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, 2001

                   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 Avenuem, 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, 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]


The issuer's revenues for its most recent fiscal year were $123,788


The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 28, 2001, was $15,146,298 based on the closing stock
price on that date.  The number of shares outstanding of the registrant's
common stock on March 28, 2001, was 16,427,169 shares.

Transitional Small Business Disclosure Format:  Yes [ ] No [X]

                                     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 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 injection of
gaseous ammonia into the exhaust system upstream of the catalytic converter.
The chemical reaction that occurs causes the NOx to be reduced to harmless
constituents primarily at the initial mixing and secondarily at the
catalytic converter. The ammonia injection is programmed to occur only when
the engine is operating at specific load and performance conditions.

                                     2

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

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

    During the course of the year 2000 the Company engaged in a number of
test programs on its NOxMaster(TM) Ammonia Injection System with a
NOxMaster(TM) Diesel Catalytic Converter. Of particular interest were
excellent results obtained on a heavy duty diesel engine from China
demonstrating the ability to reduce NOx, CO, HC and particulate emissions on
that engine to meet the Euro 3 standards. It is hoped that this successful
demonstration will lead to future orders from China.

    The Company received a grant from the UK Energy Savings Trust to test
its system as a retrofit for London taxicabs. Such tests commenced in
England at the Millbrook Proving Grounds in November 2000 and are continued
through the second quarter of 2001. That demonstration proved successful,
then the Company received for a further grant from the Energy Savings Trust
to equip multiple in-service taxicabs for on-road and in-use demonstration
of the system, particularly with regard to safety issues concerning the on-
board use of ammonia as a reductant. That [program is now underway and the
in-field testing is scheduled to continue through the summer of 2002. 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 30% of the registered and new vehicle market in
Europe.

    In November, 2000, the Company applied for US, China and PCT patent
coverage on a new emission control device, its Sonic Flow CarburetorTM,
designed to improve operating performance and reduce emissions on small
gasoline engines such as motorcycles, snowmobiles, lawnmowers and small
standby power generators.  A License Agreement was entered into with
Extengine Transport Systems, Inc for China, India and Urban Buses.

    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. This includes the services of
investment banking and financial consultants Mission Securities, Inc. who
have provided advice with regard to the Company's investor relations and
business plan development.

                                     3

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

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

    As yet the Company has not begun distribution of its products and does
not expect to begin doing so until some time in latter part of 2002.

    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

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

    During 2001 development expenses were $241,904 and during 2000 they were
$128,964.

    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

    During 2000, the Company moved into new 18,000 square foot premises
leased by its licensee Extengine Transport Systems' affiliate, Ecologic
Testing Laboratories, occupying approximately 2,000 sq. ft. The Company also

                                     4

acquired appropriate computers and test equipment to advance its development
and testing activity and acquired a diesel vehicle for testing its products.
In addition, the Company continued to use the CARB approved testing
facilities of California Environmental Engineering of Santa Ana, CA for
state testing requirements. The new Ecologic Testing Laboratories will be
utilized upon CARB certification.

    The Company plans to move into 10,000 square foot R & D facilities in
the 2nd quarter of 2002.

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


Item 3.   Legal Proceedings.

    The Company is not currently involved in any litigation.


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

    There were no submissions to a vote of security holders during 2000.



                              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.

                                     High             Low
                                   --------         -------
          2000
               1st Quarter         $12.00           $1.50
               2nd Quarter           7.75            1.1875
               3rd Quarter           2.1875          0.875
               4th  Quarter          0.9375          0.125

          2001
               1st Quarter          $1.19           $0.22
               2nd Quarter           0.85            0.45
               3rd Quarter           0.75            0.17
               4th Quarter           1.40            0.16

    Shareholders:   At December 31, 2001 there were 447 shareholders of
record with an additional 67 shareholders registered with firms reporting to
the Depository Trust Company.

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


                                     5

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 30th, 1999 the Company was issued a
third patent on "Ammonia Injection in NOx Control", US Patent # 5,992,141.
This patent deals with the NOxMaster(TM) ammonia injection control system
and chemical reaction enhancement techniques to ensure optimum effectiveness
of the system to achieve maximum NOx reduction. In the opinion of
management, this patent significantly strengthens the position of the
Company in the exploitation of its technology and increases the value of its
future commercial exploitation and licensing potential. Management believes
that its patent coverage in all the major automobile and truck producing
countries provides it with the patent protection necessary to successfully
exploit the technology world-wide. No value has been capitalized on the
books for the second and third patents.

    Two additional patents were applied for during 2001 that improve the
NOxMaster device in specific relation to its reduction of particulates. The
Company believes that a system that reduces particulates 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.

    The Company commenced testing on its Sonic Flow Carburetor with a patent
applied for. 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 has also been applied for. 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 fuel based but are produced by
the oxidation of nitrogen in the combustion air and their formation requires
high temperature (2500 degrees F and above). The higher the temperature, the
more NOx is produced. Thus NOx is produced in proportion to engine power
output and efficiency. Meeting even the current minimum standards requires
sacrifice of performance and economy.

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



                                     6

    As of this filing, the NOxMaster(TM) Diesel Catalytic Converter has
completed road trials and is now expected to be available for production and
delivery during the third quarter of the year 2002 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). Ecologic Testing Laboratories of Fullerton, California has
been certified by the California AirResources Board (CARB) and is the
Company's laboratory of choice for the continued testing of the product.

    The Company applied for an Executive Order (EO) from the California Air
Resources Board in September 2001 and has been notified that the EO has been
approved.

    The EO states that the product does not increase NOx emissions and will
allow the Company to sell the product(s) in the state of California. Once
the production prototype is finalized the Company will request formal
testing by the CARB to validate the finding of CEE and thereby certifying
that the device does in fact reduce NOx in significant amounts to qualify
for emission credits.

    Emission Credits.   The emphasis will be on NOx reduction products,
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.

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

    On December 29th, 1999 the Company signed a Letter of Intent with
Extengine Transport Systems, LLC regarding the awarding of licenses for
commercial exploitation of the Company's technology in China, India,
California and the US Urban and School Bus markets. This was subsequently
followed by completion of Licensing Agreements, the exclusive terms of
which, if fulfilled, would represent significant income to the Company over
the succeeding 10 years. As part of the Agreement, Extengine Transport
Systems LLC has invested funds in the Company to cover the costs of Research
and Development to fulfill contracts requiring the demonstration of NOx
reduction capability with regard to a number of engines supplied by major
Chinese automotive companies. 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.

                                     7

    The Company is planning to move into a 10,000 square foot Research and
Development facility in Irvine, California the second quarter of 2002 where
it will expand its R & D dynomometer testing capabilities and broaden the
range of engine types and sizes for which it can customize its products.

    The Company is planning to apply for EPA and CARB Retrofit Verification
in the first and second quarters of 2002 in line with new protocols for
Selective Catalytic Reduction (SCR) being finalized by those agencies. These
verifications are necessary to permit sale of the Company's NOxMaster system
nationwide and to qualify its customers for emission credits.

    The NOxMaster has now been installed and is in service on a number of
London Taxicabs where they are undergoing field tests through the summer of
2002. 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      77   Director/ VP-Research     2 years    April 1995

Lionel Simons        67    Director/President/
                           Secretary/Treasurer      2 years     Dec. 1995

William H. Ward, Jr  62    Director/Consultant      2 years     Nov. 1996

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


                                     8

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

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


Item 10.    Executive Compensation

    Mr. Berriman, Mr. Simons and Mr. Zabsky voluntarily terminated
employment and consulting contracts with the Company in mid-1996 and the
Company, with their consent, also terminated a stock option and compensation
plan for Directors. In 2001the 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           2001     -0-     -0-   300,000 shares  $ 27,720
President/Secretary

Lester Berriman         2001     -0 -    -0-   300,000 shares  $ 27,720
Chairman/ VP-Research

William H. Ward, Jr.    2001     -0-     -0-    50,000 shares  $  4,620 (1)
Director/Consultant

John Zabsky d.b.a.
 John Z Co.             2001    24,000   -0-   200,000 shares  $ 18,480 (1)
Consultant

(1) Compensation is provided to Mr. Ward and Mr. Zabsky as outside
    consultants.
(2) All shares presented are common shares.

                                     9

      (b) OPTION/STOCK APPRECIATION RIGHTS

    No stock options were granted during 2001 or free standing SARs to
executive officers of the Company.

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

    There was no exercise during 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.


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             32.45%
               328 Bay street
               Nassau, Bahamas

    Common     Lionel Simons,                  414,808 (2)(3)       2.70%
               President/Director
               36 Corniche Drive, Suite E
               Dana Point, CA 92629

    Common     Lester Berriman               1,012,048              6.58%
               18871 Portofino Drive
               Irvine, CA 92715

    Common     William H. Ward, Jr.            540,000              3.51%
               273 Hanover Drive
               Costa Mesa, CA 92626

    Common     All officers and directors
               as a group:                   6,960,733 (4)         45.20%

5% Holder
    Common      Extengine Transport Systems    400,000
                Ecologic LLC                 1,080,000              9.60%

    (1) All shares presented are common shares.  No preferred shares were
        held by members of Management at December 31, 2001.

                                     10

    (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.


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
14 to the financial statements.


Item 13.    Exhibits and Reports on Form 8-K

        None

                                  SIGNATURES

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

                                        KLEENAIR SYSTEMS, INC.

Date:  April 12, 2000                  _/s/ LIONEL SIMONS_
                                      By: Lionel Simons., President,
                                      Secretary, Principal Accounting
                                      Officer, & Principal Financial
                                      Officer

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

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

 /s/ LIONEL SIMONS                     Director         April 12, 2001
Lionel Simons


 /s/ LESTER BERRIMAN                   Director         April 12, 2001
Lester Berriman


 /s/ WILLIAM H.  WARD, Jr.             Director         April 12, 2001
William H. Ward, Jr.
                                     11


                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)




                       INDEX TO FINANCIAL STATEMENTS



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

      Balance Sheets as of December 31, 2001 and 2000  .  .  .  .  .  F-3

      Statements of Operations for the years ended
                December 31, 2001 and 2000 .  .  .  .  .  .  .  .  .  F-4

      Statement of Stockholders' Equity for the years ended
                December 31, 2001 and 2000 .  .  .  .  .  .  .  .  .  F-5

      Statements of Cash Flows for the years ended
                December 31, 2001 and 2000 .  .  .  .  .  .  .  .  .  F-7

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











                                    F-1






             REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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


We have audited the accompanying balance sheets of KleenAir Systems, Inc. (a
development stage Company) as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended.   We have also audited the cumulative statements of operations,
stockholders' equity, and cash flows for the period from January 1, 1995
through December 31, 2001.  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, 2001 and 2000, 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 & COMPANY, P.C.
Robert Early & Company, P.C.
Abilene, Texas

April 9, 2002






                                    F-2

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                               BALANCE SHEETS
                      As of December 31, 2001 and 2000


                                ASSETS

                                                       2001           2000
                                                    ----------      ----------
CURRENT ASSETS:
  Cash                                              $   33,479      $   24,365
  Accounts receivable                                    1,600              -
  Accounts receivable from related party                    -           55,693
  Prepaid expenses                                     119,862         198,925
                                                    ----------      ----------
    Total Current Assets                               154,941        278,983

PROPERTY AND EQUIPMENT (net)                            55,237         60,482

OTHER ASSETS:
  Patent license                                       152,781         130,049
                                                    ----------      ----------
    TOTAL ASSETS                                    $  362,959      $  469,514
                                                    ==========      ==========


                 LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES:
  Accounts payable ($74,899 and $67,453 due to
    related parties, respectively)                  $   95,931      $ 119,151
  Advances from directors                               95,850          40,000
                                                    ----------      ----------
     Total Current Liabilities                         191,781        159,151
                                                    ----------      ----------

STOCKHOLDERS' EQUITY:
  Preferred stock, series A, $.001 par value
    (10,000,000 shares authorized, 0 outstanding)           -               -
  Common stock, $.001 par value (50,000,000
    shares authorized, 15,391,069 and
    12,579,082 outstanding, respectively)               15,391          12,579
  Additional paid-in capital                         3,857,649       3,375,835
  Deficit accumulated during the development stage  (3,701,862)     (3,078,051)
                                                    ----------      ----------
    Total Stockholder's Equity                         171,178         310,363
                                                    ----------      ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY          $  362,959      $  469,514
                                                    ==========      ==========







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

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                          STATEMENTS OF OPERATIONS
                 For Years Ended December 31, 2001 and 2000

                                                                   Cumulative
                                                                  During Devel-
                                               2001       2000     opment Stage
                                            ---------  ----------  -----------

REVENUES                                    $ 123,788  $       -   $   123,788

PRODUCT DEVELOPMENT COSTS                     241,904     128,964      704,698

OPERATING EXPENSES:
  Personnel costs and director fees            60,328      51,000      582,602
  Consultants                                 326,385     388,245    1,604,745
  Professional fees                            32,462      48,576      233,415
  Office expenses                               1,911       3,010       25,625
  Depreciation                                 15,250      10,510       28,251
  Advertising and promotion                     1,865      17,318      154,212
  Loss on cancellation of licensing
    agreements                                     -           -        19,860
  Rent                                         18,750      27,500       51,250
  Other expenses                               48,815      44,318      124,183
  Unknown sources prior to current
    ownership                                      -           -       151,518
                                            ---------  ----------  -----------
    Total operating expenses                  505,766     590,477    2,975,661
                                            ---------  ----------  -----------
(LOSS) FROM OPERATIONS                       (623,882)   (719,441)  (3,556,571)

OTHER INCOME AND (EXPENSES):
  Interest income                                  71       2,429        2,500
  Amortization of discount on receivables          -           -        20,259
                                            ---------  ----------  -----------
(Loss) Before Extraordinary Item             (623,811)   (717,012)  (3,533,812)

Extraordinary Item:
  Costs of terminated acquisition                  -           -      (168,050)
                                            ---------  ----------  -----------
Net (Loss)                                  $(623,811) $ (717,012) $(3,701,862)
                                            =========  ==========  ===========
Earnings per Share:
Basic:
(Loss) Per Share Before Extraordinary Item  $   (0.05) $    (0.07) $     (0.68)
  (Loss) Per Share From Extraordinary Item         -           -         (0.03)
                                            ---------  ----------  -----------
Net (Loss) Per Share                        $   (0.05) $    (0.07) $     (0.71)
                                            =========  ==========  ===========

Weighted Average Shares Outstanding
  Basic                                    13,372,112  11,008,972    5,236,629
                                           ==========  ==========  ===========



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)
<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)
                                    =========  ========   ==========  ==========  ==========   =========  ===========




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

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                          STATEMENTS OF CASH FLOWS
             Increases/(Decreases) in Cash and Cash Equivalents
                 For Years Ended December 31, 2001 and 2000

                                                                   Cumulative
                                                                  During Devel-
                                               2001       2000     opment Stage
                                            ---------  ----------  -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss)                                $(623,811) $(717,012)  $(3,701,862)
  Adjustments to reconcile net (loss) to
    net cash provided by operations:
    Losses prior to current ownership              -           -       151,518
    Depreciation                               15,250      10,510       28,251
    Amortization of:
      Prepaid expenses                        237,813     178,125      668,158
      Deferred services                            -           -       250,267
    Stock issued for services                 220,876     248,617    1,560,958
    Stock issued for extraordinary loss            -           -       140,550
  Accounts receivable                          54,094     (55,694)      (1,600)
  Advances to consultants                          -           -        20,000
  Prepaid expenses                                 -      (20,000)    (200,800)
  Trade accounts payable                      (23,220)     47,355       95,931
                                            ---------  ----------  -----------
NET CASH USED BY OPERATING ACTIVITIES        (118,998)   (308,099)    (988,629)
                                            ---------  ----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Property and equipment                      (10,006)    (56,175)     (75,187)
  Patent licensing costs                      (22,732)    (11,091)     (75,381)
                                            ---------  ----------  -----------
NET CASH USED IN INVESTING ACTIVITIES         (32,738)    (67,266)    (150,568)
                                            ---------  ----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuing stock                 105,000     358,750    1,074,459
  Additional capital contributions                 -           -         2,367
  Advances from directors                      55,850      15,000       95,850
                                            ---------  ----------  -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES     160,850     373,750    1,172,676
                                            ---------  ----------  -----------
NET INCREASE/(DECREASE) IN CASH                 9,114      (1,615)      33,479

CASH AT BEGINNING OF YEAR                      24,365      25,980           -
                                            ---------  ----------  -----------
CASH AT END OF YEAR                         $  33,479  $   24,365  $    33,479
                                            =========  ==========  ===========
SUPPLEMENTAL DISCLOSURES:
Cash payments for:
  Interest                                  $      -   $       -   $        -
  Income taxes                                     -           -            -
Non-cash investing and financing transactions:
  Stock issued for:
   Compensation and directors' fees            78,540      51,000      726,648
   Services and prepaid services              301,086     553,867    1,465,735
   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

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

                           KLEENAIR SYSTEMS, INC.
                       (A Development Stage Company)
                       NOTES TO FINANCIAL STATEMENTS
                         December 31, 2001 and 2000


DESCRIPTION OF BUSINESS

KleenAir Systems, Inc. (the Company) was originally incorporated in 1986 in
Nevada as Covington Capital Corporation.  The Company has had various names
during its existence as various endeavors were attempted. None of these
actually became fruitful.  The Company was most recently known as Investment
& Consulting International, Inc. until April 1995.  At that time, the
Company purchased a patent for a proprietary device shown to be capable of
neutralizing the environmental impact of nitrous oxide from the emissions
from automobile exhaust without significant modification to the vehicle.
This device is known as the "NOxMASTER ".  Soon after the acquisition of
this patent and the right to use of the seller's name, the Company changed
to its current name. With the patent acquisition in April 1995, the Company
moved into the development stage and has since worked toward the completion
of tests, fine tuning, and clearance of California Air Resources Board
standards.


NOTE 1:   SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

The Company's accounting and reporting policies conform with generally
accepted accounting principles.  Policies 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.

Patent License -- The Company purchased the rights to a patent and developed
others as discussed at Note 6 below.  The cost of the patent and licenses,
along with legal costs incurred to register and protect them, have been
capitalized and will be amortized once the Company commences sales of the
product.  Amortization will be charged on a straight-line basis over seven
years.  No amortization expense related to these rights has been charged to
operations because development of the underlying patented device has not
been completed. Amortization will begin when sales of the device are
initiated.

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

                                    F-7

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

Deferred tax assets and liabilities are the amounts by which the Company's
future income taxes are expected to be impacted by these differences as they
reverse.  Deferred tax assets are expected to reduce future income taxes.
Correspondingly, deferred tax liabilities are expected to increase future
income taxes.  Note 5 below discusses the amounts of deferred tax benefits
and deferred tax liabilities.  The Note also presents the impact of
significant differences between financial reporting income and taxable
income.

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

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

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


NOTE 2:   GOING CONCERN

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

                                    F-8

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


NOTE 3:   CORRECTION OF AN ACCOUNTING ERROR

Upon review of the Company's financial statements during 2001, the
Securities Exchange Commission deter mined that the Company had recorded an
incorrect value for its patent in 1995.  The Company had recorded the value
of its patent at $3,500,000 based on offers to purchase the patent made to
the previous owners.  However, the SEC requires a very conservative
interpretation of the applicable accounting rules with regard to the
acquisition of intangible assets when the consideration given is non
marketable stock rather than cash.  In accordance with the required
correction, the patent's originally recorded value was revised downward from
the estimated value of the patent to the par value of the stock issued, i.e.
$7,000.  The correction of the error resulted in a corresponding reduction
of Additional Paid in Capital.  These changes were made in an amended report
and filing for December 31, 2000.


NOTE 4:   ACCOUNTS RECEIVABLE

During the last quarter of 2000, the Company incurred travel, engineering,
and other expenses in assisting NOxMaster, Ltd. of England with the testing
of the products on London taxicabs.  NOxMaster was awarded a portion of a
U.K. government funded grant for this testing.  The receivable reported in
the financial statements at December 31, 2000 was for the reimbursement by
NOxMaster to the Company for the expenses so incurred. During 2001, $9,285
of these receivables were determined to not be reimbursable under the terms
of the grant. The Company has recognized these non reimbursable costs as
part of research and development during 2001.

During 2001, a third party was billed for use of the Company's testing
equipment.  The $1,600 shown as receivable at December 31, 2001, is the
unpaid portion of this billing.


NOTE 5:   PREPAID EXPENSES

At December 31, 2000, the Company had prepaid for services under four
consulting agreements and for laboratory testing of its products in
California.  The consulting agreements were funded through the issuance of
unrestricted stock valued at $356,250.  These contracts were for services to
be provided over a one year period beginning in July 2000.  One-half of this
cost was amortized during 2000 with the balance being amortized in 2001.
Additionally, as mentioned, the Company has paid $20,000 for approved
testing work to be done in California.  These tests were delayed until 2001.

                                    F-9

In October 2001, the Company entered into new consulting agreements, funded
with unrestricted stock valued at $158,750.  These agreements were for a one
year period from early October 2001 through September 2002. Amortization of
the cost of these new agreements was $39,688

                                                    2001           2000
                                                 ----------      ----------
    Consulting agreements                        $  119,062      $  178,125
    Testing work                                         -           20,000
    Taxes                                               800             800
                                                 ----------      ----------
      Totals                                     $  119,862      $  198,925
                                                 ==========      ==========


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

                                        Amount of Net
                Year of                Operating Loss
              Expiration                Carry Forward
              ----------               --------------
                 2010                    $  148,187
                 2011                       901,206
                 2012                        79,438
                 2018                       305,825
                 2019                       804,046
                 2021                       626,785
                                        -----------
                                        $ 3,585,509
                                        ===========

The Company has deferred tax assets (no liabilities) at December 31, 2001
and 2000.  These assets have arisen from the difference in the depreciation
deduction for book and tax purposes, from operating loss carry-forwards, and
from the difference between the tax and book bases for the patent
acquisition.  These deferred tax assets total $1,216,520 and $1,528,314 at
December 31, 2001 and 2000, respectively.  However, because management is
unable to determine at this point that it is more likely than not that the
Company will be able to utilize these deductions against future revenues, a
valuation allowance has been recorded to offset the assets.  There is no
current income tax benefit or expense to be reported for the periods ended
December 31, 2001 and 2000.  The following table sets forth the reconciling
items between income per books and taxable income.

                                                    2001           2000
                                                 ----------      ----------
    Book loss                                    $ (623,811)     $ (717,012)
    Depreciation                                     (2,974)         (3,010)
                                                 ----------      ----------
    Taxable loss                                 $ (626,785)     $ (720,022)
                                                 ==========      ==========
                                    F-10

Deferred tax liabilities arise primarily from the use of accelerated methods
of depreciation of property and equipment for tax purposes and from a
difference in the tax and book bases for the patent acquisition.


NOTE 7:   PATENTS, LICENSE, RESEARCH AND DEVELOPMENT

During April 1995, the Company acquired a patent for a proprietary device
(the "NOxMASTER ") shown to reduce the pollutant content of automobile
emissions.  The cost of acquiring this patent has been capitalized and
included under the caption Patent license on the balance sheet.  Subsequent
to the acquisition of this patent, the Company has continued to refine the
device and expand its applicability to a wider range of vehicles.  Also, the
Company has been in the process of performing tests aimed at obtaining
minimum state approvals to be able to advertise and sell the device
initially as not causing an increase in pollution.  Subsequent testing and
completion of the specified procedures are expected to allow the Company to
obtain a ruling by the California Air Resource Board that the device does
not increase pollutants.  Such a ruling has been obtained in 2002 for the
diesel version of the product.  Obtaining this ruling greatly expands the
markets for the device.  The Company's rights to the patent are subject to
royalties totaling seven per cent of wholesale sales.  The royalties do not
require the Company to make minimum payments.

In addition to its work toward certification in California, the products are
being tested in England for their application to pollution control on diesel
taxicabs which are in use there.  This testing is being carried on by
NOxMaster, Ltd, an entity in which the Company owns a small equity interest
through an equity investment and has granted a marketing license while
retaining a right to royalties as discussed below.

Only the direct costs of acquisition of the license and costs of extending
or perfecting the patents are available for capitalization.  All payments
for the development and production thereof are charged to operations as
develop ment costs when incurred and are included in results of operations.
Management has estimated that additional costs required to obtain executive
orders and additional approvals for other versions of the product should be
in the $250,000 to $400,000 range.

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 have been
capitalized.

During 1996, the Company entered into an agreement to grant the Company's
president an exclusive license for the worldwide rights to manufacture,
market, distribute, sell, etc. the NOxMASTER 's application to diesel
engines.  In addition, the agreement granted the same rights for the
NOxMASTER 's application to gasoline engines in Europe, the former Soviet
Union, the Middle East, and Africa.  In exchange for this transfer, the
Company's president has 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 U.S. market

                                    F-11

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 an license agreement with Extengine
Transport Systems, LLC (ETS) which is in the business of commercialization
of environmental technologies and products.  This license is for a ten-year,
non-exclusive worldwide manufacturing, marketing, and selling license for
NOxMASTER  devices.  The Company has also entered into an exclusive ten-year
California manufacturing, marketing rights, and distribution rights for
application of the NOxMASTER  to gasoline engines and a ten-year, exclusive
manufacturing, marketing, and distribution rights for application of the
NOxMASTER  devices in China and India and to school and urban buses.  These
licenses set out per unit prices and specify minimum annual units for each
application once the Company has produced a commercially viable device and
demonstrates manufacturing capability.


NOTE 8:   PROPERTY AND EQUIPMENT

The following table presents costs of property and equipment at December 31,
2001 and 2000.

                                                    2001            2000
                                                 ----------      ----------
   Office furniture and equipment                $    9,891      $    7,447
   Test vehicle                                       5,750           5,000
   Analysis equipment                                67,847          61,036
                                                 ----------      ----------
   Totals                                            83,488          73,483

        Accumulated depreciation                    (28,251)        (13,001)
                                                 ----------      ----------
   Net Property and Equipment                    $   55,237      $   60,482
                                                 ==========      ==========

Depreciation expense totaled $15,250 and $10,510 for 2001 and 2000.  The
office furniture and equipment and the analysis equipment are being
depreciated on a straight-line basis over five years and the test auto is
being depreciated on a three-year straight-line basis.


NOTE 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.



                                    F-12

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

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

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 2001, 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.


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

                                    F-13

current operations.  Inception-to-date information required for development
stage companies is also unavailable for this period.

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

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

During 1995, other consulting services not directly related to the patent
purchase were obtained through the issuance of 24,000 common shares valued
at total of $111,875.  Directors were issued a total of 4,000 shares valued
at $22,500.  This stock-based compensation, as well as the transactions
described below, has been valued as described in Note 8.  The Company also
issued 27,334 common shares pursuant to a Regulation S offering. Net
proceeds to the Company after commissions were $66,804.  In addition,
$180,400 was received for 66,814 shares under the Regulation S offering
prior to  December 31, 1995, with the shares being issued during 1996.

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

At December 31, 1997, the Company had not issued 66,666, preferred shares to
its president in accordance with his employment contract.  These shares were
issued during 1998.  During December 1998, the Board approved the issuance
of 320,000 shares of stock to themselves and key consultants as compensation
for services rendered during 1998.  Both of these sets of shares have been
included as outstanding shares and the costs have been recognized as
expenses in the relevant periods.  The shares were issued during 1999.

During 1998, preferred stockholders exchanged 403,330 shares for a like
number of common shares.  The Company issued 2,000,000 shares to a financial
and public relations consultant for services; 2,000,000 and 800,000 shares
to Pollution Control, Inc. for license and cash as discussed at Note 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 8 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

                                    F-14

test equipment was acquired in exchange for 33,200 shares valued at $8,300.
The Company also issued 146,800 shares for $35,800 cash and exchanged 61,334
common shares for the retirement of a like number of preferred shares.

During 2000, the Company issued 1,400,000 shares to Ecologic, LLC (an
affiliate of Extengine, Inc.) for $350,000 under an agreement to provide
funds for product testing.  The Company issued 300,000 shares valued at
$51,000 to officers and directors and key engineering consultant in lieu of
cash payments for their services to the Company.  Outside consulting
services were obtained in exchange for 1,344,266 shares valued at $553,868.
(Note 8 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 12, 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.  This consisted of 138,000 warrants to buy one
restricted share at $0.625 per warrant.  These warrants expire November 30,
2001.  Of these, 14,000 were exercised during 2000 and 124,000 remain
outstanding at December 31, 2000. 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 expires January 31, 2002,
is 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 has 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.


NOTE 12:   EARNINGS PER SHARE

Basic earnings per share has been calculated based on the weighted average
common shares outstanding.  All preferred shares outstanding were converted
into common shares.  Diluted earnings per share have not been presented
because the presentation would prove antidilutive.



                                    F-15

NOTE 13:   DEFERRED CONSULTING FEES

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

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

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


NOTE 14:   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 6 and the discussion at Note 14 regarding the
aborted acquisition of National Diversified Telecom, Inc.

                                    F-16

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 6, the
Company issued 2,000,000 shares of restricted common stock to Pollution
Control to repurchase the U.S. marketing rights for its diesel product.
Pollution Control is controlled by the Company's President.  Pollution
Control's voting rights are also held by the Company's President.  These
transactions effectively transfer control of the Company to Pollution
Control and the Company's President through his control of that block of
voting stock.

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

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

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


NOTE 15:   EXTRAORDINARY LOSS ITEM

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


NOTE 16:   SUBSEQUENT EVENTS

During January 2002, the Company arranged to sale 500,000 combination stock
and warrant units to an invest ment fund.  These units sold for $500,000.
The warrants were exercisable at any time before December 2002 at $0.80 per
share.  In February 2002, the fund elected to exercise its warrants.  These
actions resulted in total proceeds of $900,000 to the Company for the
issuance of 1,000,000 restricted shares.

                                    F-17

The Company has also issued approximately 32,000 unrestricted S-8 shares for
the services of consultants during the first quarter of 2002.

In April 2002, the Company has signed a letter of intent to acquire an
entity that makes and sells products that will work in conjunction with the
NOxMaster.  The terms of the acquisition are expected to be finalized and
announced during the latter part of April.  Under the terms of the letter,
all proceedings are to be confidential until finalized.







                                    F-18