FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[ X ]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934
        For the fiscal year ended - January 31, 2002 OR
[   ]   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934
        For the transition period from _______________ to _______________

                        Commission file number 333-30838

                           EXHAUST TECHNOLOGIES, INC.
             (Exact name of registrant as specified in its charter)

WASHINGTON                                         91-1970433
(State or other juristiction of                    (Employer Identification No.)
incorporation or organization

                               230 North Division
                            Spokane, Washington 99202
          (Address of principal executive offices, including zip code.)
                                 (509) 838-4447
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
     None

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

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

Check if no disclosure of delinquent  filers  pursuant to Item 405 of Regulation
S-B is contained  herein,  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. [   ]

State  Issuer's  revenues  for its most  recent  fiscal  year.  January 31, 2002
$366,767

<PAGE>

The  aggregate  market  value of the  registrant's  voting  common stock held by
non-affiliates  was  $959,936 as of January 31, 2002 based on the average of the
bid and ask prices  quoted on the OTC Bulletin  Board.  There are  approximately
662,025 shares of common voting stock of the registrant held by non-affiliates.

Issuers involved in Bankruptcy Proceedings during the past Five Years.
     Not Applicable.

State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest  practicable date: April 24, 2002 - 6,491,000 shares of
Common Stock

Documents Incorporated by Reference

1.   The Registrant's Form 10SB  Registration  Statement and exhibits filed with
     the Securities and Exchange  Commission,  SEC file  #000-25875 on April 27,
     1999, and all amendments thereto.

2.   The Registrant's Form SB-2  Registration  Statement and exhibits filed with
     the Securities and Exchange Commission, SEC file #333-30838 on February 22,
     2000, and all amendments thereto.

3.   All reports filed with the Securities and Exchange after February 22, 2000.

Transitional Small Business Issuer Format
     YES [   ]      NO [ X ]



                                       2
<PAGE>

                                     PART I

Item 1. BUSINESS

General

     The Company was formed  under the laws of the state of  Washington  on July
21, 1998, to develop, manufacture and market two automotive devices.

The Devices

     The  two  devices  that  have  been  developed  and  are  currently   being
manufactured and marketed are the Turbolator and the Pneumatic Hand Tool Exhaust
Muffler (PHTEM). Both devices are available for sale.

     On July 21,  1998,  we  entered  into a  Licensing  Agreement  with  Robert
Sterling,  our President,  and Matthew Sterling,  the son of Robert Sterling for
the licensing of the development, manufacturing and marketing of the Turbolator.
Further,  on the same date,  we entered into a Licensing  Agreement  with Robert
Sterling,  for the  development,  manufacturing  and marketing of the PHTEM. The
foregoing agreements were subsequently amended to extend the time period that we
have to generate  revenues from the sale of our products.  On May 25, 2001,  the
patent rights to the  Turbolator and PHTEM were given to the Company in exchange
for common  stock  issued to Robert  Sterling  and Matthew R.  Sterling  and the
license agreements were terminated.

The Turbolator

     The Turbolator was invented by Robert Sterling,  our President and a member
of the Board of  Directors,  and his son,  Matthew R. Sterling in 1990. A patent
was issued on October 18, 1994 (No.  5,355,673).  The  Turbolator  is  currently
being  marketed.  During the period the patent was pending,  the  Turbolator was
marketed and generated gross revenues of $160,364.  The revenue was earned prior
to our  formation  and was not  recognized  as  revenue  to us. In  addition  to
obtaining a patent for the Turbolator, Robert Sterling obtained a trademark with


                                       3
<PAGE>

the United States Trademark office on the name  "Turbolator."  Messrs.  Sterling
and Sterling have issued an exclusive license to us to manufacture,  develop and
market the  Turbolator,  provided we generate  sales from the Turbolator of $-0-
through 2001 and $100,000 per year,  thereafter.  The license  granted to us for
the Turbolator  requires that Robert Sterling and Matthew  Sterling  approve any
license transfer from us by either a merger or sale of assets.  On May 25, 2001,
all patent rights to the Turbolator were  transferred to the Company in exchange
for common  stock  issued to Robert  Sterling  and Matthew R.  Sterling  and the
license agreement was terminated.


     The  Turbolator  is designed for  installation  on all  vehicles,  with the
exception of turbo-charged  vehicles. It is composed of a spring butterfly valve
mounted in a tube  housing.  The  butterfly  valve is  regulated by a pre-loaded
torsion spring. The tube housing or tip housing is installed directly behind the
catalytic converter or directly behind the muffler. The Turbolator comes in five
sizes  which are six inches  long with an outside  diameter  varying  from 2 7/8
inches to 4 1/8 inches  depending on the exhaust pipe size. Two  Turbolators are
installed for a vehicle equipped with dual exhausts.

     The purpose of the Turbolator is to regulate  exhaust flow from the engine.
By regulating  exhaust flow,  the device  creates a more  efficient fuel burning
engine,  thus creating more horsepower and torque without other modifications to
the engine.

     The  Turbolator  operates  in  conjunction  with the exhaust  system  "OEM"
computer controlled  electronic port fuel injection and emission control systems
already certified with the stock engine. Installation of the Turbolator does not
alter the OEM  location  of the oxygen  sensor and the  converter.  The  tune-up
specifications  for a  vehicle  remain  the same.  In lab  tests the  Turbolator
reduced certain emissions and improved fuel mileage.

Pneumatic Hand Tool Exhaust Muffler

     The  Pneumatic  Hand Tool  Exhaust  Muffler  (the  "PHTEM") was invented by
Robert E. Sterling,  in 1997. Mr.  Sterling  applied for a patent on January 13,
1998 and the patent has been approved.  The PHTEM is currently  being  marketed.
Mr.  Sterling has granted us an exclusive  license to manufacture and market the
PHTEM,  provided the Company  generates  sales of $-0- through 2001 and $100,000
each year  thereafter.  On May 25,  2001 all  patent  rights  to the PHTEM  were
transferred  to the  Company  in  exchange  for  common  stock  issued to Robert
Sterling and the license agreement was terminated.

     The PHTEM is a tool with a noise  muffling  system  that can  reduce  sound
levels and remove  entrained  solid and oil  contaminates  from the  exhaust air
before it is discharged  into the  atmosphere.  The PHTEM is used in air powered
tools.  The PHTEM has a handle with an exhaust  passage  where the  contaminates
pass. The PHTEM includes a number of washers positioned longitudinally about the
inner tube. The combination of the inner tube and washers are located within the
handle  exhaust  passage.  An end cap is  provided in closing off the inner tube
distal end. During use,  exhaust air enters the inner tube,  flows out the inner
tube airflow openings into the washers,  and out the end cap. The handle muffles
the sound of the tool and retains the contaminates therein.


                                       4
<PAGE>

     Messrs  Sterling and Sterling have  registered  the  trademark  "AirCat" to
market a line of air powered tools which they have designed that uses the PHTEM.
The tools include a patent  pending  handle design which has been  ergonomically
engineered  to better  position and balance the tool during use.  Several  tools
have been field tested during the past year and some are now in production.  The
tools incorporating the PHTEM are substantially quieter with essentially no loss
of power. The trademark examiner has authorized the publication of the trademark
for  comments.  As of the date hereof the  trademark  has not been  approved and
there is no assurance that the trademark will ever be approved.

Testing

     We have conducted  independent  performance tests of the Turbolator through
an EPA approved California testing facility. Based upon the tests, we received a
California CARB  certificate  (CARB  #D-226-1).  The California CARB Certificate
certifies that the  Turbolator  meets,  or exceeds,  the air quality and vehicle
performance guidelines set forth in California. Because California's air quality
standards  are the most  stringent  in the  United  States,  such  certification
establishes that the Turbolator meets or exceeds the air qualification standards
in all other states. The tests further  established that the Turbolator improves
fuel economy and reduces carbon monoxide and hydrocarbon emissions.

Manufacturing

     We are currently retaining a non-related company in Taiwan to manufacture a
Pneumatic Hand Tool and install our muffler  assembly.  Our Company provides the
muffler  assembly  parts  which are  purchased,  from our  specifications,  from
various parts manufacturers.  The Taiwan company provides us with a PHTEM, boxed
and ready for shipment to our customers.

     The Turbolator is currently being manufactured by an non-related company in
Spokane, Washington. A completed unit is provided to us and we box the unit and
ship it to customers.

     We believe there are a number of manufacturers who are capable of producing
the  Turbolator  and the PHTEM.  Raw materials for the  Turbolator and PHTEM are
readily  available from numerous  sources.  Our founders have spent in excess of
$50,000 during the two years prior to our  incorporation  in the  development of
the Turbolator and PHTEM.

                                       5
<PAGE>


     In August 1999, we entered into a purchase  agreement with Apex Industries,
Inc.  ("Apex"),  whereby Apex agreed to manufacture,  and we agreed to purchase,
10,000 Turbolator  assemblies.  We have an unconditional  obligation to purchase
the  10,000  Turbolator  assemblies  and we have no right to return  any  unsold
Turbolator  assemblies.  The total cost of the 10,000  Turbolator  assemblies is
estimated to be approximately $200,000, of which $28,500 relates to tooling cost
that will become our property.  In conjunction with the purchase agreement,  our
president  secured  an  irrevocable  standby  letter of  credit  with a bank for
$80,000 on our behalf and for the benefit of Apex.  Drawings under the letter of
credit bear interest  payable  monthly at the bank's prime rate plus two percent
(2%) and matured on November  23,  1999.  The Company has taken  delivery of the
10,000  units.  The letter of credit has expired.  We are current on our account
with Apex.

Distribution

     The  Turbolator  and  PHTEM  are  currently   being  sold  and  shipped  to
independent  sales   representatives  and  distributors,   as  well  as,  retail
customers,  by our  Company.  While  it is the  intent  of the  Company  to have
independent  distributors  handle the  majority of the  Company's  products,  no
agreements  have been entered into for  distribution  nor can we be assured that
any will be.

Marketing

     We  are   currently   selling  to  sales   representatives   and  warehouse
distributors. We are also selling to retail customers and through catalog sales.

     On February 25, 2000, we entered into an exclusive consulting and marketing
agreement  with  Clarkstone  International  Corporation.  Under the terms of the
agreement, Clarkstone is to provide consulting,  marketing and sales services to
us.  Clarkstone will receive as  consideration  for its services,  the following
commissions on the sale of all products by us:

*    Sales under $10,000        -    15% of the sale
*    Sales $10,000-$20,000      -    $1,500 plus 12% of the
                                     amount of the sale over
                                     $10,000
*    Sales $20,000-$30,000      -    $2,700 plus 11% of the
                                     amount of the sale over
                                     $20,000
*    Sales over $30,000         -    $3,800 plus 10% of the
                                      amount of the sale over
                                      $30,000


                                       6
<PAGE>

     The  commission  is payable on or before the 20th of the month  immediately
following  the month  during which the payment of the invoice  applicable  to an
order in whole or in part is received by us.

     Clarkstone is owned by unaffiliated third parties.

     In the event  Clarkstone  is  instrumental  in  locating a third  person to
execute a  licensing  agreement  with us,  Clarkstone  will  receive  15% of the
royalties or other fees paid to us under the licensing agreement.

     The  term of our  agreement  with  Clarkstone  is  three  years  and  shall
automatically  renew  from  year to year  thereafter  unless  the  agreement  is
terminated by written notice from the party desiring  termination ten days prior
to  the  annual  renewal  date.  The  agreement  will  then  terminate  90  days
thereafter.  If the  agreement is  terminated  for any reason,  Clarkstone  will
receive its full commission for a period of twelve months thereafter.

     Under the terms of the  agreement,  the Company served notice to Clarkstone
within the prescribed  time period to terminate the agreement.  The Company will
pay  commissions to Clarkstone,  based on sales for twelve months  subsequent to
February 25, 2001.

Licensing Agreements

     On August 31,2001, we entered into a non-exclusive licensing agreement with
Double Dynasty Co., Ltd., a Taiwan trading and manufacturing  company tp produce
and use certain noise reduction rights that we own. The rights include the right
to  manufacture,  use,  market and sell our noise  reduction  rights  worldwide,
except the United States and Canada.  In consideration of the foregoing,  Double
Dynasty  must pay us $150,000 on or before  February 1, 2002 and make  quarterly
royalty  payments of 6% of its gross sales. Any quarter royalty payments will be
deducted from the $150,000  referred to above.  Double Dynasty may terminate the
license upon 180 days written  notice to us. We may  terminate  the license upon
sixty days written notice if Double  Dynasty fails to provide a royalty  payment
of more than $500,000 per year for any two consecutive  years; if Double Dynasty
defaults in making proper reports to us; and upon default by Double Dynasty.  We
may also  terminate the license on thirty days written  notice if Double Dynasty
becomes bankrupt or insolvent. We are also obligated to indemnify Double Dynasty
if  Double  Dynasty  is sued as a result  of a  patent,  proprietary  right,  or
trademark  infringement.  Double  Dynasty is obligated to indemnify us if we are
sued as a result of Double Dynasty breaching any of the terms of the license.

Double Dynasty made the required payment of $150,000 on February 1, 2002.


                                       7
<PAGE>

     Effective October,  2001, we entered into a licensing arrangement with Tool
&  Hoist  Division   ("Licensee")  of  Ingersoll  Rand  Company,  a  New  Jersey
corporation,  pursuant  to which the Company  granted  the  Licensee a worldwide
license of the  Company's  noise  reduction  technology.  Except for (1) certain
rights  retained  by the  Company  to use  the  noise  reduction  technology  in
conjunction  with the  Company's  "AIRCAT"  products  in the  United  States and
Canada,  and (2) certain  rights  previously  granted to another  licensee,  the
license  is  exclusive.  In  consideration  for the  license  granted  under the
agreement  with the Licensee,  the Licensee paid the Company an advance  royalty
payment.  Under the terms of the agreement,  the Licensee is required to pay the
Company royalties in connection with sales of products  containing the Company's
noise reduction  technology.  The Licensee paid the Company a minimum royalty of
$150,000  for the calendar  year 2002.  The royalty  obligation  ceases upon the
expiration of the Company's  rights in the noise  technology.  In the event of a
default by the Licensee, the license will continue, and the Licensee will remain
obligated to pay the required royalties.  The agreement has no termination date,
meaning that it may continue  indefinitely.  The  agreement may be terminated by
the Licensee upon 90 days prior written notice.


Competition

     With respect to the Turbolator,  we are not aware of any competitors within
the industry that manufacture a similar  product.  With respect to the PHTEM, we
are aware of a number of  competitors  within the industry  that  manufacture  a
similar, but not an identical product. Some of the foregoing  manufacturers have
considerably greater financial and other resources than us.

We have deregister unsold units and warrants

     On March 7, 2001, we terminated our offering of 550,000  Units,  consisting
of one  share  of  common  stock  and  one  redeemable  warrant,  and  1,000,000
additional  redeemable  warrants which was filed on Form SB-2  (Registration No.
333-30838) and declared effective by the SEC on December 7, 2000. No shares were
sold,  but three  persons  did  subscribe  for a total of 400 units.  A total of
$2,039.00 was deposited into the escrow account. We elected to reject all of the
foregoing  subscriptions  and directed the escrow agent to return the  foregoing
subscriptions to the subscribers thereof and close the escrow account.

Govermental Regulation

     There  are  no  governmental  regulations  which  effect  the  manufacture,
development or sale of the Turbolator or PHTEM.


                                       8
<PAGE>

Company's Office

     Our offices are located at 230 North Division,  Spokane,  Washington 99202.
These are the offices of Robert Sterling,  our President and major  shareholder.
We have used the offices on a rent free basis.  Effective February 1, 2002, rent
and  related  office  expenses  will be paid to Robert  Sterling on an as needed
basis and based on space required by the Company. At this time, we have not made
any plans to change office locations.

Employees

     We have no full-time employees. See "Management."

Agreement with Dotson Exploration Company

     On or about  September  13,  2001,  as part of the  private  placement,  we
entered into an agreement with Dotson  Exploration  Company to acquire a 47 acre
tract of land in consideration of 400,000 restricted shares of common stock. The
property will be transferred free and clear of any claims and encumbrances.  The
sale will close on June 30, 2002. In the event less than $2,500,000 is raised in
this private placement, we have the right to rescind the transaction.

Risk Factors

1.   We  have a  limited  operating  history  with  an  accumulated  deficit  of
approximately  $771,000 and our auditors have expressed  concern that we may not
be able to stay in business.

     We are  recently  formed and have a limited  operating  history.  We cannot
assure you that we will be  successful in our plans.  Therefore our  independent
certified  public  accountants have modified their report to include a paragraph
wherein they expressed substantial doubt about the Company's ability to continue
in  business  as a going  concern.  We face all of the risks  and  uncertainties
encountered by a new business. Because we have had no long operatiing history we
cannot reliably forecast our future operations. See "Business."

2.   We Have No Market Research

     We have not conducted or engaged other entities to conduct market  research
for our products.  Accordingly,  there is no assurance that market demand exists
for our products.

3.   We Do Not Have Key Personnel Insurance

     We do not maintain  any life  insurance on the lives of any of our officers
and  directors.  If one or all of our  officers or  directors  die or  otherwise
become incapacitated, our operations could be interrupted or terminate.


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<PAGE>

4.   We need Additional Key Personnel

     We have no full time  employees.  Our success will depend in part, upon our
ability to attract and retain qualified employees. There is no assurance we will
be able to obtain or retain qualified employees.  If we are unable to engage and
retain the necessary  personnel,  our business would be materially and adversely
affected. See "Business."

5.   Reliance Upon Our Directors and Officers.

     We are wholly  dependent  upon the  personal  efforts and  abilities of our
officers who will exercise  control over the day to-day  affairs of the Company,
and upon  our  Directors,  most of whom are  engaged  in other  activities.  Our
officers  will  devote  approximately  80%  of  their  time  to  our  day-to-day
operation.  As such, while we will solicit business through our officers,  there
can be no  assurance  as to the  volumn  of  business  which we may  succeed  in
obtaining.  Further,  we  cannot be sure that our  proposed  operations  will be
profitable. See "Business" and "Management."

6.   Non-Arms' Length Transaction.

     The number of shares  issued to present  shareholders  of the  Company  for
property  and  services  was  arbitrarily  determined  by us and  should  not be
considered   the  product  of  arm's   length   transactions.   See   "Principal
Shareholders."

7.   Indemnification of Officers and Directors for Securities Liabilities.

     Our Articles of  Incorporation  provide that we may indemnify any Director,
Officer,  agent  and/or  employee  for  liabilities  as  are  specified  in  the
Washington  Business  Corporation  Act.  Further,  we may  purchase and maintain
insurance  on behalf  of any such  persons  whether  or not we have the power to
indemnify such person against the liability insured against. The foregoing could
result in substantial  expenditures  by us and prevent us from  recovering  from
such Officers,  Directors,  agents and employees for losses  incurred by us as a
result of their  actions.  Further,  we have been advised that in the opinion of
the Securities and Exchange Commission, indemnification is against public policy
as expressed  in the  Securities  Act of 1933,  as amended,  and is,  therefore,
unenforceable.

8.   Competition.

     We  have  competitors  and  potential   competitors,   many  of  whom  have
considerably  greater financial and other resources than we do. Further,  if our
products  are  successful,  others  will  enter  the  market  which may draw our
customers away from us. See "Business - Competition."


                                       10
<PAGE>

9.   Patents May Not Give Adequate Protection.

     We have obtained patents for our products. There is no assurance,  however,
that third  parties  may not  infringe on our  patents.  In order to protect our
patent  rights,  we may have to file lawsuits and obtain  injunctions.  If we do
that, we will have to spend large sums of money for attorney's  fees in order to
obtain the injunctions. Even if we obtain the injunctions, there is no assurance
that those infringing on our patents will comply with the injunctions.  Further,
we may not have  adequate  funds  available to prosecute  actions to protect our
patents,  in which case those  infringing on our patents could continue to do so
in the future.

10.  Cumulative Voting, Preemptive Rights and Control.

     There are no preemptive  rights in connection  with the shares.  Cumulative
voting in the election of directors is not provided  for.  Accordingly,  even if
all of the units are sold,  the holders of a majority of the shares will be able
to elect all of the directors.

11.  No Dividends Anticipated.

     We do not anticipate paying dividends,  cash or otherwise, on the shares in
the foreseeable future. Future dividends will depend on our earnings,  financial
requirements  and  other  factors.  If you  believe  you  will  have a need  for
immediate  income  from this  investment  in the  units,  shares  or  redeemable
warrants, you should not purchase our securities. See "Dividend Policy."

12.  Liability Insurance Coverage

     Although  we  carry  $10,000,000  in  product  liability  insurance,   such
insurance  may not be  sufficient  to cover  any  potential  liability.  If that
happens  and we are held  liable,  we could be sued for a large  sum of money in
excess of our  liability  coverage.  If we cannot  pay the  judgment  and become
insolvent,  or do not have the funds to defend a lawsuit,  we could be forced to
stop doing business.

13.  Uninsured Risks

     We may not maintain  insurance  against all losses we suffer or liabilities
we  incur  because  of our  operations.  This  could  be  because  insurance  is
unavailable, we do not have the financial resources to acquire the insurance, or
because we have elected not to purchase insurance.


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<PAGE>

ITEM 2. DESCRIPTION OF PROPERTIES.

     We own no real property.

     Our offices are located at 230 North Division,  Spokane,  Washington 99202.
These are the offices of Robert Sterling,  our President and major  shareholder.
We have used the offices on a rent free basis.  Effective February 1, 2002, rent
and  related  office  expenses  will be paid to Robert  Sterling on an as needed
basis and based on space required by the Company.  At this time we have not made
any plans to change office location.

ITEM 3. LEGAL PROCEEDINGS

     There are no material legal  proceedings to which the Company is subject to
or which are anticipated or threatened.

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

     There  were no  matters  submitted  to the  shareholders  during the fourth
quarter, which ended January 31, 2002.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.


     The Company's stock trades on the NASD'S OTCBB under the symbol "EXHS". The
Company began trading on the OTCBB on December 24, 2001.  There has been limited
trading activity and the trading price has ranged from $0.67 to $2.05.

     We have no outstanding options or warrants, or other securities convertible
into,  common equity.  Of the shares of common stock outstanding as of April 24,
2002,  6,048,250  shares may only be resold in  compliance  with Rule 144 of the
Securities  Act of 1933  with  the  exception  of the one  year  holding  period
contained  therein.  Our officers and  directors do not have to comply with said
one year holding  period because the shares issued to them were sold pursuant to
Reg. 504 of the Act.

     At January 31, 2002,  there were 18 holders of record including shares held
by brokerage  clearing houses,  depositories or otherwise in unregistered  form.
The beneficial owners of such shares are not known to us.

     We have not declared any cash dividends,  nor do we intend to do so. We are
not  subject to any legal  restrictions  respecting  the  payment of  dividends,
except that they may not be paid to render us insolvent. Dividend policy will be
based on our cash resources and needs and it is  anticipated  that all available
cash will be needed for our operations in the foreseeable future.



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<PAGE>

SEC Rule 15g

     Our Company's  shares are covered by Section 15g of the  Securities  Act of
1933,  as  amended  that  imposes  additional  sales  practice  requirements  on
broker/dealers  who sell such  securities  to  persons  other  than  established
customers and accredited investors (generally institutions with assets in excess
of  $5,000,000 or  individuals  with net worth in excess of $1,000,000 or annual
income  exceeding  $200,000  or  $300,000  jointly  with  their  spouses).   For
transactions  covered  by the  Rule,  the  broker/dealer  must  make  a  special
suitability  determination  for the purchase and have  received the  purchaser's
written agreement to the transaction prior to the sale.  Consequently,  the Rule
may affect the ability of  broker/dealers  to sell our  securities  and also may
affect your ability to sell your shares in the secondary market.

     Section  15g  also  imposes  additional  sales  practice   requirements  on
broker/dealers who sell penny securities. These rules require a one page summary
of certain  essential  items.  The items  include the risk of investing in penny
stocks in both public  offerings and  secondary  marketing;  terms  important in
understanding  of the  function  of the penny  stock  market,  such as "bid" and
"offer"  quotes,  a  dealers  "spread"  and  broker/dealer   compensation;   the
broker/dealer   compensation,   the  broker/dealers  duties  to  its  customers,
including the disclosures  required by any other penny stock  disclosure  rules;
the   customers   rights  and  remedies  in  causes  of  fraud  in  penny  stock
transactions;  and, the NASD's toll free telephone number and the central number
of  the  North  American  Administrators  Association,  for  information  on the
disciplinary history of broker/dealers and their associated persons.

ITEM 6. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Plan of Operation

     The following Plan of Operation contains forward-looking statements,  which
involve risks and uncertainties. Our actual results could differ materially from
those  anticipated  in these  forward-looking  statements as a result of certain
factors, including those set forth elsewhere in this document.

     Our plan and focus during the next twelve months include the following:

     1.   Increase  present  sales  and  marketing   efforts  by  enlisting  the
          assistance of experienced persons or firms.


                                       13
<PAGE>

     2.   Create  private  label  license  agreements  for our  products  or our
          technology.

     3.   Expand our worldwide market by changing our license agreement with our
          Shareholder and Inventor regarding patent rights.

     4.   Develop a warehousing network.

     During the last  fiscal  year we have  completed  the vast  majority of our
technological  phase and begun  manufacturing  and marketing  our products.  Our
present revenues have not been sufficient to offset operating  expenses and thus
we are continuing to experience  operating  losses. At January 31, 2002 we had a
working capital deficiency of approximately  $262,000 and an accumulated deficit
of approximately $771,000.

     The  development  and  marketing of new  automotive  technology  is capital
intensive. We have funded operations to date from revenues, sale of common stock
and  advances  made by our  Chief  Executive  Officer  through  a line of credit
agreement  and other  advances.  We have  utilized  funds  obtained  to date for
organizational purposes, complete certain research and development and inventory
build-up for our marketing  efforts.  We do not currently  intend to conduct any
additional product research or development as it is our belief that our products
are marketable.

     We do not  currently  intend to  purchase a plant or to expend  significant
amounts for additional equipment in the next twelve months.

Operating Expenses:

     Operating  expenses  include  costs  incurred  for  professional   services
provided to us in  connection  with  certain  agreements  executed by us and the
costs incurred for both a private  placement and an aborted  underwriting of our
common stock. In addition,  we incurred certain  expenses  necessary to complete
the  necessary  research  and  development  associated  with  our  products  and
marketing  costs in bringing our products to market.  For the year ended January
31, 2002 our operating  expenses totaled  approximately  $273,000 as compared to
approximately  $359,000 for the year ended  January 31, 2001.  This  decrease of
approximately  $86,000 was primarily  the result of a decrease of  approximately
$69,000 in research and development costs, approximately $74,000 in professional
services,  approximately  $6,000 in  travel  expenses,  approximately  $9,000 in
insurance  expenses and  increases  of  approximately  $47,000 in  compensation,
approximately  $2,000 in  commissions  and  approximately  $6,000 in bad  debts.
Finally,  approximately  $17,000 of additional  expense was incurred  during the
year ended January 31, 2002, and was primarily the result of the increase in our
general administrative activities.


                                       14
<PAGE>

Other Income (Expenses):

     Other  income  (expenses)  consist of  interest  expense  incurred by us on
borrowings  on the related  party line of credit and bank loan.  During the year
ended January 31, 2002 we recognized  interest expense of approximately  $67,000
as compared to approximately $52,000 for the prior year. Royalty income was from
the  advance   payments   pursuant  to  the  new  license   agreements  and  the
miscellaneous income was from an overpayment of prior years insurance policy.

Net Loss:

     Primarily  as  a  result  of  the  foregoing  factors,  our  net  loss  was
approximately  $152,000  for the year ended  January  31,  2002 as  compared  to
approximately  $395,000 for the year ended  January 31, 2001.  This  decrease of
approximately  $243,000 lead to a $0.06  decrease in the loss per share to $0.02
for the year ended January 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Financial Condition:

     For the year ended January 31, 2002 we used cash in operating activities of
approximately  $484,000 as compared to approximately $266,000 for the year ended
January 31, 2001.  This  increase in the cash used in operating  activities  was
associated with the buildup of inventory and the related  inventory  credit note
and the pay down of  accounts  payable.  As of  January  31,  2002 we had a cash
balance of $11,890 in cash and cash equivalents.  We have historically  financed
our operation from either the sale of our common stock or from borrowings on the
related party line of credit. During the year ended January 31, 2002 we obtained
funds from the sale of common stock totaling $500,000.

     At January 31, 2002 we had a deferred tax asset of approximately  $262,000.
We do not  believe  that our present  condition  or past  results  makes it more
likely than not that we will be able to realize the benefit of this deferred tax
asset.  As such, a valuation  allowance  has been  established  equal to the net
deferred tax asset.

     As of January 31, 2002, we do not have sufficient sales to offset operating
expenses,  have  incurred  losses  since  inception  and have a working  capital
deficiency.  Primarily as a result of these factors,  our independent  certified
public  accountants  included an  explanatory  paragraph  in their report on our
financial  statements  for the years  ended  January  31,  2002 and 2001,  which
expressed substantial doubt about our ability to continue as a going concern. We
believe the  ability of our  Company to continue as a going  concern and achieve
profitability  is highly  dependent on a number of factors,  including,  but not
limited  to: our  ability  to market  and  distribute  our  products  and obtain
sufficient financing.


                                       15
<PAGE>

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                Financial Statements begin on the following page.

Exhaust Technologies, Inc.

Report of Independent Certified Public Accountant .......................... F-2
Balance Sheets.............................................................. F-3
Statements of Loss.......................................................... F-4
Statements of Changes in Stockholders' (Deficit) Equity..................... F-5
Statements of Cash Flows.................................................... F-6
Summary of Accounting Policies...................................... F-7 to F-11
Notes to Financial Statements ..................................... F-12 to F-16


                                       16
<PAGE>


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

     (a) At its board  meeting on May 7,  2001,  the Board of  Directors  of the
Registrant engaged Williams & Webster,  P.S.,  Certified Public Accountants,  as
its independent auditor for 2001.

     (b) The accounting  firm of BDO Seidman,  LLP was dismissed.  There were no
disagreements  with BDO Seidman,  LLP on any matter of accounting  principles or
practices,   financial  disclosure,  or  auditing  scope  or  procedure  or  any
reportable events.

     (c) The former  principal  accountant's  report on the Company's  financial
statements during the last two years contained no adverse opinions or disclaimer
of opinions and were not qualified or modified as to uncertainty, audit scope or
accounting principles.

     (d)  During the last two fiscal  years and  during the  subsequent  interim
periods, there were no disagreements with the former principal accountant on any
matter of accounting principles or practices,  financial statement  disclosures,
or auditing scope or procedures.


                                    PART III


ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(A) OF THE EXCHANGE ACT.

Officers and Directors

     Each of our directors is elected by the  stockholders to a term of (1) year
and serves  until his or her  successor  is elected and  qualified.  Each of our
officers  is  elected  by the board of  directors  to a term of one (1) year and
serves until his or her successor is duly elected and qualified,  or until he or
she is removed from office.  The board of directors has no nominating,  auditing
or compensation committees.


                                       17
<PAGE>

                                   MANAGEMENT


     The following  table sets forth the name,  age and position of each Officer
and Director of the Company:

Name                     Age    Position

Robert E. Sterling       59     President and a member of the Board of Directors


Ronald L. Allen          61     Vice  President  and  a  member of  the Board of
                                Directors

William A. Sutherland    56     Secretary/Treasurer  and  a  member of the Board
of                              Directors

     The  authorized  number of directors  of the Company is presently  fixed at
ten. Each  director  serves for a term of one year that expires at the following
annual shareholders'  meeting.  Each officer serves at the pleasure of the Board
of Directors and until a successor has been qualified and  appointed.  There are
no family  relationships,  or other  arrangements or  understandings  between or
among any of the directors, executive officers or other person pursuant to which
such person was selected to serve as a director or officer.

     Set forth below is certain biographical information regarding each director
and executive officer of the Company:

Robert E. Sterling - President and a member of the Board of Directors

     Mr. Sterling,  one of our founders,  has been our President and a member of
the Board of  Directors  since  our  inception.  Mr.  Sterling  is the  founding
principal  and sole  owner  of Bob  Sterling  Enterprises,  Inc.,  a  Washington
corporation, located in Spokane, Washington. Sterling Entersprises was formed in
1967 and conducts business through itself and several subsidiary corporations in
general contracting, real estate and retail stores. Since 1967, Mr. Sterling has
owned Midas  Muffler  Shops in  Washington  and Idaho and has from  time-to-time
owned and  operated  Midas  Muffler  Shops in Hawaii  (1978) and Nevada (1979 to
1984).  Mr. Sterling has also served as an officer and director of the following
publicly traded  corporations:  Gold Express Corporation (1984 to 1989) and Gold
Coin Mining, Inc. (1984 to 1989).


                                       18
<PAGE>

Ronald L. Allen - Vice President and a member of the Board of Directors.

     Mr. Allen, one of our founders, has been our Vice President and a member of
the Board of Directors  since our  inception.  Mr. Allen has been engaged in the
commodity futures business since 1973 and since 1994 has owned Merchants Futures
of the Northwest, a commodity brokerage company located in Spokane,  Washington.
Mr. Allen has served as an officer and director of the following publicly traded
corporations:  Gold Capital,  Inc. (1983);  Remco Enterprises,  Inc. (1978) and,
Calco Enterprises, Inc. (1981).

William A.  Sutherland -  Secretary/Treasurer,  Chief Financial  Officer,  and a
                          member of the Board of Directors

     Mr.  Sutherland,  one of our  founders,  has been our  Secretary/Treasurer,
Chief  Financial  Officer  and a member  of the  Board of  Directors  since  our
inception.  Since 1970,  Mr.  Sutherland  has been  involved  in the  automotive
industry as a consultant  (1979 to the present) and  automobile  dealer (1975 to
1989). He has owned Lincoln,  Mercury,  and Mercedes Benz car dealerships and is
currently  a  consultant  to a number of auto  dealerships  located in  Spokane,
Washington.

Involvement in Certain Legal Proceedings

     We have no legal  proceedings  during  the past five  years,  no present or
former director,  executive  officer or person nominated to become a director or
an  executive  officer  has been the  subject  matter of any legal  proceedings,
including bankruptcy,  criminal proceedings,  or cival proceedings.  Further, no
legal  proceedings  are known to be  contemplated  by  governmental  authorities
against  any  director,  executive  officer  and  person  nominated  to become a
director.


                              CERTAIN TRANSACTIONS

     On  July  21,  1998 we  entered  into a  Licensing  Agreement  with  Robert
Sterling,  our President,  and Matthew Sterling,  the son of Robert Sterling for
the licensing of the development, manufacturing and marketing of the Turbolator.
Further,  on the same date,  we entered into a licensing  agreement  with Robert
Sterling,  for the  development,  manufacturing  and marketing of the PHTEM. The
foregoing agreements were subsequently amended to extend the time period that we
have to generate revenues from the sale of our products.

     On July 31,  1998,  we  issued  4,500,000  shares  of  Common  Stock to the
following pursuant to Regulation 504 of the Securities Act of 1933 (the "Act"):


                                       19
<PAGE>

Name                    Total consideration and shares acquired

Robert E. Sterling      4,250,000  shares for the Licensing Agreement and 50,000
                        shares for services as a director

Ronald L. Allen         50,000 shares for services as a director

William A. Sutherland   50,000 shares for services as a director

Matthew R. Sterling     100,000 shares for the Licensing Agreement

Total                   4,500,000  shares  for Licensing Agreements and Services
                        valued at $45,841

     We received cash  advances  under a line of credit  totaling  $500,000 from
Robert Sterling. Outstanding borrowings under the line of credit accrue interest
at 11% per annum and mature on May 25, 2003. The borrowings are unsecured.

     In April 2001,  we sold  469,275  shares of common  stock to Wang Wen Yuan,
pursuant to  Regulation  S of the  Securities  Act of 1933 in  consideration  of
$500,000, consisting of $200,000 in cash and the balance in the form of a Credit
Note to be used against future inventory purchases.  Wang Wen Yuan is related to
a company that currently manufactures our air tools.

     In April  2001,  we  issued  1,063,180  shares  of  common  stock to Robert
Sterling,  our president and 265,795 shares of common stock to Matthew Sterling,
his son,  in exchange  for  worldwide  rights to the  turbolator  and PHTEM.  No
changes were made to Messrs Sterling's and Sterling's licenses.

     In the future,  we may borrow  money from our officers  and  directors,  if
necessary.  If we do so, the terms of the loans will be no less  favorable to us
than those that can be obtained from  unaffiliated  third  parties.  We will not
loan money to our officers and  directors.  Forgiveness of a loan between us and
an affiliate must be approved by a majority of the board of directors who do not
have an interest in the transaction and who have access, at our expense,  to our
counsel or an independent counsel.

     All of our current  transactions  were  approved and ratified by all of our
directors.  In each case, our directors had access to our counsel or any counsel
of their choosing.  All past transactions  which are now closed had at least two
disinterested directors at the time of each transaction.


                                       20
<PAGE>

Compliance with Section 16(a) of the Exchange Act.

     Based  solely upon a review of Forms 3, 4 and 5 furnished  to us during the
fiscal year 2002, our officers failed to file their Form 3 on a timely basis.

ITEM 10. EXECUTIVE COMPENSATION.

Summary Compensation

     The following table sets forth the compensation paid to our officers during
fiscal 2002. This information includes the dollar value of base salaries,  bonus
awards and number of stock options granted,  and certain other compensation,  if
any.

SUMMARY COMPENSATION TABLE [1]
(a)            (b)        (c)        (d)        (e)             (f)
                                                            Restricted Stock
                                                            Award(s), Securities
                                                Other       Underlying Options/
Name and                                        Annual      SARs, All LTIP
Principal                                       Compen-     Payouts, Other
Position        Year     Salary      Bonus      sation      Compensation

Robert E.       2002    20,000 [3]      -         -               -
 Sterling       2001    20,000 [3]      -         -               -
  President     2000    30,000 [3]      -       10,000 [2]        -
                1999      -             -         -               -
                1998      -             -         -               -

Ronald L.       2002      -             -         -               -
 Allen          2001      -             -         -               -
  Vice          2000      -             -       10,000 [2]        -
  President     1999      -             -         -               -
                1998      -             -         -               -

William A.      2002      -             -         -               -
 Sutherland     2001      -             -         -               -
  Secretary-    2000      -             -       10,000 [2]        -
  Treasurer     1999      -             -         -               -
                1998      -             -         -               -

[1]  All compensation received by the officers and directors has been disclosed.

[2]  Represents  the  value of  50,000  shares  issued  to each  individual  for
     services as a director.

[3]  Mr. Sterling was entitled to  compensation of $20,000,  $20,000 and $30,000
     for services performed during fiscal 2002, 2001 and 2000, respectively. Mr.
     Sterling  elected to waive the  compensation  (expense was recorded with an
     offset to contributed capital).


                                       21
<PAGE>


     There are no stock option, retirement, pension, or profit sharing plans for
the benefit of our officers and directors.

Option/SAR grants

     No individual grants of stock options,  whether or not in tandem with stock
appreciation  rights  ("SARs")  and  freestanding  SARs  have  been  made to any
executive  officer or any director  since our inception,  accordingly,  no stock
options have been exercised by any of the officers or directors in fiscal 2002.

Long-Term Incentive Plan Awards

     We do not have any  long-term  incentive  plans that  provide  compensation
intended to serve as incentive  for  performance  to occur over a period  longer
than one fiscal year,  whether such  performance is measured by reference to our
financial performance, our stock price, or any other measure.

Compensation of Directors

     Each  member of the Board of  Directors  received  50,000  shares of common
stock to serve on the Board of Directors  during fiscal 1999.  The directors did
not  receive  any other  compensation  for  serving  as  members of the Board of
Directors.  The Board has not implemented a plan to award options.  There are no
contractual arrangements with any member of the Board of Directors.

     We do not expect to pay salaries to any of our officers  until such time as
we generate  sufficient revenues to do so. Any compensation earned prior to this
is  expected  to be waived.  We do not  anticipate  paying any  salaries  to our
officers  until  fiscal 2003.  As of the date  hereof,  we have not entered into
employment contracts with any of our officers and we do not intend to enter into
any employment contracts until such time as it is profitable to do so.

Employment Agreements

     We entered into employment agreements with Robert E. Sterling,  Robert Teed
and Matthew  Sterling to commence upon the completion of our offering.  However,
on March 7, 2001,  we terminated  our offering.  At the same time, we terminated
the employment agreements.


                                       22
<PAGE>

                                 INDEMNIFICATION

     The  Washington  Corporation  Act and certain  provisions  of the Company's
Bylaws under certain  circumstances provide for indemnification of the Company's
Officers,  Directors and controlling  persons against liabilities which they may
incur  in  such  capacities.  A  summary  of the  circumstances  in  which  such
indemnification  is provided for is contained  herein,  but this  description is
qualified  in its  entirety  by  reference  to the  Company's  Bylaws and to the
statutory provisions.

     In general,  any Officer,  Director,  employee or agent may be  indemnified
against expenses,  fines,  settlements or judgments arising in connection with a
legal  proceeding to which such person is a party, if that person's actions were
in good faith, were believed to be in the Company's best interest,  and were not
unlawful.  Unless such person is  successful  upon the merits in such an action,
indemnification  may be  awarded  only  after  a  determination  by  independent
decision  of the  Board  of  Directors,  by legal  counsel,  or by a vote of the
shareholders,  that the applicable  standard of conduct was met by the person to
be indemnified.

     The circumstances under which indemnification is granted in connection with
an action  brought on behalf of the Company is  generally  the same as those set
forth above;  however with respect to such actions,  indemnification  is granted
only with respect to expenses  actually  incurred in connection with the defense
or settlement of the action. In such actions,  the person to be indemnified must
have acted in good faith and in a manner  believed to have been in the Company's
best interest, and have not been adjudged liable for negligence or misconduct.

     Indemnification  may also be granted  pursuant  to the terms of  agreements
which may be entered  in the future or  pursuant  to a vote of  shareholders  or
Directors.  The  statutory  provision  cited  above also grants the power to the
Company to purchase  and  maintain  insurance  which  protects  its Officers and
Directors  against any liabilities  incurred in connection with their service in
such a position, and such a policy may be obtained by the Company.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table sets  forth,  as of April 24,  2002,  the  beneficial
ownership of Common Stock with respect to: (1) all persons known to us to be the
beneficial owners of more than five percent of the outstanding  shares of Common
Stock (the "Principal  Shareholders");  (2) each director and director  nominee;
(3) each named executive officer;  and, (4) all directors and executive officers
as a group.  At April 24,  2002,  the  number  of shares of common  stock of the
Company issued and outstanding was 6,491,000.


                                       23
<PAGE>

Name and Address
Beneficial                        Number of                  Percentage
Owner  [1]                        Offering                   of Ownership

Robert Sterling                  5,213,180                    80.31%
230 N. Division St.
Spokane, WA 99202

Wang Wen Yuan                      469 275                     7.23%
Keelung, Taiwan ROC

Matthew R. Sterling                330,795                     5.64%
4821 North Larch Court
Spokane, WA 99216

Ronald Allen                        50,000                      .77%
3031 W. 22nd
Spokane, WA 99204

William Sutherland                  50,000                      .77%
7202 S. Oak Road
Spokane, WA 99224

All Officers and
Directors as a Group
(3 Persons)                      5,313,180                    81.85%


[1]  The persons  named above may be deemed to be a "parent" and  "promoter"  of
     our company,  within the meaning of such terms under the  Securities Act of
     1933, as amended,  by virtue of his/its direct and indirect stock holdings.
     Messrs.  Sterling,  Allen and  Sutherland  are the only  "promoters" of our
     company.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     On July 21,  1998,  we  entered  into a  Licensing  Agreement  with  Robert
Sterling,  our President,  and Matthew Sterling,  the son of Robert Sterling for
the licensing of the development, manufacturing and marketing of the Turbolator.
Further,  on the same date,  we entered into a licensing  agreement  with Robert
Sterling,  for the  development,  manufacturing  and marketing of the PHTEM. The
foregoing agreements were subsequently amended to extend the time period that we
have to generate revenues from the sale of our products.


                                       24
<PAGE>

     On July 31,  1998,  we  issued  4,500,000  shares  of  Common  Stock to the
following pursuant to Reg. 504 of the Securities Act of 1933 (the "Act"):

                          Total Consideration
Name                      and Shares Acquired

Robert E. Sterling        4,250,000 shares for President and
                          the Licensing Agreement and Director
                          50,000 shares for services as a director

Ronald L. Allen           50,000 shares for services as a director

William A. Sutherland     50,000 shares for services as a director

Matthew R. Sterling       100,000 shares for the Licensing Agreement

TOTAL                     4,500,000 shares for Licensing Agreements and Services
                          valued at $45,841

     We had cash advances under a line of credit totaling  $500,000.  Borrowings
under the line of credit accrue interest at the rate of 11% per annum and mature
on May 25, 2003. The borrowings are unsecured.

     A  conflict  of  interest  exists  between  us  and  Robert  Sterling,  our
president.  Pursuant to the licensing agreements between us and Robert Sterling,
if we do not sell a minimum  number of  Turbolators  and PHTEMs,  the  licensing
agreements will terminate.  Therefore,  it may be to Mr. Sterling's advantage to
cause the termination of the licensing agreements.  This directly conflicts with
his duty as our president to do all things  necessary to assure that we meet the
minimum sales in order to maintain the licensing agreements. On May 25, 2001 the
license  agreements were terminated and the patent rights for the Turbolator and
PHTEM and all  related  products  were  transferred  to the Company by Robert E.
Sterling and Matthew Sterling in exchange for common stock.

     In the future,  we may borrow  money from our officers  and  directors,  if
necessary.  If we do so, the terms of the loans will be no less  favorable to us
than those that can be obtained from  unaffiliated  third  parties.  We will not
loan money to our officers and  directors.  Forgiveness of a loan between us and
an affiliate must be approved by a majority of the board of directors who do not
have an interest in the transaction and who have access, at our expense,  to our
counsel or an independent counsel.

                                       25
<PAGE>

      All of our current transactions were approved and ratified by all of our
directors. In each case, our directors had access to our counsel or any counsel
of their choosing. All past transactions which are now closed had at least two
disinterested directors at the time of each transaction.

                             PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Reports on Form 8-K

     On May 7, 2001 the Company filed a Form 8-K  terminating  its  relationship
with its auditors BDO Seidman.  The  termination  was a result of a dispute over
the accounting fees that were being charged. No other Form 8-K's have been filed
since inception.

     On  November  25, 2001 the  Company  filed a Form 8-K  stating  that it had
entered into a license  agreement  granting the licensee a worldwide  license of
the Company's noise reduction technology.

(b)
     The  following  Exhibits  are  incorporated  herein by  reference  from the
Registrant's  Form SB-2  Registration  Statement  filed with the  Securities and
Exchange Commission, SEC File #333-30838 on February 22, 2000. Such exhibits are
incorporated herein by reference pursuant to Rule 12b-32:


Exhibit No.    Document Description

3.1            Articles of Incorporation.
3.2            Bylaws.
4.1            Specimen Stock Certificate.
10.3           Modification to Licensing Agreement for Turbolator.
10.4           Modification  to  Licensing  Agreement  for  Pneumatic  Hand Tool
               Exhaust Muffler.
10.5           Second Modification of Licensing Agreement for Turbolator.
10.6           Second Modification of Licensing Agreement for PHTEM.
10.7           Consulting and Marketing Agreement with Clarkstone.
10.8           Purchase Agreement with Apex Industries,Inc.


                                       26
<PAGE>

                                   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, on this    day of April, 2002.
                    ---


                                   EXHAUST TECHNOLOGIES, INC.
                                   (Registrant)



                                BY: /s/ Robert E. Sterling
                                   -----------------------------
                                   Robert E. Sterling, President


     In  accordance  with the Exchange Act, this report has been signed below by
the following  person on behalf of the  Registrant  and in the capacities and on
this day of June, 2001.


SIGNATURES                             TITLE                         DATE


                                  President, Chief                April   , 2002
---------------------                                                   --
Robert E. Sterling                Executive Officer
                                  and Member of the
                                  Board of Directors


                                  Vice President and              April   , 2002
---------------------                                                   --
Ronald L. Allen                   Member of the Board
                                  of Directors


                                  Secretary/Treasurer             April   , 2002
---------------------                                                   --
William A. Sutherland             and Chief Financial
                                  Officer and Member
                                  of the Board of
                                  Directors


                                       27
<PAGE>

To the Board of Directors and Stockholders
Exhaust Technologies, Inc.
Spokane, WA



                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------



We have audited the accompanying balance sheet of Exhaust Technologies,  Inc., a
Washington  corporation  as of  January  31,  2002  and  2001,  and the  related
statements of operations, stockholders' equity and cash flows for the years then
ended.  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 audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audits 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 Exhaust Technologies,  Inc. as
of January  31,  2002 and 2001 and the  results of its  operations  and its cash
flows  for the  years  then  ended  in  conformity  with  accounting  principles
generally accepted in the United States of America.

The  accompanying  financial  statements  have been prepared in conformity  with
accounting principles generally accepted in the United States of America,  which
contemplates  continuation  of the Company as a going  concern.  As discussed in
Note 1, the Company has  incurred  losses of $151,628  and  $394,873  during the
years ended January 31, 2002 and 2001,  respectively,  which raises  substantial

                                      F-2a

<PAGE>

doubt about its ability to continue as a going concern.  Management's  plans are
also  discussed  in  Note  1.  The  financial  statements  do  not  include  any
adjustments  relating  to the  recoverability  and  classification  of  recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.





/s/Williams & Webster, P.S.
---------------------------
Certified Public Accountants
Spokane, Washington
April 4, 2002



                                F-2b


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                                 BALANCE SHEETS

                                     ASSETS


                                                     January 31,    January 31,
                                                         2002           2001
                                                     -----------    -----------

Current assets:
 Cash                                                $    11,890    $     3,822
 Accounts receivable, less allowance
  for doubtful accounts of $4,256
  and $-0-                                                22,986         16,224
 Accounts receivable-related party                        15,765          7,184
 Inventory                                               346,662        227,834
 Inventory credit note                                   199,535           --
 Prepaid expenses                                          7,710         12,145
                                                     -----------    -----------

     Total current assets                                604,548        267,209

Equipment, net (Note 2)                                  122,055        133,713

Other assets:
 Patents, net of accumulated
  amortization of $20,455 and
  $14,168 (Note 3)                                        10,979         17,265
                                                     -----------    -----------


     Total assets                                    $   737,582    $   418,187
                                                     ===========    ===========


          See accompanying summary of accounting policies and notes to
                             financial statements.
                                      F-3a

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                                 BALANCE SHEETS

                                     ASSETS
                                   (Continued)


                                                     January 31,    January 31,
                                                         2002           2001
                                                     -----------    -----------

                    LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
 Note payable (Note 7)                               $   120,002    $   125,000
 Accounts payable                                        129,715        132,388
 Accounts payable-related party
  (Note 4)                                                  --           97,139
 Accrued interest                                        117,145         61,312
 Line of credit-related party
  (Note 4)                                               500,000        500,000
                                                     -----------    -----------

     Total current liabilities                           866,862        915,839
                                                     -----------    -----------


Committments and contingencies
 Notes 1 and 6)                                             --             --
                                                     -----------    -----------



Stockholders' (deficit):
 Common stock, $.00001 par value;
  100,000,000 shares authorized;
  6,491,000 and 4,692,750 shares
  outstanding                                                 65             47
 Additional paid-in capital                              642,070        122,088
 Deficit                                                (771,415)      (619,787)
                                                     -----------    -----------

     Total stockholders' (deficit)                      (129,280)      (497,652)
                                                     -----------    -----------

                                                     $   737,582    $   418,187
                                                     ===========    ===========




          See accompanying summary of accounting policies and notes to
                             financial statements.
                                      F-3b


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.


                               STATEMENTS OF LOSS



                                                         Year           Year
                                                        Ended          Ended
                                                     January 31,    January 31,
                                                         2002           2001
                                                     -----------    -----------

Sales                                                $   366,767    $   149 601

Cost of sales                                            340,372        133 352
                                                     -----------    -----------

   Gross profit                                           26,395         16 249
                                                     -----------    -----------

Operating expenses:
 Professional services                                    80,126        153 984
 Research and
  development                                              9,512         78,093
 Compensation                                             66,920         20,000
 Advertising                                              45,388         43,485
 Travel                                                   10,465         16,022
 Amortization                                              6,287          6,297
 Office expense                                            9,322          5,108
 Insurance                                                 8,419         17,004
 Commissions                                               9,317          6,966
 Dues and subscriptions                                      275          3,851
 Bad debts                                                 9,467          2,882
 Repairs and maintenance                                   4,000          1,024
 Supplies                                                 13,650          4,181
                                                     -----------    -----------

Total operating expenses                                 273,148        358,897
                                                     -----------    -----------

Loss from operations                                    (246,753)      (342,648)
                                                     -----------    -----------

Other income (expense):
 Royalty income                                          150,000           --
 Miscellaneous income                                     12,040           --
 Interest expense                                        (66,915)       (52,225)
                                                     -----------    -----------

   Total other income (expense)                           95,125        (52,225)
                                                     -----------    -----------

Net loss before tax                                     (151,628)      (394,873)

Income taxes                                                --             --
                                                     -----------    -----------

Net loss                                             $  (151,628)   $   (94,873)
                                                     ===========    ===========


                                      F-4a


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                               STATEMENTS OF LOSS
                                   (Continued)


                                                         Year           Year
                                                        Ended          Ended
                                                     January 31,    January 31,
                                                         2002           2001
                                                     -----------    -----------




Net loss per share -
 basic and diluted                                   $     (0.02)   $     (0.08)
                                                     ===========    ===========
Weighted average number
 of common shares - basic and
 diluted                                               6,052,523      4,692,750
                                                     ===========    ===========





          See accompanying summary of accounting policies and notes to
                              financial statements.
                                      F-4b


<PAGE>

                    EXHAUST TECHNOLOGIES, INC.

      STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY


                        Common Stock        Additional
                    ---------------------    Paid-in    Accumulated
                      Shares      Amount     Capital      Deficit       Total
                    ---------   ---------   ---------    ---------    ---------
Balance,
 January 31,
 2000               4,692,750   $      47   $ 102,088    $(224,914)   $(122,779)

Contributed
 services                --          --        20,000         --         20,000

Net loss for
 the year                --                      --       (394,873)    (394,873)
                    ---------   ---------   ---------    ---------    ---------
Balance,
 January 31,
 2001               4,692,750          47     122,088     (619,787)    (497,652)

Contributed
 services                --          --        20,000         --         20,000

Common stock
 issued to
 inventors at
 inception for
 licenses at
 less than
 $0.01 per
 share              1,328,975          13         (13)        --           --

Common stock
 issued for
 cash and
 inventory
 credit at
 $1.06 per
 share                469,275           5     499,995         --        500,000

Net loss for
 the period              --          --          --       (151,628)    (151,628)
                    ---------   ---------   ---------    ---------    ---------

Balance
 January 31,
 2002               6,491,000          65   $ 642,070    $(771,415)   $(129,280)
                    =========   =========   =========    =========    =========


          See accompanying summary of accountung policies and notes to
                              financial statements.
                                       F-5


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS

                                                         Year           Year
                                                        Ended          Ended
                                                     January 31,    January 31,
                                                         2002           2001
                                                     -----------    -----------

Cash flows from
 operating
 activities:
 Net loss                                            $  (151,628)   $  (394,873)
 Adjustments to
  reconcile net loss
  to net cash used
  in operating
  activities:
  Amortization                                             6,286          6,297
  Depreciation                                            14,739         11,111
  Contributed
   services                                               20,000         20,000
 Changes in assets
  and liabilities:
  Accounts receivable                                    (15,343)       (23,408)
  Inventory                                             (118,828)      (119,289)
  Inventory credit note                                 (199,535)          --
  Prepaid expenses                                         4,435        (12,145)
  Accounts payable                                       (99,812)       194,572
  Accrued interest                                        55,833         51,809
                                                     -----------    -----------

Net cash used in
 operating
 activities                                             (483,853)      (265,926)
                                                     -----------    -----------

Cash flows from
 investing
 activities:
 Cash paid for
  equipment                                               (3,081)       (49,638)
                                                     -----------    -----------

Net cash used
 in investing
 activities                                               (3,081)       (49,638)
                                                     -----------    -----------






          See accompanying summary of accounting policies and notes to
                             financial statements.
                                      F-6a

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                            STATEMENTS OF CASH FLOWS
                                   (Continued)

Cash flows from
 financing
 activities:
 Borrowings under
  line of credit-
  related party                                             --          154,734
 Proceeds from
  note                                                      --          125,000
 Deferred stock
  offering costs                                            --           39,300
 Net proceeds from
  sale of common
  stock                                                  500,000           --
 Principal payments on note                               (4,998)          --
                                                     -----------    -----------

Net cash provided
 by financing
 activities                                              495,002        319,034
                                                     -----------    -----------

Net increase in cash                                       8,068          3,470

Cash, beginning of
 period                                                    3,822            352
                                                     -----------    -----------

Cash, end of period                                  $    11,890          3,822
                                                     ===========    ===========

Supplemental
 disclosures of cash
 flow information:
 Cash paid during the
  period for:
  Interest                                           $      --      $      --
  Income taxes                                       $      --      $
                                                     ===========    ===========







          See accompanying summary of accounting policies and notes to
                              financial statements.
                                      F-6b


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.


                         SUMMARY OF ACCOUNTING POLICIES
                  For the Years Ended January 31, 2002 and 2001

Nature of Business

Exhaust  Technologies,  Inc.  ("Exhaust  Technologies"  or "the  Company") is an
enterprise which holds exclusive manufacturing, developing, and marketing rights
in  the  United  States  for  the  Turbolator,   a  tube-housing   designed  for
installation on vehicles to regulate  exhaust flow from the engine,  and for the
Pneumatic Hand Tool Exhaust Muffler ("PHTEM"), a noise muffling system installed
on pneumatic wrenches which can reduce the sound levels and remove  contaminates
from the exhaust air before  discharging  into the  atmosphere.  The Company was
incorporated  pursuant to the laws of the State of Washington in July 1998.  The
Company's fiscal year end is January 31.

Cash Equivalents

For  financial  reporting  purposes,  the Company  considers  all highly  liquid
investments with an original  maturity of three months or less when purchased to
be a cash  equivalent.  Financial  instruments,  which  potentially  subject the
Company to a concentration of credit risk, consist of cash and cash equivalents.
Cash and cash  equivalents  consist of funds  deposited with various high credit
quality financial institutions.

Inventory

Inventory consists of saleable products, supplies and component parts. Inventory
is stated at the lower of cost (first-in, first-out method) or market.

Equipment

Equipment is recorded at cost.  Depreciation and amortization are provided using
the straight-line  method over the useful lives of the respective assets.  Major
additions and betterments are capitalized. Upon retirement or disposal, the cost
and the related  accumulated  depreciation or amortization  are removed from the
accounts  and any gain or loss is  reflected  in  operations.  Equipment  with a
nominal value was contributed by the founders at inception, and accordingly,  no
asset has been  recognized.  Equipment held for use in production is recorded at
cost.



                                       F-7


<PAGE>


                           EXHAUST TECHNOLOGIES, INC.

  SUMMARY OF ACCOUNTING POLICIES For the Years Ended January 31, 2002 and 2001
                                   (Continued)

Deferred Stock Offering Costs

In conjunction with the Company's  registration  statement to sell shares of the
Company's  common stock and common stock  purchase  warrants,  certain costs and
fees were capitalized.  The registration statement was terminated in April, 2001
and the deferred stock offering costs were written off at January 31, 2001.

Patents and Licenses

The costs  associated  with  acquiring  exclusive  licensing  rights to patented
technology  have been  capitalized  and are being  charged to expense  using the
straight-line method of amortization over five years, the estimated useful lives
of the patents.

In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121,  "Accounting  for the Impairment of Long-lived  Assets and for
Long-lived  Assets to be Disposed of" and ("SFAS") No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived Assets",  management of the Company reviews
the  carrying  value of its  intangible  assets  on a regular  basis.  Estimated
undiscounted  future cash flows from the intangible assets are compared with the
current  carrying  value.  Reductions to the carrying  value are recorded to the
extent  the net book  value of the  property  exceeds  the  estimate  of  future
undiscounted cash flows.

Income Taxes

Income taxes are provided based on the liability  method of accounting  pursuant
to SFAS No. 109,  "Accounting  for Income Taxes." Under this approach,  deferred
income  taxes are  recorded to reflect the tax  consequences  on future years of
differences  between the tax basis of assets and liabilities and their financial
reporting  amounts at each year end. A valuation  allowance is recorded  against
deferred tax assets if management does not believe the Company has met the "more
likely than not" standard  imposed by SFAS No. 109 to allow  recognition of such
an asset.

Revenue Recognition

Revenues and costs of revenues are recognized when products are shipped.


                                       F-8


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                         SUMMARY OF ACCOUNTING POLICIES
                  For the Years Ended January 31, 2002 and 2001
                                   (Continued)


Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  at the dates of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting periods. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company's  financial  instruments  as defined by SFAS No. 107,  "Disclosures
about Fair Value of Financial Instruments," include cash, advances to affiliate,
trade  accounts   receivable,   investment  in  securities   available-for-sale,
restricted   cash,   accounts   payable  and  accrued  expenses  and  short-term
borrowings.   All   instruments   other  than  the   investment   in  securities
available-for-sale  are accounted for on a historical cost basis,  which, due to
the short maturity of these financial  instruments,  approximates  fair value at
January 31, 2002 and 2001.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Net Loss Per Share

SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the face
of all income  statements  issued after  December 15, 1997 for all entities with
complex  capital  structures.  Basic EPS is computed as net loss  divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential  dilution  that could occur from common  shares  issuable
through stock options,  warrants and other convertible  securities.  The Company
had no  dilutive  potential  common  stock  at  January  31,  2002  and 2001 and
therefore, basic and diluted EPS are the same in each period.





                                       F-9


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

                         SUMMARY OF ACCOUNTING POLICIES
                  For the Year Ended January 31, 2002 and 2001
                                   (Concluded)



New Accounting Pronouncements

In October 2001, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  No. 144,  "Accounting  for the  Impairment  or
Disposal of  Long-Lived  Assets"  (SFAS No. 144).  SFAS 144  replaces  SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed  Of." This new standard  establishes a single  accounting  model for
long-lived assets to be disposed of by sale, including discontinued  operations.
Statement 144 requires that these long-lived  assets be measured at the lower of
carrying amount or fair value less cost to sell,  whether reported in continuing
operations or discontinued operations. This statement is effective beginning for
fiscal years after December 15, 2001, with earlier application  encouraged.  The
Company  adopted SFAS 144 which will not have a material impact on the financial
statements of the Company at January 31, 2002.

In October 2001, the Financial  Accounting  Standards Board issued  Statement of
Financial  Accounting  Standards  No.  143,  "Accounting  for  Asset  Retirement
Obligations" (SFAS No. 143). SFAS No. 143 establishes  guidelines related to the
retirement  of tangible  long-lived  assets of the  Company  and the  associated
retirement costs. This statement requires that the fair value of a liability for
an asset  retirement  obligation  be  recognized  in the  period  in which it is
incurred  if a  reasonable  estimate of fair value can be made.  The  associated
asset  retirement  costs are  capitalized as part of the carrying  amount of the
long-lived assets.  This statement is effective for financial  statements issued
for the fiscal years beginning after June 15, 2002 and with earlier  application
encouraged.  The  Company  adopted  SFAS No. 143 and does not  believe  that the
adoption will have a material impact on the financial  statements of the Company
at January 31, 2002.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets".  SFAS No. 141 provides  elimination
of the pooling-of-interests  method of accounting for business combinations with
an  acquisition  date of July 1,  2001 or  later.  SFAS No.  142  prohibits  the
amortization of goodwill and other  intangible  assets with indefinite lives and

                                     F-10
<PAGE>


                           EXHAUST TECHNOLOGIES, INC.

                         SUMMARY OF ACCOUNTING POLICIES
                  For the Years Ended January 31, 2002 and 2001
                                   (Continued)

requires  periodic  reassessment  of the  underlying  value of such  assets  for
impairment.  SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. An early  adoption  provision  exists for companies  with fiscal years
beginning  after March 15, 2001. On January 31, 2002,  the Company  adopted SFAS
No. 142.  Application  of the  nonamortization  provision of SFAS No. 142 is not
expected  to  effect  the  results  of  operations.  The  Company  is  currently
evaluating the impact of the transitional provisions of the statement.

In September  2000, the FASB issued SFAS No. 140  "Accounting  for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This statement
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial assets and extinguishment of liabilities and also provides  consistent
standards for  distinguishing  transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 140 is effective for recognition
and   reclassification   of   collateral   and  for   disclosures   relating  to
securitization  transactions  and  collateral  for  fiscal  years  ending  after
December 15, 2000,  and is effective  for  transfers  and servicing of financial
assets and  extinguishments  of liabilities  occurring after March 31, 2001. The
Company  believes  that the adoption of this  standard  will not have a material
effect on the Company's results of operations or financial position.


Derivative Instruments

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards  No. 133  ("SFAS No.  130"),  "Sccounting  for  Derivative
Instruments and Hedging  Activities,  " as amended by SFAS No. 137,  "Accounting
for Derivative  Instruments  and Hedging  Activities - Deferral of the Effective
Date of FASB No.  133",  and SFAS No. 138,  "Accounting  for Certain  Derivative
Instruments and Certain Hedging Activities",  which is effective for the Company


                                 F-11

<PAGE>


                           EXHAUST TECHNOLOGIES, INC.

                         SUMMARY OF ACCOUNTING POLICIES
                  For the Years Ended January 31, 2002 and 2001
                                   (Concluded)

as of  January 1, 2001.  This  standard  establishes  accounting  and  reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts, and hedging activities.  It requires that an entity
recognize all  derivatives  as either assets or liabilities in the balance sheet
and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically  designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging  derivative  with the  recognition of (i) the changes in the fair
value of the hedged asset or liability that are  attributable to the hedged risk
or  (ii)  the  earnings  effect  of the  hedged  forecasted  transaction.  For a
derivative  not  designated  as a  hedging  instrument,  the  gain  or  loss  is
recognized in income in the period of change.

Historically,  the Company has not entered into  derivatives  contracts to hedge
existing risks or for speculative purposes.

At January 31, 2002, the Company has not engaged in any transactions  that would
be considered derivative instruments or hedging activities.




                                 F-12


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

 NOTES TO THE FINANCIAL STATEMENTS For the Years Ended January31, 2002 and 2001


1.    Going Concern

The Company has incurred losses since inception.  In addition, the Company has a
working  capital  deficiency,  limited  revenues to date and a product for which
market acceptance  remains generally  untested.  While the Company has commenced
selling its  product,  sales have not been  sufficient  to pay  expenses.  These
factors raise  substantial  doubt about the  Company's  ability to continue as a
going concern.  The financial statements do not include any adjustments that may
be necessary if the Company is unable to continue as a going concern.

Management  of the  Company  has  undertaken  certain  actions to address  these
conditions.  Management has commenced limited operations and has found a limited
number of companies to  manufacture  its products.  Funds  required to carry out
management's  plans  are  expected  to  be  derived  from  future  stock  sales,
borrowings from the Company's  shareholders or sales of its products.  There can
be no assurances that the Company will be successful in executing its plans.

2.    Equipment

Major classes of equipment consist of the following:

                                  January 31,     January 31,
                                     2002            2001
                                  -----------     -----------

Equipment                         $   154,620     $   151,539

Less accumulated depreciation          32,565          17,826
                                   ----------      ----------

Net equipment                      $  122,055     $   133,713
                                   ==========      ==========


3.    Licenses and Patents

In 1998, the Company acquired  exclusive  ninety-nine (99) year licensing rights
to  manufacture,  develop  and  market  the  Turbolator  and the PHTEM  from the
Company's   president  and  his  son  ("inventors")   under  separate  licensing
agreements.  The licenses were acquired through the issuance of 4,350,000 shares
of common stock, valued at $15,841,  which represented the inventors' historical
cost  basis in the  licenses.  Pursuant  to the terms of the  agreements,  and a
modification to these  agreements  executed on December 14, 1999, the Company is
required to generate  sales of the Turbolator and the PHTEM of at least $100,000
per year,  beginning in fiscal 2002 and continuing for all years thereafter,  in
order to retain  the  licensing  rights.  In April,  2001 the  licensing  rights
territory was increased to include world wide rights (See Note 8).


                                      F-13


<PAGE>


                           EXHAUST TECHNOLOGIES, INC.

 NOTES TO THE FINANCIAL STATEMENTS For the Years Ended January 31, 2002 and 2001
                                   (Continued)


4.    Related Party Transactions


The Company has a line of credit with the Company's  president  which allows for
borrowings up to $700,000.  Borrowings  under the line of credit are  unsecured.
Outstanding  borrowings  under the line of  credit  accrue  interest  at 11% and
mature May 25, 2003.  At January 31, 2002 and 2001,  the Company was indebted to
Mr. Sterling in the amount of $500,000.

The  Company   utilizes  office  space  provided  by  the  president  and  major
shareholder of the Company. The value of this space is not considered materially
significant.


5.    Income Taxes


At  January  31,  2002 and 2001,  the  Company  had net  deferred  tax assets of
approximately $262,000 and approximately $210,000,  principally arising from net
operating  loss  carryforwards  for income tax  purposes.  As  management of the
Company  cannot  determine that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset, a valuation  allowance  equal
to the net deferred tax asset has been established at January 31, 2002 and 2001.
The  difference  in the  expected  federal  benefit  and the actual tax  benefit
recorded is due to the increase in the valuation allowance.

At January 31, 2002, the Company has net operating loss  carryforwards  totaling
approximately $770,000, which expire in the years 2019 through 2022.





                                      F-14


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

 NOTES TO THE FINANCIAL STATEMENTS For the Years Ended January 31, 2002 and 2001
                                   (Continued)


6.    Stock Offering

The  Company  entered  into a letter of intent with an  underwriter  pursuant to
which the  underwriter  agreed to sell,  on a best  efforts  basis up to 550,000
units on the Company's  common stock.  The underwriting was terminated by mutual
agreement in April, 2001.

7.    Short-term Note Payable

On January 17, 2001 the Company entered into a loan agreement with U.S. Bank for
$125,000.  This loan bears  interest  at prime plus 1.5% and is due on  December
31,, 2002.  The loan is co-signed by the president and major  shareholder of the
Company. Collateral for the loan includes real estate owned by the president.

8.    License Agreements

In 2001, the Company entered into two separate  agreements  licensing  rights to
their  patents.  The  licenses  are  enforceable  for the  life of the  patents.
Quarterly  royalties are payable to the Company  including a minimum royalty due
annually.  The  Company  has also  retained  the right to  produce  and sell its
products in the United States and Canada under its branded trademark.

9.    Common Stock

In April,  2001 the Company sold 469,275 shares of common stock to a non-related
party pursuant to  "Regulation S" of the Securities and Exchange  Commission for
$500,000, consisting of $200,000 in cash and the balance in the form of a Credit
Note to be used against future  inventory  purchases.  The  purchasing  party is
related to a company that is currently  manufacturing  the  Company's  specialty
line of air tools.

In April,  2001 the  Company  issued  1,063,180  shares of its common  stock and
265,795  shares of its  common  stock to  Robert  E.  Sterling  and  Matthew  R.
Sterling,  respectively, in exchange for the world wide rights to the Turbolator
and PHTEM.  The license  agreements  were changed to reflect the addition of the
world wide rights.  No changes were made to the licenses  regarding the required
annual sales.


                                      F-15


<PAGE>

                           EXHAUST TECHNOLOGIES, INC.

 NOTES TO THE FINANCIAL STATEMENTS For the Years Ended January 31, 2002 and 2001
                                   (Concluded)


10.    Prior Development Stage

The  Company  was  formed on July 21,  1998,  and was in the  development  stage
through  January 31,  2001.  The year ending  January 31, 2002 is the first year
during which it is considered an operating company.






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