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, 2001
        OR
[   ]   TRANSITION REPORT PURSUANT TO SECTION  13  OR  15(d) OF  THE  SECURITIES
        EXCHANGE ACT OF 1934
        For the transition period from

                        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, 2001     $149,601



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<PAGE>

There is currently no market value of the voting stock on April 30, 2001.  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 30, 2001 - 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 ]


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<PAGE>

                                     PART I

Item 1.    BUSINESS

General

     We are a development  stage business  formed under the laws of the state of
Washington on July 21, 1998, to develop,  manufacture and market two devices, an
exhaust valve designed for gasoline  powered  automobiles and light trucks and a
quiet line of pneumatic air tools.

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. 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
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.


                                       3
<PAGE>

     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.


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<PAGE>

     Messrs  Sterling and Sterling have  registered  the  trademark  "AirCat" to
market a line or 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
$250,000 during the two years prior to our  incorporation  in the development of
the Turbolator and PHTEM.


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<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 4,000
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



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<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.

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.  Pursuant
to the  registration  statement,  we  represented  that  we  would  remove  from
registration by post effective  amendment any securities  being registered which
remain unsold at the termination of the offering.


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<PAGE>

     No securities were sold, leaving all of the securities unsold. We, pursuant
to this  registration  statement,  do hereby remove from registration all of the
units, all of the redeemable warrants, and all of the underwriter units.


Govermental Regulation

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

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 use the offices on a rent free basis. If we move to a new office location, we
will have to pay rent. At this time, we have not made any plans to change office
locations.

Employees

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

Risk Factors

1.   We have a limited operating history 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."


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<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>

14.  No Public Trading Market for the Shares

     There is no trading  in our common  stock.  We cannot  guaranty  you that a
trading  market in our  securities,  active or  otherwise,  will  develop in the
future.  Even if a trading market is developed,  we cannot guaranty that it will
be sustained for any period of time.


ITEM 2.    DESCRIPTION OF PROPERTIES.

     We own no real property, other than our inventory.

     Our offices are located at 230 North Division,  Spokane,  Washington 99202.
These are the offices of Robert Sterling,  our President and major  shareholder.
We use the offices on a rent free basis. If we move to a new office location, we
will have to pay rent.  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, 2001.

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

     No market exists for our securities and there is no assurancethat a regular
trading  market will  develop,  or if developed,  that it will be  sustained.  A
shareholder  in  all  likelihood,  therefore,  will  be  unable  to  resell  the
securities referred to herein should he or she desire to do so. Furthermore,  it
is unlikely  that a lending  institution  will accept our  securities as pledged
collateral for loans unless a regular trading market develops.

     There are no plans,  proposals,  arrangements  or  understandings  with any
person  with  regard  to  the  development  of a  trading  market  in any of the
Company's securities.

     We have no outstanding options or warrants, or other securities convertible
into,  common equity.  Of the shares of common stock outstanding as of April 30,
2001,  6,298,250  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.


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<PAGE>

     At April 30, 2001, there were 42 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.

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.



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<PAGE>


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.

          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.  While
sales have created  revenue,  we are still  considered to be in the  development
stage, as defined in Statement of Financial  Accounting Standards No. 7. We have
been in the development  stage since  inception.  Our present  revenues have not
been  sufficient  to offset  operating  expenses and thus we are  continuing  to
experience  operating  losses.  At  January  31,  2001 we had a working  capital
deficiency of $648,630 and an accumulated deficit of approximately $620,000.

     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.


                                       13
<PAGE>

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 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.  Operating expenses totaling
$574,000 have been incurred since inception. For the year ended January 31, 2001
our operating  expenses totaled  approximately  $358,000 as compared to $180,000
for the year ended January 31, 2000. This increase of approximately $178,000 was
primarily  the result of an  increase  of $35,000 in  research  and  development
costs,  $90,000  in  professional  services,  $20,000 in  advertising  expenses,
$10,000 in travel expenses and $7000 in royalty expenses. Finally, approximately
$17,000 of  additional  expense was incurred  during the year ended  January 31,
2001, and was primarily the result of the increase in our general administrative
activities.

Other Expenses:

     Other expenses  consist of interest expense incurred by us on borrowings on
the  related  party line of credit.  During the year ended  January  31, 2001 we
recognized interest expense of $52,000 as compared to $9,000 for the prior year.

Net Loss:

     Primarily as a result of the foregoing  factors,  our net loss was $395,000
for the year ended  January 31, 2001 as compared to $189,000  for the year ended
January 31,  2000.  This  increase  of  approximately  $206,000  lead to a $0.04
increase in the loss per share to $0.08 for the year ended January 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

Financial Condition:

     For the year ended January 31, 2001 we used cash in operating activities of
$266,000  as  compared to $210,000  for the year ended  January 31,  2000.  This
increase  in the cash  used in  operating  activities  was  associated  with the
increase  in the net loss for the year ended  January 31,  2001,  the buildup of
inventory and the buildup of accounts  payable.  As of January 31, 2001 we had a
cash  balance  of  $3,822  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, 2001 we obtained financing funds totaling $319,000.



                                       14
<PAGE>

     At January 31, 2001 we had a deferred tax asset of approximately  $210,000.
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, 2001, 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 year ended  January  31,  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.

ITEM 7.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Financial Statements begin on page F-1.

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.


                                       15
<PAGE>

                                    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.

     The name,  age and position of our present  officers and  directors are set
forth below:

Name                          Age        Position
----                          ---        --------

Robert E. Sterling            58         President and a member of the
                                         Board of Directors

Ronald L. Allen               60         Vice President and a member of
                                         the Board of Directors

William A. Sutherland         55         Secretary/Treasurer and a
                                         member of the Board of Directors

     All directors hold office until the next annual meeting of shareholders and
until their successors have been elected and qualified. Our officers are elected
by the Board of Directors  after each annual  meeting of  shareholders  and hold
office until their death, or until they resign or have been removed from office.

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).

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).


                                       16
<PAGE>

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.

     All of our officers and directors are engaged in other  business.  As such,
they will not be devoting time  exclusively to our operations.  Our officers and
directors intend to devote  approximately  80% of their time to the operation of
our business.

     We have not held an annual meeting of shareholders since inception.

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.

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 2001,  our  officers  failed to file  their  Forms 3, 4 and 5, on a
timely basis.


ITEM 10.   EXECUTIVE COMPENSATION.

Summary Compensation

     The following table sets forth the compensation paid to our officers during
fiscal 2000. 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.      2001    20,000 [3]      -        -              -
 Sterling      2000    30,000 [3]      -      10,000 [2]
  President    1999      -             -        -              -
               1998      -             -        -              -

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

William A.     2001      -             -        -              -
 Sutherland    2000      -             -      10,000 [2]       -
  Secretary-   1999      -             -        -              -
  Treasurer    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  and $30,000 for
     services performed during fiscal 2000 and 1999, respectively.  Mr. Sterling
     elected to waive the  compensation  (expense was recorded with an offset to
     contributed capital).


                                       17
<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 2000.

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 2002.  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.

Indemnification

     Pursuant to the Articles of Incorporation and Bylaws of the corporation, we
may  indemnify  an officer or  director  who is made a party to any  proceeding,
including a law suit, because of his position,  if he acted in good faith and in
a manner he reasonably believed to be in our best interest. In certain cases, we
may advance expenses  incurred in defending any such  proceeding.  To the extent
that the officer or director is successful on the merits in any such  proceeding
as to which such person is to be indemnified,  we must indemnify him against all
expenses  incurred,  including  attorney's  fees.  With  respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the  proceeding,  and if the officer or director is judged  liable,
only by a court  order.  The  indemnification  is  intended to be to the fullest
extent permitted by the laws of the State of Washington.

     Regarding  indemnification for liabilities arising under the Securities Act
of 1933, as amended, which may be permitted to directors or officers pursuant to
the foregoing provisions, we are informed that, in the opinion of the Securities
and Exchange  Commission,  such  indemnification  is against public  policy,  as
expressed in the Act and is, therefore, unenforceable.

ITEM 11.   SECURITY OWNERSHIP OF CERTAIN BEBEFICIAL OWNERS AND MANAGEMENT.

     The following  table sets forth,  as of April 30, 2001, the total number of
shares owned beneficially by each of our directors,  officers and key employees,
individually  and as a group,  and the present owners of 5% or more of our total
outstanding  shares.  Each of the stockholders listed below has direct ownership
of his shares and possesses  sole voting and  dispositive  power with respect to
the shares.


                                       18
<PAGE>

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

Robert Sterling                 5,363,180               82.62%
230 N. Division St.
Spokane, WA 99202

Wang Wen Yuan                     469 275                7.23%
Keelung, Taiwan ROC

Matthew R. Sterling               365 795                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)                     5,463,180               84.16%


[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.


                                       19
<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"):


Name                       Total Consideration 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  and
additional  cash  advances of $97,139 at January 31, 2001 from Robert  Sterling.
Borrowings  under the line of credit accrue interest at the rate of 8% per annum
and mature on August 1,2001. 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.

     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>

                                     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.

(b)  The  following  Exhibits  are  incorporated  herein by  reference  from the
Registrants'  Form 10SB  Registration  Statement  filed with the  Securities and
Exchange  Commission,  SEC file  #000-25875 on April 27, 1999. Such exhibits are
incorporated herein by reference pursuant to Rule 12b-32:

Exhibit No.    Document Description
-----------    --------------------

10.1           Licensing Agreement for Turbolator.
10.2           Licensing Agreement for Pneumatic Hand Tool
               Exhaust Muffler.

     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.




                                       21
<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 19th day of June, 2001.


                                   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 19th day of June, 2001.


SIGNATURES                          TITLE                    DATE
----------                          -----                    ----


 /s/ Robert E. Sterling        President, Chief          June 19, 2001
--------------------------     Executive Officer
Robert E. Sterling             and Member of the
                               Board of Directors


 /s/ Ronald L. Allen           Vice President and        June 19, 2001
--------------------------     Member of the Board
Ronald L. Allen                of Directors


 /s/ William A. Sutherland     Secretary/Treasurer       June 19, 2001
--------------------------     and Chief Financial
William A. Sutherland          Officer and Member
                               of the Board of
                               Directors



                                       22
<PAGE>

                           Exhaust Technologies, Inc.
                         (a development stage company)

                               Table of Contents
                               -----------------


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 to F-7
Summary of Accounting Policies . . . . . . . . . . . . . . . . . . . F-8 to F-10
Notes to FinancialStatements . . . . . . . . . . . . . . . . . . . .F-11 to F-13






                                      F-1

<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 (a development stage company) as of January 31, 2001, and
the related  statements of operations,  stockholders'  equity and cash flows for
the year 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 audit.  The financial  statements of Exhaust
Technologies,  Inc. as of January 31, 2000, were audited by other auditors whose
report  dated  February  22, 2000,  expressed  an  unqualified  opinion on those
statements.

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 audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  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, 2001 and the results of its operations and its cash flows for the
year 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 been in the  development  stage since its  inception  on
July 21, 1998 and incurred a loss of $394,873  during the year ended January 31,
2001.  These factors  raise  substantial  doubt about the  Company's  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.
----------------------------
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
June 14, 2001


                                      F-2

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                                 BALANCE SHEETS

                                 ASSETS (Note 1)

                                      January 31,    January 31,
                                          2001           2000
                                      -----------    -----------

Current assets:
 Cash                                 $     3,822    $       352
 Accounts receivable                       16,224           -
 Accounts receivable-related party          7,184           -
 Inventory                                227,834        108,545
 Prepaid expenses                          12,145           -
                                      -----------    -----------

     Total current assets                 267,209        108,897

Equipment, net (Note 2)                   133,713         95,186

Other assets:
 Licenses, net of accumulated
  amortization of $14,168 and
  $7,871 (Note 3)                          17,265         23,562
 Deferred stock offering costs
  (Note 6)                                   -            39,300
                                      -----------    -----------


                                      $   418,187    $   266,945
                                      ===========    ===========


                     LIABILITIES AND STOCKHOLDERS' (DEFICIT)

Current liabilities:
 Note payable (Note 7)                $   125,000    $      -
 Accounts payable                         132,388         34,955
 Accounts payable-related party
  (Note 4)                                 97,139           -
 Accrued interest                          61,312          9,503
 Line of credit-related party
  (Note 4)                                500,000        345,266
                                      -----------    -----------

     Total current liabilities            915,839        389,724
                                      -----------    -----------

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

Stockholders' (deficit):
 Common stock, $.00001 par value;
  100,000,000 shares authorized;
  4,692,750 shares issued and
  outstanding                                  47             47
 Additional paid-in capital               122,088        102,088
 Deficit accumulated during the
  development stage                      (619,787)      (224,914)
                                      -----------    -----------

     Total stockholders' (deficit)       (497,652)      (122,779)
                                      -----------    -----------

                                      $   418,187    $   266,945
                                      ===========    ===========



See  accompanying   summary  of  accounting  policies  and  notes  to  financial
statements.

                                       F-3

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                               STATEMENTS OF LOSS

                                      Date of
                                     Inception
                                        Year            Year         (7/21/98)
                                       Ended           Ended          Through
                                    January 31,     January 31,     January 31,
                                        2001            2000            2001
                                    -----------     -----------     -----------

Sales                               $   149,601     $      --       $   149,601

Cost of sales                           133,352            --           133,352
                                    -----------     -----------     -----------

   Gross profit                          16,249            --            16,249
                                    -----------     -----------     -----------

Operating expenses:
 Professional services                  153,984          64,630         218,614
 Research and
  development                            78,093          43,703         121,796
 Compensation                            20,000          30,000          50,000
 Advertising                             43,485          23,666          67,151
 Travel                                  16,022           6,368          25,228
 Amortization                             6,297           6,287          14,168
 Office expense                           5,108           2,755           8,522
 Insurance                               17,004            --            17,004
 Directors fees                            --              --            30,000
 Royalties                                6,966            --             6,966
 Dues and subscriptions                   3,851             275           4,126
 Bad debts                                2,882            --             2,882
 Repairs and maintenance                  1,024            --             1,024
 Supplies                                 4,181           2,646           6,827
                                    -----------     -----------     -----------

Total operating expenses                358,897         180,330         574,308
                                    -----------     -----------     -----------

Loss from operations                   (342,648)       (180,330)       (558,059)

Other expense:
 Interest expense                        52,225           8,718          61,728
                                    -----------     -----------     -----------

Net loss                            $  (394,873)    $  (189,048)    $  (619,787)
                                    ===========     ===========     ===========

Net loss per share -
 basic and diluted                  $     (0.08)    $     (0.04)    $     (0.13)
                                    ===========     ===========     ===========
Weighted average number
 of shares - basis and
 diluted                              4,692,750       4,690,223       4,681,152
                                    ===========     ===========     ===========


See  accompanying   summary  of  accounting  policies  and  notes  to  financial
statements.

                                 F-4

<PAGE>
<TABLE>
<CAPTION>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

             STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
                    For the Year Ended January 31, 2001 and
                        the Period Ended January 31, 2001

                                                              Deficit
                                                              Accumulated
                                               Additional     During the
                          Common Stock         Paid-in        Development
                      Shares        Amount     Capital        Stage             Total
                   -----------   -----------   -----------    -----------    -----------
<S>                <C>           <C>           <C>            <C>            <C>
Common stock
 issued to
 inventors at
 inception for
 licenses at
 less than
 $0.01 per
 share               4,350,000   $        43   $    15,798    $      --      $    15,841

Common stock
 issued for
 services at
 $0.20 per
 share                 150,000             2        29,998           --           30,000

Common stock
 issued for cash
 at approx. $.11
 per share             142,500             1        16,243           --           16,244

Net loss for
 the period               --            --            --          (35,866)       (35,866)
                   -----------   -----------   -----------    -----------    -----------
Balance
 January 31,
 1999                4,642,500            46        62,039        (35,866)        26,219

Common stock
 issued for
 cash $.20
 per share              50,250             1        10,049           --           10,050

Contributed
 services                 --            --          30,000           --           30,000

Net loss for
 the year                 --            --            --         (189,048)      (189,048)
                   -----------   -----------   -----------    -----------    -----------

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

</TABLE>

See  accompanying   summary  of  accounting  policies  and  notes  to  financial
statements.

                                       F-5

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
                           Increase (Decrease) in Cash

                                                     Date of
                                                    Inception
                           Year          Year        (7/21/98)
                           Ended         Ended       Through
                        January 31,   January 31,   January 31,
                           2001          2000          2001
                        ----------    ----------    ----------

Cash flows from
 operating
 activities:
 Net loss               $ (394,873)   $ (189,048)   $ (619,787)
 Adjustments to
  reconcile net loss
  to net cash used
  in operating
  activities:
  Amortization               6,297         6,287        14,168
  Depreciation              11,111          --          11,111
  Contributed
   services                 20,000        30,000        50,000
  Issuance of common
   stock for services         --            --          30,000
 Changes in assets
  and liabilities:
  Accounts receivable      (23,408)         --         (23,408)
  Inventory               (119,289)     (100,554)     (220,623)
  Prepaid expenses         (12,145)         --         (12,145)
  Accounts payable         194,572        34,955       229,527
  Accrued interest          51,809         8,718        61,312
                        ----------    ----------    ----------

Net cash used in
 operating
 activities               (265,926)     (209,642)     (479,845)
                        ----------    ----------    ----------

Cash flows from
 investing
 activities:
 Cash paid for
  license                     --         (15,592)      (15,592)
 Cash paid for
  equipment                (49,638)      (95,186)     (144,824)
                        ----------    ----------    ----------

Net cash used
 in investing
 activities                (49,638)     (110,778)     (160,416)
                        ----------    ----------    ----------


See  accompanying   summary  of  accounting  policies  and  notes  to  financial
statements.

                                       F-6

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                            STATEMENTS OF CASH FLOWS
                           Increase (Decrease) in Cash
                                   (Continued)


                                                     Date of
                                                    Inception
                           Year          Year        (7/21/98)
                           Ended         Ended       Through
                        January 31,   January 31,   January 31,
                           2001          2000          2001
                        ----------    ----------    ----------

Cash flows from
 financing
 activities:
 Borrowings under
  line of credit-
  related party            154,734       322,757       492,789
 Proceeds from
  note                     125,000          --         125,000
 Deferred stock
  offering costs            39,300       (39,300)         --
 Net proceeds from
  sale of common
  stock                       --          10,050        26,294
                        ----------    ----------    ----------

Net cash provided
 by financing
 activities                319,034       293,507       644,083
                        ----------    ----------    ----------

Net increase
 (decrease in cash           3,470       (26,913)        3,822

Cash, beginning of
 period                        352        27,265          --
                        ----------    ----------    ----------

Cash, end of period     $    3,822           352    $    3,822
                        ==========    ==========    ==========

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


Noncash investing
 and financing
 activities:
 Issuance of common
  stock in exchange
  for licenses          $     --      $     --      $   15,841
                        ==========    ==========    ==========

Inventory advanced
 under line of
 credit-related
 party                  $     --      $     --      $    7,211
                        ==========    ==========    ==========


See  accompanying   summary  of  accounting  policies  and  notes  to  financial
statements.

                                       F-7

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                         SUMMARY OF ACCOUNTING POLICIES
             For the Year Ended January 31, 2001 and the Period From
           Date if Inception (July 21, 1998) through January 31, 2001


Nature of Business

Exhaust  Technologies,  Inc.  ("Exhaust  Technologies"  or "the  Company")  is a
development  stage 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-8

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                         SUMMARY OF ACCOUNTING POLICIES
             For the Year Ended January 31, 2001 and the Period From
           Date of Inception (July 21, 1998) through January 31, 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.

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,"  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-9

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                         SUMMARY OF ACCOUNTING POLICIES
             For the Year Ended January 31, 2001 and the Period From
           Date of Inception (July 21, 1998) through January 31, 2001
                                   (Concluded)


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 carrying  amounts  reported in the balance sheets as of January 31, 2001 and
2000 for cash equivalents and accrued expenses approximate fair value because of
the immediate or short-term  maturity of these financial  instruments.  The fair
value  of the  related  party  payables  and the  line of  credit-related  party
approximate  their carrying value as the stated rate of the debt reflects recent
market conditions.

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.  Basis EPS is computed as net income 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,  2001  and 2000 and
therefore, basic and diluted EPS are the same for the periods.

New Accounting Pronouncements

In June 1998 the Financial  Accounting  Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative  Instruments and Hedging  Activities".  SFAS No.
133 requires companies to recognize all derivative contracts as either assets or
liabilities  in the balance sheet and to measure them 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  forcasted  transaction.  For a derivative not
designated as a hedging instrument,  the gain or loss is recognized as income in
the period of change.  In July 1999,  the FASB issued SFAS No. 137,  "Accounting
for DerivativeInstruments and Hedging  Activities-Deferral of the effective date
of SFAS No. 133." SFAS No. 137 amends the effective  date of SFAS No. 133 to now
be for all fiscal quarters of fiscal years beginning after June 15, 2000.  Based
on its current and planned future activities relative to derivative instruments,
the  Company  believes  that  the  adoption  of SFAS  No.  133  will  not have a
significant effect on its financial statements.

Advertising

Advertising costs are charged to operations in the year incurred.



                                      F-10

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                        NOTES TO THE FINANCIAL STATEMENTS
            For the Year Ended January 31, 2001 and the Period From
           Date of Inception (July 21, 1998) through January 31, 2001


1.    Development Stage Operations and Going Concern

The Company has been in the development  stage since its inception.  The Company
has incurred losses since inception.  The 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 currently has commenced sales and production.  Marketing
representatives  are attempting to establish product channel.  Funds required to
carry out management's  plans are expected to be derived from future stock sales
or borrowings from the Company's  shareholders.  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,
                                      2001            2000
                                  -----------     -----------

Equipment                         $   151,539     $   101,901

Less accumulated depreciation          17,826           6,715
                                  -----------     -----------

Net equipment                     $   133,713     $    95,186
                                  ===========     ===========


3.    Licenses

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



                                      F-11

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                        NOTES TO THE FINANCIAL STATEMENTS
            For the Year Ended January 31, 2001 and the Period From
           Date of Inception (July 21, 1998) through January 31, 2001
                                   (Continued)


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).

4.    Related Party Transactions

The Company has a line of credit with the Company's  president  which allows for
borrowings up to $500,000.  Borrowings  under the line of credit are  unsecured.
Outstanding borrowings under the line of credit accrue interest at prime plus 2%
and mature August 1, 2001. At January 31, 2001,  the Company was indebted to Mr.
Sterling  in the amount of  $500,000.  In  addition  to the line of credit,  the
Company's  president  has  advanced  $97,139  as of  January  31,  2001  with no
interest, collateral or repayment terms.

The Company sold its products to a company  owned and operated by its  president
and major  shareholder.  Sales  totaling 5% of total sales were to this  related
party.  At January 31,  2001,  the Company had accounts  receivables  related to
these sales in the amount of $7,184.

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,  2001 and 2000,  the  Company  had net  deferred  tax assets of
approximately $210,000 and $73,000,  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,  2001 and 2000.  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, 2001, the Company has net operating loss carryforwards totaling
approximately $619,000, which expire in the years 2019 through 2021.


                                      F-12

<PAGE>

                           EXHAUST TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                        NOTES TO THE FINANCIAL STATEMENTS
            For the Year Ended January 31, 2001 and the Period From
           Date of Inception (July 21, 1998) through January 31, 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  and  the  determination  as to  the  refund  of the
underwriting deposit is still being discussed.

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  September
15, 2001.  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.    Concentrations

During the year ended January 31, 2001,  the Company sold  approximately  58% of
its product to a single customer.  At January 31, 2001 there were no amounts due
from that customer.

9.    Subsequent Events

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-13