslow in London. An Energy savings
Trust grant has been awarded for a test and evaluation program on both
these vehicles. Final emissions tests on these vehicles have been
scheduled for February 2003. Patent awards have now been confirmed for
several European countries including the UK, Germany, France, Italy,
Spain and Sweden, and anticipated soon for Japan, Brazil, and China.

Systems have been ordered by several other London Boroughs and were
installed by the end of the 3rd quarter of 2002 on both the refuse
collection truck and the buses.

US 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. The Company has received an EO certification from the
California Air Resources Board (CARB) for off-road and stationary engine
applications, which will enable it to commence sales of its products in
California. EO certification for on-road applications is expected
shortly.

The Company is preparing to meet CARB and EPA Retrofit Verification
requirements for heavy-duty vehicles on both its NOxMaster(TM) NOx
reduction system and its Oxidizing Particulate Trap (OPT). It will seek
certification 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 (SCR), the absence of which has previously prevented the
Company from commencing certification procedures.

The Company has acquired Carbon Cloth Technologies, Inc. of Malibu,
California, a manufacturer of automotive thermal management systems. Its
CarbonGuard(TM) is currently installed on a number of New York City
Transit Authority buses as enhancements for the operating efficiency of
its installed base of particulate traps. It has been selected as a sole
source product and included as a specified component in  tender under
offer for use with close to 1,000 particulate traps to be installed over
the coming months. A further several hundred buses are anticipated to be
upgraded with the CarbonGuard(TM).  It is expected that this product
will generate meaningful revenues during 2003 and make a significant
contribution toward covering the Company's overhead expenses. Multiple
prototypes have been purchased by a number of automotive OEM
manufacturers with a view to 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 is used to enhance the effectiveness
of particulate filters which need to maintain 300 degrees centigrade for
30% of a vehicle operating time.  Otherwise 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.


                                   3

Carbon Cloth has years of experience developing thermal solutions for
such motorsports industry leaders as Ferrari, Mercedes-Benz and Penske,
which has enabled development of the CarbonGuard(TM), a significant
addition to the battle on pollution.

A definitive agreement was signed for the acquisition of 51% of
ServoTech Industries, Inc, a Ford tier one supplier in Detroit, that was
expected to be closed in February 2003. At this time the acquisition has
not been completed and discussions continue. The Company signed a
marketing agreement with ServoTech under which it receives a percentage
of any SOBRIS sales it may generate.

ServoTech  employs over 50 people, has revenues approaching $7 million
and EBITDA of over $1 million.  It is a licensee of Ford Motor Company
on SCR injection technology . It's SOBRIS product is under test and
evaluation by a number of automotive manufacturers in the US and Europe.

Once production and sales of the NOxMaster(TM) and OPTs 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.

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

In May 1997, the Company effected a one (1) for fifteen (15) reverse
split of its common outstanding shares leaving the par value at $.001
per share. The number of issued and outstanding shares was reduced to
362,157 while its authorized shares remained unchanged at 50,000,000.
The Series 1 Preferred Shares were similarly effected by the same 1 for
15 reverse split and were reduced to 500,000 shares. Subsequent to
December 31, 1999 the last of the outstanding preferred shares have been
converted into common shares at a ratio of 1 common share for each share
of Series 1 Preferred. In February 2000, the Board of Directors approved
a 2 for 1 stock split effective March 20, 2000.

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

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

A timing pulse from the engine is used to determine certain parameters
indicating NOx production and to trigger a solenoid causing the

                                   4

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 has complemented its NOxMaster(TM) Ammonia Injection System
with a NOxMaster(TM)  Diesel Catalytic Converter for the purpose of
applying its NOx reduction technology to diesel fueled engines as well
as reducing CO, hydrocarbons and particulates emitted by such engines.
It has done so through the development of specially formulated ceramic
wash-coats that allow for ammonia in the atmosphere and which provides a
significant particulate reduction for the retrofit market. It is
planning the acquisition of plasma technology capable of much greater
reductions of particulate emissions, particularly ultra-fine
particulates, the health hazards of which are getting increasing
attention by the EPA. Such an integrated ammonia NOx reduction system
and plasma particulate reduction system will be suited to both the OEM
and retrofit markets.

In order to conserve operating capital, the Company has 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.

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 an 8% royalty plus 30% of a Company to be established overseas
and which is now called KleenAir Systems International, Inc. This
Company was subsequently  formed and it established a wholly owned
subsidiary in the UK called KleenAir Systems Ltd. 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.


                                   5

The Company began distribution of its CarbonGuard(TM) thermal management
system during 2002 and has now started shipping its NOxMaster(TM)
products. It has received a forecast order from its European systems
integrator, DINREX A/S for the year 2003 of $3,500,000 dollars with an
initial stocking order of over $150,000 and monthly orders ranging up to
$400,000 during the course of 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 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. The Company has been notified that an Executive Order has
been approved

During 2002 development expenses were $337,773 and during 2001 they were
$241,904.

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 new 10,000 square foot R & D facilities
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.


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.



                                   6


                               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, 2000 and
2001 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             $2.45      $1.10       $1.19       $0.22
      2nd Quarter              1.80       0.75        0.85        0.45
      3rd Quarter              1.01       0.47        0.75        0.17
      4th Quarter              0.75       0.30        1.40        0.16

Shareholders: At December 31, 2002 there were 693 shareholders of record
with an additional 68 shareholders registered with firms reporting to
the Depository Trust Company.

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


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

In addition to the original US Patent # 5,224,346 acquired in April of
1995, US Patent # 5,609,026 "Engine NOx Reduction" was issued in 1997
after successfully overturning a challenge in Patent Court.
International patent rights have been granted for these patents and have
been issued for Europe (patent # 5 638 139 covering Germany, France and
the UK) and international coverage extends to certain Asian countries
and Canada as well as Brazil and certain other countries. On November
30, 1999 the Company was issued a third patent on "Ammonia Injection
in NOx Control", US Patent # 5,992,141. This patent deals with the
NOxMaster(TM) ammonia injection control system and chemical reaction
enhancement techniques to ensure optimum effectiveness of the system to
achieve maximum NOx reduction. In the opinion of management, this patent
significantly strengthens the position of the Company in the
exploitation of its technology and increases the value of its future
commercial exploitation and licensing potential. Management believes
that its patent coverage in all the major automobile and truck producing
countries provides it with the patent protection necessary to
successfully exploit the technology world-wide. No value has been
capitalized on the books for the second and third patents.

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 oxides of nitrogen meets the two major
sources of mobile source pollution of greatest concern to he mandating
authorities such as the EPA and CARB.

                                   7

The Company commenced testing on its Sonic Flow Carburetor with a patent
granted in September 2002. 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. A similar
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.

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 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 NOxMaster(TM) device
gives the manufacturer a method of control that is essentially
independent of engine operating parameters and provides new options for
economy and performance.

As of this filing, the NOxMaster(TM) Diesel Catalytic Converter has
completed road trials and is now currently available for production and
delivery during the year 2003 to potential overseas customers. This
product can also be distributed in states other than California where an
Executive Order (EO) 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). Retrofit Verification testing for the EPA and CARB is planned
at the Southwest Research Institute in San Antonio, Texas.

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 is planning to apply for EPA and CARB Retrofit Verification
in the second and third quarters 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.

                                   8

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 signed a distribution agreement with DINEX A/S of
Denmark and its UK subsidiary Dinex UK Ltd. Under this agreement DINEX
has a non-exclusive right to sell the Company's products in its market
area which consists of Scandinavia, UK, Germany, France, Italy and
Spain. DINEX has forecast purchases of over $3,500,000 for the year
2003.

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 US Urban and School Bus markets. This was
subsequently followed by completion of Licensing Agreements, the
exclusive terms of which, if fulfilled, would represent significant
income to the Company over the succeeding 10 years. As part of the
Agreement, Extengine Transport Systems LLC has invested funds in the
Company to cover the costs of research and development to fulfill
contracts requiring the demonstration of NOx reduction capability with
regard to a number of engines supplied by major Chinese automotive
companies. 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 retains a limited
exclusive in the US Urban Bus market.

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.


                                   9

Several NOxMasterTM 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 a waste collection truck.


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       78   Director/ VP-Research    2 years    April 1995

Lionel Simons         68   Director/President/      2 years     Dec. 1995
                           Secretary/Treasurer

Hamid Servati         50   Director/Consultant      2 months    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.

                                   10

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:

      (a) SUMMARY COMPENSATION TABLE

                        Annual Compensation
------------------------------------------------------------------------
   Names and                   Salary/           Other Annual    Market
Principle Position      Year     Fee     Bonus   Compensation    Value
---------------------   ----   -------   -----  --------------  --------
Lionel Simons           2002   $   -0-   $ -0-      None        $   -0-
President/Secretary     2001       -0-     -0-  300,000 shares    27,720
                        2000       -0-     -0-  100,000 shares    17,000

Lester Berriman         2002   $   -0-   $ -0-      None        $   -0-
Chairman/ VP-Research   2001       -0-     -0-  300,000 shares    27,720
                        2000       -0-     -0-  100,000 shares    17,000

William H. Ward, Jr.    2002   $   -0-   $ -0-      None        $   -0-
Director/Consultant     2001       -0-     -0-   50,000 shares     4,620 (1)
                        2000       -0-     -0-   50,000 shares     8,500 (1)

Hamid Servati           2002   $   -0-   $ -0-      None        $   -0-  (2)
Director/Vice Chairman  2001      N/A     N/A       N/A             N/A
                        2000      N/A     N/A       N/A             N/A

John Zabsky             2002   $24,000   $ -0-      None        $   -0-  (1)
  d.b.a. John Z Co      2001    24,000     -0-  200,000 shares    18,480 (1)
Consultant              2000       -0-     -0-   50,000 shares     8,500 (1)

(1) Compensation is provided to Mr. Zabsky 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 2001 or free standing SARs to
executive officers of the Company.

                                   11

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

    There was no exercise during 2001 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 2001.


      (e) COMPENSATION OF DIRECTORS

    No Directors of the Company received cash compensation for their
services as Director during 2001.

      (f) EMPLOYMENT CONTRACTS

    The Company has no employment contracts with executive officers.


Item 11.   Security Ownership of Certain Beneficial Owners and Management

Title of         Name and Address of         Shares of            Percent
 Class            Beneficial Owner           Record (1)           of Class
--------       ----------------------      ------------          --------
Common         Pollution Control Inc.         4,993,877            24.64%
               328 Bay street
               Nassau, Bahamas

Common         Lionel Simons                    714,808 (2)(3)      3.53%
               36 Corniche Drive
               Dana Point, CA 92629

Common         Lester Berriman                1,362,048             6.72%
               18871 Portofino Drive
               Irvine, CA 92715

Common         Prudent Bear Funds, Inc.       3,141,045            15.50%
               8140 Walnut Hill Lane
               Suite 405
               Dallas, TX 75231

Common         John Zabsky                    1,180,432 (4)         5.82%
               3640 S Main St
               Santa Ana, CA 92707

Common         Extengine Transport Systems      400,000 (5)         1.97%
               1370 S.  Acacia
               Fullerton, CA 92831

Common         Ecologic LLC                   1,090,000 (5)         5.38%
               1370 S.  Acacia
               Fullerton, CA 92831



                                   12

    (1)  All shares presented are common shares.  No preferred shares were
         outstanding at December 31, 2002.
    (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.
    (5)  Extengine and Ecologic are entities that share common control
         between them and, though listed separately in this list are
         treated as one entity for purposes of the Company's dealings with
         them.

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                5,708,685 (2)(3)    28.16%
               36 Corniche Drive                      (4)
               Dana Point, CA 92629

Common         Lester Berriman              1,362,048            6.72%
               18871 Portofino Drive
               Irvine, CA 92715

Common         Hamid Servati                  500,000            2.47%
               510 Savage Road
               Belleville, Mi 48111


Common         William H. Ward, Jr.           590,000 (5)        2.91%
               273 Hanover Drive
               Costa Mesa, CA 92626

Common         All officers and directors
                   as a group:              7,570,733 (5)       37.35%


    (1)  All shares presented are common shares.  No preferred shares were
         held by members of Management at December 31, 2002.
    (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.

                                    13

ITEM 12.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

See also the discussion of related party transactions presented at Note 13
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


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

          Exhibit No.                          Description
          -----------       ----------------------------------------------
             23.1           * Consent of Robert Early & Company, P.C.

     ------------------
     * Filed herewith.


 (b)  Reports on Form 8-K

        None


Item 14.   Controls and Procedures

Within 90 days prior to the filing date of this report, our management
conducted an evaluation, under the supervision and with the participation
of our President and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on
this evaluation, the President and Chief Financial Officer concluded that
our disclosure controls and procedures are effective. There have been no
significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of our
last evaluation.

                                    14



                              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:  March 31, 2003                      /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      March 31, 2003
 Lionel Simons


 /s/ LESTER BERRIMAN                  Director      March 31, 2003
 Lester Berriman


 /s/ HAMID SERVATI                    Director      March 31, 2003
Hamid Servati




                                    15

                              CERTIFICATION

I, Lionel Simons, certify that:

1.  I have reviewed this annual report on Form 10-KSB of KleenAir Systems
Inc.;

2.  Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3.  Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;

4.  I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:

    a)  Designed such disclosure controls and procedures to ensure that
    material information relating to the registrant, including its
    consolidated subsidiaries, is made known to me by others within those
    entities, particularly during the period in which this annual report
    is being prepared;

    b)  Evaluated the effectiveness of the registrant's disclosure
    controls and procedures as of a date within 90 days prior to the
    filing date of this annual report (the "Evaluation Date"); and

    c)  Presented in this annual report my conclusions about the
    effectiveness of the disclosure controls and procedures based on my
    evaluation as of the Evaluation Date;

5.  I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):

    a)  All significant deficiencies in the design or operation of
    internal controls which could adversely affect the registrant's
    ability to record, process, summarize and report financial data and
    have identified for the registrant's auditors any material weaknesses
    in internal controls; and

    b)  Any fraud, whether or not material, that involves management or
    other employees who have a significant role in the registrant's
    internal controls; and

6.  I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date:  March 31, 2003                  /s/ Lionel Simons
                                     Lionel Simons, Chief Executive
                                     Officer and Chief Financial Officer

                                    16








                        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, 2002 and 2001 .  .  F-3

      Consolidated Statements of Operations for the years
           ended December 31, 2002 and 2001.  .  .  .  .  .  .  .  .  .  F-4

      Consolidated Statement of Stockholders' Equity for the
           years ended December 31, 2002 and 2001.  .  .  .  .  .  .  .  F-5

      Consolidated Statements of Cash Flows for the years
           ended December 31, 2002 and 2001.  .  .  .  .  .  .  .  .  .  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, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years then ended.   We have also audited the
cumulative statements of operations, stockholders' equity, and cash flows
for the period from January 1, 1995 through December 31, 2002. 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, 2002 and 2001, 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 in the development stage and has no
significant 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 & CO
Robert Early & Company, P.C.
Abilene, Texas

February 22, 2003



                                   F-2

                       KLEENAIR SYSTEMS, INC.
                    (A Development Stage Company)
                     CONSOLIDATED BALANCE SHEETS
                   As of December 31, 2002 and 2001


                                ASSETS

                                                      2002             2001
                                                    ----------      ----------
CURRENT ASSETS:
    Cash                                           $   76,758      $   33,479
    Accounts receivable                                 12,542           1,600
    Accounts receivable from related parties            50,000              -
    Advances                                            52,000              -
    Parts inventory (at cost)                          114,076
    Prepaid expenses                                   121,542         119,862
    Loans to licensee                                  220,000              -
                                                    ----------      ----------
          Total Current Assets                         646,918         154,941

PROPERTY AND EQUIPMENT (net)                           195,620          55,237

OTHER ASSETS:
    Patent license (net)                             1,617,380         152,781
                                                    ----------      ----------
    TOTAL ASSETS                                    $2,459,918      $  362,959
                                                    ==========      ==========

                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
  Accounts payable ($69,534 and $74,899 due to
    related parties, respectively)                  $  150,176      $   95,931
  Advances from directors                               95,850          95,850
  Capital lease liability                                4,811              -
  Note payable to related entity                        50,000              -
                                                    ----------      ----------
      Total Current Liabilities                        300,837         191,781
                                                    ----------      ----------

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, 20,270,556 and 15,391,069
     outstanding, respectively)                         20,271          15,391
  Additional paid-in capital                         6,959,717       3,857,649
  Deficit accumulated during the development stage  (4,820,907)     (3,701,862)
                                                    ----------      ----------
         Total Stockholder's Equity                  2,159,081         171,178
                                                    ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY          $2,459,918      $  362,959
                                                    ==========      ==========

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, 2002 and 2001

                                                                   Cumulative
                                                                  During Devel-
                                               2002        2001   opment Stage
                                           ----------  ----------  -----------
REVENUES                                   $   51,235  $  123,788  $   175,023

COST OF REVENUES                               50,461          -        50,461
PRODUCT DEVELOPMENT COSTS                     337,773     241,904    1,042,471

OPERATING EXPENSES:
  Personnel costs                              84,697      60,328      667,299
  Consultants                                 439,185     326,385    2,043,930
  Professional fees                           162,276      32,462      395,691
  Office expenses                              17,738       1,911       43,363
  Depreciation                                 33,579      15,250       61,830
  Amortization of intangible assets            65,511          -        65,511
  Advertising and promotion                    57,552       1,865      211,764
    Loss on cancellation of licensing
     agreements                                   -           -        19,860
  Rent                                         63,250      18,750      114,500
  Travel                                       94,874      41,943      199,998
  Other expenses                               71,562       6,872       90,621
  Unknown losses under prior ownership             -           -       151,518
                                           ----------  ----------  -----------
   Total operating expenses                 1,090,224     505,766    4,065,885
                                           ----------  ----------  -----------
(LOSS) FROM OPERATIONS                     (1,427,223)   (623,882)  (4,983,794)

OTHER INCOME AND (EXPENSES):
  Interest income                                  15          71        2,515
  Interest expense                             (2,189)         -        (2,189)
  Amortize discount on receivables                 -           -        20,259
                                           ----------  ----------  -----------
(Loss) before income taxes                 (1,429,397)   (623,811)  (4,963,209)
  Benefit from Deferred taxes                 397,852          -       397,852
                                           ----------  ----------  -----------
(Loss) Before Extraordinary Item           (1,031,545)   (623,811)  (4,565,357)

Extraordinary Item:
  Costs of terminated acquisitions            (87,500)         -      (255,550)
                                           ----------  ----------  -----------
Net (Loss)                                $(1,119,045) $ (623,811) $(4,820,907)
                                           ==========  ==========  ===========
Earnings per Share (Basic):
(Loss) Before Extraordinary Item           $    (0.06) $    (0.05) $     (0.67)
(Loss) From Extraordinary Item                     -           -         (0.03)
                                           ----------  ----------  -----------
Net (Loss) Per Share                       $    (0.06) $    (0.05) $     (0.71)
                                           ==========  ==========  ===========

Weighted Average Shares Outstanding
  Basic                                    17,729,544  13,372,112    6,797,174
                                           ==========  ==========  ===========

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)
                                    =========  ========   ==========  ==========  ==========   =========  ===========





<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, 2002 and 2001

                                                                   Cumulative
                                                                  During Devel-
                                              2002        2001    opment Stage
                                          -----------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)                                $(1,119,045) $ (623,811) $(4,820,907)
Adjustments to reconcile net (loss) to
  net cash provided by operations:
  Losses prior to current ownership                -           -       151,518
  Depreciation                                 33,579      15,250       61,830
  Amortization of:
    Prepaid expenses                          170,270     237,813      838,428
    Intangibles                                65,511          -        65,511
    Deferred services                              -           -       250,267
  Stock issued for services                   192,184     220,876    1,840,642
  Deferred income taxes                      (397,852)         -      (397,852)
  Stock issued for extraordinary loss          87,500          -       140,550
Change in operating assets and liabilities:
  Accounts receivable                         (90,545)     54,094      (92,145)
  Inventory                                   (91,538)         -       (91,538)
  Advances to consultants                          -           -        20,000
  Prepaid expenses                            (46,200)         -      (247,000)
  Trade accounts payable                      (41,899)    (23,220)      54,032
                                           ----------  ----------  -----------
NET CASH USED BY OPERATING ACTIVITIES      (1,238,035)   (118,998)  (2,226,664)
                                           ----------  ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment                     (172,570)    (10,006)    (247,757)
  Patent licensing costs                      (56,107)    (22,732)    (131,488)
  Business acquisition                        (44,820)         -       (44,820)
  Notes receivable                           (220,000)         -      (220,000)
                                           ----------  ----------  -----------
NET CASH USED IN INVESTING ACTIVITIES        (493,497)    (32,738)    (644,065)
                                           ----------  ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuing stock               1,720,000     105,000    2,794,459
  Capital lease obligation                      7,765          -         7,765
  Payments on capital lease                    (2,954)         -        (2,954)
  Additional capital contributions                 -           -         2,367
  Advances from directors                      50,000      55,850      145,850
                                           ----------  ----------  -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,774,811     160,850    2,947,487
                                           ----------  ----------  -----------
NET INCREASE IN CASH                           43,279       9,114       76,758

CASH AT BEGINNING OF YEAR                      33,479      24,365           -
                                           ----------  ----------  -----------
CASH AT END OF YEAR                        $   76,758  $   33,479  $    76,758
                                           ==========  ==========  ===========

  See Note 3 for Supplemental 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, 2002 and 2001


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
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.


NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

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.

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

                                     F-9

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 will be amortized once the Company commences
sales of the product.  Amortization is expected to be charged on a
straight-line basis over ten years.  No amortization expense related to
these rights has been charged to operations because development of the
underlying patented device has not been completed. Amortization will begin
when sales of the device are initiated.

The acquisition cost allocated to the CarbonGuard((TM)) (Carbon Cloth's
intangible asset) is being amortized over fifteen years beginning May 2002.

Inventory -- Inventories are stated at the lower of cost or market.

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.

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

                                     F-10

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.

Stock-Based Compensation -- The Company grants stock options for a fixed
number of shares to employees and  consultants with an exercise price
either equal to the fair value of the shares at the date of the grant or
at a fixed price determined by the board of directors.  The Company
accounts for stock option grants in accordance with FASB Statement No.
123.  This involves the use of option valuation models.  No compensation
expense has been recognized during 2002 or 2001 due to valuation model
calculations that indicated no value for the options granted.

Reclassifications -- Certain reclassifications have been made to the prior
year and cumulative financial statements to conform to the current year
presentation.  These reclassifications had no effect on previously reported
results of operations or retained earnings.


NOTE 2:   GOING CONCERN

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

Management has been in contact with various parties who are interested in
providing funding for the completion of testing and trials to obtain
certifications from the State of California and the EPA regarding the
product's ability to function as an emission control device.  Because of
these contacts, Management anticipates that efforts to obtain certification
will be continued and that there should be no substantial difficulties in
obtaining sufficient financing to obtain such certifications and subsequent
distribution.  Additionally, testing in England has proven quite successful
and it is anticipated that product sales and installation will begin there
through the Company's UK affiliate during 2003.  These financial statements
do not include any adjustments relating to the recoverability and

                                     F-11

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-
                                              2002       2001     opment Stage
                                           ---------  ----------  -----------
Cash payments for:
    Interest                               $      -   $       -   $        -
    Income taxes                                  -           -            -

Non-cash investing and financing trans-
    actions (Stock has been issued
   for the following):
    Compensation and directors' fees          92,912      78,540      819,560
    Consultants and prepaid services         225,022     301,086    1,690,757
    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


NOTE 4:   RECEIVABLES

During 2002, the Company advanced $45,000 to NOxMaster, Ltd. of England for
expenses incurred in the testing of the product on London taxicabs and
buses.  NOxMaster was awarded a portion of a U.K. government-funded grant
for this testing.  An additional $5000 was advanced to a consultant.

An advance of $52,000 was provided to one of the principles of Carbon Cloth
against stock to be issued to him under his employment agreement.  This
receivable is to be repaid when the Company issues the contractual shares
(which have been recorded as outstanding though not issued at year end).

During the first quarter of 2002, the Company lent $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.  This loan and the
stock were later assigned to a third party by the licensee.  No date has
been set for repayment by the third party.  During the third quarter, the
Company lent this same entity another $100,000 secured by 120,000 shares of
the Company's stock.  The note called for repayment during March 2003, but
that date has been extended pending settlement of negotiations regarding
various licenses.  (See Note 7.)


NOTE 5:   PREPAID EXPENSES

The Company follows a practice of employing consultants for advisor
services.  Typically, these agreements are for one year periods and call for

                                     F-12

the bulk of their compensation to be paid with stock at the initiation of
the services.  The stock called for under the 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 amortized to
consulting fees over the one-year period of the contract.

In 2001, the Company entered into consulting agreements, funded with
unrestricted stock valued at $158,750.  In 2002, the Company started
contracts with a combination of unrestricted and restricted stock valued at
a total of $125,750.  Amortization of these costs during 2002 and 2001 was
$170,270 and $39,688, respectively.  Balances of items making up prepaid
expenses at December 31, 2002 and 2001 were as follows:

                                                    2002            2001
                                                 ----------      ----------
    Consulting agreements                        $   74,542      $  119,062
    Rent                                             46,200              -
    Taxes                                               800             800
                                                 ----------      ----------
      Totals                                     $  121,542      $  119,862
                                                 ==========      ==========

NOTE 6:   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
                                       ------------
                                       $  5,046,365
                                       ============

The Company has deferred tax assets and liabilities at December 31, 2002 and
2001.  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 $2,987,430 and $2,006,200 at December 31, 2002 and 2001,
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

                                     F-13

or expense to be reported for the periods ended December 31, 2002 and 2001.
The following table sets forth the reconciling items between income per
books and taxable income.

                                                   2002            2001
                                               -----------      ----------
    Book loss                                  $(1,119,045)     $ (623,811)
    Deferred tax benefit                          (397,852)             -
    Non deductible expenses                          7,116              -
    Depreciation                                     1,098          (2,974)
    Amortization of intangibles                     47,829              -
                                               -----------      ----------
    Tax loss                                   $(1,460,854)     $ (626,785)
                                               ===========      ==========

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:

                                                   2002             2001
                                                 ----------      ----------
    Deferred tax assets:
      Patent costs                               $1,390,404      $1,187,484
      Net operating losses                        2,008,958       1,219,073
                                                 ----------      ----------
           Total                                  3,399,362       2,406,557
                                                 ----------      ----------
   Deferred tax liabilities:
      Property and equipment                          2,553           2,553
      Investment in Carbon Cloth                    409,375              -
                                                 ----------      ----------
           Total                                    411,928           2,553
                                                 ----------      ----------
    Net deferred tax asset                        2,987,434       2,404,004

    Valuation allowance                          (2,987,434)     (2,404,004)
                                                 ----------      ----------
      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 7:   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

                                     F-14

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
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 NOxMaster, Ltd., an
entity in which the Company owns a small equity interest and has granted a
marketing license while retaining a right to royalties as discussed below.

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. (KSI), in the United Kingdom and transferred this license to it.
NOxMaster Ltd. of the UK is a wholly owned subsidiary of KSI.  The Company
received a 30% ownership interest in KSI and is to receive a royalty of 8%
of its gross revenue.  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 KSI 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 manufacturing, marketing, and 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

                                     F-15

specify minimum annual units for each application once the Company has
produced a commercially viable device and demonstrates manufacturing
capability.  During 2002, the Company has moved to eliminate Extengine's
exclusivity in certain markets.  This action has been undertaken because of
certain actions and certain inactions on the part of Extengine.  Management
is hoping to reach a negotiated compromise with regard to these licenses.


NOTE 8:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
2002 and 2001.

                                                    2002            2001
                                                 ----------      ----------
   Office furniture and equipment                $   61,497      $    9,891
   Test vehicles                                     28,028           5,750
   Analysis equipment                               158,358          67,847
   Leasehold improvements                            11,682              -
                                                 ----------      ----------
   Totals                                           259,565          83,488

        Accumulated depreciation                    (63,945)        (28,251)
                                                 ----------      ----------

   Net Property and Equipment                    $  195,620      $   55,237
                                                 ==========      ==========

Depreciation expense totaled $33,579 and $15,250 for 2002 and 2001.  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 9:   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 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

                                     F-16

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.

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 10:   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 11:   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 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.

                                     F-17

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.

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

                                     F-18

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


NOTE 12:   EARNINGS PER SHARE

Basic earnings per share has been calculated based on the weighted average
common shares outstanding.  The Company had a warrant to purchase 240,000

                                     F-19

shares and an option to purchase 200,000 shares at $0.625 per share
outstanding at December 31,2002.  Both of these expire in 2004.  These
underlying shares have not been added to outstanding common shares in a
presentation of diluted earnings per share because the presentation would
prove anti-dilutive.


NOTE 13:   RELATED PARTY TRANSACTIONS

Most 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 have also
continued many of the development and other services that they were
previously providing.

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

See also the discussion of the granting of a license for Europe to the
Company's President at Note 7 and the discussion at Note 14 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 7, the
Company issued 2,000,000 shares of restricted common stock to Pollution
Control to repurchase the U.S. marketing rights for its diesel product.
Pollution Control is controlled by the Company's President.  Pollution
Control's voting rights are also held by the Company's President.  These
transactions effectively 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 of the Board paid
$85,000 for 325,000 shares.

                                     F-20


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.


NOTE 14:   EXTRAORDINARY LOSS ITEMS

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

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 fallen through for at least the time being.
These shares, valued at $87,500, have been recorded as an extraordinary
expense during 2002.


NOTE 15:   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.  It is expected that this product will generate meaningful revenues
during the 2003 and make a significant contribution toward the Company's
overhead expense.  It is also expected that there will be a synergy of sales
from the combination of presentations for 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 calls for
the issuance of an additional 146,750 shares as incentive commissions based
on achievement of product sales.  These additional shares are compensation
and are 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.

                                     F-21

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             (397,852)
             Equity                           (1,014,127)


NOTE 16:   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 noncancelable 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 noncancelable lease totals $215,600 at December 31, 2002.  This amount
includes the deposit which will represent a prepayment of the final six
months rental.


NOTE 17:   SUBSEQUENT EVENTS

After December 31, 2002, the Company was unable to complete the acquisition
of the Servotech entities announced in a Form 8-K filing in November 2002.
As a result, the 2002 expense discussed at Note 14 was recorded.

In January 2003, the Company entered into two new consulting agreements that
called for the issuance of 200,000 unrestricted shares and 200,000
restricted shares.  The Company has also continued its monthly compensation
agreements with certain service providers.









                                     F-22