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, 2000. 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 31, 2001 was  19,834,445.  The  aggregate  market value of voting stock
held by non-affiliates of the Registrant was $3,356,974 as of March 31, 2001.


Revenues for the year ended December 31, 2000 were $407,898.

                   Documents Incorporated by Reference: None

                      SONEX RESEARCH, INC. 2000 FORM 10-KSB


                         ITEM 1. DESCRIPTION OF BUSINESS

The Company

Sonex Research,  Inc.  ("Sonex" or the  "Company"),  incorporated in Maryland in
1980,  is an  engineering  research  and  development  firm that is  seeking  to
commercialize  its  patented  proprietary   technology  (the  "Sonex  Combustion
System",  "SCS" or "Ultra Clean BurnTM  technology") for in- cylinder control of
ignition and combustion  that is designed to reduce  emissions and increase fuel
mileage of diesel and gasoline  engines.  The Company was  co-founded in 1980 by
Dr. Andrew A. Pouring, a former Professor of Aerospace  Engineering and Chairman
of the Department of Aerospace  Engineering at the U.S. Naval Academy. At Sonex,
Dr. Pouring  conducted basic research into the principle of in-cylinder  control
of ignition and combustion. By the late 1980's and early 1990's, the development
of the SCS had  moved in the  direction  of  chemical/turbulent  enhancement  of
combustion.

The SCS improves the combustion of fuel in engines  through design  modification
of the  pistons  in  four-stroke  direct  injected  (DI)  diesel  engines or the
cylinder  heads in  two-stroke  spark-ignited  (SI)  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 SI or
compression ignited (CI), carburetted or fuel injected, using gasoline,  diesel,
alcohol and/or other fuels.

For the past several years, Sonex has concentrated its commercial efforts on the
application of the SCS to the reduction of exhaust  emissions in DI turbocharged
diesel engines.  SCS designs reduce soot and other  emissions while  maintaining
fuel consumption and power.  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.  The Company is participating  in demonstration  and development
programs  with  some  of  the  world's  largest   multi-national  diesel  engine
manufacturers  with the goal of  executing  license  agreements  for  industrial
production of SCS pistons.

In  2000  Sonex  introduced  its  Stratified   Charge  Radical  Ignition  (SCRI)
combustion technology,  a new branch of the SCS which Sonex believes will enable
practical application of an alternative  combustion process known as homogeneous
charge  compression  ignition  (HCCI) that is being  examined  by the  worldwide
automotive industry. HCCI has been studied by many researchers for years because
of  its  potential  for  lowering  both  emissions  and  fuel  consumption,  yet
unresolved issues with ignition have prevented practical implementation of HCCI.
Sonex  believes it has  attained  the  control of  ignition  that will make HCCI
viable for commercial  application.  In a single cylinder  laboratory  engine at
Sonex,  the SCRI  achieved  significant  reductions  in both  emissions and fuel
consumption using diesel-type fuels.

Management believes that the SCRI piston design, with further  development,  can
enable DI gasoline engined  automobiles,  currently sold only in markets outside
the U.S.  because of emissions  problems,  to become  emissions  compliant while
maintaining  their current fuel consumption  advantages.  The Company is seeking
committed  industrial  partners  and/or funding  assistance from agencies of the
U.S. government to provide substantial  on-going financial support and technical
expertise to continue development of the SCRI.

The Company,  in its laboratory  and under  contract with the U.S.  military and
defense contractors, also has applied a proprietary patented SCS starting system
and modified combustion chamber to the conversion of reliable,  lightweight, SI,
two-stroke, gasoline engines to start and operate on JP-5/JP-8 standard military
fuels (also referred  to as "heavy  fuels") in a variety of applications such as
small, remotely  controlled  military  unmanned  aerial vehicles  (UAVs). The
military  now  requires  such engines to operate on less volatile heavy fuels to
reduce the hazard associated with gasoline, making heavy fuel engines (HFEs)
more suitable for applications  where gasoline  storage and use are undesirable.

Sonex HFEs achieve power and fuel consumption substantially equal to that of the
stock  gasoline  engines.  Sonex-modified  single-cylinder, 100cc HFEs have been
deployed  aboard ship and on land by the U.S.  Marine Corps (USMC) in the
Dragondrone UAV, the only UAV qualified for shipboard use.

As of March 31, 2001, the Company has five  full-time  employees and engages the
part-time  services of several  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.

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


Ability to generate cash flow from revenue or to secure financing necessary to
fund future operations


Ability to demonstrate commercial viability of SCS technology

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

Ability to attract and retain skilled personnel

Changes in general economic conditions

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 normal
operating 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 testing  conducted  in modern
turbocharged  engines of several  manufacturers,  fitted with a variety of Sonex
pistons  including  aluminum  screw  assembled  pistons  fabricated by Sonex and
pre-production type electron beam welded pistons made by a piston  manufacturer,
the Company has demonstrated that the SCS may reduce smoke/particulate emissions
in excess of 50% 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  OEMs  has  shown  that  SCS  diesel
technology is complementary to new developments such as high pressure and common
rail injection and EGR.


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
were issued in January 1999 and January  2001,  and the most recent U.S.  patent
for the SCS heavy fuel engine  technology  was issued in January 1999.  The name
"SONEX" was registered at the U.S. Patent and Trademark Office in 1987.

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.

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.


Competition

The  Company  faces   significant   competition  from  the  extensive   research
departments  of the world's major vehicle and engine  manufacturers.  These OEMs
exercise a bias toward in-house technologies over those developed by independent
suppliers.  Competition also comes from several  independent  engine testing and
consulting firms around the world which are in the business of developing engine
technologies.  The Company's  competitors have substantially  greater financial,
technical  and  marketing  resources  than does the  Company.  Accordingly,  the
Company  cannot be sure that it will have the  resources or expertise to compete
successfully in the future.

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.





Overview of SCS design modifications

The  patented SCS engine  design  modifications  for heavy fuel  operation in SI
two-stroke  engines  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 "Low Soot"  design,  based on the Sonex U.S.  patents  issued in January
1999 and January  2001,  is a recent  invention in the series for the SCS for DI
diesel  engines  and  involves  rearrangement  of SCS  features  to exploit  new
fundamental  understandings  of fluid  dynamics.  The key  feature of the SCS DI
diesel technology is the presence of improved  microchambers 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 10%
NOx reduction in the Sonex single cylinder, DI, normally aspirated research
engine with no change in injection timing. Sonex has also  demonstrated  that
the SCS  technology  can be transferred to a modern turbocharged, intercooled DI
diesel engine.

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%) 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.

SCS generated  radical  chemical species from a design similar to the "Low Soot"
design are also being used at Sonex in  relation  to an  alternative  combustion
process known as homogeneous  charge  compression  ignition (HCCI) that is being
examined by the  worldwide  automotive  industry.  HCCI has been studied by many
researchers  for years because,  in theory,  it can lower  emissions  while also
achieving  reduced  fuel  consumption,  because  compression  ignition  does not
require the use of a spark plug;  however,  the lack of a method for controlling
the  ignition  point  has  prevented  practical  implementation  of HCCI.  Sonex
believes it has attained the control of ignition  that will make HCCI viable for
commercial application by achieving radical assisted,  four-stroke combustion to
enable fully controllable compression ignition at low pressures as a function of
fuel  injection  timing,  a mode Sonex refers to as Stratified  Charge,  Radical
Ignition (SCRI).

With SCRI,  radical  (chemical)  species  that  enable  ignition  are created by
interaction of the injected fuel spray with specially designed  microchambers in
the piston side wall. The net result is an engine that is fully  controllable at
all loads and speeds  without  limitation,  has  extremely low emissions and the
fuel economy of a diesel engine.  On a DI, single cylinder  laboratory engine at
Sonex, the SCRI reduced NOx emissions by 80% and smoke by 90% while  maintaining
fuel consumption, using diesel- type fuels.


Targeted applications


                    SCS "Low Soot" Design for Truck Diesel Engines

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.

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.  The SCS design for "classical" DI diesel engines,
referred to as the "Low Soot"  design,  has shown 50% reduction in soot with 10%
reduction in NOx while maintaining fuel consumption and power.  Evidence to date
shows that the SCS is a  significant  new engine design  variable,  and that the
synergy  of the SCS in  combination  with EGR can enable  in-cylinder  emissions
reduction to meet future regulatory standards.

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.


                  SCS SCRI Design for Truck Diesel Engines

The new SCS Stratified  Charge Radical  Ignition  (SCRI)  combustion  technology
attempts to enable  practical  application  of  homogeneous  charge  compression
ignition  (HCCI)  that,  in theory,  can lower  emissions  while also  achieving
reduced fuel  consumption.  Compression  ignition  does not require the use of a
spark plug; however, the lack of a method for controlling the ignition point has
prevented practical implementation of HCCI. With the SCRI, Sonex believes it has
attained  the  control of  ignition  that will make HCCI  viable for  commercial
application.

SCRI  combines  the best  aspects  of HCCI  without  its  inherent  limitations.
Combustion pressure is kept low so lightweight  gasoline engine construction can
be used. The spark plug is eliminated so diesel-like  radical  ignition is used;
its timing is fully controllable by the use of diesel-type direct injection into
the cylinder.  Sonex demonstrated this ignition control in a laboratory,  single
cylinder engine in meeting a Department of Defense objective to convert gasoline
engines to JP-5  (kerosene-  like)  fuel while  retaining  the  performance  and
lightweight  advantages of a gasoline engine.  The laboratory engine was adapted
to run on JP-5 based on the SCRI piston  embodiments,  DI sparkless ignition and
low compression ratio controlled combustion over a wide range of speed and load.
Compared to the stock engine at higher  compression  ratio, the Sonex laboratory
engine running on JP-5 preserves fuel economy while reducing NOx by 80% and soot
by 90%.

A joint  feasibility study of the SCRI is now underway with a major truck OEM to
transfer the SCRI results achieved on the single-cylinder laboratory engine to a
multi-cylinder,  medium-duty  truck diesel engine that employs all of the latest
diesel engine technology.


          		  SCS SCRI Process for Gasoline Engines

Management believes that the SCRI piston design, with further  development,  can
enable DI gasoline engined  automobiles,  currently sold only in markets outside
the U.S.  because of emissions  problems,  to become  emissions  compliant while
maintaining their current fuel consumption advantages.

Vehicle  manufacturers are now trying to out do each other on fuel mileage, with
improvement of 15% being a major objective,  but NOx emissions remain a problem.
U.S. firms are focusing their attention on hybrid propulsion technologies,  such
as gasoline/diesel-electric power plants, rather than improvements in combustion
technology  (more  efficient ways of burning fuel).  Hybrid power plants utilize
the gasoline or diesel  engine  during  steady speed  operation.  These  engines
operate at high rpm to develop the needed power and suffer from added weight.

There are ongoing efforts in Japan,  however,  to achieve a new class of engines
known as GDI,  Gasoline Direct Injected  engines,  that operate on high air-fuel
ratios.  Direct injection (DI) uses unrestricted air flow and a fuel injector in
each cylinder of the engine to provide precisely timed, metered fuel delivery to
the  combustion  chamber to  overcome  the air and fuel flow  inefficiencies  of
present  gasoline  engines.  GDI engines have  achieved  reductions  in gasoline
consumption of 20% to 30%. Mitsubishi has produced over 800,000, five-passenger,
2,700 pound  vehicles  with GDI engines that achieve 53 mpg, for sale in markets
other than the U.S. Significantly, all the GDI engines reported to date are
complex, use a spark plug to initiate  conventional (non-homogeneous)
combustion,  require  premium  fuel,  and  do not  meet  U.S. emissions
standards for NOx regardless of the catalytic converter technology.

All automobile manufacturers are familiar with the benefits of the GDI engine in
performance,   fuel  consumption  and   cost-to-manufacture,   as  well  as  the
challenging  exhaust problem with NOx emissions in the presence of excess oxygen
that cannot be solved with a catalytic  converter.  Engine  researchers know the
key to solving the GDI NOx problem is to replace spark ignited,  lean combustion
with homogeneous,  compression  ignition and controlled,  high rate heat release
combustion.  The  vexing  challenge  has been to  achieve a  combustion  control
mechanism that works effectively over the range of engine operation  expected of
an automotive application.

Worldwide  automotive  industry  researchers  have been  studying  HCCI  because
compression  ignition does not require the use of a spark plug; thus, in theory,
HCCI can lower emissions while also achieving reduced fuel consumption. The lack
of a method for controlling the ignition point, however, has prevented practical
implementation of HCCI.

With the SCRI process, Sonex believes it has the potential not only to make HCCI
viable  for  commercial  application  but  also to  leapfrog  the  Japanese  GDI
accomplishments.  The SCRI piston design could enable fuel-efficient GDI engines
to become emissions  compliant and thereby improve fuel mileage of U.S. produced
automobile and light trucks by 25% to 30%.

The Company is seeking  committed  industrial  partners  to provide  substantial
on-going financial support and technical  expertise to achieve these objectives.
First,  Sonex must evolve the current SCRI engine performing on diesel fuel into
a   single-cylinder   gasoline  engine  to  establish   feasibility  and  design
parameters.  The  emphasis on this first phase will  establish a knowledge  base
upon which a prototype  multi-cylinder engine can be designed in a second phase.
The Company then would be in a solid  position to work with the auto industry on
demonstration projects to transition SCRI to multi- cylinder engines so gasoline
can  be  burned  effectively  in  eventual  production  engines  of  all  sizes.
Fortunately,  demonstration projects with automotive manufacturers could provide
results fairly quickly since the sparkless  SCRI can  advantageously  employ the
centrally  located  spark  plug hole of most  production  4-valve  per  cylinder
engines for the installation of the injector.


              SCS for Military and Commercial Heavy Fuel Engines (HFEs)

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/JP-8  standard  military  fuels (also referred to as "heavy  fuels").  UAVs
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.

In a directive  originally  issued  January  1993 and reissued  April 1999,  the
Department of Defense (DoD)  mandated the  elimination of gasoline such that the
primary  fuel for  combat  support  equipment  shall be a single  kerosene-based
"heavy fuel" (such as JP-5 and JP-8). The DoD directive also states in part that
"... to the maximum  extent  practical,  no new combat support or combat service
support equipment or vehicles requiring  gasoline-type fuels will be acquired or
developed." The military, however, has yet to comply fully with the directive by
continuing  to acquire  commercial  off-the-shelf  products  powered by gasoline
engines.

The reasons for a single military fuel are centered around simplified  logistics
- minimizing  the number and complexity of fuels - and safety,  particularly  on
board the ships and vehicles that must transport the fuel. Less volatile, widely
available  heavy fuels are used by jet  aircraft and  military  vehicles.  While
larger  vehicles,  motor  generators,  etc.,  acquired by the military in recent
years have tended  toward diesel  engines that can use these fuels,  no solution
has been identified for the tens of thousands of smaller engines in use, such as
those powering UAVs, standby generators,  water pumps, chainsaws,  earth tampers
and outboard engines.

Management  believes that the Sonex heavy fuel  technology  can assist  military
customers in achieving  compliance  with the directive for a single  battlefield
fuel by converting  exisitng  gasoline  engines to operate on heavy fuel.  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.  The first Sonex HFEs
have been deployed by the USMC since 1998 in the  Dragondrone  UAV and qualified
for shipboard use.

The Company is exploring  additional  potential uses by the military for the SCS
HFE  technology,  as  well  as  private  sector  opportunities.  Operation  of a
light-weight  engine on less  volatile  diesel and heavy  fuels will  reduce the
dangers associated with the storage of gasoline, such as in utility engines used
in pumps,  generator sets, etc., in homes,  commercial  buildings and boats. The
range of commercial applications is 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.

The primary  objective is to  capitalize on the success to date with SCS HFEs by
participation in new DoD programs. In addition,  Sonex seeks sponsors within the
DoD who are  obliged  to make an  effort  to comply  with the  directive  on the
elimination   of  gasoline  when   purchasing   numerous   items  as  commercial
off-the-shelf that are powered by two-stroke gasoline engines.


DI diesel engine programs with engine and piston 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.
Also, 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
international  supplier of engine components based in Southfield,  Michigan. 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.

Promising  test  results  at  Sonex in 1999 of the SCS "Low  Soot"  design  on a
turbocharged six-cylinder DI diesel engine using hand-assembled pistons have led
a second  foreign engine  manufacturer  to arrange in early 2001 for third party
evaluation  of the Sonex  "Low Soot"  diesel  technology  by one of the  world's
leading  independent  engine  R&D  and  testing  firms.  The  test  engine  is a
turbocharged and intercooled six-cylinder,  DI diesel engine used in medium-duty
trucks.  Pre-production SCS pistons have been fabricated by Federal-Mogul  Corp.
for this evaluation.

Sonex expects the results of the testing to confirm  emissions  measurements  of
Sonex  "Low  Soot"  diesel   technology  taken  by  the  Company  in-house  with
hand-assembled,  experimental  SCS pistons  that showed a 50%  reduction in soot
particles.  Similar testing by another foreign diesel engine  manufacturer of an
earlier  Sonex  design  confirmed  that  pre-production  pistons  would  perform
considerably better than experimental pistons.

The results of this evaluation of the Sonex "Low Soot" design are expected to be
published later this year in a technical paper to be submitted to the Society of
Automotive Engineers.

During  2000  a  second   foreign  engine  OEM  conducted  a  test  program  for
hand-assembled  SCS "Low Soot" design  pistons in a  six-cylinder  diesel engine
with the objective of meeting  future  emissions  limits in a production  engine
with no  exhaust  aftertreatment  devices.  In fall 2000 the  engine  OEM halted
parametric testing of these experimental  pistons.  (Parametric testing involves
operating the engine in a laboratory test stand under prescribed  conditions for
each SCS design  variation.)  The test results were not as expected by Sonex, as
the emissions  reduction  achieved  earlier at Sonex in the OEM's  four-cylinder
engine was not evident in the six-cylinder  engine.  Sonex believes this was due
to major  differences  in the piston  combustion  bowl of the two engines.  At a
progress  meeting with the OEM late in 2000, the Company also presented its SCRI
single-cylinder  engine data. The OEM then decided to pursue development of both
Sonex processes.

Further  evaluation of potential  variations of the SCS "Low Soot" piston design
will now take place through  computer  simulation  by the OEM before  parametric
testing resumes.  Computer simulation of the combustion process through use of a
mathematical model permits simulation of the prescribed test conditions. The OEM
seeks to  determine  whether or not the  complexity  of the  chemistry  and flow
dynamics of the SCS process can yet be achieved.

In late March 2001 Sonex and the OEM reached  agreement  on a joint  feasibility
study of the potential of the SCRI diesel design.  The objective of the study is
to transfer the SCRI results achieved by Sonex on the single-cylinder laboratory
diesel engine to a modern, advanced,  multi-cylinder,  medium- duty truck diesel
engine that employs all of the latest  diesel engine  technology  such as a high
pressure, electronically controlled injection system, and turbo-charging.

Program  planning has begun in spring  2001,  with testing to begin later in the
second quarter of 2001 in one of the OEM's facilities.  The Company will receive
progress payments during the feasibility study and will be entitled to incentive
payments at the  conclusion of the test program upon the  achievement of certain
emissions reduction targets.  The agreement also includes provisions pursuant to
which the engine OEM is granted  priority  rights to negotiate a license for the
SCRI diesel technology.

Another  international  OEM has proposed a  single-cylinder  diesel  engine test
program to apply the SCS "Low Soot"  design to a new V6/V8  diesel  engine being
developed  for light  trucks  and  sport  utility  vehicles.  This work has been
included in a joint proposal by the OEM and a major U.S.  university to the U.S.
military  seeking  development  funding.  The Company has been informed that the
military is now  negotiating  contract  details with the OEM, and a  subcontract
award to Sonex is expected in the near future.



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 EPA held public  hearings on the  progress of the  settlement  in  September
1999,  December  1999 and March  2000,  after  which it  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  project  descriptions  provided  by  the  engine
manufacturers  appear to place  heavy  emphasis  on exhaust  aftertreatment  and
alternative  fuels rather than on efforts to refine or optimize  the  combustion
system.

Before the Consent Decrees were entered,  Sonex maintained  correspondence  with
and visited  several U.S. diesel engine OEMs during 1999 to present the improved
SCS test results. 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 DI diesel  technology in that engine.  Following months
of testing at Sonex  using SCS  pistons in this  engine,  in summer 2000 the OEM
accepted  the  results  as a  successful  "proof-of-principle"  of the SCS,  and
proposed a follow-on  project for a more  extensive  evaluation in an industrial
version of this engine  series.  The basic terms of an  agreement  were  quickly
negotiated  with  the  manufacturer's  technical  team.  After a  representative
visited  Sonex in August  and the  Company  later  completed  a short  series of
additional tests,  progress stalled.  Ultimately,  the engine OEM indicated that
changes  involving  its senior  management  and  significant  reductions  in its
workforce in response to a steep decline in the North American  heavy-duty truck
market would preclude any funding for the follow-on SCS program.

Sonex will continue to approach the U.S. diesel engine OEMs but will concentrate
its efforts on the completion of current programs with foreign OEMs.





Heavy fuel engines (HFEs) for the military

Under a "best efforts" feasibility  demonstration  contract from the U.S. Marine
Corps  (USMC)  Systems  Command  in  Quantico,  Virginia,  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  UAVs aboard ship for the
first time,  as the  Dragondrone  UAVs with Sonex HFEs are in service in several
locations around the world.

Other  demonstration  programs for the Sonex HFE  technology for UAVs have taken
place under  contract  with the military and defense  contractors  as well.  The
Company has  successfully  demonstrated  the heavy fuel  conversion of 290cc and
350cc,  two-stroke,  carburetted,  SI two cylinder gasoline engines for the U.S.
Navy, and in 2000 delivered on orders from two defense  contractors  for a total
of five UAV 100cc HFEs. The Company also has high expectations of receiving
award of two small  contracts from the military in the second quarter of 2001
for development of small HFEs for two experimental UAVs.

Under a  sub-contract  from a prime  contractor to the U.S.  Navy, in the summer
2000  Sonex  completed  its  demonstration  of  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  development  of  the  SCS  4-stroke  HFE  technology  was  conducted  in a
laboratory feasibility demonstrator single-cylinder engine at Sonex and is based
on SCRI, the new enhanced SCS combustion  process for low compression  ratio, DI
engines. The feasibility  demonstrator engine starts and operates on JP-5 over a
wide range of engine  speeds  and  loads,  with good fuel  economy  and  without
knocking. Rather than continue implementation into the full-scale eight cylinder
engine, which would retain its performance and lightweight advantages,  the Navy
decided instead to fund gas-turbine or other  conventional  diesel  technologies
for this application.  Sonex is approaching other military customers to continue
this development.


Federal legislative and funding support

Fuel  economy of  vehicles  sold in the U.S. is a matter of public law under the
CAFE (Corporate  Average Fuel Economy)  legislation.  For the past six years the
U.S.  automobile  industry  has been  successful  in thwarting  any  legislative
actions that would have led to an increase in CAFE. In 2001, however, the future
of CAFE and  other  national  fuel  economy  solutions  have  become  front-page
political issues. Gasoline direct injected (GDI) engines in vehicles produced by
Japanese OEMs have been shown to deliver 20% to 30% improvement in fuel mileage,
yet are not  available  in the U.S.  due to  failure  to comply  with  emissions
standards. With the SCRI process, Sonex believes it has the potential to make an
alternative combustion process known as homogeneous charge, compression ignition
(HCCI) viable for commercial  application to achieve  fuel-efficient,  emissions
compliant GDI engines available for sale in the U.S.

Sonex seeks exposure and  "encouragement" to the auto industry to make something
happen as soon as possible with SCRI.  CAFE changes to incentivise  fuel economy
in the vehicular  marketplace could create a healthy  technical  competition and
draw automotive  industry attention to the benefits of the Sonex SCRI combustion
process.

The Company has initiated contact with the R&D Center in the U.S. that developed
the PNGV hybrid vehicle for an international engine OEM. (The PNGV - Partnership
for a New  Generation  Vehicle - is a U.S.  government  sponsored  consortium of
automakers with the goal of achieving an 80mpg vehicle). The OEM has suggested a
project  to apply the SCS "Low  Soot"  design to its three  cylinder,  DI diesel
engine  involved in the PNGV  project.  The R&D Center  expects to inform  Sonex
shortly on its decision whether or not to proceed with this project.

In March 2001 Dr.  Andrew A. Pouring,  CEO and founder of Sonex,  testified in a
hearing before the House Committee on Armed  Services'  Subcommittee on Research
and Development on Innovative Research  Companies.  Dr. Pouring gave an overview
of the potential of the patented  SCS,  piston-  based,  engine  technology  for
in-cylinder  control of ignition and combustion to reduce emissions and increase
fuel mileage of diesel and gasoline  engines.  The Company is following-up  with
the Committee and is enlisting  the aid of Maryland  legislators  in Congress to
gain exposure for the SCRI process.

The Department of Energy recently solicited proposals to achieve ignition
control of lean burn  gasoline  combustion  to which a team  comprised of Sonex,
Drexel  University and the  University of Texas  responded with a development to
extend SCRI in anticipation of its application to GDI engines. The proposal
evaluation  is scheduled to be  completed in May 2001,  with  contract awards to
follow later in the year.

Also at the hearing before the House  Committee on Armed  Services,  Dr. Pouring
reported  on the  unresponsiveness  of the  military to the  existing  directive
mandating the elimination of gasoline in favor of heavy fuels, and how SCS heavy
fuel engine (HFE) technology can assist in the implementation of that directive.
Sonex-modified single-cylinder, two-stroke, 100cc HFEs have been deployed aboard
ship by the U.S.  Marine  Corps in the  Dragondrone  UAV,  and the  Company  has
successfully  completed  heavy fuel  conversions  of other UAV  engines  for the
military.  Sonex  also  conducted  a  feasibility  study  in  a  single-cylinder
laboratory engine for the Navy using the SCRI combustion system that would allow
conversion  of an  eight-cylinder  gasoline  engine  to  heavy  fuel  use  while
retaining its light weight and flexibility. The feasibility was proven, with the
Sonex  laboratory  engine  achieving  the  fuel  economy  of a  diesel  and  low
emissions;  however,  rather than  proceed  with a program to transfer the Sonex
single-cylinder  engine results to the gasoline  engine,  which would retain its
performance  and  lightweight  advantages,  the Navy instead  decided to examine
conventional diesel and turbine technologies.

Dr.  Pouring told the Committee that Sonex seeks to capitalize on the success to
date  with SCS HFEs by  participation  in new  military  programs,  and that the
Company  is seeking  sponsors  within the  military  who are  obliged to make an
effort  to  comply  with  the   directive  on  the   elimination   of  gasoline.
Specifically,  he described a Defense Advanced  Research Projects Agency (DARPA)
development  of a new unmanned  helicopter  that is using a gasoline  automobile
engine.  Dr. Pouring  suggested that a Sonex heavy fuel conversion  program on a
full scale  gasoline  engine  for this  application  would  produce a heavy fuel
prototype  demonstrator  for all the  services  to  evaluate  for a  variety  of
applications. The Company has maintained an ongoing dialogue with DARPA over the
past year with respect to initiating  such a project.  DARPA has been supportive
of the Sonex advances, but has indicated that no funding is available for such a
project to help achieve  compliance  with the DoD directive  requiring  that new
systems have heavy-fuel  capability.  Dr. Pouring asked the Committee to provide
funding for a Sonex HFE conversion program for DARPA's unmanned helicopter.

Finally,  Dr.  Pouring  suggested  that  completion  of such a  project  for the
military would have  substantial  benefit for commercial  applications  as well.
Sonex heavy fuel  conversion  of the DARPA  gasoline  engine  would  provide the
direct injected  embodiments to allow transfer of the results to a gasoline SCRI
prototype.  Thus, "a spin-off" from a timely military  program could  accelerate
the prospects of the U.S. having an SCRI, multi-cylinder,  sparkless, GDI engine
prototype,  with  substantially  lower emissions and  dramatically  reduced fuel
consumption.



                       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.



             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 2000.


        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,
1999 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, 1999                       $.63             $.38
        June 30, 1999                         .56              .38
        September 30, 1999                    .53              .35
        December 31, 1999                     .47              .22
        March 31, 2000                        .50              .28
        June 30, 2000                         .47              .28
        September 30, 2000                    .44              .19
        December 31, 2000                     .24              .11
        March 31, 2001                        .25              .14

As of March 31, 2001, there were 19,834,445 shares issued and outstanding,  with
approximately  970  holders  of  record.  The  shares  for  approximately  2,900
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 31, 2001, a total of 9,825,475  shares of the Company's  Common Stock were
reserved for issuance in connection  with the conversion of preferred  stock and
the exercise of outstanding 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 2000,  combined with revenue from development
and demonstration programs, met a significant portion of the Company's operating
expenditure  requirements for the year. Additional cash of $173,500 was provided
during  2000 by the  exercise  of stock  warrants  and  $193,750  from a private
placement of stock and warrants.


Financial position and liquidity

As of March  31,  2001,  the  Company  had  available  cash and  equivalents  of
approximately $58,700 and no significant accounts receivable.  During April 2001
the  Company  hopes to raise  additional  funds of $25,000  to $50,000  from the
second  closing of a private  placement  of stock and warrants  which  initially
raised  $75,000 in late March 2001.  The Company also has high  expectations  of
receiving  two  contracts  from the  military in the second  quarter of 2001 for
development of small HFEs for two experimental UAVs.

Based upon  available  resources,  current and projected  spending  levels,  and
expected revenue from current and anticipated contracts, management believes the
Company will have sufficient  capital to fund operations  through June 30, 2001.
In the event that anticipated revenue is delayed or does not materialize,  or if
additional  short-term capital is not arranged,  the Company will have to reduce
the  scope of its  operations  later in the  second  quarter.  Furthermore,  the
Company's  prospects  beyond that date are  dependent  upon its ability to enter
into  significant  funded  contracts  for  the  further  development  of its SCS
technology,  establish  joint  ventures  or  strategic  partnerhips  with  major
industrial concerns,  or secure a major capital infusion.  There is no assurance
that the Company will be able to achieve these objectives.


Salary deferrals by officers and 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.


Results of operations

Certain  reclassifications  have been made to the  reporting of the balances for
1999 and 1998 to  conform  to the  classifications  used in 2000,  primarily  to
segregate "Cost of revenue" from research and development expenses.


Condensed comparative results:

                                                 2000       1999         1998
                                              ---------   ---------   ---------

  Total revenue                               $ 407,898   $ 324,386   $ 395,213
                                              ---------   ---------   ---------

  Cost of revenue                               228,587     100,857     212,986
  Research and development (R&D) expenses       453,494     531,584     439,536
  General and administrative (G&A) expenses     332,607     315,649     276,674
                                              ---------   ---------   ---------

  Total expenses                              1,014,688     948,090     929,196
                                              ---------   ---------   ---------

    Net loss from operations                   (606,790)   (623,804)   (533,983)

  Gain on sale of marketable securities                      43,508     247,144
  Investment and other income                     4,860      10,181      16,477
                                              ---------   ---------   ---------

    Net loss                                  $(601,930)  $(570,115)  $(270,362)
                                              =========   =========   =========
Total revenue increased from 1999 to 2000 by $83,612,  or 26%, as higher revenue
from  military  contracts  more than offset the decline in revenue from programs
for truck diesel engine manufacturers.  Total expenses increased $66,598, or 7%,
from 1999 to 2000,  due to the increase in costs  associated  with the increased
level of funded contracts and higher personnel costs. As a result,  the net loss
from operations decreased by $17,014 from 1999 to 2000. The overall net loss for
2000,  however,  was higher than that for 1999 by $31,815,  as the 1999 net loss
was reduced by gains on the sale of marketable securities.

From 1998 to 1999 total revenue decreased by $70,927,  or 18%, as higher revenue
from programs for truck diesel engine  manufacturers  only partially  offset the
decline in revenue from military contracts. Total expenses increased $18,894, or
only 2%,  from  1998 to 1999,  as the 1998  total was  unusally  high due to the
inclusion  of  the  costs  of a  significant  subcontract  to  another  firm  in
connection with a large military prime contract,  thereby offsetting much of the
increase in  personnel  costs that  occurred  from 1998 to 1999.  The decline in
revenue and the increase in total expenses  caused the net loss from  operations
to  increase  by  $89,821  from  1998 to 1999.  The  overall  net loss for 1999,
however,  was higher than that for 1998 by $299,753,  primarily because gains on
the sale of marketable securities were higher by $203,636 in 1998 than in 1999.

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 the  investment  was sold in 1999.  Because  the
Company's  basis for this investment was zero, all sales proceeds are recognized
as gains.  Overall,  from 1996 through  1999,  the Company  realized  gains (net
proceeds) from the sale of these securities of $359,064.



Revenue and cost of revenue:

                                            2000        1999        1998
                                         ---------   ---------   ---------

  Defense revenue                        $ 337,898   $ 224,286   $ 334,663
  Commercial revenue                        70,000     100,000      60,550
                                         ---------   ---------   ---------
    Total revenue                          407,898     324,286     395,213
                                         ---------   ---------   ---------

    Cost of revenue                        228,587     100,857     212,986
                                         ---------   ---------   ---------


Changes  in annual  revenue  are  subject  to the  number  of  funded  contracts
received, the timing of completion of those contracts, and the extent of related
subcontracts.  Commercial  revenue  earned 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.  Over the last  three  years  the  Company  has
obtained  several   government   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.

Total revenue  increased 26% from 1999 to 2000,  after having decreased 18% from
1998 to 1999. Approximately $260,000 of the government revenue reported for 2000
relates to a sub-contract awarded in the fall of 1999 from a prime contractor to
the U.S. Navy pursuant to which Sonex demonstrated the technical  feasibility of
converting an existing high  performance,  gasoline fueled engine for marine use
to start and operate on heavy fuels.  The Company devoted a significant  portion
of its available  resources to the performance of this sub-contract from late in
1999 through June 2000 when work was substantially completed.  Revenue from this
contract  recognized in 1999 was approximately  $124,000.  The remaining defense
revenue  for 2000  consisted  of five  smaller  contracts  ranging  in size from
$12,500  to  $20,000,   including   three  contracts  for  UAV  gasoline  engine
conversions to heavy fuel operation.

Approximately  $100,000 of the government  revenue reported for 1999 was related
to a contract from the U.S.  Naval  Research  Laboratory  for an HFE  conversion
demonstration on a gasoline UAV engine. Follow-on work on this program failed to
materialize.

Revenue from  commercial  contracts,  earned  primarily in  connection  with the
Company's DI diesel engine piston technology, declined $30,000 from 1999 to 2000
as there was a  substantial  delay  from the time of  completion  of the  funded
programs  in 2000  until  negotiations  for the next  phase of funded  work were
completed in the first quarter of 2001. Revenue from this program with a foreign
diesel engine OEM which began in 1998 was $100,000 in 1999 and $50,000 in 2000.

From 1998 to 1999 total revenue decreased $70,927, or 26%, primarily as a result
of a decline in defense  revenue of $110,377.  Defense  revenue in 1998 included
subcontract revenue of approximately $73,000, of which nearly $51,000 related to
the USMC  contract  to convert  the  Dragondrone  UAV engines to heavy fuel use.
There were no  subcontracts  in 1999.  The  remaining  defense  revenue for 1998
included  approximately  $94,000  for  the  Dragondrone  HFEs,  and a  total  of
approximately  $167,000 from three other HFE  demonstration  contracts for which
there was no follow-up work in 1999.

Revenue from  commercial  contracts for 1998  included  $50,000 from the program
with a diesel  engine  OEM  mentioned  above and  $10,550  from a  program  on a
smaller, non-vehicular engine.

Cost of revenue  primarily  consists of direct labor charges,  direct  purchases
attributable  to funded  programs,  and  subcontract  costs.  Such  amounts were
substantially  higher  in 2000  than in 1999  due to the  relative  sizes of the
government  contracts being performed at the time. A small portion of total cost
of revenue for each period represented  charges directly  attributable to funded
commercial  projects.  The total for 1998 includes  defense program  subcontract
costs of  approximately  $69,000,  while there were no  subcontracts  in 1999 or
2000.

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:

                                                2000         1999        1998
                                              ---------   ---------   ---------

  Personnel (includes stock and options):
    Employee compensation                     $ 333,027   $ 314,442   $ 281,886
    Taxes & benefits                             48,594      42,761      39,676
    Consulting fees                             115,672     106,277      99,382
                                              ---------   ---------   ---------
    Total personnel                             497,293     463,480     420,944

  Cost of subcontracts	                                                 69,326
  Project parts and supplies                     49,343      44,810      59,169
  Occupancy                                      48,785      47,044      46,939
  Depreciation, patent amortization
     and write-off of abandoned patents          62,409      51,493      21,288
  Patent maintenance and renewal feess            8,831       9,962      11,726
  Other expenses                                 15,420      15,652      22,530
                                              ---------   ---------   ---------
      Total expenses                            682,081     632,441     652,522

  Less amounts classified as cost of revenue:
      Personnel                                (192,330)    (96,719)   (125,798)
      Cost of subcontracts                                              (69,326)
      Project parts and supplies                (32,951)     (4,138)    (17,862)
      Other expenses                             (3,306)
                                              ---------   ---------   ---------

    Total R&D                                 $ 453,494   $ 531,584   $ 439,536
                                              =========   =========   =========


The  following  analysis is based on a comparison  of total R&D expenses  before
deduction of amounts classified as cost of revenue.

Total R&D expenses  increased  by $49,640,  or 8%, from 1999 to $453,494 in 2000
as a result of  increases  in  personnel  costs and  non-cash  charges  for
depreciation,  patent  amortization and patent write-offs.  After subtraction of
subcontract  costs of $69,326 in 1998,  total R&D  expenses  of $583,196 in 1998
increased  by $49,245,  or 8%, to 1999 as a result of  increases  in  personnel,
depreciation, patent amortization and patent write-offs were partially offset by
a decrease in project parts and supplies and other expenses.

The  increase  in R&D  personnel  costs of  $43,208,  or 9%,  from  1999 to 2000
resulted  from  higher  total  salaries  due to the  hiring  early  in 2000 of a
technician  who was employed  until October 2000, a 4% increase in the salary of
the Company's CEO and Chief Scientist,  an increase in health insurance  premium
rates,  and an increase in consulting  fees,  with total bonus awards  declining
slightly.  While  consulting fees in total  increased only $9,395,  or 9%, total
fees for funded  contracts  (related only to the Navy  contract)  increased from
approximately $15,000 in 1999 to approximately  $56,000 in 2000 to reflect  the
increase in time spent by the consultant who served as program manager (the same
individual  who serves as the Company's  director of business  development - see
G&A discussion),  as well as the charges for a fuel injection system consultant.
This was offset  significantly by a decrease from approximatley  $90,500 in 1999
to $59,700 in 2000 in charges for the Company's R&D supervisor and international
corporate  liaison  who  resides  in  Europe.  This  individual  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. During 1999
he spent a considerable  amount of time in Annapolis and therefore was paid 100%
compensation  for his  time in  Annapolis,  while  in 2000 he made no  trips  to
Annapolis and thus was paid part-time compensation nearly the entire year.

The increase in personnel costs from 1998 to 1999 of $42,536,  or 10%,  includes
an  increase in total  salaries  of  approximately  $32,500,  or 12%,  resulting
primarily from an increase in the wage rates of non-officer  technical personnel
effective  January 1999 and the award of higher bonus  compensation  for 1999 of
$22,000  versus 1998 of $4,000.  The 1999 bonuses were awarded in December  1999
with the  stipulation  that payment of such bonuses was to be deferred until the
Board of Directors determined that the Company's cash resources were sufficient.
(Bonuses in December  2000 were awarded under the same  conditions.  During 2000
the Company paid $17,000 of the bonuses  awarded and accrued in December  1999.)
Higher  consulting  charges were also  incurred in 1999 related to the Company's
R&D supervisor and  international  corporate  liaison.  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  amount of  personnel  costs  charged  to cost of revenue in 2000 was nearly
double that for 1999,  as a much higher  percentage of the workforce was devoted
to funded  projects in 2000 as opposed to 1999,  as well as the fact that nearly
$56,000 in  consulting  fees were  charged to Navy  project in 2000  versus only
$15,000  in  1999.  In 1998 as well a higher  percentage  of the  workforce  was
devoted  to funded  projects  than in 1999,  and there were no  consulting  fees
charged to funded projects in 1998.

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,
increased  only  slightly from 1999 to 2000;  however,  a  significantly  higher
percentage of the total  expenditures  in 2000 were related to funded  projects,
reflecting the fact that personnel  spent more of their time on funded  projects
in 2000 versus 1999.  From 1998 to 1999, the total for these expenses  decreased
by $14,359,  or 24%, but after considering the application of related charges to
funded  contracts,  the remaining  project parts and supplies  expense  remained
comparable from 1998 to 1999.

Occupancy  expenses have  remained  relatively  consistent  for the past several
years until the  monthly  rent was  increased  in March  2000.  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  depreciation,  patent  amortization,  and patent write-offs  increased by
nearly  $11,000 from 1999 to 2000. The largest  component is patent  write-offs,
which were higher by $12,514,  from $25,555 in 1999 versus $38,069 in 2000. Such
write-offs  represent the unamortized  costs of patents abandoned by the Company
due to lack of expected  commercial  potential,  and  generally  relate to older
patents filed in small countries.

From 1998 to 1999 total depreciation, patent amortization, and patent write-offs
increased by $29,605, reflecting the patent write-offs on $25,555 in 1999 versus
none in 1998.



General and administrative (G&A) expenses:

                                                 2000        1999        1998
                                              ---------   ---------   ---------

  Personnel (includes stock and options):
    Employee compensation                     $ 113,564   $ 103,296   $ 110,079
    Consulting fees                              80,836      71,115
    Other option compensation                    29,764      29,760      44,644
    Taxes & benefits                              9,560       9,374      12 066
                                              ---------   ---------   ---------
    Total personnel                             233,724     213,545     166,789

  Occupancy                                      11,727      11,406      11,398
  Travel                                          6,113      13,550      10,328
  Proxy solicitation & annual meeting            19,545      18,021      22,701
  Legal fees                                      8,873       2,069       8,120
  Audit fees                                      9,150       8,580       8,000
  Stock transfer agent fees                       8,743       9,027       9,565
  Other expenses                                 34,732      39,451      39,773
                                              ---------   ---------   ---------

    Total G&A                                 $ 332,607   $ 315,649   $ 276,674
                                              =========   =========   =========


Total G&A expenses increased by $16,958, or 5%, from 1999 to 2000, primarily due
to an increase in personnel costs, while an increase in legal fees was offset by
reductions  in travel  and other  costs.  From 1998 to 1999  total G&A  expenses
increased by $38,975,  or 14%, mostly because of significantly  higher personnel
costs as the Company began to make extensive use of consulting services in 1999.

The  increase  in G&A  personnel  costs of  $20,179,  or 9%,  from  1999 to 2000
resulted  from higher  salary  expense due to a 4% increase in the salary of the
Company's  CFO in January  2000,  the award of a larger bonus to the CFO in 2000
versus 1999,  and an increase in  consulting  fees relating  almost  entirely to
increased  services by the  individual  who serves as the Company's  director of
business  development.  The Company has a contract  with this  consultant  for a
minimum  amount of services per month,  half of which amount is paid in cash and
half is paid in stock  options.  During 2000,  services in excess of the monthly
minimum were required on occasion, all of which extra charges were paid in stock
options.

From 1998 to 1999 personnel costs increased  $46,756,  or 28%, as decreases
in total salaries and and other stock option  compensation were more than offset
by charges  relating to the Company's  employing the services of two consultants
beginning in 1999. Total salaries  decreased $6,783, or 6%, from 1998 to 1999 as
an increase  related to a bonus award to the  Company's  CFO accrued in 1999 was
more than offset by a decrease in wages for an administrative  assistant,  which
position  became  vacant  early in 1999.  The bonus of  $6,000  was  awarded  in
December 1999 with the stipulation  that payment of was to be deferred until the
Board of Directors determined that the Company's cash resources were sufficient.
(The bonus in December  2000 of $10,000 was awarded  under the same  conditions.
During 2000 the Company paid $3,000 of the bonus awarded and accrued in December
1999.)

Consulting  fees in 1999  and  2000  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 of the individual who serves as the Company's  director
of business development.  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.


Adoption of new accounting pronouncements

The  adoption  by the Company in fiscal  2001 of new  accounting  pronouncements
which have a delayed effective date is not expected to have a material impact on
its financial statements.



                          ITEM 7. FINANCIAL STATEMENTS


Index to financial statements:

     Reports of independent accountants

     Financial statements:

       Balance sheets as of December 31, 2000 and 1999

       Statements of operations and accumulated deficit for the three years
	   ended December 31, 2000

       Statements of paid-in capital for the three years ended December 31, 2000

       Statements of cash flows for the three years ended December 31, 2000

     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, 2000 and 1999,  and the  related  statements  of
operations  and  accumulated  deficit and cash flows for each of the three years
ended December 31, 2000, 1999 and 1998, 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, 2000 and 1999, and the results of its operations and its cash flows
for  each  of  the  three  years  ended  December  31,  2000,   1999  and  1998,
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 generate sufficient 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 30, 2001










                              SONEX RESEARCH, INC.
                                 BALANCE SHEETS

                                                             December 31,
                                                       ------------------------
                                                           2000         1999
                                                       -----------  -----------
                Assets

Current assets
 Cash and equivalents                                  $    89,306  $    57,768
 Accounts receivable                                        17,340       77,461
 Prepaid expenses                                           27,142       29,836
 Loans to officers and employees (Note 5)                   22,500       22,500
                                                       -----------  -----------
     Total current assets                                  156,288      187,565

Notes receivable from officers and employees (Note 6)       18,125

Patents (Note 7)                                           215,707      219,776

Property and equipment (Note 8)                             69,026       83,968
                                                       -----------  -----------

        Total assets                                   $   459,146  $   491,309
                                                       ===========  ===========

   Liabilities and Stockholders' Equity/(Deficit)

Current liabilities
 Accounts payable and other accrued liabilities        $    41,775  $    49,212
 Accrued compensation (Note 9)                              97,807       79,381
                                                       -----------  -----------
     Total current liabilities                             139,582      128,593
                                                       -----------  -----------

Deferred compensation (Note 10)                            810,844      763,744
                                                       -----------  -----------

Stockholders' equity/(deficit) (Note 12)
 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: 19,479,868 in 2000 and
   18,008,169 in 1999                                      194,799      180,082
 Additional paid-in capital                             20,927,437   20,430,476
 Accumulated deficit                                   (21,628,916) (21,026,986)
                                                       -----------  -----------
     Total stockholders'equity/(deficit)                  (491,280)    (401,028)
                                                       -----------  -----------
Commitments (Note 15)

  Total liabilities and stockholders'equity/(deficit)  $   459,146  $   491,309
                                                       ===========  ===========


The accompanying notes are an integral part of the financial statements.
                              SONEX RESEARCH, INC.
                  STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT


                                                 Year ended December 31,
                                       ---------------------------------------
                                           2000          1999          1998
                                       -----------   -----------   -----------
Revenue
  Defense                              $   337,898   $   224,286   $   334,663
  Commercial                                70,000       100,000        60,550
                                       -----------   -----------   -----------
                                           407,898       324,286       395,213
                                       -----------   -----------   -----------

Costs and expenses
 Cost of revenue                           228,587       100,857       212,986
 Research and development                  453,494       531,584       439,536
 General and administrative                332,607       315,649       276,674
                                       -----------   -----------   -----------
                                         1,014,688       948,090       929,196
                                       -----------   -----------   -----------

Net loss from operations                  (606,790)     (623,804)     (533,983)
                                       -----------   -----------   -----------

Other income and expense
 Investment and other income                 4,860        10,181        16,477
 Gain on sales of
   marketable securities                                  43,508       247,144
                                       -----------   -----------   -----------

Net loss                                  (601,930)     (570,115)     (270,362)

Accumulated deficit
  Beginning of period                  (21,026,986)  (20,456,871)  (20,186,509)
                                      ------------  ------------  ------------

  End of period                       $(21,628,916) $(21,026,986) $(20,456,871)
                                      ============  ============  ============


Weighted average number of
 common shares outstanding              18,472,727    17,765,110    17,572,147
                                        ==========    ==========    ==========


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






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

                              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, 1998      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
February exercise of
 Warrants                 .35                      285,000    2,850      96,900
March for services        .40                       24,130      241      10,125
June exercise of
 Warrants                .375                      196,667    1,967      71,783
June exercise of
 warrants for notes	 .375                       48,333      483      17,642
June for services         .41                       31,538      315      12,695
September for services    .24                       56,877      569      13,181
December private
 Placement                .25                      775,000    7,750     186,000
December for services     .25                       54,154      542      12,996
Stock option compensation                                                45,875
Amortization of deferred
 compensation from
 stock options                                                           29,764
                              ---------  ------ ----------  -------  ----------
Balance, December 31, 2000    1,540,001 $15,400 19,479,868 $194,799 $20,927,437
                              ========= ======= ========== ======== ===========

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


                              SONEX RESEARCH, INC.
                            STATEMENTS OF CASH FLOWS



                                                   Year ended December 31,
                                             ---------------------------------
                                                2000        1999        1998
                                             ---------   ---------   ---------
Cash flows from operating activities:
 Net loss                                    $(601,930)  $(570,115)  $(270,362)
 Adjustments to reconcile net loss to net
    cash used in operating activities
  Depreciation                                  16,328      13,573       8,955
  Amortization of patents                       46,091      37,920      12,933
  Amortization of deferred compensation
    from stock options                          29,764      29,760      44,644
  Current charges paid in stock or options      96,539      67,366      41,539
  Gain on sale of marketable securities        	           (43,508)   (247,144)
  (Increase) decrease in accounts receivable    60,121      25,024     107,603
  (Increase) decrease in prepaid expenses        2,694        (999)      7,447
  Increase (decrease) in accrued liabilities    10,989      13,680     (72,308)
  Increase (decrease) in deferred
     compensation                               47,100      49,706      65,747
                                             ---------   ---------   ---------
Net cash used in operating activities         (292,304)   (377,593)   (300,946)
                                             ---------   ---------   ---------

Cash flows from investing activities:
  Proceeds from sale of marketable securities               43,508     247,144
  (Increase) decrease in loans to employees                  5,000      (5,000)
  Acquisition of property and equipment         (1,386)    (63,009)    (26,281)
  Additions to patents and technology          (42,022)    (14,096)    (24,791)
                                             ---------   ---------   ---------
Net cash provided by (used in)
 investing activities                          (43,408)    (28,597)    191,072
                                             ---------   ---------   ---------

Cash flows from financing activities:
  Issuance of stock - private placement        193,750
  Issuance of stock - exercise of warrants     173,500
  Issuance of stock - exercise of options                  127,500      90,750
                                             ---------   ---------   ---------
Net cash provided by financing activities      367,250     127,500      90,750
                                             ---------   ---------   ---------

Increase (decrease) in cash                     31,538    (278,690)    (19,124)

Cash at beginning of period                     57,768     336,458     355,582
                                             ---------   ---------   ---------
Cash at end of period                        $  89,306   $  57,768   $ 336,458
                                             =========   =========   =========




The accompanying notes are an integral part of the financial statements.
                              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 2000.

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.

Patents:  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,  as well as the unamortized costs of patents abandoned by the
Company due to lack of expected commercial potential,  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 and demonstration
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 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 modified with
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 Statement of Financial
Accounting Standards (SFAS) No. 123 - "Accounting for Stock-based Compensation".

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 and,  accordingly,  are
excluded from the computation.

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
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 June 30, 2001. In the event 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.


NOTE 4 - MARKETABLE SECURITIES

In 1995 the Company's  former  inactive  subsidiary,  SonoChem,  Inc.,  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 12),  became the  directors  and  officers of
Digital.  The shares of Digital stock  received by the Company  pursuant to this
merger  became  available for public  trading in 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  has been  accounted  for in  accordance  with  SFAS No.  115 -
"Accounting  for  Certain  Investments  in  Debt  and  Equity  Securities".  The
Company's  carrying  basis  in the  original  SonoChem  investment  of zero  was
considered to be its cost basis in the Digital stock as well.  Accordingly,  the
aggregate net proceeds from the sale of these securities have been 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.  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, 2001.


NOTE 6 - NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES

In connection  with the exercise of warrants to purchase  shares of common stock
in June 2000 (see Note 12), the Company  accepted notes  receivable  aggregating
$18,125 from its chief  financial  officer and two other  employees.  The notes,
payable on or before June 30, 2005, are secured by the shares  issuable upon the
exercise  of  the  warrants  and  deferred  salaries  payable  to  each  of  the
individuals.  Interest  accruing  on the notes at 6% per annum will be waived if
the entire principal amount is paid on or before June 30, 2002.













NOTE 7 - PATENTS

The net unamortized capitalized costs of patents is comprised of the following:


                                                      December 31,
                                                 ----------------------
                                                   2000          1999
                                                 --------      --------

    Capitalized costs                            $255,307      $288,522
    Accumulated amortization                      (39,600)      (68,746)
                                                 --------      --------
                                                 $215,707      $219,776
                                                 ========      ========

The Company  continues to conduct its own research  and  development  activities
which  have  resulted  in   additional   patents.   Development   of  commercial
applications  of  certain  elements  of the SCS  has  commenced  and  management
believes  the  capitalized  cost of patents will be  recovered  through  revenue
derived from the  licensing of the  underlying  technology.  Management  closely
monitors the patent  application  process and other factors which may affect the
economic value of the Company's technology,  and reduces the capitalized cost of
patents  should  the  recovery  of such  costs  no  longer  be  sustainable.  In
connection  with  patents  abandoned  by the  Company  due to lack  of  expected
commercial  potential,  unamortized costs of $38,069 in 2000 and $25,555 in 1999
were charged to  operations  and  reflected as  additional  amortization  in the
accompanying financial statements.


NOTE 8 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                      December 31,
                                                 ----------------------
                                                   2000          1999
                                                 --------      --------

    Shop equipment                               $457,545      $456,159
    Office equipment                               36,512        37,457
                                                 --------      --------
                                                  494,057       493,616
    Accumulated depreciation                     (425,031)     (409,648)
                                                 --------      --------
                                                 $ 69,026      $ 83,968
                                                 ========      ========










NOTE 9 - ACCRUED COMPENSATION

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

                                                      December 31,
                                                 ----------------------
                                                   2000          1999
                                                 --------      --------

        Accrued vacation pay                     $ 53,000      $ 48,000
        Accrued bonuses                            38,000        25,000
        Accrued wages at year-end                   6,807         6,381
                                                 --------      --------
                                                 $ 97,807      $ 79,381
                                                 ========      ========

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 10. The amount of accrued
vacation  included above that was payable to the Company's  officers at December
31, 2000 and 1999 was $39,938 and $37,400,  respectively.  In December  2000 and
1999, the Company awarded bonuses totaling $30,000 and $25,000, respectively, 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.  During 2000, the Company paid
$17,000 of the bonuses accrued at December 31, 1999.


NOTE 10 - 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.  Beginning in January 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,
                                                 ----------------------
                                                   2000          1999
                                                 --------      --------
        Current executive officers               $478,237      $431,137
        Current employees and consultants          62,088        62,088
        Former employees                          270,519       270,519
                                                 --------      --------
                                                 $810,044      $763,744
                                                 ========      ========
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,
2001.  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.

At the  conclusion  of a legal  challenge by two former  officers of the Company
initiated  in  1993  demanding  full  payment  of  deferred  salaries  upon  the
termination of their  employment,  in 1996 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 11 - INCOME TAXES

The  Company  has not  incurred  any  federal or state  income  taxes  since its
inception  due to operating  losses.  At December 31, 2000,  the Company had net
operating loss ("NOL") carryforwards of approximately $15.5 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
        ------------              -----------       ---------

            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                      900,267
         2006 - 2012                7,095,459
         2018 - 2020                1,423,769
                                  -----------       ---------

                                  $15,536,331       $ 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 the  accounting  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 a
prior year 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 $6.0 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 $3,032,760 have expired unused.


NOTE 12 - 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.

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, 2000, a total
of 459,999 shares of preferred stock had been converted into 1,314,278 shares of
common stock.

Exercise of Warrants; Private placements of common equity: In February 2000 the
Company  received  cash  proceeds  of $99,750  from the  exercise of warrants to
purchase  285,000  shares of its common  stock at an exercise  price of $.35 per
share.  In June 2000 the Company  received  cash  proceeds  of $73,750  from the
exercise  of  warrants  to  purchase  196,667  shares of its common  stock,  and
accepted five-year notes receivable aggregating $18,125 from its chief financial
officer  and two other  employees  (see Note 6) for the  exercise of warrants to
purchase 48,333 shares of its common stock, all at a price of $.375 per share.

In December  2000 the Company  completed a private  financing in which it raised
$193,750 from a small number of the Company's shareholders,  including its chief
executive  officer and chief  financial  officer,  who  participated in previous
private  financings of the Company.  A total of 775,000  shares of the Company's
common stock and five-year  warrants to purchase an additional 387,500 shares of
common stock at $.50 per share were issued in this financing. The offer and sale
of these shares of common stock and warrants to purchase  shares of common stock
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 transaction  based on management's  belief that the
separate fair value of such warrants is not significant.


NOTE 13 - 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 2010.

Between  January 1, 1998 and December 31, 2000,  the Company had the  following
activity in options to purchase shares of common stock under the Plan:


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

Unexercised at January 1, 1998      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
                                                           =========     ====
    Granted                           272,500      .39
    Exercised                               0
    Lapsed or canceled                 (6,000)     .50
                                   -----------

Unexercised at December 31, 2000    4,323,216     $.51     3,760,716     $.52
                                   ===========    ====     =========     ====


Options granted under the Plan during 1998 include grants of ten-year options in
December  1998 to each of the  Company's  four  outside  directors  to  purchase
100,000  shares of common stock.  These options vest at the rate of 25% per year
beginning  with the date of grant.  Options  granted  under the Plan during 1999
include grants of ten-year options in June 1999 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 1999 to the Company's
president,  exercisable  25% per  year  beginning  with the  date of  grant,  to
purchase 250,000 shares of common stock.  These options granted in 1999 and 1998
all have an exercise  price of $.50 per share,  which price was above the market
price of the common stock at each grant date.

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 options  granted  with an exercise  price below the market price at the date
of grant,  the  Company  credits an amount to  additional  paid-in  capital
representing  the excess of the aggregate market value at the date of grant over
the  aggregate  exercise  price of such  options,  and  charges a like amount to
compensation  expense in that year. There were no such charges from 1998 through
2000 in connection with options granted under the Plan.  Since late in 1998, the
Company has engaged a  consultant  to serve as director of business  development
and project manager who is compensated  partially in cash and partially in stock
options.  While the  exercise  price of such options has been equal to or higher
than the  market  price of the  stock at each  date of grant,  the  Company  has
recorded  compensation  expense equal to the value of the consultant's  services
which are payable by such stock  options.  Such  charges  aggregated  $45,875 in
2000,  $24,000  in 1999,  and  $5,000 in 1998,  with like  amounts  credited  to
additional paid-in capital.

In  connection  with the  grant of the  option in 1997 by  Proactive  to the new
president of the Company,  $29,764 in 2000, $29,760 in 1999, and $44,644 in 1998
was  credited  to  additional  paid-in  capital  and  like  amounts  charged  to
compensation expense in each of those years.  Additional compensation of $29,761
will be recorded  similarly  in 2001 for the final  portion of the option  which
will vest.  There are no such  charges for the option  granted by  Proactive  in
December  1999 to the  president  of the  Company  because  the  exercise  price
exceeded the market price of the stock at the date of grant.

While the Company  applies APB Opinion  No. 25 in  accounting  for stock  option
compensation,  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%,  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:








                                            2000       1999       1998
                                          --------   --------   --------

  Weighted average fair value per share       $.37       $.36       $.34

  Net loss - as reported                  $601,930   $570,115   $270,362
  Net loss - pro forma                    $926,125   $861,650   $531,122

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


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 14 - COMMON STOCK RESERVED FOR FUTURE ISSUANCE

As of December  31,  2000,  a total of  11,239,591  shares of common  stock were
reserved by the Company for issuance for the following purposes:


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

Currently exercisable at $.50 per share, expiring in
      December 2005                                                387,500
Currently exercisable at $.75 per share, expiring in
      February 2002                                                167,759
      March 2002                                                   220,000
                                                                ----------
                                                                   775,259
                                                                ----------
Currently exercisable options:
 Exercisable at $.25 per share                                      31,250
 Exercisable at $.50 per share                                   3,483,466
 Exercisable at $.75 per share                                     196,000
 Exercisable at $1.00 per share                                     50,000
                                                                ----------
                                                                 3,760,716
                                                                ----------
Granted options becoming exercisable in the future:
 Exercisable at $.25 per share                                      93,750
 Exercisable at $.50 per share                                     468,750
                                                                ----------
                                                                   562,500

Options available for future grants                              1,741,116

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

   Total shares reserved                                        11,239,591
                                                                ==========


In February  2000  warrants  exercisable  at $.35 and $.75 per share to purchase
285,000 and 3,098,209 shares, respectively, of common stock expired unexercised.
In June  2000  warrants  exercisable  at $.375  and $.50 per  share to  purchase
350,000 and 590,000 shares, respectively, of common stock expired unexercised.



NOTE 15 - 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 currently provides for monthly rent of $4,000
and  requires  the  Company to pay all  property  related  expenses.  Gross rent
charges  aggregated  $47,000 in 2000, $42,000 in 1999 and $42,000 in 1998, while
the Company also earned sublease income of $2,400,  $2,400,  and $2,000 in 2000,
1999 and 1998, 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.




              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.

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.


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

Preferred Stock Directors:

 Charles C. McGettigan       56   2002  Director
 Myron A. Wick, III          57   2002  Chairman of the Board

Common Stock Directors:

 Nuno Brandolini             47   2003  Vice Chairman of the Board
 Lawrence H. Hyde            76   2002  President and Director
 Andrew A. Pouring           69   2001  Chief Executive Officer, Chief Scientist
                                          and Vice Chairman of the Board
Other Executive Officers:

 George E. Ponticas          41         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,  following  a  career  as  an  executive  with  major
investment banking firms,  including  Hambrecht & Quist, Inc. and 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.  Mr.  Brandolini has spent
his career in the buyout and finance industries, both as a principal in a number
of small and medium-size  management firms, as well as in an executive  position
with Salomon  Brothers,  Inc.  Since  November 1995 Mr.  Brandolini has been the
Chairman of the Board and Chief Executive Officer of Scorpion Holdings,  Inc., a
merchant banking  company.  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 as  President
since October 1997. Mr. Hyde is a private investor with interests in a number of
publicly and  privately  held  companies.  He spent the majority of his business
career  as  an  executive  in  the  automotive  industry,   serving  in  various
engineering,  marketing,  international,  and chief executive  capacities for AM
General Company,  American Motors Corporation and Ford Motor Co. Currently,  Mr.
Hyde also 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.

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.  Prior to forming Sonex,
Dr.  Pouring  served as a Professor of Aerospace  Engineering  at the U.S. Naval
Academy,  including  four years as the Chairman of the  Academy's  Department of
Aerospace  Engineering.  Dr.  Pouring  is a member of various  professional  and
scientific societies, including the American Society of Mechanical Engineers and
the Society of  Automotive  Engineers.  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.  Prio to joining  Sonex,  Mr.  Ponticas  was a member of the auditing
staff of Price  Waterhouse  in  Baltimore,  Maryland,  attaining the position of
audit manager. 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
executive  officers  who 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     2000   $ 87,500    $ 37,500    $ 10,000      35,000
 CEO & Chief Scientist    1999     84,000      36,000       7,500      35,000
                          1998     72,000      48,000                  35,000

Mr. George E. Ponticas    2000   $ 86,400    $  9,600    $ 10,000      30,000
 CFO & Secretary          1999     82,800       9,200       6,000     125,000
                          1998     82,800       9,200                  25,000


The  authorized  full annual  salaries  for Dr.  Pouring and Mr.  Ponticas  were
increased in January 2000 from $120,000 to $125,000 and from $92,000 to $96,000,
respectively, representing the first increase since January 1997.

In order to help conserve the Company's  limited cash  resources,  however,  the
Named Executives 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 and other
current  and former  employees  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.

For many years through 1998,  Dr.  Pouring had been  deferring 40% of his annual
salary.  In January  1999,  the  percentage  deferral  was  reduced to 30%.  Mr.
Ponticas has been deferring 10% of his annual salary for the last several years.
The  conditions  that would  require  repayment of deferred  amounts have yet to
occur.  As of December  31,  2000,  a total of $372,480 and $105,757 in deferred
salary is owed to Dr. Pouring and Mr. Ponticas, respectively.

In December of both 2000 and 1999, the Company awarded bonuses  totaling $30,000
and $25,000,  respectively, to its officers and employees, including the amounts
reported  above for the Named  Executives.  The bonus  awards in both years were
made with the  stipulation  that payment of such bonuses would be deferred until
the  Board  of  Directors  determines  that the  Company's  cash  resources  are
sufficient to enable such payments. As of December 31, 2000, $10,000 and $13,000
in  accrued  bonuses   remained   payable  to  Dr.  Pouring  and  Mr.  Ponticas,
respectively.

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.  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.



                       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          28%          $.25       $.15        Dec. 27, 2010
Ponticas       30,000          24%          $.25       $.15        Dec. 27, 2010






               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, 2000       December 31, 2000
          # of shares
          acquired on     Value         Exercisable/            Exercisable/
  Name     exercise     realized        unexercised             unexercised
--------  -----------   --------   ----------------------   -------------------

Pouring:
  Exercisable @ $.25        $0          8,750/35,000             $0/$0
  Exercisable @ $.50        $0        200,066/220,066            $0/$0
  Exercisable @ $.75        $0         18,750/25,000             $0/$0

Ponticas:
  Exercisable @ $.25        $0          7,500/30,000             $0/$0
  Exercisable @ $.50        $0        232,500/245,000            $0/$0
  Exercisable @ $.75        $0         18,750/25,000             $0/$0



The exercise  price of all options held by the Named  Executives was higher than
the  December 31, 2000 market price of $.11 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 31, 2001 information relating to
beneficial  ownership  by  directors  and  executive  officers  of the  Company,
individually  and 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 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
a  beneficial  owner  of  securities  as to  which  he has no  record  ownership
interest,  and the  same  shares  may be  beneficially  owned  by more  than one
reporting person.  Unless otherwise noted, all shares are beneficially owned and
sole voting and investment power is held by the persons named.

Beneficial  ownership  includes  securities which the reporting person currently
owns or has the right to acquire  within  sixty days  through  the  exercise  of
options  and  warrants  or  through  the  conversion  of  preferred  stock.  The
percentage of beneficial ownership for a reporting person is based on the number
of  outstanding  shares of common stock of the Company plus the number of shares
which the reporting  person has the right to acquire within sixty days, but does
not include shares which any other reporting person has the right to acquire.


                           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      405,150        516,876         2.6
Lawrence H. Hyde              644,986    1,285,430      1,930,416         9.5
Charles C. McGettigan       1,383,118    2,078,948      3,462,066  (3)   15.8
George E. Ponticas	      236,262      296,250        532,512         2.6
Andrew A. Pouring             763,239      277,566      1,040,805         5.2
Myron A. Wick, III          1,383,118    2,078,948      3,462,066  (3)   15.8

All directors & officers
 as a group (6 persons)     3,139,331    4,343,344      7,482,675        30.9

Herbert J. Mitschele, Jr.
  Far Hills, NJ             1,021,655       77,857      1,099,512         5.5

Proactive , et.al. (2)
  San Francisco, CA         2,732,064    3,479,895      6,211,959        26.6

-----------------------------
(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  3,123,066  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              405,150                                     405,150
Lawrence H. Hyde             464,000   821,430                         1,285,430
Charles C. McGettigan (1)    339,000  (410,715)     79,235  2,071,428  2,078,948
George E. Ponticas	     258,750                37,500               296,250
Andrew A. Pouring            227,566                50,000               277,566
Myron A. Wick, III (1)       339,000  (410,715)     79,235  2,071,428  2,078,948

All directors & officers
 as a group (6 persons)    2,033,466   410,715     166,735  2,071,428  4,343,344

Herbert J. Mitschele, Jr.                           35,000     42,857     77,857

Proactive , et.al. (2)
  San Francisco, CA                   (821,430)    158,469  4,142,856  3,479,895

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

(1)  Includes  1,739,948  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.




             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.



                                   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.


April 12, 2001          By:           /s/ Andrew A. Pouring
                              ----------------------------------
                              Andrew A. Pouring
                              Principal Executive Officer

April 12, 2001          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.


April 12, 2001                                  *
                              ----------------------------------
                              Myron A. Wick, III
                              Chairman of the Board of Directors

April 12, 2001                                  *
                              ----------------------------------
                              Nuno Brandolini
                              Vice Chairman of the Board of Directors

April 12, 2001                       /s/ Andrew A. Pouring
                              ----------------------------------
                              Andrew A. Pouring
                              Vice Chairman of the Board of Directors

April 12, 2001                                  *
                              ----------------------------------
                              Lawrence H. Hyde
                              President and Director

April 12, 2001                                  *
                              ----------------------------------
                              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 30, 2001 appearing on page 24 of
this Form 10-KSB.


/s/C.L. STEWART & COMPANY

Annapolis, Maryland
March 30, 2001

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