SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                   FORM 10-KSB


                   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934


             For the fiscal year ended December 31, 1999. Commission
                              file number 0-14465.



                              SONEX RESEARCH, INC.


                        Incorporated in State of Maryland
                   23 Hudson Street, Annapolis, Maryland 21401

Telephone Number:(410)266-5556     I.R.S. Employer Identification No. 52-1188993



          Securities registered pursuant to Section 12(b) of the Act:

               Title of                 Name of each exchange on
              each class                    which registered
              ----------                    ----------------
                 None                             None



          Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value



Check  whether the Issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months, and (2) has been
subject to such filing requirements for the past 90 days.   YES [X] NO [ ]


Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B 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 number of shares  outstanding of the Issuer's $.01 par value Common Stock as
of March 15, 2000 was  18,293,169.  The  aggregate  market value of voting stock
held by non-affiliates of the Registrant was $7,646,223 as of March 15, 2000.


Revenues for the year ended December 31, 1999 were $324,286.


                   Documents Incorporated by Reference: None.



















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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                         ITEM 1. DESCRIPTION OF BUSINESS

The Company
-----------

Sonex Research,  Inc.  ("Sonex" or the  "Company"),  incorporated in Maryland in
1980, has developed a patented  proprietary  technology  (the "Sonex  Combustion
System", "SCS" or "Ultra Clean BurnTM technology") which improves the combustion
of fuel in engines  through design  modification of the pistons in large engines
or the cylinder heads in small engines.  Variations of the Company's  technology
have been applied to all types of internal combustion  engines,  including those
used in personal and commercial  vehicles  (automobiles,  trucks,  buses, boats,
motorcycles) as well as engines used in fixed or portable  utility  applications
(motor  generator  sets,  pumps,  chain  saws),  whether  spark  ignited (SI) or
compression ignited (CI), carburetted or fuel injected, using gasoline,  diesel,
alcohol and/or other fuels.

The Company's objective is to execute broad agreements with engine manufacturers
and their  piston  suppliers  for  industrial  production  of SCS pistons  under
license from Sonex. Sonex concentrates its commercial efforts on the application
of the SCS to the  reduction  of  exhaust  emissions  in  direct  injected  (DI)
turbocharged diesel engines.

Management believes that the Company's piston-based emissions reduction enabling
technology for DI diesel engines,  which changes only a single engine  component
while  introducing  no additional  parts and is  self-driven  by the  combustion
process, can be an alternative to exhaust aftertreatment. Evidence to date shows
that the SCS is a significant new engine design  variable,  and that the synergy
of the SCS in  combination  with  exhaust  gas  recirculation  (EGR) can  enable
in-cylinder emissions reduction to meet future regulatory standards.

The primary achievements of the SCS DI diesel engine technology are as follows:

      o    reduction of exhaust emissions in vehicular diesel engines

      o    potential elimination of exhaust aftertreatment systems

      o    equal fuel consumption

      o    potential for lower cost, less complexity and greater reliability

In addition,  the Company,  in its  laboratory  and under contract with the U.S.
military and defense contractors, has applied the SCS to the conversion of small
gasoline   engines  to  operate  on  military   heavy  fuels  in  a  variety  of
applications.


Employees
---------

As of March 15, 2000, the Company had five full-time employees and one part-time
employee,  and engages the part-time  services of two  consultants  on a regular
basis. The Company has never experienced a strike or work stoppage, and believes
its relations with its employees are good.


Caution regarding forward-looking statements
--------------------------------------------

Sections of this Report, as well as all publicly disseminated material about the
Company, contain information in the form of "forward-looking"  statements within
the meaning of the Private Securities  Litigation Act of 1995 (the "Act").  Such
statements  are  based  on  current  expectations,  estimates,  projections  and
assumptions by management with respect to, among other things,  trends affecting
the Company's  financial  condition or results of  operations  and the impact of
competition.  Words  such  as  "expects",  "anticipates",  "plans",  "believes",
"estimates",  variations of such words, and similar  expressions are intended to
identify such  statements that include,  but are not limited to,  projections of
revenues, earnings, cash flows and contract awards.

Such  forward-looking  statements are not guarantees of future  performance  and
involve risks and uncertainties,  all of which are difficult to predict and many
of which are  beyond  the  control  of the  Company.  Accordingly,  readers  are
cautioned not to place undue reliance on such forward-looking statements.

In order to obtain the benefits of the "safe  harbor"  provisions of the Act for
any  such  forward-looking   statements,   the  Company  cautions  shareholders,
investors and prospective investors about significant factors which, among other
things,  have in some cases affected the Company's actual results and are in the
future  likely to affect the Company's  actual  results and cause them to differ
materially from those expressed in any such forward-looking statements.

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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



Factors that could cause actual results to differ  materially  include,  but are
not limited to, the following:

      o    ability to secure financing necessary to fund future operations

      o    ability to complete technology development and demonstration programs
           and execute licensing agreements that produce significant revenue

      o    ability to demonstrate commercial viability of SCS technology

      o    ability to attract and retain skilled personnel

      o    changes in general economic conditions

      o    competition


Potential benefits of the SCS in the reduction of emissions
-----------------------------------------------------------

Government  agencies  around the world  continue  to mandate  increasingly  more
strict  requirements  for the  reduction  of allowable  diesel truck  emissions,
specifically  with respect to  smoke/particulates  and NOx (oxides of nitrogen).
The use of costly electronic controls and ultra-high pressure injection systems,
including  the new "common  rail"  injection  systems  that are  integral to the
engine  itself,  may  permit  truck   manufacturers  to  attain  some  of  these
reductions;  however,  it is unlikely any one emissions reduction technique will
enable  manufacturers  to meet the emission  standards to be  implemented in the
next few years.

High pressure  injectors may reduce  smoke/particulates,  but they also increase
NOx emissions while doing so. Manufacturers, therefore, may be able to eliminate
equipment such as particulate  traps, but they likely will need de-NOx catalytic
converters,  further retard of injection timing,  and  replenishment  chemicals,
leading to an increase in fuel consumption and additional maintenance,  all at a
significantly  higher  cost.  Management  believes  that  the  Company's  diesel
technology,  which primarily  requires a change of piston design,  under various
conditions  causes a reduction  in  smoke/particulates,  carbon  monoxide  (CO),
hydrocarbons  (HC),  and NOx by  significant  amounts  while  maintaining  brake
specific  fuel  consumption  (BSFC)  and  power.  In tests  conducted  in modern
turbocharged  engines of several  manufacturers,  fitted with a variety of Sonex
pistons,  including  aluminum  screw  assembled  pistons (SAP) and electron beam
welded  (EBW)  pistons,  using an earlier  SCS piston  design,  the  Company has
demonstrated  that the SCS may reduce  smoke/particulate  emissions in excess of
40% and HC  emissions  by 5%, while  maintaining  equal NOx  emissions at future
targets and BSFC approximately equal to that of the stock engine.

The ability of the SCS to reduce soot emissions has an added benefit towards the
reduction  of NOx in diesel  engines.  Many  manufacturers  are turning to using
exhaust  gas  recirculation  (EGR) to  reduce  NOx.  (EGR is inert  exhaust  gas
recycled  and pumped  back into the  engine  cylinders  for the next  combustion
cycle.) EGR can significantly reduce NOx, but the soot recirculated with EGR can
increase particulate  emissions and increase engine wear. The SCS acts to reduce
both the engine  wear and the  quantity  of  particulates  in the  emissions  by
significantly reducing the soot content of the emissions.

Management  believes  that Sonex Ultra Clean  BurnTM  technology  is perhaps the
least expensive  method of emissions  reduction,  but it is likely to be used in
conjunction with other  technologies to enable  manufacturers to meet the strict
diesel truck emission  standards that will be introduced in the near future. All
testing  to date by Sonex  and the  engine  OEM's  has  shown  that  SCS  diesel
technology is complementary to new developments such as high pressure and common
rail injection and EGR.


Targeted applications
---------------------

Ongoing  SCS  demonstration  and  development  programs  at  various  stages  of
completion  with  some of the  largest  multi-national  diesel  engine  original
equipment  manufacturers  (OEMs) in the world target  engines used in medium and
heavy duty trucks. The demonstration process involves many stages, from proof of
concept using screw-assembled prototype pistons fabricated in-house by Sonex and
tested by the engine  manufacturer in its  laboratories,  to working with piston
suppliers for the  fabrication of finished  pre-production  pistons that will be
used in field trials,  and  durability,  manufacturing  optimization,  and other
tests required before the start of full series production.




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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


The Company  has  completed  separate  demonstration  programs  with some of the
largest  multi-national  diesel engine OEMs in the world,  and each has verified
and accepted  that the SCS can  substantially  reduce  particulate  emissions at
future NOx levels in a DI diesel engine for medium duty trucks while maintaining
fuel consumption and power. Tests conducted by one of these manufacturers showed
that an engine using  SCS-modified  pistons  along with EGR could attain  future
U.S. and European  emissions  targets when OEM type  production  pistons  become
available.  In-house  testing  of the  Company's  most  recent  patented  design
innovation for vehicular DI diesel engines,  referred to as the "SCS-AD", yields
more impressive results than earlier designs. The SCS-AD, when coupled with EGR,
achieves significant reductions in soot and NOx emissions with no fuel penalty.

Sonex has now reached the next stage with these programs,  that is, optimization
of the piston design for the fabrication of pre-production  pistons.  The engine
manufacturers  have stated that the SCS benefits could be in lower cost and less
complexity.  These  factors  are now  being  addressed  by the  Company  and its
customers. Continued revision of emissions limits, however, has challenged Sonex
to produce piston  designs that reduce both NOx and soot,  leading to a delay in
successful commercialization of the SCS.

The Company also has  successfully  applied a patented  SCS starting  system and
modified  combustion chamber design to the conversion of reliable,  lightweight,
SI, 2-stroke,  gasoline fueled engines of various sizes used in small,  remotely
controlled military unmanned aerial vehicles (UAVs) to start and operate on JP-5
standard military fuel (also referred to as "heavy fuel").  The Sonex heavy fuel
engines (HFEs) achieve power and fuel consumption substantially equal to that of
the stock  gasoline  engines and provide  dependable  performance  over the full
engine operating range without "knocking", which has been a major shortcoming of
other heavy fuel conversion technologies.

As heavy fuels are less volatile than  gasoline,  in addition to the UAV market,
the Company is examining a wide range of  sustained  commercial  utility  engine
applications  for its heavy fuel  conversion  technology  to reduce the  hazards
associated with the storage of gasoline in buildings and on boats. Over the past
few months, Sonex has also been applying its heavy fuel technology to a 4-stroke
engine in connection with a contract with the U.S. military.


Overview of SCS design modifications; In-house test results
-----------------------------------------------------------

The SCS engine design  modifications  for heavy fuel  operation in SI two-stroke
engines,  based on the Sonex  U.S.  Patent  5,855,192  issued  January  5, 1999,
consist of  modified  cylinder  heads and  special  combustion  chamber  inserts
housing the proprietary SCS technology.  The SCS conversion aims to maintain the
gasoline engine's stock carburetion,  intake and exhaust port timing, intake and
exhaust systems, ignition system, ignition timing, compression ratio and weight.
The SCS  starting  system  employs  heaters  similar  to those  used in a diesel
engine.

The  patented  SCS for DI diesel  engines  improves  the  process of  combustion
through a  combination  of  chemical  and fluid  dynamic  effects  that occur by
modifying the engine's  combustion  chamber and the processes  occurring  within
that  chamber.  SCS  DI  diesel  designs  integrate  one  or  more  cavities  as
microchambers  which form a ring around the piston bowl, with each  microchamber
positioned  in line  with a spray  from the  fuel  injector.  The  microchambers
perform as reservoirs that produce active chemical  species  (partially  reacted
charges) which are expelled at high velocity to enhance  combustion and burn the
soot cloud. The  microchambers  are connected to the piston bowl by tunnel- like
vents that  control the amount of fuel and air that enter the  microchamber  and
also control the amount of turbulence  that is created when gases jet out of the
microchambers  through  these vents into the piston  bowl.  The  position of the
microchambers  is a  critical  factor  in  controlling  the  temperature  of the
microchamber  and the rate of  reaction  of gases  that may be  resident  in the
microchamber at any one time.

The SCS-AD, based on the Sonex U.S. Patent 5,862,788 issued January 26, 1999, is
the  latest  invention  in the  series  for the SCS for DI  diesel  engines  and
involves   re-arrangement   of  SCS   features   to  exploit   new   fundamental
understandings of fluid dynamics.  The key feature of the SCS-AD is the presence
of improved micro-chambers in the piston which produce and conserve intermediate
and radical  chemical  species from a small  portion of the incoming  fuel.  The
expulsion  of these  materials  at high  velocity  enhances  turbulence  mixing,
achieving  better than a 50% soot reduction and a 15% NOx reduction in the Sonex
single  cylinder,  DI,  normally  aspirated  research  engine  with no change in
injection  timing.  SCS generated radical chemical species from a similar design
are also being used at Sonex to achieve radical  assisted,  4-stroke  combustion
and therefore represent a major step forward in combustion engineering.




                                       4
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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Application  of the  SCS  for  achieving  reduced  diesel  emissions  is  highly
leveraged  when  used  with  EGR,  allowing  enhanced  ignition  with  low  soot
production in the presence of large amounts of EGR. In the Sonex single cylinder
research  engine,  the  synergy  of SCS  and EGR (at  levels  up to 45  percent)
produced far greater NOx reduction than the same engine without EGR over a range
of loads and speeds while  maintaining the same soot level.  Typically,  without
the SCS,  a high  level of NOx-  reducing  EGR  produces  at least a  three-fold
increase in soot.

Sonex has also  demonstrated  that the SCS  technology  can be  transferred to a
modern  turbocharged,  intercooled DI diesel  engine.  Our most recent data from
this engine  clearly show the potential of the SCS where,  with no fuel penalty,
soot is reduced  by 50% and NOx is  reduced  by 11% with no retard of  injection
timing or use of EGR.  SCS  pistons  for this  engine are now in  pre-production
using electron-beam welding for assembly.


Competition
-----------

The Company's  competition comes from the extensive research  departments of the
world's major vehicle and engine  manufacturers as well as independent  research
organizations.   Although  the  experience   and  financial   resources  of  its
competitors  far exceed those of the Company,  management  believes that the SCS
can provide  significant  advantages  over the competition in terms of low cost,
improved performance, and simplicity, since no additional moving parts are added
to the engine.


Secrecy and non-disclosure
--------------------------

Due to the  highly  competitive  nature  of the  world's  automotive  and  truck
industries,  in connection with its contracts and/or demonstration programs with
such  manufacturers  the  Company is  required  to  execute  joint  secrecy  and
disclosure  agreements  that  expressly  prohibit the public  disclosure  of the
customers' names and other significant information. Failure by Sonex to maintain
this strict level of  confidentiality  would  jeopardize the relationship of the
Company with its customers.


DI diesel engine programs with foreign engine OEMs
--------------------------------------------------

On a  continuing  basis  for the past  few  years,  the  Company  has  performed
extensive  design and development  work on medium- and heavy-duty  truck engines
for large foreign multi-national diesel truck engine OEMs, in separate programs.

Funded  development  of Sonex pistons for  industrial  production for one of the
foreign OEM's proceeded  successfully  through  verification tests by the engine
manufacturer of pre-production, finished, aluminum pistons, using an earlier SCS
design,  in an engine in its own  facility.  During  1998 and 1999 the  Company,
under contract with this OEM, participated with suppliers of the OEM's injection
system and turbo-charger,  and one of the world's leading independent engine R&D
and  testing  firms,  on a joint  engine  application  program  involving  Sonex
technology for eventual production in a DI turbo-charged, intercooled, mid-range
diesel engine using high pressure  electronically  controlled injection,  common
rail high pressure, variable geometry turbocharger, cooled EGR, etc.

The manufacturer's objective is to meet future stringent emissions limits in the
production  version of this engine by use of the SCS technology,  in combination
with  these  other fuel  system  improvements,  with no  exhaust  aftertreatment
devices, such as catalytic converters or particulate traps. Based on all OEM and
Sonex tests to date, with further  optimization of traditional diesel parameters
and EGR, the OEM hopes to achieve these particulate and NOx emissions goals.

Testing of the SCS pistons in 1999 was delayed due to  difficulties  encountered
by the engine testing firm with the very advanced,  non-Sonex  components  being
evaluated.  Late in 1999,  however,  the engine manufacturer moved to accelerate
the schedule by taking over responsibility  itself for evaluating the SCS piston
design for its new low emission engine series.  In February 2000 Sonex delivered
pistons  incorporating  the SCS-AD to the engine  manufacturer  for testing in a
complete  six-cylinder  engine.  Results of these tests are expected in the near
future.  Management is hopeful that  successful  evaluation of the Sonex pistons
will lead  later  this year to  negotiations  for  further  design  optimization
services and a license agreement.






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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Promising test results at Sonex of the SCS-AD on a turbocharged  six-cylinder DI
diesel engine led a second foreign engine  manufacturer  last fall to engage its
piston supplier to produce  pre-production SCS pistons. Sonex is providing input
into the piston design  process and delivery of the  pre-production  pistons for
further engine testing at the OEM is expected soon.

In  cooperation  with the engine  OEMs,  the  Company  has worked with the major
piston suppliers to these manufacturers,  providing  engineering  specifications
and  drawings  for their use in  evaluating  alternative  production  methods in
anticipation of eventual piston orders from the engine  manufacturers.  The most
extensive  collaboration  has been with the former T&N Piston  Products Group of
the U.K., which was acquired in 1998 by Federal-Mogul Corp., a major supplier of
engine components based in Southfield,  Michgan.  T&N invested significant funds
internally in developing  innovative and economical  techniques of manufacturing
Sonex  pistons for series  production,  as well as  performing  finite  element,
thermal and stress analyses to examine the effects of stress on the Sonex piston
under a variety of extreme  conditions.  Federal-Mogul,  however,  has indicated
that it is not prepared to commit further  internal funding to complete the work
initiated  by T&N,  but is willing to  cooperate  with any engine OEM that would
fund  production  development.  In fact,  Federal- Mogul  currently is producing
pre-production SCS pistons for one of the foreign engine OEMs discussed above.


U.S. diesel engine manufacturers
--------------------------------

In November 1998 seven diesel engine manufacturers completed negotiation of a $1
billion  settlement  with the  Environmental  Protection  Agency  (EPA)  and the
Department  of Justice to settle  allegations  that the  companies  used "defeat
devices" for the past  several  years that  allowed  their  engines to emit more
pollution  on  the  road  than  in  certification  tests  in  order  to  achieve
performance benefits.  The settlement,  in the form of Consent Decrees under the
Clean Air Act, levied stiff civil penalties, required industry to accelerate the
introduction of advanced anti-pollution controls on new engines, and included an
industry  obligation to fund millions of dollars of research and  development in
projects to lower emissions, including consideration of projects proposed by the
public.

In January 1999 Sonex responded to the  announcement by submitting a proposal to
the EPA,  the Justice  Department,  and the diesel  engine  manufacturers  for a
cooperative effort between Sonex, the diesel engine  manufacturing  industry,  a
major engine research facility, a major automotive piston  manufacturer,  and an
advanced  metal-forming  parts  manufacturer,  to demonstrate  that a new engine
design variable exists in the piston-based SCS allowing in-cylinder reduction of
emissions as an alternative to exhaust aftertreatment.

The Consent Decrees with each  manufacturer were formally entered by the Federal
District Court on July 1, 1999. The EPA held public  hearings on the progress of
the  settlement in September  1999,  December 1999 and March 2000,  and early in
2000 approved the projects proposed by the diesel engine manufacturers under the
Consent Decrees. After having reviewed limited publicly available information on
the scope of these projects and having  attended and addressed the December 1999
public  hearing,   Sonex  believes  that  the  potential  benefits  of  the  SCS
in-cylinder piston based emissions reduction technology have not been recognized
in the engine manufacturer responses.

The  goal-oriented  project  descriptions  provided by the engine  manufacturers
appear to place heavy emphasis on exhaust  aftertreatment and alternative fuels,
and do not include an  assessment  of technical  feasibility.  As a result,  the
potential role for SCS in-cylinder  technology is limited to those projects that
indicate  that at least some  investment  will be made to refine or optimize the
combustion  system.  Sonex will attempt to become a  participant  in projects of
this scope, particularly by emphasizing the recent discoveries of the synergy of
the SCS and EGR to achieve economical in- cylinder emissions reductions.

Before the Consent Decrees were entered,  Sonex maintained  correspondence  with
and visited several U.S. diesel engine  manufacturers during 1999 to present the
improved test results  demonstrated by the SCS-AD. Last summer one of these U.S.
manufacturers  delivered  to Sonex an engine  used in current  production  sport
utility  vehicles  and  pick-up  trucks for a  demonstration  of the SCS in that
engine.  Tests  conducted over the past few months at Sonex using SCS pistons in
this engine are progressing,  and Sonex expects to provide a preliminary  report
on results to the  manufacturer  later this year.  Discussions  are ongoing with
other U.S. engine manufacturers as well; however, no specific programs have been
defined as yet.







                                        6
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                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Heavy fuel engines (HFEs)
-------------------------

The Company has  successfully  converted  small,  SI,  carburetted,  two-stroke,
gasoline  fueled  engines of various  sizes used in small,  remotely  controlled
military  unmanned  aerial  vehicles  (UAV's)  to start and  operate  on JP5/JP8
standard  military  fuels (also  referred to as "heavy  fuels").  UAV's  conduct
short-range  tactical   reconnaissance  while  operating  virtually  unseen  and
unheard,  taking pictures of battlefields and enemy  installations  and relaying
them back to ground  forces.  Existing UAV engines in the  military's  inventory
operate on gasoline.  Because of safety and  logistics  concerns,  however,  all
military small engines, such as those powering UAVs, eventually will be required
to operate on less volatile,  widely  available heavy fuels used by jet aircraft
and most military vehicles.

Under a "best efforts" feasibility  demonstration  contract from the U.S. Marine
Corps (USMC) Systems  Command in Quantico,  Virginia,  early in 1998 the Company
delivered  five  prototype  UAV heavy fuel engines  (HFEs).  Sonex  successfully
converted  the existing SI,  carburetted,  100cc  single  cylinder,  two-stroke,
gasoline  fueled  engine to start  and run on heavy  fuel,  leading  the USMC to
contract  Sonex  to  convert  an  additional  forty  UAV  engines  used  in  the
Dragondrone  UAV. The USMC is now deploying  tactical  UAV's aboard ship for the
first time, as the Dragondrone  UAV's with Sonex HFE's are in service in several
locations around the world.

Other  demonstration  programs have taken place under contract with the military
and  defense  contractors.  Also in 1998 Sonex  completed  a UAV HFE  conversion
feasibility  demonstration  for the U.S.  Naval  Air  Warfare  Center,  Aircraft
Division (the "Navy"), in Patuxent River, Maryland. Sonex converted the existing
350cc,  two-stroke,  carburetted,  SI two cylinder  gasoline  engine used in the
Pioneer  UAV to heavy fuel  operation,  demonstrating  starting  and  running at
various  loads  and  speeds  with  little  visible  smoke and  without  knock or
detonation.  Two  feasibility  demonstration  Sonex HFE's were  delivered to the
Navy; however,  the Company has since been informed that the Navy is planning to
replace the engine used in the Pioneer.  The Navy has indicated  informally that
Sonex will participate in the development of an HFE for the replacement  engine.
In recent  months  the Army and the Navy  have  awarded  multi-year  development
contracts  to major  defense  companies  for next  generation  UAV's  that  will
ultimately  require HFEs.  Sonex  continues to discuss its HFE  technology  with
these defense contractors.

By  January  1999  the  Company  completed  work on a  Phase  I  Small  Business
Innovation  Research  (SBIR)  Program  contract  awarded  by the U.S.  Naval Sea
Systems Command  (NAVSEA).  Sonex  demonstrated the feasibility of utilizing SCS
technology  to  design  a  low-cost,  small,  rugged  engine  to fit in a 5-inch
diameter  cylinder,  capable of starting and operating on  shipboard-safe  heavy
fuels,  for use in a small  aircraft that would be suitable for launch from guns
and missiles and for delivery by airdrop.  The aspects of the design  ruggedness
and other interface  requirements for potential  transition  opportunities  were
performed under subcontract by Science  Applications  International  Corporation
(SAIC),  an  advanced  technology  firm with  particular  expertise  in national
defense concepts such as UAV's. The first transition  opportunity identified for
such an engine is in the Forward Air Support  Munition  (FASM),  a  gun-launched
surveillance,  targeting,  and precision delivery air vehicle being developed by
the Naval Surface Fire Support  program  office.  SAIC is the  designated  prime
contractor for the FASM Fleet Advanced Demonstration.

Late in 1999 the Company  learned that its proposal for a Phase II award for the
development of an operational  prototype  engine had been  recommended  based on
technical  merit,  but Sonex did not  receive a contract  award due to a lack of
funding for the program.  Nevertheless,  the Company expects to collaborate with
SAIC on FASM and other HFE projects for the military.

In September 1999 Sonex completed an HFE conversion demonstration under contract
with the U.S. Naval  Research  Laboratory  (NRL) on a two-stroke,  two cylinder,
290cc  gasoline UAV engine.  The Navy is  supportive of UAV  technology  and the
integration  of UAV's  into  shipboard  operations.  A supply  of heavy  fuel is
readily  available  onboard  ships,  and the  deployment  of UAV's  would not be
hindered by the amount or type of fuel available. NRL took delivery of two Sonex
HFEs which were to be integrated into a pair of prototype UAVs that NRL is using
as test beds for various UAV technologies and payloads.

The Company is assessing  additional  potential uses by the military for the SCS
HFE  technology,  as  well  as  private  sector  opportunities.  Operation  of a
light-weight  engine on high flash point  fuels such as diesel and heavy  fuels,
will reduce the hazard associated with gasoline, making such an engine much more
suitable for  applications  where gasoline  storage is  undesirable,  such as in
diesel fueled utility  engines used in pumps,  generator  sets,  etc., in homes,
commercial  buildings  and  boats.  The  range  of  commercial  applications  is



                                       7
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


particularly  important  to the military as it acquires  off-the-shelf  products
powered by two-cycle  engines and thereby  continues to perpetuate  the need for
gasoline in the logistics  system.  Military  applications  for  two-cycle  HFEs
include standby generators,  water pumps, chainsaws,  earth tampers and outboard
engines.  Sonex has submitted proposals to several military development sponsors
suggesting  a work  program for  optimization  of the SCS heavy fuel  conversion
technology  to fully  examine,  engineer and qualify an SCS  implementation  for
military and commercial applications.

One such program on an alternative HFE application is already underway.  Under a
sub-contract  from a prime contractor to the U.S.  military,  Sonex is examining
the technical  feasibility  of converting  an existing  high  performance,  650+
horsepower,  4-stroke, gasoline fueled propulsion system for marine use to start
and operate on heavy fuels.  This  demonstration  of the SCS 4-stroke heavy fuel
combustion   technology   is  being   conducted  in  a  laboratory   feasibility
demonstrator single-cylinder engine at Sonex.

After  analysis and design  iteration,  Sonex has  fabricated a preliminary  SCS
screw-assembled   piston  for  this  engine  that  will   produce  and  conserve
intermediate  and radical  chemical species from a small portion of the incoming
fuel to provide radical and spark ignition combustion of the JP-5. At this stage
of the project, the feasibility demonstrator  single-cylinder engine is starting
and  operating on JP-5 over a wide range of engine  speeds and loads,  with good
fuel  economy  and  without  knocking.  Progress  reviews  to date by the  prime
contractor and the military have been favorable;  soon, Sonex hopes to receive a
request for quotation for a follow-up contract for prototype conversion,  design
enhancements, and installation and operational assessment.


Patents and proprietary information
-----------------------------------

The Company has  endeavored  to protect its  technology by filing for patents in
the U.S. and in those foreign countries in which it may be able to commercialize
the SCS. The most recent U.S.  patents for the SCS DI diesel  engine  technology
and the SCS heavy fuel engine technology were issued in January 1999.

The Company has also developed a significant body of trade secrets,  proprietary
information  and know-how  relating to its  technology.  Although the principles
underlying  the SCS concept are  capable of being  understood  by experts in the
field,  management  believes  that  it  would  be  difficult  to  apply  the SCS
successfully to any given engine configuration  without the benefit of the trade
secrets, know-how and proprietary information owned by the Company.

The name "SONEX" was registered at the U.S. Patent and Trademark Office in 1987.

Management  believes that the Company's business depends  substantially upon the
protection  afforded by its granted  and pending  patents,  as well as its trade
secrets, proprietary information and know-how. All contracts outside the Company
involving  any exchange of  confidential  technical  information  are made under
secrecy agreements approved by the Company's patent counsel. In addition, all of
the  management  and  technical  employees  of the Company are  required to sign
non-disclosure agreements respecting the Company's technology.



                         ITEM 2. DESCRIPTION OF PROPERTY

The Company's principal executive offices and testing facility are located at 23
Hudson  Street,  Annapolis,  Maryland,  21401.  The  facility is  equipped  with
emissions  test equipment and machine shop and storage  facilities  necessary to
support the laboratory.  Management  believes that all of the Company's property
is adequately covered by insurance.  The building contains  approximately  6,000
square feet and is being occupied by the Company on a month-to-month basis under
the terms of an operating lease agreement,  pursuant to which the property owner
is required to provide  thirty days notice if he wants the Company to vacate the
premises.  Management  will  seek to  negotiate  a new  long-term  lease for its
facility or search for an  alternative  location in the event that an  agreement
cannot be  reached  for the  existing  premises.  Management  believes  that the
resolution of the uncertainty  with respect to the facility will not result in a
significant interruption in the operations of the Company.



                            ITEM 3. LEGAL PROCEEDINGS

As of the date of this  report,  management  is  aware  of no legal  proceedings
pending against the Company.




                                       8
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



           ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of 1998.



         ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock currently is traded in the over-the-counter market on
the OTC Bulletin Board service under the symbol  "SONX".  The OTC Bulletin Board
is an electronic and screen-based quotation medium operated by Nasdaq. Quotation
information on OTC Bulletin Board stocks is available on  stockbrokers'  desktop
terminals.

The  Company  has never paid cash  dividends  on its  Common  Stock and does not
expect to pay any cash  dividends in the  foreseeable  future.  The high and low
closing  prices of the Common Stock for each  quarterly  period since January 1,
1997 were as follows (These prices, which are drawn from reports provided to the
Company by Nasdaq, reflect inter-dealer prices without mark-ups,  mark-downs, or
commissions, and may not necessarily represent actual transactions.):

     Quarter ended:                        High             Low
                                        ---------          ------

        March 31, 1998                    $1.09             $.56
        June 30, 1998                       .84              .47
        September 30, 1998                  .75              .41
        December 31, 1998                   .65              .38
        March 31, 1999                      .63              .38
        June 30, 1999                       .56              .38
        September 30, 1999                  .53              .35
        December 31, 1999                   .47              .22
        Through March 15, 2000              .51              .31


 As of March 15, 2000, there were 18,293,169 shares issued and outstanding, with
approximately  980  holders  of  record.  The  shares  for  approximately  2,800
additional  beneficial owners of the Common Stock are held of record (in "street
name") by brokers, dealers, banks, and other entities holding such securities of
record in nominee  name or otherwise or as a  participant  in a clearing  agency
registered pursuant to Section 17A of the Securities Exchange Act of 1934. As of
March 15, 2000, a total of 12,382,091  shares of the Company's Common Stock were
reserved for issuance in connection  with the conversion of preferred  stock and
the exercise of warrants and options.



       ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
                            AND RESULTS OF OPERATIONS


Accumulated losses; sources of capital
--------------------------------------

Since its inception in 1980, the Company has generated  cumulative net losses in
excess of $21 million.  Operating funds have been raised  primarily  through the
sale of equity securities in both public and private offerings.  For each of the
last three years,  however,  revenues have  increased  substantially  from prior
levels.

Cash available at the beginning of 1999,  combined with revenue from development
and demonstration programs, met a significant portion of the Company's operating
expenditure  requirements  for the year.  Additional  cash was  provided  by the
exercise of stock options by management,  primarily the Company's president, who
exercised options for the purchase of 250,000 shares of common stock for a total
of $125,000 during 1999. In February 2000 the Company  received cash proceeds of
$99,750 from the exercise of stock  warrants to purchase  285,000  shares of its
common stock.


Financial position and liquidity
--------------------------------

As of March  15,  2000,  the  Company  had  available  cash and  equivalents  of
approximately  $80,000 and  accounts  receivable,  all due from a U.S.  military
prime contractor,  of approximately  $133,000.  Based upon available  resources,
current and projected  spending  levels,  and expected  revenue from current and
anticipated  contracts,  management  is  optimistic  that the Company  will have
sufficient  capital to fund operations  through  December 31, 2000. In the event

                                       9
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


that the award of anticipated contracts is delayed or does not materialize,  and
in the absence of the realization of significant  revenues,  additional  capital
may be necessary to fund  operations  through and beyond that date.  There is no
assurance that such additional  capital will be available or, if available,  can
be obtained on favorable terms.


Salary deferrals by employees
-----------------------------

In order to help conserve the Company's  limited cash resources,  certain of the
Company's  employees  for several  years have  voluntarily  deferred  receipt of
payment of significant portions of their authorized annual salaries upon request
by the  Board  of  Directors.  By  written  agreement  with the  Company,  these
individuals  have consented to the deferral of payment of amounts so accumulated
until the Company has  received  licensing  revenue of at least $2 million or at
such earlier date as the Board of Directors  determines  that the Company's cash
flow is sufficient to allow such payment.  Since January 1, 1997, however, there
has been no further  deferral of salary  requested of the Company's  non-officer
employees.  The conditions that would require repayment of deferred amounts have
yet to occur,  and it is  unlikely  that such  conditions  will  occur  prior to
December 31, 2000.


Results of operations
---------------------

Condensed comparative results:
------------------------------

                                                 1999       1998         1997
                                              ---------   ---------   ---------

  Gross revenue                               $ 324,286   $ 395,213   $ 417,588
  Cost of government/defense sub-contracts                  (69,326)   (111,750)
                                              ---------   ---------   ---------
    Net revenue                                 324,386     325,887     305,838
                                              ---------   ---------   ---------

  Research and development (R&D) expenses       632,441     583,196     558,526
  General and administrative (G&A) expenses     315,649     276,674     334,389
                                              ---------   ---------   ---------
    Total expenses                              948,090     859,870     892,915
                                              ---------   ---------   ---------

    Net loss from operations                   (623,804)   (533,983)   (587,077)

  Gain on sale of marketable securities          43,508     247,144      38,299
  Investment and other income                    10,181      16,477      18,782
                                              ---------   ---------   ---------

    Net loss                                  $(570,115)  $(270,362)  $(529,996)
                                              =========   =========   =========


While net revenue  remained  relatively  the same in 1999 and 1998, the net loss
from  operations  increased  nearly  $90,000,  primarily  as a result  of higher
personnel  costs,  including the costs of consultants.  The net loss for 1999 is
nearly  $300,000  higher than the net loss for 1998 because,  in addition to the
higher  personnel  costs,  $203,636  more in  gains  on the  sale of  marketable
securities were realized in 1998 than in 1999.

Net revenue increased  approximately $20,000 from 1997 to 1998, but the net loss
from operations decreased  approximately $53,000, as an increase in R&D expenses
of almost $25,000 was more than offset by the  combination of higher net revenue
and a decrease in G&A expenses of nearly $58,000.

Gains on the sale of marketable  securities represent the proceeds from the sale
of the  Company's  holdings  in the  common  stock of  Digital  Dictation,  Inc.
(acquired in 1998 by Medquist,  Inc.), the corporation  which in 1995 was merged
with and into the  Company's  inactive  former  subsidiary,  SonoChem,  Inc. The
Company  liquidated most of this investment during 1998 when its value increased
substantially.  The balance of this investment was sold in 1999.









                                       10
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


     Revenue and cost of subcontracts:
     ---------------------------------
                                                 1999        1998        1997
                                              ---------   ---------   ---------

  Government/defense prime contracts          $ 222,866   $ 261,362   $  90,668
  Commercial contracts                          101,420      60,550     207,500
                                              ---------   ---------   ---------
                                                324,286     321,912     298,168
  Revenue from government/defense
       sub-contracts                                         73,301     119,420
                                              ---------   ---------   ---------

    Total revenue                             $ 324,286   $ 395,213   $ 417,588
                                              =========   =========   =========

  Cost of government/defense sub-contracts                $  69,326   $ 111,750
                                                          =========   =========

Total revenue  decreased 18% from 1998 to 1999,  after having  decreased 5% from
1997 to 1998.  Revenue in 1999 exclusive of subcontracts  was nearly the same as
that for 1998.  Changes in annual  revenues  are subject to the number of funded
contracts received, the timing of completion of those contracts,  and the extent
of related subcontracts.  Revenue from commercial contracts, earned primarily in
connection with the Company's DI diesel engine piston technology,  is subject to
the negotiated amount, if any, that an engine manufacturer is willing to provide
in funding to partially offset the development  costs incurred by the Company in
applying its technology to one of the manufacturer's  engines.  Such revenue for
1999 and 1998 includes  $100,000 and $50,000,  respectively,  for a joint engine
application program for the development and testing of prototype SCS pistons for
an engine OEM.  Revenue for 1997  includes  $90,000  related to the  delivery of
prototype Sonex pistons to another major  international  OEM, as well as $90,000
under a  demonstration  program to apply the SCS to a truck diesel  engine for a
third international OEM.

For the past three years the Company has obtained several military contracts for
its heavy fuel engine (HFE) technology.  All contracts to date in this area have
involved the conversion of commercial  gasoline fueled engines used in UAV's and
the like to heavy  fuel  operation.  Two such  contracts  in 1998 and 1997  also
included subcontracts for services performed by outside firms in connection with
the Company's prime  contracts.  The related  revenue for these  subcontracts is
reported  separately above, while payments to these  subcontractors are reported
as a separate  line item of  expenses as "Cost of  subcontracts."  There were no
such subcontracts in 1999.

Management is unable to predict future changes to development and  demonstration
contract  revenue  because the amounts earned to date under  previous  contracts
have been determined through  negotiations with individual  manufacturers  based
upon the level of effort  required and the level of funding,  if any,  that each
manufacturer has been willing to commit.  Management anticipates,  however, that
future revenue may also include  consulting  fees earned while working  together
with   manufacturers   to  optimize   the  results   achieved  on  a  particular
manufacturer's  engine, and,  ultimately,  license fees and royalty revenue once
the Company's technology is placed into production engines by manufacturers. The
future  amounts of such other types of revenue,  however,  cannot be  reasonably
estimated.


     Research and development (R&D) expenses:
     ----------------------------------------
                                                 1999        1998        1997
                                              ---------   ---------   --------

  Personnel (includes stock and options):
    Employee compensation                     $ 314,442   $ 281,886   $ 287,663
    Taxes & benefits                             42,761      39,676      41,071
    Consultants, including expenses             106,277      99,382      63,864
                                              ---------   ---------   ---------
    Total personnel                             463,480     420,944     392,598
  Project parts and supplies                     44,810      59,169      30,869
  Occupancy                                      44,044      46,939      43,263
  Depreciation, patent amortization
     and renewal fees                            61,455      33,614      58,048
  Software engineering                                        5,000      20,000
  Other expenses                                  7,364      17,530      13,748
                                              ---------   ---------   ---------

    Total R&D                                 $ 632,441   $ 583,196   $ 558,526
                                              =========   =========   =========



                                       11
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Total R&D expenses increased by $49,245,  or 8%, from 1998 to 1999, as increases
in personnel  costs and  depreciation  and patent  amortization  were  partially
offset by a decrease in project parts and supplies and other expenses. Total R&D
expenses  increased  by  $24,670,  or 4%,  from 1997 to 1998,  as  increases  in
personnel  costs  and  project  parts  and  supplies  were  partially  offset by
decreases in software  engineering fees,  depreciation,  and patent  maintenance
fees and amortization.

The increase in personnel costs from 1998 to 1999 of $42,536,  or 10%,  includes
an increase in salaries of $32,556, or 12%, resulting primarily from an increase
in the wage rates of non-officer  technical  personnel effective January 1, 1999
and the award of higher bonus  compensation  for 1999 versus 1998. While awarded
in 1999,  these  bonuses  remain  accrued and will be paid only if the Company's
cash flow is sufficient.  Higher  consulting  charges were also incurred in 1999
related to the Company's R&D  supervisor and corporate  liaison in Europe.  This
individual,  a former officer of the Company,  is  compensated  primarily in the
form of  restricted  stock  for work  performed  in  Europe  based on  part-time
service,  while for time spent in Annapolis  he receives  cash  compensation,  a
portion of which is deferred,  for full-time  service.  In the fourth quarter of
1998 his annual rate of compensation was increased for the first time in several
years,  accounting  for most of the increase in consulting  charges from 1998 to
1999.  (Compensation  charges for stock  issued for  services is measured at the
market price on the date of award or at the agreed-upon  value of the services.)
The  remaining  increase  in  consulting  charges  reflects  an  increase in the
services of a consultant  hired in late 1998 to assist in the preparation of the
Company's proposal response to the Justice  Department's  Consent Decree against
the diesel  engine  manufacturers.  This  consultant  now serves as the  program
manager for the Company's 4-stroke heavy fuel engine contract with the military.

The increase in personnel costs from 1997 to 1998 of $28,346,  or 7%, was due to
a $35,518  increase in consulting  charges offset by a $7,172 decrease in wages,
taxes and benefits. Most of the increase in consulting expense relates to higher
charges for the  compensation  and expenses of the Company's R&D  supervisor and
corporate  liaison in Europe.  He was asked to spend  considerably  more time in
Annapolis for full-time  services in 1998 as opposed to 1997. A further increase
resulted  from the hiring in late 1998 of the  consultant  who assisted with the
response to the Consent  Decree.  The net decrease in wages,  taxes and benefits
consisted of an increase  resulting  from the  resignation of an engineer in the
second quarter of 1997 and the hiring of a new engineer in the fourth quarter of
1997,  offset by a  reduction  in charges for  compensation  paid in the form of
stock or options.

Project parts and supplies expense,  which includes motor fuel, engine parts and
other  items  used or  consumed  in  engine  testing  and in the  machine  shop,
decreased by $14,359,  or 24%, from 1998 to 1999. Such costs fluctuate from year
to year  depending on the number and type of engines being tested.  Charges were
higher in 1998 because of greater  expenditures  for funded  contracts and other
research  not  performed  under  contract,  particularly  with  respect  to  the
Company's HFE work, than in either 1999 or 1997.

Occupancy expenses have remained relatively consistent for the past three years,
primarily because the annual rent allocated to R&D,  approximately  $34,000, has
not changed  during that time.  Rent expense is allocated  80% to R&D and 20% to
G&A based on the proportionate share of floor space devoted to each category.

Total charges for depreciation,  patent maintenance fees and amortization of the
capitalized  costs of patents and  technology  increased from $33,614 in 1998 to
$61,455 in 1999,  primarily because in 1999 the Company wrote-off  approximately
$25,500 in unamortized costs of patents abandoned while there was no such charge
in 1998.  From 1997 to 1998 the Company  experienced a reduction in the total of
such  charges  of  $24,434  due to the fact that in 1997 the  Company  wrote-off
approximately  $24,500  in  unamortized  costs of  patents  abandoned.  Software
engineering  charges for 1998 and 1997  represent  amounts paid to the Company's
former president for programming assistance with a technology design manual that
is to be used to teach engineers from  prospective  customers how to incorporate
the elements of the SCS into pistons.
















                                       12
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


     General and administrative (G&A) expenses:
     ------------------------------------------

                                                 1999        1998        1997
                                              ---------   ---------   ---------

  Personnel (includes stock and options):
    Employee compensation                     $ 103,296   $ 110,079   $ 131,160
    Consulting fees                              71,115
    Other option compensation                    29,760      44,644      44,643
    Taxes & benefits                              9,374      12,066      15,601
                                              ---------   ---------   ---------
    Total personnel                             213,545     166,789     191,404
  Occupancy                                      11,406      11,398      12,106
  Travel                                         13,550      10,328      27,761
  Proxy solicitation & annual meeting            18,201      22,701      18,554
  Legal fees                                      2,069       8,120      21,641
  Audit fees                                      8,580       8,000      12,454
  Stock transfer agent fees                       9,027       9,565       8,106
  Other expenses                                 39,451      39,773      42,363
                                              ---------   ---------   ---------
    Total G&A                                 $ 315,649   $ 276,674   $ 334,389
                                              =========   =========   =========


Total G&A expenses increased by $38,975, or 14%, from 1998 to 1999 primarily due
to the extensive use of  consulting  services in 1999,  offset in part by slight
decreases  in salaries  and  payroll  taxes.  Total G&A  expenses  decreased  by
$57,715,  or 17%, from 1997 to 1998 due to decreases in personnel  costs,  legal
and audit fees, and travel charges.

The $46,756, or 28%, increase in personnel costs from 1998 to 1999 resulted from
charges  relating to the  Company's  employing  the services of two  consultants
beginning  in 1999,  offset in part by decreases  in employee  compensation  and
other stock option  compensation.  Total salaries  decreased $6,783, or 6%, from
1998 to 1999 as an increase  related to a bonus  award  accrued in 1999 was more
than  offset by a  decrease  in wages  for an  administrative  assistant,  which
position  became vacant early in 1999.  Consulting  fees include $20,000 payable
annually to the president of the Company,  who is engaged on a part-time  basis,
under an agreement  effective in January 1999 that recognizes an increase in the
level of services  provided.  Consulting fees of  approximately  $50,000 in 1999
represent  charges for the services in regard to business  opportunities for the
SCS HFE  technology  by the  consultant  hired in late 1998 to  assist  with the
response to the Consent Decree. Of this total,  $24,000  represents fees paid in
options to purchase  Company stock.  (Compensation  cost for options granted for
services is measured as the excess, if any, of the market price of the Company's
stock at the date of grant over the exercise price of the option granted,  or at
the agreed-upon  value of the services.)  Other option  compensation  represents
annual  non-cash  charges in connection  with a below-market  option to purchase
stock owned by the Company's  principal  shareholder  granted in 1997 to the new
president  of the  Company  in order to induce  him to take that  position.  The
decrease in such charges from 1998 to 1999 results from a correction  to reflect
the actual 5-year  vesting  period versus the 4-year period  improperly  used to
calculate the expense in 1998 and 1997.

The $24,615,  or 13%, decrease in personnel costs from 1997 to 1998 results from
a decrease in employee  compensation caused by the termination of the employment
as of the end of the third  quarter of 1997 of the Company's  former  president,
who had been  employed  on a  part-time  basis,  and higher  charges in 1997 for
options granted to employees,  offset in part by the hiring of an administrative
assistant in the fourth quarter of 1998.

The  significant  decline  in travel  expenses  from  1997 to 1998 is  primarily
attributed  to the  extensive  travel  required  by members of the Board in 1997
while  negotiating  a  piston  licensing  agreement  with an  overseas  OEM that
ultimately  failed to be consummated.  Legal fees decreased  significantly  from
1997 to 1998 as charges from the Company's securities counsel were significantly
higher in 1997 due to work in 1996,  some of which was not  billed  until  1997,
associated with an SEC registration  statement that eventually was not filed, as
well as for advice on  restructuring  certain stock warrants and undertaking two
private  financings.  A decline in charges from the  Company's  patent  attorney
resulted  from the fact  that  significant  services  were  used in 1997 for the
preparation  of the  proposed  piston  licensing  agreement  that  failed  to be
consummated.  Legal fees declined  again from 1998 to 1999 due to fewer services
required of the Company's attorneys.







                                       13
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Adoption of new accounting pronouncements
-----------------------------------------

The  adoption  by the Company in fiscal 2000 of new  accounting  pronouncements
which have a delayed effective date is not expected to have a material impact on
the financial statements of the Company.




                          ITEM 7. FINANCIAL STATEMENTS

Index to financial statements:

     Reports of independent accountants

     Financial statements:

       Balance sheets as of December 31, 1999 and 1998

       Statements  of  operations,   accumulated   deficit  and  comprehensive
       income/loss for the three years ended December 31, 1999

       Statements of paid-in capital for the three years ended December 31, 1999

       Statements of cash flows for the three years ended December 31, 1999

     Notes to financial statements




                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
Stockholders of Sonex Research, Inc.

We have audited the  accompanying  balance sheets of Sonex  Research,  Inc. (the
"Company")  as of December  31, 1999 and 1998,  and the  related  statements  of
operations,  accumulated deficit and comprehensive income/(loss), and cash flows
for  each  of  the  three  years  ended  December  31,  1999,   1998  and  1997,
respectively. These financial statements are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Sonex  Research,  Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for  each  of  the  three  years  ended  December  31,  1999,   1998  and  1997,
respectively, in conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  described  in  Note 3 to the
financial   statements,   the  Company's  ability  to  commence   generation  of
significant  revenue  and  ultimately  achieve  profitable   operations  remains
uncertain.  The Company has incurred significant net losses since its inception.
The Company's future prospects depend upon its ability to demonstrate commercial
viability of its products and ultimately  achieve profitable  operations,  which
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note 3. The  financial  statements  do not  include any  adjustments  that might
result from the outcome of this uncertainty.


C. L. STEWART & COMPANY

Annapolis, Maryland
March 2, 2000




                                       14
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



                              SONEX RESEARCH, INC.

                                 BALANCE SHEETS

                                                             December 31,
                                                       ------------------------
                                                           1999         1998
                                                       -----------  -----------

                Assets

Current assets
 Cash and equivalents                                  $    57,768  $   336,458
 Marketable securities, available-for-sale (Note 4)                      29,460
 Accounts receivable, including unbilled costs
   and estimated earnings on uncompleted contracts
   of $25,690 in 1998                                       77,461      102,485
 Prepaid expenses                                           29,836       28,837
 Loans to officers and employees (Note 5)                   22,500       27,500
                                                       -----------  -----------
     Total current assets                                  187,565      524,740

Patents and technology (Note 6)                            219,776      243,600

Property and equipment (Note 7)                             83,968       34,532
                                                       -----------  -----------

        Total assets                                   $   491,309  $   802,872
                                                       ===========  ===========


   Liabilities and Stockholders' Equity/(Deficit)

Current liabilities
 Accounts payable and other accrued liabilities        $    49,212  $    46,979
 Accrued subcontract costs on uncompleted contracts                      16,456
 Accrued compensation (Note 8)                              79,381       51,477
                                                       -----------  -----------
     Total current liabilities                             128,593      114,912
                                                       -----------  -----------

Deferred compensation (Note 9)                             763,744      714,039
                                                       -----------  -----------

Stockholders' equity/(deficit) (Note 11)
 Preferred stock, $.01 par value - 2,000,000 shares
   issued; 1,540,001 shares outstanding                     15,400       15,400
 Common stock, $.01 par value - shares issued and
   outstanding: 18,008,169 in 1999 and
   17,642,860 in 1998                                      180,082      176,429
 Additional paid-in capital                             20,430,476   20,209,503
 Accumulated other comprehensive income: unrealized
   increase in value of marketable securities                            29,460
 Accumulated deficit                                   (21,026,986) (20,456,871)
                                                       -----------  -----------
     Total stockholders'equity/(deficit)                  (401,028)     (26,079)
                                                       -----------  -----------
Commitments (Note 14)

  Total liabilities and stockholders'equity/(deficit)  $   491,309  $   802,872
                                                       ===========  ===========


















    The accompanying notes are an integral part of the financial statements.

                                       15
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



                              SONEX RESEARCH, INC.

                  STATEMENTS OF OPERATIONS, ACCUMULATED DEFICIT

                         AND COMPREHENSIVE INCOME/(LOSS)



                                                 Year ended December 31,
                                       ---------------------------------------
                                           1999          1998          1997
                                       -----------   -----------   -----------
Revenue
 Development contracts                 $   324,286   $   321,912   $   298,168
 Subcontracts                                             73,301       119,420
                                         ---------     ---------     ---------
                                           324,286       395,213       417,588
                                         ---------     ---------     ---------
Costs and expenses
 Research and development                  632,441       583,196       558,526
 Cost of subcontracts                                     69,326       111,750
 General and administrative                315,649       276,674       333,389
                                         ---------     ---------     ---------
                                           948,090       929,196     1,004,665
                                         ---------     ---------     ---------

Net loss from operations                  (623,804)     (533,983)     (587,077)
                                         ---------     ---------     ---------

Other income and expense
 Investment and other income                10,181        16,477        18,782
 Gain on sales of
   marketable securities                    43,508       247,144        38,299
                                         ---------     ---------     ---------

Net loss                                  (570,115)     (270,362)     (529,996)

Deficit accumulated during
 development stage
  Beginning of period                  (20,456,871)  (20,186,509)  (19,656,513)
                                      ------------  ------------  ------------

  End of period                       $(21,026,986) $(20,456,871) $(20,186,509)
                                      ============  ============  ============


Net loss per share                          $ (.03)       $ (.02)       $ (.03)
                                            ======        ======        ======

Weighted average number of
 common shares outstanding              17,765,110    17,572,147    17,031,016
                                        ==========    ==========    ==========



Comprehensive income/(loss):

Net loss                                $ (570,115)   $ (270,362)   $ (529,996)

Other comprehensive income - unrealized
  gains on marketable securities
     Arising during the period                            19,242        87,900
     Reclassification of gains
       reported in income                  (29,460)     (106,982)       (7,500)
                                        ----------    ----------    ----------

Total comprehensive income/(loss)       $ (599,575)   $ (358,102)   $ (449,596)
                                        ==========    ==========    ==========











    The accompanying notes are an integral part of the financial statements.

                                       16
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



                              SONEX RESEARCH, INC.

                          STATEMENTS OF PAID-IN CAPITAL


                        Price  Preferred stock     Common stock      Additional
                         per   ($.01 par value)   ($.01 par value)    paid-in
                        share   Shares   Amount   Shares    Amount    capital
                        ----- --------- ------- ---------- -------- -----------


Balance, January 1, 1997      1,550,001 $15,500 16,214,020 $162,140 $19,165,535

January - December
 option exercises        $.50                      352,834    3,528     172,889
January - June
 option exercises         .75                       17,000      170      12,580
March private placements  .75                      775,519    7,755     573,884
October - conversion
 (.35 to 1)                     (10,000)   (100)    28,571      286        (186)
December for services    1.00                        5,962       60       5,902
Amortization of deferred
 compensation from
 stock options                                                          104,456
                              ---------  ------ ----------  -------  ----------
Balance, December 31, 1997    1,540,001  15,400 17,393,906  173,939  20,035,060

January - December
 option exercises         .50                      181,500    1,815      88,935
March for services        .625                      20,000      200      12,300
June for services         .75                        7,949       80       5,882
September for services    .44                       26,813      268      11,463
December for services     .50                       12,692      127       6,219
Stock option compensation                                                 5,000
Amortization of deferred
 compensation from
 stock options                                                           44,644
                              ---------  ------ ----------  -------  ----------

Balance, December 31, 1998    1,540,001  15,400 17,642,860  176,429  20,209,503

March for services        .44                       20,975      210       9,098
June for services         .46                       17,925      179       8,071
September for services    .38                       36,923      369      13,593
December for services     .32                       36,803      368      11,478
April and December
 option exercises         .50                      255,000    2,550     124,950
Correction of stock ledger                          (2,317)     (23)         23
Stock option compensation                                                24,000
Amortization of deferred
 compensation from
 stock options                                                           29,760
                              ---------  ------ ----------  -------  ----------

Balance, December 31, 1999    1,540,001 $15,400 18,008,169 $180,082 $20,430,476
                              ========= ======= ========== ======== ===========























    The accompanying notes are an integral part of the financial statements.

                                       17
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                              SONEX RESEARCH, INC.
                          (A Development Stage Company)

                            STATEMENTS OF CASH FLOWS



                                                   Year ended December 31,
                                             ---------------------------------
                                                1999        1998        1997
                                             ---------   ---------   ---------
Cash flows from operating activities:
 Net loss                                    $(570,115)  $(270,362)  $(529,996)
 Adjustments to reconcile net loss to net
    cash used in operating activities
  Depreciation                                  13,573       8,955      13,747
  Amortization of patents                       37,920      12,933      72,394
  Amortization of deferred compensation
    from stock options                          29,760      44,644     104,456
  Current charges paid in stock or options      67,366      41,539       5,962
  Gain on sale of marketable securities        (43,508)   (247,144)    (38,299)
  (Increase) decrease in accounts receivable    25,024     107,603    (160,088)
  (Increase) decrease in prepaid expenses         (999)      7,447       2,408
  Increase (decrease) in current liabilities    13,680     (72,308)     (8,150)
  Increase (decrease) in deferred
     compensation                               49,706      65,747      52,671
                                             ---------   ---------   ---------
Net cash used in operating activities:        (377,593)   (300,946)   (484,895)
                                             ---------   ---------   ---------

Cash flows from investing activities:
  Proceeds from sale of marketable securities   43,508     247,144      38,299
  (Increase) decrease in loans to employees      5,000      (5,000)      9,406
  Acquisition of property and equipment        (63,009)    (26,281)     (2,945)
  Additions to patents and technology          (14,096)    (24,791)    (64,828)
                                             ---------   ---------   ---------
Net cash provided by (used in)
investing activities:                          (28,597)    191,072     (20,068)
                                             ---------   ---------   ---------

Cash flows from financing activities:
  Issuance of stock - private placement                                581,639
  Issuance of stock - exercise of options      127,500      90,750     189,167
                                             ---------   ---------   ---------
Net cash provided by financing activities:     127,500      90,750     770,806
                                             ---------   ---------   ---------

Increase (decrease) in cash:                  (278,690)    (19,124)    265,843

Cash at beginning of period:                   336,458     355,582      89,739
                                             ---------   ---------   ---------
Cash at end of period:                       $  57,768   $ 336,458   $ 355,582
                                             =========   =========   =========



























    The accompanying notes are an integral part of the financial statements.

                                       18
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                              SONEX RESEARCH, INC.

                          NOTES TO FINANCIAL STATEMENTS


NOTE 1 - THE COMPANY

Sonex Research, Inc. has developed a proprietary technology,  known as the Sonex
Combustion  System  (SCS),  which  improves the  combustion  of fuel in internal
combustion  engines through  modification of the pistons in large engines or the
cylinder heads in small  engines.  Variations of the Company's  technology  have
been applied to all types of internal combustion  engines,  including those used
in personal and commercial vehicles as well as engines used in fixed or portable
utility   applications.   Sonex  concentrates  its  commercial  efforts  on  the
application of the SCS to the reduction of exhaust  emissions in direct injected
turbocharged  diesel  engines.  The  Company's  objective  is to  execute  broad
agreements with engine  manufacturers  and their piston suppliers for industrial
production of SCS pistons under license from Sonex.


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Presentation of financial statements
------------------------------------

Certain reclassifications have been made to
the financial  statements  of the prior years to conform to the  classifications
used in 1999.


Cash and equivalents
--------------------

The Company's By-Laws restrict the types of permitted  investments to securities
issued by the U.S. Treasury, savings accounts insured by the U.S. Government, or
investment  companies that invest in  obligations of the U.S.  Government or its
agencies. The Company considers all short-term,  highly liquid investments which
are convertible into cash within three months or less to be cash equivalents.


Marketable securities
---------------------

Securities  held by the Company are classified as  "available-for-sale"  in
accordance  with Statement of Financial  Accounting  Standards  (SFAS) No. 115 -
"Accounting for Certain Investments in Debt and Equity Securities"; accordingly,
unrealized  gains and losses with respect to such  securities  are reported as a
separate  component  of  stockholders'  equity.  Realized  gains and  losses are
reported in the Company's statement of operations.


Patents and technology
----------------------

The  costs  associated  with the  filing of patent  applications  are  deferred.
Amortization is recorded on a straight-line  basis over the remaining legal life
of patents, commencing in the year in which the patent is granted. Costs related
to patent applications which ultimately fail to result in the grant of a patent,
either through  rejection by patent  authorities  or through  abandonment by the
Company, are charged to operations at the time such determination is made.


Property and equipment
----------------------

Property  and  equipment  is stated at cost or, in the case of leased  equipment
under  capital  leases,  at the present  value of future  lease  payments,  less
accumulated  depreciation.  Major renewals and  betterments  are capitalized and
ordinary  repair and maintenance  expenditures  are charged to operations in the
year  incurred.  Depreciation  is computed  using the straight  line method over
useful lives of three to seven years.


Revenue recognition
-------------------

Revenue  derived from  development  contracts is  recognized  upon the Company's
completion of the milestones  and/or submission of progress reports specified in
each contract.  Commercial  development  contracts are executed in situations in
which an engine  manufacturer is willing to provide funding to partially  offset


                                       19
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


the development  costs incurred by the Company in applying its technology to one
of the  manufacturer's  engines.  Generally,  commercial  development  contracts
require  the  Company  to  demonstrate  that  the  manufacturer's  engine,  when
modifiedwith the Company's technology,  can meet certain emissions reduction and
performance  goals  specified  in the  contract.  In addition,  these  contracts
sometimes  provide that payment of part of the contract amount will be made only
if the Company meets the specified  goals.  The Company is not required to repay
any funds received in connection with its development contracts.

Development  contracts  are  executed  for funding  supplied by a United  States
Government (the "Government")  agency or defense contractor for proof-of-concept
demonstration programs.  Certain of these contracts require a performance period
of several months and/or require the Company to serve as prime contractor with a
substantial  portion of the related  project being assigned to a  subcontractor.
Revenue  and costs for these  contracts  that  require  the  Company  to provide
stipulated   services  for  a  fixed  price  have  been  recognized   using  the
percentage-of-completion   method  of  accounting  by  relating  contract  costs
incurred to date to total  estimated  contract costs at completion.  Subcontract
revenue  and  costs,   along  with  the  associated   receivables   and  accrued
liabilities,  are reflected in the Company's  financial  statements  because the
Company is  contractually  responsible  for the  ultimate  acceptability  of the
project by the Government.


Stock-based  compensation
-------------------------

The Company  accounts for  stock-based  compensation  using the intrinsic  value
method  prescribed  in  Accounting  Principles  Board  (APB)  Opinion  No.  25 -
"Accounting for Stock Issued to Employees".  Under APB No. 25, compensation cost
is measured as the excess,  if any, of the quoted  market price of the Company's
stock at the  date of  grant  over the  exercise  price of the  option  granted.
Compensation  cost for stock  options,  if any, is  recognized  ratably over the
vesting  period.  The  Company  provides  additional  pro forma  disclosures  as
required under SFAS No. 123 - "Accounting for Stock-based Compensation".


Comprehensive income
--------------------

SFAS Statement No. 130 - "Reporting Comprehensive Income",  effective for fiscal
years  beginning after December 15, 1997 and adopted by the Company in 1998 on a
retroactive  basis,  defines  comprehensive  income  as net  income  plus  other
revenues,  expenses,  gains and  losses  that are  excluded  from net income and
included  separately in the  stockholders'  equity section of the balance sheet.
The only adjustments  necessary to arrive at the Company's  comprehensive income
relate to unrealized  gains, and the subsequent  effect of recognized  gains, on
marketable securities.


Net loss per  share
-------------------

Net loss per share is computed based upon the weighted  average number of common
shares  outstanding  during the year.  Potentially  dilutive  securities,  which
include convertible preferred stock, stock options and warrants,  would serve to
reduce the loss per share.


Use of estimates
----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial  statements and accompanying notes.
Actual results may differ from those estimates.


NOTE 3 - LIQUIDITY

Management  recognizes that the Company's history of operating losses,  level of
available funds, and revenue from current and future development  contracts,  in
relation to projected expenditures,  raise substantial doubt as to the Company's
ability   to   commence   generation   of   significant    revenues   from   the
commercialization  of the  SCS and  ultimately  achieve  profitable  operations.
Accordingly,  the Company will continue to minimize its  operating  expenditures
through a number of measures,  including the continued  deferral by its officers
of portions  of their  salaries.  Based upon  available  resources,  current and
projected  spending  levels,  and expected  revenue from current and anticipated
contracts,  management  is  optimistic  that the  Company  will have  sufficient
capital to fund  operations  through  December 31,  2000.  In the event that the

                                       20
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


award of anticipated  contracts is delayed or does not  materialize,  and in the
absence of the realization of significant  revenues,  additional  capital may be
necessary to fund operations through and beyond that date. There is no assurance
that such additional capital will be available or, if available, can be obtained
on favorable terms.


NOTE 4 - MARKETABLE SECURITIES

In 1995 the Company's former inactive  subsidiary,  SonoChem,  Inc.,  effected a
1:10 reverse split of all of its  outstanding  shares of common  stock,  and was
merged with and into a privately held medical  transcription  services  company.
The name of the surviving  corporation  was changed to Digital  Dictation,  Inc.
("Digital") and the officers and directors of the privately held company, two of
whom  are  directors  of  the  Company  and  general  partners  of  its  largest
shareholder,  Proactive  (see Note 11),  became the  directors  and  officers of
Digital.  At the  time of this  merger,  the  Company's  carrying  basis  in the
SonoChem stock of zero was considered to be its cost basis in the Digital stock,
and no gain or loss was  recorded in the accounts of the Company with respect to
this  transaction.  The shares of Digital stock received by the Company pursuant
to this  merger  became  available  for public  trading in April  1996,  and the
Company  began to  liquidate  its  holdings.  In 1998  Digital  was  acquired by
Medquist, Inc., its largest competitor,  in a share exchange. Shares of Medquist
also trade in the public market.

This  investment is accounted for in accordance with SFAS No. 115 and classified
as a current asset as a security that is "available-for-sale".  Accordingly, the
Company's  investment  in the  Digital  or  Medquist  shares  still held at each
financial statement date is recorded at its aggregate fair value at that date. A
corresponding  amount,  representing  the aggregate  unrealized gain in the fair
value of this investment in excess of its cost basis at each financial statement
date, is reported as a separate component of stockholders' equity. The aggregate
net proceeds from the sale of these  securities  are  recognized as gains in the
year of sale.


NOTE 5 - LOANS TO OFFICERS AND EMPLOYEES

Loans to officers  and  employees  represent  the  remaining  balance of amounts
advanced in prior years for the  payment of income tax  liabilities  incurred by
these  individuals  upon their receipt of  compensation in the form of shares of
the  Company's  common  stock,  and  recent  short-term  loans  made to  Company
personnel.  The loans, which are non-interest  bearing,  are secured by deferred
salaries  payable  to  each of the  borrowers.  The due  date of the  loans  was
recently extended to December 31, 2000.


NOTE 6 - PATENTS AND TECHNOLOGY

The capitalized costs of patents and technology consists of the following:

                                                      December 31,
                                                 ----------------------
                                                   1999          1998
                                                 --------      --------
    Capitalized costs                            $288,522      $307,318
    Accumulated amortization                      (68,746)      (63,718)
                                                 --------      --------
                                                 $219,776      $243,600
                                                 ========      ========

The Company  continues to conduct its own research  and  development  activities
which  have  resulted  in  additional   proprietary   technology   and  patents.
Development  of  commercial  applications  of  certain  elements  of the SCS has
commenced and management believes the capitalized cost of patents and technology
will be recovered through revenue derived from the licensing of such technology.
Management  closely  monitors the patent  application  process and other factors
which may affect the economic value of the Company's technology, and will reduce
the capitalized cost of patents and technology  should the recovery of such cost
no longer be sustainable.












                                       21
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


NOTE 7 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:
                                                      December 31,
                                                 ----------------------
                                                   1999          1998
                                                 --------      --------

    Shop equipment                               $456,159      $407,687
    Office equipment                               37,457        22,920
    Vehicle                                                      11,053
                                                 --------      --------
                                                  493,616       441,660
    Accumulated depreciation                     (409,648)     (407,128)
                                                 --------      --------
                                                 $ 83,968      $ 34,532
                                                 ========      ========


NOTE 8 - ACCRUED COMPENSATION

Accrued  compensation  consists  of the  following  amounts  payable  to current
employees:

                                                      December 31,
                                                 ----------------------
                                                   1999          1998
                                                 --------      --------

        Accrued vacation pay                     $ 48,000      $ 45,000
        Accrued bonuses                            25,000
        Accrued wages at year-end                   6,381         6,477
                                                 --------      --------
                                                 $ 79,381      $ 51,477
                                                 ========      ========


The Company's only liability to employees for future compensated absences is for
accrued but unused  vacation pay. The amount of vacation pay earned by employees
is  determined  by job  classification  and length of service.  Such amounts are
payable upon  termination  of employment and are not subject to the terms of the
Company's  written  agreement with current and former employees to defer payment
of portions  of their  salaries  as  described  in Note 9. The amount of accrued
vacation  included above that was payable to the Company's  officers at December
31, 1999 and 1998 was $37,400 and $35,800, respectively.

In December 1999 the Company  awarded bonuses  totaling  $25,000 to its officers
and  employees  with the  stipulation  that  payment  of such  bonuses  is to be
deferred  until  the  Board of  Directors  determines  that the  Company's  cash
resources are sufficient to enable such payments.


NOTE 9 - DEFERRED COMPENSATION

In order to help conserve the Company's  limited cash resources,  certain of the
Company's  employees  for several  years have  voluntarily  deferred  receipt of
payment of significant portions of their authorized annual salaries upon request
by the  Board  of  Directors.  By  written  agreement  with the  Company,  these
individuals  have consented to the deferral of payment of amounts so accumulated
until the Company has  received  licensing  revenue of at least $2 million or at
such earlier date as the Board of Directors  determines  that the Company's cash
flow is sufficient to allow such payment.  Since January 1, 1997, however, there
has been no further deferral of salary requested of the Company's  non-executive
employees.

Deferred compensation outstanding is payable to the following classifications of
personnel:

                                                      December 31,
                                                 ----------------------
                                                   1999          1998
                                                 --------      --------

        Current executive officers               $431,137      $385,938
        Current employees and consultants          62,088        57,582
        Former employees                          270,519       270,519
                                                 --------      --------
                                                 $763,744      $714,039
                                                 ========      ========



                                       22
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


The  conditions  that would  require  repayment of deferred  amounts have yet to
occur,  and it is unlikely that such conditions will occur prior to December 31,
2000.  Accordingly,  such deferred  compensation  is reported  separately in the
accompanying balance sheet as a non-current liability.  From time to time in the
past,  however,  portions of such  deferred  amounts  have been paid through the
issuance to the employees of shares,  or discounted  options to purchase shares,
of the Company's common stock.

In 1993  two  former  officers  of the  Company  initiated  litigation  upon the
termination of their  employment,  demanding  immediate full payment of deferred
salaries and a judgment under the Maryland Wage Payment and Collection Law of up
to three times the amount owed.  The  litigation  was concluded in 1996 when the
Maryland  Court of  Special  Appeals  rejected  this  demand  and ruled that the
written agreement to defer compensation was a valid and enforceable contract.


NOTE 10 - INCOME TAXES

The  Company  has not  incurred  any  federal or state  income  taxes  since its
inception  due to operating  losses.  At December 31, 1999,  the Company had net
operating loss ("NOL") carryforwards of approximately $16.2 million available to
offset  future  taxable  income.  Net  operating  losses  generated  in 1998 and
subsequent  years  may be  carried  forward  twenty  years,  while  such  losses
generated  in 1997 and prior  years may be carried  forward  fifteen  years.  If
certain substantial changes in the Company's ownership should occur, there would
be an  annual  limitation  on the  amount  of  the  carryforwards  which  can be
utilized.  Sales of  marketable  securities  have also  generated  capital  loss
carryforwards for income tax purposes. Capital loss carryforwards,  which expire
after five years, may only be used to offset future capital gains. The Company's
tax loss carryforwards are summarized as follows:


         Expiration                  NOL's           Capital
        ------------              -----------       ---------

            2000                  $ 1,105,399
            2001                    1,748,874       $ 201,681
            2002                    1,837,965         133,400
            2003                    1,344,816         365,147
            2004                    1,185,181          14,970
         2005 - 2012                7,995,726
         2018 - 2019                  941,695
                                  -----------       ---------

                                  $16,159,656       $ 715,198
                                  ===========       =========

The difference between the net operating loss carryforwards  described above and
the  accumulated   deficit  reported  in  these  financial   statements  results
principally  from  (1)  temporary  differences  for  income  tax  and  financial
reporting  purposes  relating  to the  amounts  and timing of  deductibility  of
deferred  salaries and compensation  related to the grant of stock options,  and
the  differences  in  theaccounting  for the Company's  investment in its former
consolidated subsidiary for income tax and financial reporting purposes, and (2)
permanent  differences  principally due to the  non-deductibility for income tax
purposes of a significant  charge to operations for debt  conversion  expense in
1988 and the  non-deductibility of compensation related to the exercise of stock
options recorded previously in the Company's accounts.

The  potential  income tax  benefit of these loss  carryforwards  and  temporary
differences of approximately $6.2 million has not been recorded in the financial
statements  due  to the  uncertainty  of  realization  based  on  the  Company's
financial  performance  to date.  Since 1995 net  operating  loss  carryforwards
aggregating $1,927,361 have expired unused.


NOTE 11 - CAPITAL STOCK

Authorized capital stock
------------------------

The Company is presently authorized to issue 48 million shares of $.01 par value
common stock and 2 million shares of $.01 par value convertible preferred stock.
All of the  authorized  shares of  preferred  stock,  along  with  common  stock
purchase  warrants,  were issued for $2 million in February 1992 (the "Preferred
Stock Investment") to a small number of individuals who qualified as "accredited
investors"  pursuant to Rule 501 of Regulation D of the  Securities  Act of 1933
(the  "Act") and to  Proactive  Partners,  L.P.  and  certain of its  affiliates
("Proactive"),  who became the largest  beneficial owner of the Company's common
stock by virtue of the acquisition of the convertible preferred stock and common
stock purchase warrants.

                                       23
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


The preferred  stock has priority in liquidation  over the common stock,  but it
carries no stated  dividend.  The holders of the  preferred  stock,  voting as a
separate class,  have the right to elect that number of directors of the Company
which  represents a majority of the total  number of  directors.  The  preferred
stock is  convertible  at any time at the option of the holder into common stock
at the rate of $.35 per share of common stock.  As of December 31, 1999, a total
of 459,999 shares of preferred stock had been converted into 1,314,278 shares of
common stock.


Private placements of common equity
-----------------------------------

In February  1997 the  Company  notified  the holders of all of its  outstanding
warrants to purchase shares of its common stock, issued in private financings in
February 1992, June 1994, June 1995 and December 1995, of proposed amendments to
such  warrants,  offered  because  the  Company was unable to complete a planned
registration  during 1996 of the common stock  issuable upon the exercise of the
warrants. The proposed amendments included, in various combinations,  extensions
of the expiration  dates,  reductions in the exercise prices,  reductions in the
number of  warrants,  provisions  for  cashless  exercise,  and  provisions  for
"piggy-back" registration rights.


The amendments  proposed for the warrants issued in February 1992 (the "February
1992  Warrants")  were  also  offered  in  connection  with  a  $250,000  equity
investment  proposal  from  Proactive  accepted  by the  Board of  Directors  in
February 1997. In exchange for this cash investment,  Proactive received 333,333
shares of common  stock and  five-year  warrants to purchase  166,666  shares of
common  stock at an  exercise  price of $.75 per  share,  along with a number of
amendments to the February 1992 Warrants. One other participant in the Preferred
Stock Investment,  who also agreed to make an additional  investment in February
1997, also received the amendments to the February 1992 Warrants in exchange for
his cash  investment of $1,639,  pursuant to which he also received 2,186 shares
of common stock and five-year  warrants to purchase 1,093 shares of common stock
at an exercise price of $.75 per share.

In March  1997 the  Company  completed  a private  financing  in which it raised
$330,000 from a small number of the Company's  shareholders  who participated in
previous  private  financings  of the Company and who  qualified  as  accredited
investors. A total of 440,000 shares of the Company's common stock and five-year
warrants to purchase an  additional  220,000  shares of common stock at $.75 per
share were issued in this financing.

The offer and sale of a total of 775,519  shares of common  stock and  five-year
warrants to  purchase a total of 387,759  shares of common  stock in  connection
with the February 1997 and March 1997  financings  described above satisfied the
conditions of Rule 506 of Regulation D of the Act and, as such, were exempt from
the  registration  requirements  of  Section  5 of the Act as  transactions  not
involving any public offering within the meaning of Section 4(2) of the Act.

No  separate  value  has been  reflected  in the  financial  statements  for the
warrants issued in the above transactions based on management's  belief that the
separate fair value of such warrants is not significant.


NOTE 12 - STOCK OPTIONS

The Company  maintains a non-qualified  stock option plan (the "Plan") which has
made available for issuance a total of 7.5 million  shares of common stock.  All
directors,  full-time  employees and consultants to the Company are eligible for
participation.  Option awards are  determined at the  discretion of the Board of
Directors.  Upon a change in control of the  Company,  all  outstanding  options
granted to employees and  directors  become vested with respect to those options
which have not  already  vested.  Options  outstanding  expire at various  dates
through December 2009.

Between  January 1, 1997 and December 31,  1999,  the Company had the  following
activity in options to purchase shares of common stock under the Plan:













                                       24
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                                                Weighted               Weighted
                                                 average                average
                                                exercise  # of shares  exercise
                                   # of shares    price   exercisable    price
                                   -----------  -------   -----------  --------

Unexercised at January 1, 1997      3,973,484     $.51     3,195,734     $.53
                                                           =========     ====
    Granted                           147,000      .56
    Exercised                        (369,834)     .51
    Lapsed or canceled               (152,934)     .50
                                   -----------  -------

Unexercised at December 31, 1997    3,597,716     $.52     3,277,966     $.52
                                                           =========     ====
    Granted                           548,500      .50
    Exercised                        (181,500)     .50
    Lapsed or canceled               (108,000)     .50
                                   -----------  -------

Unexercised at December 31, 1998    3,856,716     $.52     3,391,966     $.52
                                                           =========     ====
    Granted                           556,000      .50
    Exercised                        (255,000)     .50
    Lapsed or canceled               (101,000)     .50
                                   -----------  -------

Unexercised at December 31, 1999    4,056,716     $.52     3,426,716     $.52
                                   ===========    ====     =========     ====


Options granted under the Plan during 1999, all at an exercise price of $.50 per
share,  included  grants of  ten-year  options  in June to the  Company's  chief
financial officer,  exercisable 50% on the date of grant and 50% one year later,
to purchase  100,000  shares of common stock,  and in September to the Company's
president,  exercisable  25% per  year  beginning  with the  date of  grant,  to
purchase 250,000 shares of common stock.

In December 1997 Proactive, the Company's principal shareholder,  granted to the
new  president  of the  Company  a  ten-year  option,  exercisable  20% per year
beginning  with the date of grant,  to purchase  714,286  shares of common stock
owned by  Proactive  at an exercise  price of $.35 per share.  In December  1999
Proactive granted the Company's president a ten-year option, exercisable 25% per
year beginning with the date of grant, to purchase an additional  500,000 shares
of common stock owned by Proactive at an exercise  price of $.50 per share.  The
options granted by Proactive are not covered by the Company's Plan.

For certain  options  under the Plan granted or repriced,  the Company  credited
$59,813 in 1997 to additional  paid-in  capital,  representing the excess of the
aggregate  market value at the date of grant or repricing of shares under option
over the aggregate exercise price of such options,  and charged a like amount to
compensation expense in that year. In connection with the grant of the option in
1997 by Proactive to the new president of the Company,  $29,760 in 1999, $44,644
in 1998, and $44,643 in 1997 was credited to additional paid-in capital and like
amounts  charged  to  compensation  expense in each of those  years.  Additional
compensation  of $59,525 is being  amortized  to  compensation  expense over the
remaining  vesting period of this option.  There are no similar  charges for the
option  granted by  Proactive in December  1999 to the  president of the Company
because the exercise price exceeded the market value of the stock at the date of
grant.

The  Company  applies  APB  Opinion  No.  25  in  accounting  for  stock  option
compensation;  however,  SFAS No.  123  requires  the  Company  to make  certain
disclosures  as if the fair value based method of accounting had been applied to
the Company's  stock option grants.  Accordingly,  the Company has estimated the
grant date fair value of each option using the Black-Sholes option pricing model
with the following  weighted average  assumptions:  volatility factor of 120% in
1999,  101% in 1998,  and  112% in 1997,  risk-free  interest  rate of 6%,  zero
dividend  yield,  and  expected  term of ten years.  For  purposes  of pro forma
disclosures,  the  estimated  fair value of options is amortized to expense over
the vesting period of each option.

Had  compensation  cost for options  granted  under the Plan and for the options
granted by Proactive to the Company's president been determined  consistent with
the  method of SFAS No.  123 using the  weighted  average  fair value of options
granted during the year as indicated  below, the Company's net loss and net loss
per share for each year on a pro forma basis would have been as follows:





                                       25
<PAGE>
                      SONEX RESEARCH, INC. 1999FORM 10-KSB


                                            1999       1998       1997
                                          --------   --------   --------

  Weighted average fair value per share       $.36       $.34       $.70

  Net loss - as reported                  $570,115   $270,362   $529,996
  Net loss - pro forma                    $861,650   $531,122   $876,273

  Net loss per share - as reported            $.03       $.02       $.03
  Net loss per share - pro forma              $.05       $.03       $.05


The  Black-Sholes  and other option  pricing  models were  developed  for use in
estimating  the  fair  value  of  traded  options  as  opposed  to the  type  of
compensatory  options  granted by the  Company.  It also  requires  the input of
highly  subjective  assumptions,  such as the expected  stock price  volatility,
changes in which can materially affect the fair value estimate. As a result, the
amounts  calculated  using  the  Black  Sholes  option  pricing  model  may  not
necessarily  provide a reliable  single measure of fair value of options granted
by the Company. In addition,  these pro forma disclosures are not representative
of the effects on reported  net loss and net loss per share for future years due
to the effects of vesting.


NOTE 13 - COMMON STOCK RESERVED FOR FUTURE ISSUANCE

As of December  31,  1999,  a total of  16,051,728  shares of common  stock were
reserved by the Company for issuance for the following purposes:


                    Purpose                                    # of shares
---------------------------------------------------------      -----------

Currently exercisable warrants:
 Exercisable at $.35 per share, expiring in February 2000          571,428
 Exercisable at $.375 per share, expiring in June 2000             595,000
 Exercisable at $.50 per share, expiring in June 2000              595,000
 Exercisable at $.75 per share, expiring in
   February 2000                                                 3,098,209
   December 2000                                                   340,000
   February 2002                                                   167,759
   March 2002                                                      220,000
                                                                ----------
                                                                 5,587,396
                                                                ----------
Currently exercisable options:
 Exercisable at $.50 per share                                   3,191,966
 Exercisable at $.75 per share                                     184,750
 Exercisable at $1.00 per share                                     50,000
                                                                ----------
                                                                 3,426,716
                                                                ----------
Granted options becoming exercisable in the future:
 Exercisable at $.50 per share                                     618,750
 Exercisable at $.75 per share                                      11,250
                                                                ----------
                                                                   630,000

Options available for future grants                              2,007,616

Conversion of preferred stock                                    4,400,000
                                                                ----------

   Total shares reserved                                        16,051,728
                                                                ==========


In June 1999 warrants exercisable at $.75 per share to purchase 1,048,536 shares
of common stock expired  unexercised.  In February 2000  warrants exercisable at
$.35 per share to purchase 285,000 shares of common stock were exercised. At the
same time,  warrants to purchase an additional  286,428 shares at $.35 per share
and 3,098,209 shares at $.75 per share expired unexercised.










                                       26
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


NOTE 14- COMMITMENTS

The Company  occupies  its office and  laboratory  facility on a  month-to-month
basis  under the terms of an  operating  lease  agreement  pursuant to which the
property owner is required to provide thirty days notice if he wants the Company
to vacate the  premises.  The lease  requires  the  Company to pay all  property
related  expenses.  Gross rent  charges  aggregated  $42,000 in each of the past
three years, as the Company's rent has been $3,500 per month,  while the Company
also earned sublease income of $2,400,  $2,000, and $750 in 1999, 1998 and 1997,
respectively.  The Company will seek to negotiate a new long-term  lease for its
facility or search for an  alternative  location in the event that an  agreement
cannot be  reached  for the  existing  premises.  Management  believes  that the
resolution of the uncertainty  with respect to the facility will not result in a
significant interruption in the operations of the Company.


NOTE 15 - SUBSEQUENT EVENT

In February 2000 the Company received cash proceeds of $99,750 from the exercise
of stock warrants to purchase  285,000 shares of its common stock at an exercise
price of $.35 per share.  At the same time,  warrants to purchase an  additional
286,428  shares  at $.35 per  share  expired  unexercised,  as did  warrants  to
purchase 3,098,209 shares at $.75 per share.





              ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE


The Company has had no disagreements with its current  independent  accountants,
C.L. Stewart & Company,  on any matter of accounting  principles or practices or
financial  statement  disclosure.  C.L. Stewart & Company has been the Company's
independent accountants since October 31, 1997.



            ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS

The Company's Board of Directors is divided into two categories:  "Common Stock"
directors  elected  by the  holders  of  Common  Stock;  and  "Preferred  Stock"
directors  elected by the holders of Preferred  Stock.  These two  categories of
directors  are further  divided into three  classes as nearly equal in number as
possible,  with the term of one of the three  classes of  directors  expiring at
each annual meeting of shareholders.  The members of each class of directors are
to hold office for terms of three years until their successors have been elected
and qualified.  The holders of the Preferred Stock,  voting as a separate class,
have the right to elect that number of directors of the Company which represents
a majority of the total number of directors.

The  Company's  By-laws  state that the Board of Directors  shall consist of not
fewer than three directors,  with the total number of directors to be set by the
Board  by  resolution.  Following  the  resignation  of  three  Preferred  Stock
directors and one Common Stock  director in 1997,  the total number of directors
is now five,  two of whom are  Preferred  Stock  directors and three of whom are
Common Stock directors.

Directors  of the  Company  do not  receive  fees for  their  services,  but are
eligible to receive stock option grants and are reimbursed for expenses  related
to their activities as directors.  Executive officers are appointed and serve at
the discretion of the Board of Directors.  The names,  ages, dates first elected
as directors,  and  principal  occupations  and  employment of the directors and
executive officers of the Company are set forth below.

















                                       27
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                                Term as
                                director
           Name             Age expires           Position
     ----------------       --- -------      -------------------

Preferred Stock Directors:

 Charles C. McGettigan       55   2002  Director
 Myron A. Wick, III          56   2002  Chairman of the Board

Common Stock Directors:

 Nuno Brandolini             46   2000  Vice Chairman of the Board
 Lawrence H. Hyde            75   2002  President and Director
 Andrew A. Pouring           68   2001  Chief Executive Officer, Chief Scientist
                                          and Vice Chairman of the Board
Other Executive Officers:

 George E. Ponticas          40         Vice President - Finance, Secretary,
                                          Treasurer and Chief Financial Officer


Background of directors and executive officers
----------------------------------------------

Mr.  Charles C.  McGettigan  has been a director of the Company  since  February
1992.  He was a founding  partner in 1991 and is a general  partner of Proactive
Investment  Managers,  L.P., which is the general partner of Proactive Partners,
L.P.  In  1988  Mr.  McGettigan  co-founded  McGettigan,  Wick & Co.,  Inc.,  an
investment  banking  firm.  From  1984  to 1988  he was a  Principal,  Corporate
Finance,  of Hambrecht & Quist,  Inc. Prior to that Mr.  McGettigan was a Senior
Vice President of Dillon,  Read & Co. Inc. He currently  serves on the Boards of
Directors of Cuisine Solutions, Inc., Modtech, Inc., PMR Corporation, Tanknology
- NDE Corporation, WrayTech Instruments, Inc., and Onsite Energy, Inc., of which
he is the Chairman. Mr. McGettigan is a graduate of Georgetown  University,  and
received  his MBA in  Finance  from The  Wharton  School  of the  University  of
Pennsylvania.

Mr.  Myron A.  ("Mike")  Wick,  III,  has been a director of the  Company  since
November  1991 and was elected  Chairman of the Board of Directors in June 1993.
He was a  founding  partner  in  1991  and is a  general  partner  of  Proactive
Investment  Managers,  L.P., which is the general partner of Proactive Partners,
L.P. In 1988 Mr. Wick  co-founded  McGettigan,  Wick & Co.,  Inc., an investment
banking  firm.  From  1985 to 1988  Mr.  Wick was  Chief  Operating  Officer  of
California Biotechnology, Inc. in Mountain View, California. He currently serves
on the Boards of Directors of Modtech,  Inc., StoryFirst  Communications,  Inc.,
Tanknology - NDE Corporation, and WrayTech Instruments, Inc., of which he is the
Chairman.  Mr. Wick received a B.A.  degree from Yale University and an MBA from
the Harvard Business School.

Mr. Nuno  Brandolini  has been a director of the Company  since January 1982 and
was elected a Vice  Chairman of the Board in May 1988.  Since  November 1995 Mr.
Brandolini  has been the  Chairman of the Board and Chief  Executive  Officer of
Scorpion Holdings,  Inc., a merchant banking company. From December 1993 through
October  1995 he was a managing  director of  Rosecliff,  Inc.,  also a merchant
banking  company.  From June 1991 to November 1993 he was a Vice  President with
Salomon Brothers,  Inc. From 1988 to 1991 Mr. Brandolini was a part owner of The
Baltheus Group,  Inc., a management  consulting and financial  advisory firm. He
has a law degree  from the  University  of Paris and he received an MBA from The
Wharton School of the University of Pennsylvania.

Mr.  Lawrence H. Hyde has been a director of the Company since  September  1986,
serving as Chairman of the Board from June 1987 to June 1993,  and was appointed
President  of the  Company in October  1997.  Mr.  Hyde was a director of Harris
Graphics Corp.  from 1983 to 1986,  where during 1985 and 1986 he also served as
its Chairman of the Board and Chief  Executive  Officer.  He was  President  and
Chief  Executive  Officer of AM  General  Company  from 1979 to 1985.  He joined
American  Motors  in 1974 and  remained  until  1983.  At  various  times he had
corporate wide responsibility for engineering,  international and marketing; his
last position was Executive Vice President  responsible  for  International  and
Engineering.  Mr. Hyde,  now retired  from  full-time  employment,  is a private
investor with interests in a number of publicly and privately held companies. In
addition,  he serves as a trustee of the American  University in Cairo, where he
is also  chairman of the Karnak  Equity Fund.  Mr. Hyde is a graduate of Harvard
College and Harvard Business School.







                                       28
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


Dr.  Andrew  A.  Pouring  has been a  full-time  employee,  director,  and Chief
Scientist  of the  Company  since  1980,  serving as  President  from April 1980
through  November  1991,  and as Chief  Executive  Officer  since May  1985.  In
November 1991 he was elected a Vice  Chairman of the Board of Directors.  He has
co-authored all of the Company's patented  inventions.  He served as a Professor
of Aerospace  Engineering  at the U.S.  Naval Academy from 1964 to 1983, and was
Chairman of the Academy's Department of Aerospace Engineering from 1975 to 1978.
Dr.  Pouring  is a member of  various  professional  and  scientific  societies,
including  the  American  Society of  Mechanical  Engineers  and the  Society of
Automotive  Engineers,  as has been  organizer and chairman of many symposia for
these  societies.  Dr.  Pouring  received his Bachelors  and Masters  degrees in
mechanical engineering from Rensselaer  Polytechnic  Institute.  He received his
Doctor of  Engineering  degree  from Yale  University,  where he also was a post
doctoral research fellow and lecturer.

Mr.  George E.  Ponticas  has been Vice  President of Finance,  Chief  Financial
Officer,  Secretary and Treasurer of the Company since  September 1991. From May
1987 through  August 1991, he served as the Company's  Controller  and Assistant
Secretary. From August 1981 through April 1987, Mr. Ponticas was a member of the
auditing  staff  of Price  Waterhouse  in  Baltimore,  Maryland,  attaining  the
position of audit manager in 1986. At Price Waterhouse,  he worked on the audits
of a  number  of  public  and  private  companies,  with an  emphasis  on  small
businesses.  Mr. Ponticas is a Certified Public  Accountant,  and is a member of
the  American  Institute  of  Certified  Public  Accountants  and  the  Maryland
Association of Certified Public Accountants.  He received his B.S. in Accounting
from Loyola College in Maryland.



                         ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company to its chief
executive officer;  no other executive officer earned annual compensation during
the most recently  completed year in excess of $100,000 (together referred to as
the "Named Executives").

                           SUMMARY COMPENSATION TABLE

                                        Annual compensation
                                 --------------------------------
                                        Salary                       Long-term
                                 --------------------     Accrued   compensation
     Name and Position    Year   In cash     Deferred      bonus    # of options
     -----------------    ----   ---------   --------    --------   ------------

Dr. Andrew A. Pouring     1999   $ 84,000    $ 36,000    $  7,500      35,000
 CEO & Chief Scientist    1998     72,000      48,000                  35,000
                          1997     72,000      48,000                  35,000

In order to help conserve the Company's  limited cash resources,  certain of the
Company's  employees  for several  years have  voluntarily  deferred  receipt of
payment of significant portions of their authorized annual salaries upon request
by the Board of Directors. By agreement with the Company, these individuals have
consented to the deferral of payment of amounts so accumulated until the Company
has received licensing revenue of at least $2 million or at such earlier date as
the Board of Directors  determines that the Company's cash flow is sufficient to
allow such payment.  Since January 1, 1997,  however,  there has been no further
deferral of salary requested of the Company's non-executive employees.

For many years through  December 31, 1998, Dr. Pouring has been deferring 40% of
his annual salary.  On January 1, 1999,  the percentage  deferral was reduced to
30%. The conditions that would require repayment of deferred amounts have yet to
occur.  As of December 31, 1999, a total of $334,980 in deferred  salary is owed
to Dr. Pouring.

In December 1999 the Company  awarded bonuses  totaling  $25,000 to its officers
and  employees,  including  $7,500 to Dr.  Pouring,  with the  stipulation  that
payment  of  such  bonuses  is to be  deferred  until  the  Board  of  Directors
determines  that the  Company's  cash  resources  are  sufficient to enable such
payments.

In order to avoid  long-term  financial  commitments,  the Company does not have
employment  agreements  with any of its  personnel.  The  salaries of  executive
officers  are set by the Board of Directors on an annual  basis.  Dr.  Pouring's
authorized annual salary was increased in 1997 for the first time since 1989.

With the  exception of the granting of stock  options,  the Company does not pay
its Named  Executives any bonuses or any type of long-term  compensation  in the
form of restricted stock awards,  stock appreciation rights (SARs) or other form
of long-term incentive plan payments.


                                       29
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                       OPTION GRANTS IN LAST FISCAL YEAR

                                    Individual Grants
             -------------------------------------------------------------------
             Number of    % of total
            securities      options
            underlying    granted to
              options    employees in    Exercise     Market        Expiration
 Name         granted     fiscal year      price       price           date
 ----         -------     -----------      -----       -----       -------------

Pouring        35,000          15%          $.50       $.375        Dec. 7, 2009


Options  granted  under the Company's  Stock Option Plan during 1999,  all at an
exercise price of $.50 per share, included grants of ten-year options in June to
the Company's chief financial officer,  exercisable 50% on the date of grant and
50% one year later, to purchase 100,000 shares of common stock, and in September
to the Company's president,  exercisable 25% per year beginning with the date of
grant, to purchase 250,000 shares of common stock.

In December 1997 Proactive, the Company's principal shareholder,  granted to the
new  president  of the  Company  a  ten-year  option,  exercisable  20% per year
beginning  with the date of grant,  to purchase  714,286  shares of common stock
owned by  Proactive  at an exercise  price of $.35 per share.  In December  1999
Proactive granted the Company's president a ten-year option, exercisable 25% per
year beginning with the date of grant, to purchase an additional  500,000 shares
of common stock owned by Proactive at an exercise  price of $.50 per share.  The
options granted by Proactive are not covered by the Company's Stock Option Plan.



               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUES

                                    Number of securities    Value of unexercised
                                   underlying unexercised       in-the-money
                                      options/SARs at         options/SARs at
                                     December 31, 1999       December 31, 1999
          # of shares
          acquired on     Value         Exercisable/            Exercisable/
  Name     exercise     realized        unexercised             unexercised
--------  -----------   --------   ----------------------   -------------------

Pouring        0           $0

  Exercisable @ $.50                  167,566/220,066            $0/$0
  Exercisable @ $.75                   18,750/25,000             $0/$0


The exercise  price of all options held by the Named  Executives was higher than
the  December 31, 1999 market price of $.375 of the  Company's  publicly  traded
common stock.



            ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                                 AND MANAGEMENT

The  following  table sets forth as of March 15,  2000  information  relating to
beneficial  ownership  by  directors of the  Company,  directors  and  executive
officers of the Company as a group,  and any other  persons known by the Company
to be the beneficial owner of more than five percent of the currently issued and
outstanding  common stock of the Company. A reporting person is deemed to be the
"beneficial  owner" of a security if that person has or shares the power to vote
or to direct the voting of such  security,  or the power to dispose or to direct
the disposition of such security.  Under this  definition,  more than one person
may be  deemed  to be a  beneficial  owner of  securities  as to which he has no
record ownerhip interest,  and the same shares may be beneficially owned by more
than one reporting person.  Beneficial  ownership includes  securities which the
reporting  person  currently  owns or has the right to acquire within sixty days
through the  exercise of currently  exercisable  options and warrants or through
the  conversion of preferred  stock.  Shares which the reporting  person has the
right to acquire are not deemed to be  outstanding  for computing the percentage
of beneficial ownership of any other person.  Unless otherwise noted, all shares
are  beneficially  owned and sole  voting  and  investment  power is held by the
persons named.





                                       30
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB


                           Total Beneficial Ownership
                           --------------------------

                              Common     Rights to    Total shares
                              shares      acquire     beneficially     Percent
 Name and address (1)         owned       shares         owned        of class
 --------------------       ---------    ---------     ---------      --------

Nuno Brandolini               111,726      380,150        491,876         2.6
Lawrence H. Hyde              644,986      930,072      1,575,058         8.4
Charles C. McGettigan       1,399,511    2,810,359      4,209,870  (3)   19.9
Andrew A. Pouring             688,239      186,316        874,555         4.7
Myron A. Wick, III          1,399,511    2,810,359      4,209,870  (3)   19.9

All directors & officers
 as a group (6 persons)     3,000,724    4,584,397      7,585,121        33.2

Herbert J. Mitschele, Jr.
  Far Hills, NJ               946,755       62,857      1,009,612         5.5

Proactive , et.al. (2)
  San Francisco, CA         2,748,457    4,770,235      7,518,692        32.6

-----------------------------
(1)   The business address for each director and named executive officer is 23
      Hudson Street, Annapolis, Maryland, 21401.
(2)   Includes  shares  beneficially  owned directly and indirectly by Proactive
      Partners,  L.P. and several affiliated  entities and  individuals
      ("Proactive et.al."), as reported in a Form 13D filing with the Securities
      and Exchange Commission.
(3)   Includes  3,895,870  shares  beneficially  owned  by  Proactive et.al.,
      which shares could be deemed to be beneficially owned by both Mr.
      McGettigan  and Mr.  Wick by  virtue  of  their  executive  and  ownership
      positions in Proactive et.al. Both individuals  exercise shared voting
      and investment power with respect to such shares.



                           Rights to Acquire Shares
                           ------------------------
                                                                         Total
                                      Exercisable            Preferred rights to
                         Exercisable    (put)/   Exercisable   stock    acquire
        Name               options     call (2)    warrants  converted  shares
--------------------      ----------  ---------   ---------  --------- ---------

Nuno Brandolini              380,150                                     380,150
Lawrence H. Hyde             376,500   553,572                           930,072
Charles C. McGettigan (1)    314,000  (276,786)    487,432  2,285,713  2,810,359
Andrew A. Pouring            186,316                                     186,316
Myron A. Wick, III (1)       314,000  (276,786)    487,432  2,285,713  2,810,359

All directors & officers
 as a group (6 persons)    1,748,466   276,786     587,432  2,285,713  4,584,397

Herbert J. Mitschele, Jr.                           20,000     42,857     62,857

Proactive , et.al. (2)
  San Francisco, CA                   (553,572)    966,666  4,357,141  4,770,235

---------------------------

(1)  Includes  2,496,359  shares  beneficially  owned by Proactive,  et.al.,
     which  shares  could be  deemed  to be  beneficially  owned by both Mr.
     McGettigan  and Mr.  Wick by virtue of their  executive  and  ownership
     positions in Proactive,  et.al. Both individuals exercise shared voting
     and investment power with respect to such shares.

(2)  Represents the currently  exercisable  portions of ten-year options granted
     in December  1997 and December  1999 by  Proactive,  et.al.  to Mr. Hyde to
     purchase 714,286 shares and 500,000 shares,  respectively,  of common stock
     presently owned by Proactive,  et.al. at an exercise price of $.35 and $.50
     per share, respectively. The December 1997 and December 1999 options become
     exercisable  at the rate of 20% and 25%,  respectively,  per year beginning
     with the date of grant. Because these agreements relate to shares which are
     already  outstanding,  the  exercise  of such  rights will not result in an
     increase  in the  total  number of the  Company's  outstanding  shares  for
     purposes of  computing  the  percentage  of  beneficial  ownership  of each
     reporting person. Mr. McGettigan and Mr. Wick each has indirect  beneficial
     ownership in 50% of the shares subject to these agreements.


                                       31
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



             ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                     None.




                 ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K

(a)   Exhibits.

  3       Articles of Incorporation  and Bylaws (as amended) - Incorporated
          by reference to the  Company's  Annual  Report on Form 10-KSB for
          the year ended December 31, 1992.

  4       Instruments defining the rights of security holders (contained in
          Exhibit 3 hereof).

  10.1    1987 Non-Qualified Stock Option Plan, as amended - Incorporated by
          reference to the Company's Registration Statement No. 33-34520 on
          Form S-8.

  21      Subsidiaries of the Registrant:  Sonex International, B.V. - The
          Netherlands; Sonex Engines, Inc. - Delaware (both are inactive
          subsidiaries).

  23.a    Consent of C.L. Stewart & Company

  24      Power of Attorney - Incorporated by reference to the Company's Annual
          Report on Form 10-KSB for the year ended December 31, 1998.

  27      Financial Data Schedule


(b)   Reports on Form 8-K.

          None.












































                                       32
<PAGE>
                      SONEX RESEARCH, INC. 1999 FORM 10-KSB



                                   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.


                       SONEX RESEARCH, INC.


March 30, 2000         By:           /s/ Andrew A. Pouring
                              ----------------------------------
                              Andrew A. Pouring
                              Principal Executive Officer

March 30, 2000         By:            /s/ George E. Ponticas
                              ----------------------------------
                              George E. Ponticas
                              Principal Financial and Accounting 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.


March 30, 2000                                  *
                              ----------------------------------
                              Myron A. Wick, III
                              Chairman of the Board of Directors

March 30, 2000                                  *
                              ----------------------------------
                              Nuno Brandolini
                              Vice Chairman of the Board of Directors

March 30, 2000                       /s/ Andrew A. Pouring
                              ----------------------------------
                              Andrew A. Pouring
                              Vice Chairman of the Board of Directors

March 30, 2000                                  *
                              ----------------------------------
                              Lawrence H. Hyde
                              President and Director

March 30, 2000                                  *
                              ----------------------------------
                              Charles C. McGettigan
                              Director

--------------------

*  Executed on behalf of these persons by George E.  Ponticas,  a duly appointed
   attorney-in-fact of each such person.


      /s/ George E. Ponticas
----------------------------------
George E. Ponticas, Attorney-In-Fact


The Registrant  will furnish its  shareholders  with copies of its annual report
and proxy statement after the date of this report.



                                                                   EXHIBIT 23.a

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We  hereby  consent  to  the   incorporation  by  reference  in  the  Prospectus
constituting  part of the Registration  Statement on Form S-8 (No.  33-34520) of
Sonex Research,  Inc. of our report dated March 10, 1999 appearing on page 13 of
this Form 10-KSB.

/s/C.L. STEWART & COMPANY

Annapolis, Maryland
March 30, 2000

                                       33