ZEROS USA INC /FA/, 10SB12G/A, 1998-02-09

ZEROS USA INC /FA/
10SB12G/A, 1998-02-09
REFUSE SYSTEMS

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-SB/A

GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or 12(g) of the Securities Exchange Act of 1934

ZEROS USA, Inc.
(Name of Small Business Issuer in its charter)

Texas 76-0520236
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

507 North Belt East, Suite 550, Houston, Texas 77060
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(Address of Principal Executive Offices) (Zip Code)

Issuer's Telephone Number: 281,448-6083

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

<TABLE>
<CAPTION>
Title of each class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
<S> <C>
none
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</TABLE>

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

Common
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(Title of Class)
<PAGE> 2
GENERAL

ZEROS USA, Inc., a Texas corporation (the "Company" or "ZEROS"), seeks
to become a reporting company and is filing this Form 10-SB on a voluntary
basis. The Company intends to voluntarily file periodic reports even if its
obligation to file such reports is suspended under the Exchange Act of 1934, as
amended (the "Exchange Act").

ITEM 1. BUSINESS

GENERAL

ZEROS was organized in November 1996, for the purpose of selling
licenses and equipment, and providing licensee support services, in connection
with the Zero-emission Energy Recycling Oxidation System (the "ZEROS System").
The ZEROS System is a closed, waste disposal and energy production system which
processes toxic and non-toxic waste and recycles the processed waste into
marketable energy, carbon dioxide products, brine and other products. The
waste processing is performed with zero emissions and is an alternative to the
traditional "smokestack" incineration. The Company holds an exclusive license
to sell licenses and equipment in connection with the ZEROS System technology
to customers pursuant to a Master License Agreement (the "Master License
Agreement"), entered into by and between the Company and M, Ltd., a Bahamian
business entity and the owner of the rights to the ZEROS System technology.

ORGANIZATION AND HISTORY

The Company was organized in Texas on November 12, 1996. On June 30,
1997 the Company merged with ZEROS USA, Inc., a Utah corporation incorporated
on February 14, 1996, formerly known as Gunner Holdings, Inc. ("Gunner").
Pursuant to the terms of such merger, each shareholder of Gunner received one
share of common stock of the Company, $.001 par value per share ("Common
Stock"), for each share of Gunner common stock held by such shareholder.

Prior to the merger, Gunner was a private corporation with 14.9 million
issued and outstanding shares of common stock held by shareholders other than
the Company. Such shares of common stock were held by the Agri Capital Trust,
the Star Trust and the Gunner Trust. On March 15, 1997, immediately prior to the
merger, Gunner effected a one for ten shares reverse split of its common stock,
reducing to approximately 1.5 million of its shares of outstanding common stock.
Following the Merger, the three trusts distributed shares to an aggregate of 163
beneficiaries. At that time, Steve Clark, a director and chief executive officer
of the Company, remained the controlling shareholder of the Company with an
80.3% voting interest.

Steve Clark formed M, Ltd., in 1993 primarily to manage revenues derived
from international projects using his patents, technologies and systems and to
own, develop and market his various inventions to be used in the oil and gas
industry. Mr. Clark initially developed the predecessor to the ZEROS System
based on mature technologies. This technology has evolved from operational
facilities since 1983 performing environmental restoration for oil industry
clients. Mr. Clark conveyed all rights to the predecessor to the ZEROS System to
M, Ltd., in 1993. M., Ltd., continued further development of the technology
into the ZEROS System. Mr. Clark is the majority shareholder of M, Ltd., and
UCBM Management, a Bahamian company ("UCBM"), provides the officers and
directors. Mr. Clark is neither an officer nor a director of M. Ltd. Mr. Clark
has no ownership interest in UCBM, nor any rights to management of UCBM.

In November 1996, M, Ltd., entered into the Master License Agreement with
the Company, providing the Company with the exclusive right and license to sell
operating licenses, to sell or lease through related parties ZEROS System
equipment to customers and to use M, Ltd.'s proprietary marks, indicia and
information regarding patents in connection therewith. The license covers an
unlimited geographical area and includes any and all territories, foreign and
domestic. The Company agreed to pay M, Ltd., a master license fee in the
aggregate amount of $16.0 million, due and payable on or before eight years from
the date of the agreement. The master license fee consists of a $4.0 million
fee for the right and license granted pursuant to the Master Transaction
Agreement, and a $12.0 million royalty payment. Such royalty payment is to be
paid at the rate of $3.0 million per system for each of the first four systems
sold by the Company to other licensees. In addition, M, Ltd., shall receive a
five percent commission on the Company's collections arising in connection with
the sale of licenses and equipment, five percent of the waste disposal fees
("tipping fees") and five percent of the value of all by-products produced from
the operation of each ZEROS System.

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During 1997, the Company entered into five non-exclusive territorial
license agreements providing for license fees of $13.5 million in the
aggregate, including installments of $4.5 million to be paid to the Company in
1998 beginning one year from the effective date of the license agreement. The
effective dates of such license agreements are as follows:

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<CAPTION>
LICENSEE EFFECTIVE DATE
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<S> <C>
ZEROS Piney Creek Corporation February 27, 1997

ZEROS California Corporation March 31, 1997

Lawson ZEROS Corporation May 31, 1997

ZHM, Inc. October 29, 1997

ZEROS Western Corporation November 2, 1997
</TABLE>

BUSINESS OF THE ISSUER

The Company sells non-exclusive territorial licenses to operate the ZEROS
System and the right to sell additional operating licenses for the use of the
ZEROS System. In addition, the Company sells and leases through related
parties, and arranges for the manufacture and installation of, the equipment
required to operate the ZEROS System. Under terms of its license agreements
with customers, the Company collects royalties on the waste by-products
generated as a result of the operation of a ZEROS System facility by its
licensees, as well as royalties on the tipping fees collected by its licensees.
In addition, the Company intends to provide additional ongoing services to the
users to permit the equipment to operate more efficiently.

The Company is in the business of licensing and selling technology and
equipment to customers that recycle energy from a variety of fuels, including
hazardous and non-hazardous, toxic and non-toxic wastes. The Company sells or
leases through related parties the necessary equipment for the operation of the
ZEROS System, which equipment is manufactured by another entity to the
specifications of the Company and its customers. The Company itself does not
recycle waste, energy or operate any equipment.

The standard license agreement entered into by and between the Company
and its licensees permits the licensee to either purchase and operate the ZEROS
System for its own use or act as an authorized representative of the Company in
the sale or lease of the ZEROS System technology and equipment to third
parties. The license covers a limited geographical area specified in each
license agreement. Although the license is non-exclusive, the license
agreement provides that the licensee shall have the right to be paid a
commission by the Company for any other operating license sold after the date
of such agreement to another entity within such licensee's geographical area.

Pursuant to the terms of the Company's typical license agreement, the
licensee agrees to pay the Company a license fee in the amount of $2.7 million,
payable in three annual installments of $900,000 each, beginning one year from
the date of the agreement, and subject to such further terms and conditions
agreed to by the Company and licensee. In addition, the Company will receive
fifteen percent of the gross income generated by the use of the ZEROS System by
the licensee. For purposes of the Company's license agreements, "gross income"
is defined as all of the income of the licensee, before deducting operating
expenses and taxes, that is generated from tipping fees and from the sale of
all products produced by each ZEROS System facility operated by licensee.

The Company may terminate its typical license agreement in the event the
Company has given written notice to the licensee of a breach of such license
agreement, and such breach is not cured by the licensee within thirty days of
receipt of such notice. In addition, the license agreement terminates
immediately upon the occurrence of any of the following events: (i) the
termination of the licensee's rights to possession of its current offices,
unless such termination is without fault or affirmative action on the part of
the licensee, (ii) the bankruptcy of the licensee, (iii) the making of a
general assignment by the licensee for the benefit of creditors, and (iv) the
appointment of a receiver or similar officer to take charge of the licensee's
business, or any attachment, execution, levy, seizure, or appropriation of the
licensee's interest in the license agreement.

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In the event the licensee proposes to sell the business operated
pursuant to the license agreement to any party other than a controlled
corporation, the licensee must first notify the Company of such proposed sale.
The Company shall have the right to purchase the business on the same terms as
stated in such proposed sale. If the Company does not notify the licensee of
its election to exercise such right within fourteen days, the licensee may sell
the business to the third party, but only upon the same terms and conditions
and only upon the consent of the Company.

ZERO-EMISSION ENERGY RECYCLING OXIDATION SYSTEM

The ZEROS System is a closed, energy recycling process, operating as a
thermal oxidation process. Unlike incineration, the process does not consume
ambient air and it has no smokestack or other vent to discharge emissions. The
Company believes that the ZEROS System would be classified as "Air Quality
Exempt" by state environmental agencies, acting in accordance with the
Environmental Protection Agency ("EPA") regulations, because the system has
demonstrated a 100% mass balance, thus proving to be emission free. On April
29, 1997 the Company received a letter from the Texas Natural Resource
Conservation Commission stating that the Commission has determined that the
construction and testing of the ZEROS System will not create a new source of air
contaminants or increased emissions of air contaminants from existing sources
and that, on this basis, no permit will be required from the Office of Air
Quality. Principal components of the ZEROS System are represented in the
diagram below.

[Inserted below contains a diagram of the Zero-emission Energy Recycling
Oxidation System, showing the primary combustion chamber, secondary combustion
chamber, baghouse, combustion gas manifold, ozone oxidation chamber,
electrostatic precipitator and catalytic reactor, acid scrubber, filtration
system, distillation brine concentration, indirect heat exchanger, refrigerated
heat exchanger and carbon dioxide recovery system.]

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The ZEROS System employs a rotary kiln primary combustion chamber
followed by a cyclone separator where entrained particulate matter is removed
from combustion gasses exiting the rotary kiln before their entry into the
secondary combustion chamber. Combustion gasses are exposed to a high
temperature, high turbulence, oxidative environment for at least two seconds in
the secondary combustion chamber resulting in extremely high process oxidation
efficiency. Both the primary and secondary combustion chambers are oxygen
fired from an oxidizer source, not with ambient air, eliminating nitrogen
(which comprises approximately 78% of ambient air) and nitrous oxide, a
principal smokestack contaminant, from the system.

Hot combustion gasses from the secondary combustion chamber
(approximately 2400 degrees Fahrenheit) are circulated through an energy
recovery boiler and a baghouse filter to remove entrained fly ash. A portion
of the cleaned and cooled combustion gas is returned from the outlet of the
baghouse fabric filter and re-introduced to the primary and the secondary
combustion chambers at a temperature of up to 1200 degrees Fahrenheit together
with the pure oxygen providing for thermal oxidation of fuel and waste.

The use of recycled combustion gasses and pure oxygen provides a number
of advantages over ambient air as the oxidizer source. The absence of nitrogen
and other gasses which together comprise approximately 79% of ordinary air
greatly diminish the mass of exhaust gasses which exit the combustion chamber.
The recycled combustion gasses reenter the combustion chambers approximately
1000 degrees Fahrenheit above the ambient temperature, allowing high
temperature operation that promotes complete combustion without the energy cost
that would otherwise be incurred in continuously heating ambient air. Recycled
combustion gasses have a higher heat transfer capability than air at elevated
temperatures such as those in the operating combustion chambers and in the
energy recovery boiler. Additionally, at elevated temperatures the recycled
combustion gasses have the benefit of being reactive with carbon and some
hydrocarbons to form a synthetic fuel gas that is reinjected into the
combustion chamber.

Both combustion chambers are operated at pressures below standard
atmospheric pressure during normal operations. Special seals are installed on
the rotary kiln to prevent air infiltration. These same seals additionally
prevent the expulsion of combustion gasses should the rotary kiln primary
combustion chamber become slightly pressurized due to inadvertent over feeding
or the introduction of highly volatile waste stock. As a backup for fail safe
operation a vacuum tank is provided to automatically scavenge excessive
combustion gas during an inadvertent kiln pressurization.

Upon exiting the secondary combustion chamber the combustion gasses are
routed into a heat recovery boiler. The boiler is operated at 250 pounds per
square inch of steam pressure and the combustion gasses exit the boiler at
approximately 450 degrees Fahrenheit. From the boiler, the combustion gasses
are routed to a baghouse filter where entrained particles are removed.

Steam produced by the heat recovery boiler has many uses on site. It
can be used as pure steam energy to drive wood dryers or to generate
electricity by driving a turbine generator. The Company believes that the
electrical power generated can be used as a portion of the electrical power
required to operate the facility, drive water purification equipment and sold
commercially, thus defraying a considerable portion of the operating expense of
the facility.

Upon exiting the baghouse fabric filter the cleaned combustion gasses
enter the induced draft fan which provides the motive force keeping the gasses
moving through the process. At the exit of the induced draft fan the gasses
split into two streams of flow. A portion of the cleaned and cooled combustion
gas is returned to both combustion chambers where it mixes with the products of
combustion there and is re-heated. The cooler, recycled combustion gas
moderates the temperatures in the combustion chambers. Conventional combustion
processes introduce a constant four parts nitrogen with each one part oxygen
delivered for combustion. To increase temperature these conventional
combustion processes increase fuel and firing rate which results in increasing
production of nitrous oxides. In the ZEROS System, the operator can simply
reduce the amount of re-circulated combustion gas to increase combustion
chamber temperature without increasing fuel consumption and firing rate.
Temperature and oxidation rate can be readily controlled in the combustion
chambers by regulating the flow of oxygen (increasing oxygen to increase
temperature and oxidation rate) and the cooler recycled combustion gasses
(which moderate temperature and oxidation rate). This factor provides an extra
measure of control to enhance the safety and quality of operation of the ZEROS
System facility.

Cleaned and cooled combustion gasses which is not returned to the
combustion chambers are routed into the wet scrubbing system to remove acidic
constituents such as Sulphur Dioxide ("SO(2)") and Hydrochloric acid ("HCl")
before the

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gas enters the Carbon Dioxide ("CO(2)") recovery plant. The first component of
the wet scrubbing system is an adiabatic quench and low pressure drop Venturi.
Combustion gas temperature is dropped from approximately 400 degrees Fahrenheit
to roughly 175 to 180 degrees Fahrenheit in the Venturi quench by direct
contact with and evaporation of water. This direct contact with water spray
also provides for absorption of HCl from the gas into the water. Approximately
90 percent of the HCl in the combustion gas will be removed by this first
mechanism in the wet scrubbing process. SO(2) and additional HCl are removed
from the combustion gas by contact with reagents in the packed bed scrubber
and in additional scrubbing columns added to insure optimum scrubbing
efficiency before the gas enters the CO(2) recovery system. There is also an
activated carbon packed bed absorber immediately before the inlet of the CO(2)
recovery system to remove trace levels of residual organic compounds and metal
fume such as mercury which might find its way into the process with certain
waste streams.

The wet scrubbing process requires that a liquid brine be produced and
discharged from the scrubber. The amount of brine discharge depends on the
level of chlorine and sulfur present in the waste being processed. This brine
is mixed with the ash product and cement described below to form cinder blocks.
In the event that waste with very high chlorine and/or sulfur content is
processed and more liquid brine discharge is produced than can be mixed with
ash and cement, the excess will be filtered and steam from the boiler will be
utilized to evaporate water from this filtered brine to produce a marketable
fracturing agent (frac) for the oil industry. If required a solid salt cake
can be produced from this brine.

After treatment in the wet scrubbing system, the remaining combustion
gas, a mixture of water vapor, CO(2), excess oxygen and nitrogen (from the
combustion of natural gas, fuel oil, and certain waste streams), enters the
CO(2) recovery unit. The CO(2) recovery unit condenses and discharges the
moisture as a liquid. This water is then used as make-up to the wet scrubber
system to replace the water that is discharged there as a brine. The amount of
water recovered from the combustion gas will vary, but the Company anticipates
a typical collection rate of 10 gallons per minute. In the event that the
scrubber does not require this amount of water due to a very low chlorine and
sulfur content in the waste, the excess water will be contained, filtered,
treated, sampled and analyzed as required to allow for its discharge into the
waste heat boiler.

The gaseous combination of roughly four parts oxygen and one part
nitrogen that is discharged from the CO(2) recovery unit cannot be reintroduced
into the ZEROS System process because the nitrogen would accumulate and grow in
proportion to the other gasses until the process was overwhelmed. The gaseous
mixture is recovered as a separate product from the CO(2) and sold for oxygen
enrichment to metal smelters or used on site to fire a small clean fuel burner
for a recycling process for scrap metal or glass, or the mixture can be
processed further to yield pure oxygen.

Upon exiting the boiler the combustion gasses are routed into the
baghouse fabric filter where particulate matter entrained in the gas flow is
removed. This particulate matter is commonly referred to as fly ash because it
so readily takes flight with a moving gas. Fly ash is readily ingested by
breathing and typically contains trace levels of metals which are harmful to
human health and the environment. To prevent accidental discharge and the
consequential dispersion of fly ash into the air the system is operated below
atmospheric pressure and a wetting process is used to convert the fine dry
powder into a paste.

Ash is also discharged from the exit of the rotary kiln primary chamber,
the cyclone separator, and from the bottom of the secondary combustion chamber.
Air seals are provided at each of these discharge points to prevent air
infiltration, including rotary seals submerged in water for cooling, dust
suppression, and additional blockage of air. Ash discharged from this process
is hot (212 degrees Fahrenheit) and requires cautious handling. Cement can be
added during this period if required as a measure to bind leachable metals or
other hazardous inorganic or residual trace organic constituents.

Cement is mixed with the paste formed by mixing water with the baghouse
fly ash. The cement and fly ash is then mixed with the bottom ash from the
kiln and cyclone separator. This mixture is formed into cinder blocks for
storage on site. Walkways, barricades, fences, small storage buildings, and
fire walls separating waste storage areas can all be constructed from the
cinder blocks produced over time from the ash discharged from the facility.

The Company believes that some of the advantages of the ZEROS System
over conventional destructive waste disposal systems include:

(i) The ZEROS System produces no "emissions" (as defined by
the EPA)
(ii) No "Emergency Stack Opening" is required

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(iii) Gas velocities are not a factor in operation of the ZEROS
System
(iv) The ZEROS System provides increased system control
(v) Co-generation of electrical energy for sale and for water
purification
(vi) Production of marketable products, including dry ice,
liquid carbonics, carbon dioxide gas and brine.

The ZEROS System equipment can be manufactured in the following general
formats:

Industrial Units which are generally installed on fixed
industrial sites. These units range in the 100 to 200 ton per day
processing capacity and will handle integrated waste streams.

Mobile Processing Units are mounted on tractor trailers with
wheels and designed according to the licensee's project and required
capacity. These units will generally handle between 50 and 75 tons per
day and will be moved from site to site.

Biomedical Facilities are smaller units designed for installation
in an enclosed structure which can be placed on a hospital's premises.
The Company estimates that the processing capacity for such unit will be
between 25 to 50 tons per day. The EPA has mandated that hospitals
with in-house waste incinerators shut down their incinerators by the
year 2000. The biomedical units provide hospitals an alternative waste
disposal process without emissions.

The ZEROS System technology can also be manufactured as a Special Use
System which can process waste streams which are radioactive and contaminated
with low level nuclear material. Since no systems of this type have been
proposed, the design and engineering of such unit has not progressed to a
presentation stage.

MANUFACTURE OF THE ZEROS SYSTEM EQUIPMENT

The Company has entered into an agreement with OCS, Inc., a Texas
corporation ("OCS"), to authorize OCS to manufacture the ZEROS System
equipment. Pursuant to such agreement, OCS would manufacture, install, test,
and maintain the ZEROS System equipment as well as provide each licensee with a
product warranty, training, inspections, and technical support. The Company
will receive a 10% interest in the revenues resulting from the design,
manufacture, assembly and installation of equipment in connection with the
ZEROS System equipment manufactured by OCS.

In order to manufacture the ZEROS System equipment, OCS will use its
100,000 square foot facility with storage, welding and machine works equipment
as well as an industrial laboratory for testing, inspecting and qualifying the
ZEROS System equipment. The Company believes that this facility is capable of
producing equipment for four ZEROS System facilities simultaneously during a
150 day period and a total of eight facilities per year.

The construction of the ZEROS System equipment involves conventional
petroleum refinery equipment and conventional construction techniques. The
components for the ZEROS System will be constructed and tested at the OCS
facility and transported to the site determined by the licensee for
installation.

OCS is an oilwell control services company, engaged in oilwell blowout,
fire, failure and quality assurance management services and construction and
has been in business for more than 23 years. It has serviced more than 1,950
oilwell blowouts, failures and fires during the time it has been in business.
The Company believes that OCS has the requisite expertise to manufacture the
ZEROS System equipment. OCS was organized by Mr. Clark in January, 1975, in
order to manage his business activities in oil well blowout and failure
analysis and control. Mr. Clark is the sole shareholder of OCS.

DEPENDENCE ON CERTAIN MAJOR CUSTOMERS

Currently, the Company has only five licensees. Since a significant
portion of the Company's revenues will be derived from the royalty payments to
be paid by each licensee pursuant to the license agreement, the failure of any
licensee to pay its deferred license fees or to succeed in the construction and
operation of its ZEROS System will have a substantial impact on the revenues of
the Company. However, the Company is vigorously marketing the ZEROS System to
prospective licensees. As the number of licensees grows, the effect on the
Company of the failure of a licensee will not be as significant.

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COMPETITION

Although the Company does not process waste, it sells ZEROS System
operating licenses and equipment to licensees that have a need to process
waste. Consequently, the Company competes with both national and local waste
management businesses that provide alternative waste disposal options to
prospective licensees. These businesses primarily store or bury waste in
landfills, incinerate it, or treat the waste with chemicals. The Company
believes that the ZEROS System will be able to compete effectively because of
its ability to (i) process waste with 100% mass balance zero emissions and (ii)
convert the waste into marketable energy, and (iii) produce carbon dioxide,
brine and certain other products. Some of the Company's competitors, however,
are larger and have greater financial and other resources than the Company.

MARKETING AND NEW BUSINESS DEVELOPMENT

The Company plans to establish marketing and business development
offices in key areas of the United States and in certain international
locations. The Company anticipates that the average annual cost of its
business centers will be $100,000 which will include payment of basic overhead
expenses with base salaries for an average of two commissioned marketing
representatives per office. Other forms of compensation are performance-based
commissions for the sale of licenses and equipment to the licensee. The
Company's business development offices presently in organization include the
following:

1. Houston ZEROS Business Center (Houston, Texas)
2. Oakland-Alameda ZEROS Business Center (Bay Area, California)
3. Banning ZEROS Business Center (Palm Springs, California Area)
4. Syracuse ZEROS Business Center (Syracuse, New York)
5. Seattle ZEROS Business Center (Seattle, Washington)
6. BAF de Mexico ZEROS International Center (Mexico D.F., Mexico)

It is the Company's goal for each of the ZEROS business development offices to
originate and place two new licenses per year for which the Company will pay a
commission. The Company intends to market aggressively the ZEROS System
technology and equipment, utilizing its business relationship with Capital to
assist the prospective licensees and buyers in arranging financing for the
purchase of ZEROS System equipment. The Company will pursue leads from users,
staff personnel, trade shows and conferences as well as hire a professional
marketing staff. The Company has developed and currently has a "web site" on
the internet, located at www.zerosusa.com and has participated in trade shows.
The Company also distributes pamphlets, brochures and promotional packets to
prospective investors, licensees and end-users. Other new business sources
include business referrals, announcements of contractors, advertisement for
bids and requests for proposals which the licensees originate for the
development of sales opportunities. The Company will coordinate and assist the
ZEROS System licensees with plans and programs to respond to various commercial
and governmental requests for bid proposals as well as respond to
advertisements made by prospective customers in situations where the ZEROS
System process is suitable.

INTELLECTUAL PROPERTY

The Company's business depends on the continuation of the Master License
Agreement with M, Ltd., through which the Company obtains all rights to the
technology that it markets and licenses. The Master License Agreement provides
the Company with the exclusive right to develop business opportunities related
to the ZEROS System technology, and to sell, lease, license, market and use,
under terms and conditions approved by M, Ltd., the ZEROS System technology and
all improvements thereof. The rights granted under the Master License
Agreement cover an unlimited geographical area and continue perpetually unless
terminated as a result of (i) the termination of the Company's rights to
possession of its current offices, unless such termination is without fault or
affirmative action on the part of the Company, (ii) the bankruptcy of the
Company, (iii) the making of a general assignment by the Company for the
benefit of creditors, and (iv) the appointment of a receiver or similar officer
to take charge of the Company's business, or any attachment, execution, levy,
seizure, or appropriation of the Company's interest in the Master License
Agreement.

The technology comprising the ZEROS System is protected by one United
States patent and three United States patent applications pending which
primarily relate to reduced emission combustion process with resource
conservation and recovery options, and non-thermal process for cleaning
hydrocarbon from soils. The patents grant M, Ltd., the right to exclude others
from making, using, offering for sale and selling the inventions in the United
States. The process of seeking patent protection can be long and expensive,
and no assurance can be given that a patent will issue from the currently

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pending applications of M, Ltd., or its future applications or that, if patents
are issued, that they will be of sufficient scope or strength to provide a
meaningful protection or any commercial advantage to M, Ltd., or the Company.
Litigation, which could demand significant financial and management resources,
may be necessary to enforce patents or other intellectual property rights of M,
Ltd., and the Company.

A significant portion of the ZEROS System comprises innovations based on
mature technology and is protected by M, Ltd., and the Company as confidential
proprietary information or trade secrets. Although the Company and M, Ltd.,
have taken steps to maintain the confidentiality of such information, there can
be no assurance that such confidentiality can be maintained or that competitors
cannot reverse engineer key elements of the ZEROS System without access to
confidential information. Although such patents and proprietary information
are material to the operations of the Company, the Company believes that its
future success will depend more on its technological, marketing and general
business skills than on exclusive rights to its proprietary technology.

Mr. Clark initially filed a patent application for the ZEROS System. He
then transferred the rights to M, Ltd., in 1993. On November 15, 1996,
pursuant to a Master License Agreement, M, Ltd., granted the Company an
exclusive license to sell licenses and equipment in connection with the ZEROS
System. In accordance with the Master License Agreement, M, Ltd., retained all
rights to any improvements and related technologies, whether patented or not,
discovered or invented by the Company. The agreement further provides that all
costs incurred in the development and filing of the patent applications are to
be paid by the Company.

RESEARCH AND DEVELOPMENT

The Company conducts research and development to improve the quality and
efficiency of the ZEROS System and to develop specific applications of the
system according to the needs of its customers. Research and development
activities include in-house development, extensive field testing, and
development with its affiliates, OCS and M, Ltd.

Through its research and development efforts, the Company has developed
additional technologies for soil and water remediation which the Company calls
Biodynamics and Aquadynamics, respectively.

Pursuant to the Master License Agreement, M, Ltd., is entitled to
royalties on advances and innovations developed by the Company arising out of
the technology comprising the ZEROS System.

GOVERNMENTAL APPROVALS AND POTENTIAL FUTURE REGULATIONS

The waste management industry is a highly regulated industry by both
federal and state law. Since the Company does not operate a ZEROS System,
however, but instead sells rights to technology to its licensees who in turn
operate the systems, the Company believes there are no environmental laws that
are applicable to the Company. In addition, the Company does not intend to
manufacture the ZEROS Systems. Rather, the Company will contract with OCS and
other qualified contractors to manufacture the ZEROS System equipment for sale
to its licensees. Consequently, the Company believes there are no regulations
of a manufacturing or operational nature that are applicable to the Company.

The Company believes that the ZEROS process is currently exempt from EPA
and the Department of Environmental Quality regulation because there is no
smokestack or emissions to regulate or measure as described by Title 40 and the
Environmental Impact Statements required. The Company received a letter from
the Texas Natural Resource Conservation Commission dated April 29, 1997 stating
that the Commission has determined that the construction and testing of the
ZEROS System will not create a new source of air contaminants or increased
emissions of air contaminants from existing sources and that, on this basis, no
permit will be required from the Commission's Office of Air Quality.

Resource Conservation and Recovery Act of 1976. In 1976, Congress
passed the Resource Conservation and Recovery Act of 1976 ("RCRA") as a
response to growing public concern about problems associated with the handling
and disposal of solid and hazardous waste. RCRA required the EPA to promulgate
regulations identifying hazardous wastes. RCRA also created standards for the
generation, transportation, treatment, storage and disposal of solid and
hazardous wastes, including a manifest program for the transportation of
hazardous wastes and a permit system for solid and hazardous waste disposal
facilities. The Company believes that its existing licensees will not be
subject to RCRA because the

9
<PAGE> 10
hazardous waste to be treated originated on the site where the ZEROS System is
to be located and such licensees currently have no plans to transport, transfer
or receive hazardous materials.

Comprehensive Environmental Response, Compensation and Liability Act of
1980. The Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended ("CERCLA"), established a regulatory and remedial program to
provide for the investigation and clean-up facilities from which there has been
an actual or threatened release of hazardous substances into the environment,
including the designation of "Superfund" sites. CERCLA and similar state laws
impose strict joint and several liability on the current and former owners and
operators of facilities from which releases of hazardous substances have
occurred and on the generators and transporters of the hazardous substances that
come to be located at such facilities. Responsible parties may be liable for
substantial waste site investigation and clean-up costs and natural resource
damages, regardless of whether they exercised due care and complied with
applicable laws and regulations. If a ZEROS System licensee were found to be a
responsible party for a particular site, it could be required to pay the entire
cost of waste site investigation and clean-up, even though other parties may
also be liable. The Company believes that its existing licensees will not be
subject to CERCLA as a result of their use of the ZEROS System, however, because
the ZEROS System will be used to treat waste generated at the site and, as such,
the ZEROS System will not be the cause or a contributor to the release of
hazardous waste under CERCLA.

State and Local Regulation. The Company has licensed ZEROS Systems in
four states and is marketing throughout the United States. Each state has its
own regulations related to the handling, treatment, processing, transferring,
recycling and storage of hazardous waste subject to the priority of federal
laws and regulations. In each of the states where a licensee of the Company
currently intends to operate a ZEROS System, the licensee is required to comply
with numerous state and local laws and regulations as well as its site-specific
operating plan. Agencies writing regulations at the state level typically
include departments of health and state environmental protection agencies. In
addition, many municipalities have ordinances, local laws and regulations
affect the operations of the Company's licensee, including but not limited to
zoning and health measures.

The Company believes increased government regulation regarding
landfills, incinerators and other waste processing systems could substantially
benefit the Company. However, the demand for the ZEROS System may be adversely
affected by the amendment or repeal, or reduction in enforcement of federal,
state and local laws and regulations. The Company cannot predict the extent to
which any legislation or regulation that may be enacted, amended, repealed or
enforced, or any failure or delay in enactment of legislation or regulations in
the future may affect the Company's operations.

EMPLOYEES

As of October 1, 1997, the Company had approximately nine full-time
employees. The Company's employees are not subject to any collective
bargaining agreements and management regards its relations with employees to be
good.

LOCATION

The Company maintains offices at 507 North Belt East, Suites 155 and
550, Houston, Texas 77060, (281) 448-6070. This space is leased from Capital
American Associates, Inc. ("Capital").

RISK FACTORS

In addition to the other information contained herein, the following
risk factors should be considered carefully by any interested party before
investing in the Company.

No Operating History

As an emerging company, the Company has had a limited operating history.
Thus far, the management has devoted significant efforts to raising capital and
identifying appropriate candidates with which to enter into license agreements.
The success of the Company will depend, in part, upon its ability to identify
and close license agreements with qualified licensees who can operate the ZEROS
System successfully and provide an income stream to the Company.

10
<PAGE> 11
Liquidity Risk

The Company's revenues are derived from the sale of licenses and
equipment ordinarily upon deferred payment terms. As a result, although the
Company may record substantial revenues, it may not have sufficient cash flows
to finance its current operations. As a result of the Company's financing
activities, it believes that it has sufficient funds to conduct its planned
operations for the subsequent twelve months. Ultimately, the Company is
dependent upon the ability of its licensees to finance deferred licensee fee
payments and the cost of constructing, equipping and operating the ZEROS
System. There can be no assurance that sufficient cash will be available as
needed to fully execute the Company's business plans.

Financing for Licensee

Although each of the current licensees have entered into an agreement
with Capital to arrange construction and permanent financing in order to build
a ZEROS System facility, currently no licensee has obtained financing or a
commitment for financing from any lender. There can be no assurance that each
of the licensees will be able to obtain financing sufficient to build and equip
a ZEROS System or to satisfy its obligations pursuant to the license agreement.

Risk That System Does Not Work

The ZEROS System does not have a history of commercial operation by
licensees. However, a prototype has been built, tested and operated. The
ZEROS System is not based on new technology, but rather is primarily an
application of well-established technology. The ZEROS System relies on a
series of devices, equipment and apparatus substantially all of which must
function as designed for the licensee to conduct commercial operations.
Because no assurances can be given that every piece of equipment will be fully
operational at all times, Investors should be aware that any loss of business
to any licensee because of equipment failure will affect the revenue stream to
the Company.

Dependence on Success of Licensee

Although the Company will earn a one time license fee each time it sells
a new license, a significant portion of the Company's revenues will be derived
from the royalty payments to be paid by each licensee pursuant to the license
agreement. Such royalty payment is equal to fifteen percent of the gross
income (defined as income before deducting operating expenses and taxes)
generated from tipping fees and the sale of all products produced by each ZEROS
System facility operated by a licensee. Consequently, the success of the
Company, in part, will depend upon the operations and success of its licensees.

Dependence on Steve Clark

As the designer of the ZEROS System, the success of the Company will
depend on the continuing efforts of Steve Clark with whom the Company has
entered into a three-year employment agreement.

Dependence on Key Management Personnel

The success of the Company's operations will depend on the continuing
efforts of its executive officers. The business of the Company could be
affected adversely if any of the executive officers does not continue in his or
her management role and the Company is unable to attract and retain a qualified
replacement.

Limited Experience of Management

Other than Steve Clark's previous experience with OCS, none of the
officers or directors have had prior experience in the field of recycling
waste. The Company believes, however, that the absence of such experience will
not have a material adverse effect on the Company since the Company is not in
the waste recycling business, but rather sells licenses to the ZEROS System
technology.

11
<PAGE> 12
Need for Substantial Additional Capital

As an emerging company and in order to develop its business plan, the
Company will require substantial capital for administration, operations,
marketing, legal and accounting fees and other similar expenses. There can be
no assurance that additional financing will be available on a timely basis, if
at all, or that it will be available on terms acceptable to the Company. In
the event that adequate financing is not available or is not available in the
amounts or on terms acceptable to the Company, the business plan and strategy
could be severely impeded and the Company's ability to react to the demands of
the industry in which it plans to do business could be limited, which could
have a material adverse effect on the Company's business, financial condition
and future prospects.

Environmental Regulation

The waste management industry is a highly regulated industry by both
federal and state law. Because the Company does not own or operate any ZEROS
System, but, rather, sells rights to ZEROS System technology to licensees who
operate the systems, the Company believes there are no environmental laws that
are applicable to the Company. In addition, the Company does not intend to
manufacture the ZEROS Systems. Rather, the Company will contract with OCS, and
other approved contractors to manufacture the ZEROS System equipment for sale
to the Company's licensees. Consequently, the Company believes there are no
regulations of a manufacturing or operational nature that are applicable to the
Company. Notwithstanding the foregoing, the Company has obtained from the
Texas Natural Resource Conservation Commission a letter concluding that since
the equipment as designed produces no emissions and does not contaminate the
air, no permits or exemptions are required for the operation of a ZEROS System.

Reliance on Patents and Proprietary Technologies

The Company's success depends in part on its ability to obtain patents
and other intellectual property rights covering its technology. The Company
has obtained certain patents and intends to continue to seek patents on its
technology. The process of seeking patent protection can be long and
expensive, and there can be no assurance that patents will issue from currently
pending or future applications or that, if patents are issued, they will be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to the Company. In addition, the laws of certain foreign countries
may not protect the Company's intellectual property rights to the same extent
as the laws of the United States. Litigation, which could demand financial and
management resources, may be necessary to enforce patents or other intellectual
property rights of the Company. In addition, there can be no assurance others
will not independently develop substantially equivalent or better technology
that would be free of the Company's patents and other intellectual property
rights.

Risks of Future Legal Proceedings

The Company is not currently involved in any litigation or legal
proceedings with any person and the Company is not aware of any threatened
legal proceedings or any disputed claims which it believes will lead to any
legal proceedings. The Company anticipates that it may, from time to time, be
involved in legal proceedings in the ordinary course of business. Although no
assurance can be given regarding the outcome of any legal proceeding, the
Company believes that because it does not own, operate or manufacture any
equipment comprising the ZEROS System that the Company expects to successfully
defend suits based on allegations of environmental laws. Nevertheless, the
Company promotes and sells licenses for the ZEROS System and provides custom
design services intended to accommodate the particular needs of such licensees.
There can be no assurance that legal proceedings will not arise as a result of
disputes relating to allegations involving environmental laws.

The Emergence of New Technology

The Company has no control over the emergence of new technology other
that its own. The Company's technology can be surpassed by the introduction of
other technology. The Company continues to improve and enhance its ZEROS
System design, however, so that it can remain state of the art.

Although the Company does not believe that it would suffer a direct loss
from an equipment failure or industrial accident because the Company does not
own, operate or manufacture the ZEROS System, any loss of business to any
licensee because of equipment failure will ultimately affect the revenue stream
to the Company, and if a record of industrial accidents

12
<PAGE> 13
were to develop with respect to the ZEROS System, the ensuing damage to the
reputation of the system could have adverse effect on the Company's license
sales and revenue stream.

ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION

The Company was organized November 12, 1996 and operates on a fiscal
year ending March 31. The Company's revenues are derived from the sale of
licenses and equipment ordinarily upon deferred payment terms. As a result,
although the Company may record substantial revenues, it may not have
sufficient cash flows to finance its current operations. As a result of its
financing activities, the Company believes that it has sufficient funds to
conduct its planned operations for at least the next twelve months. There can
be no assurance, however, that sufficient cash will be available as needed to
fully execute the Company's business plan.

Although the Company reported revenues of $3,383,845 during its fiscal
year ended March 31, 1997, the only cash generated during the period came from
the private placement of $885,000 debentures. Negotiations are in varying
stages with regard to the sale or lease of ZEROS System equipment to existing
licensees. Although the total estimated cost of these plants has been
defined, the financing necessary to commence construction has not been
finalized. Therefore, until the buyer of the ZEROS System equipment has
delivered the required payment, the Company cannot be assured of the sale of the
equipment.

The Company has entered into a Master License Agreement with M, Ltd.,
which requires the payment of $4.0 million no later than eight years after the
effective date of the agreement and an additional $3.0 million to be paid for
each of the first four plants sold by the Company to other Licensees. The
payment of $12.0 million to be made in connection with the first four plants is
not required until the Company has received payments from the licensees.

Each licensee must obtain its own financing to pay its license fees to
ZEROS and to pay a manufacturer to construct and equip its ZEROS System to the
licensee's specifications. Although the Company believes that several of its
licensees have sufficient capital to pay such fees and construction costs
without third party financing, each of the licensees has engaged Capital
American Associates, Inc. ("Capital") to arrange financing for it. As of the
date hereof, no commitment for construction or permanent financing has been
obtained by any of the licensees. The Company and Capital believe that such
financing can be obtained on terms and conditions adequate to meet the
licensees' needs. Of course, there can be no assurance that such financing can
be obtained, or if obtained, that the terms will be favorable enough to produce
a profit for the licensees.

During the first two quarters of the Company's 1998 fiscal year, the
six-month period from September 30, 1997, the Company continued its efforts to
sell non-exclusive territorial licenses for the ZEROS System technology as well
as continuing its improvements of the ZEROS System technology. During the
fiscal year ended March 31, 1997, the Company raised $855,000 by the sale of
its One Year 10% Secured Debentures (the "Debentures"). As of September 30,
1997, the total debentures sold were $1,928,084 and $135,000 of Series A Five-
Year 12% Percent Convertible Bonds.

The debentures have various maturing dates starting January 1998 with a
monthly total of $200,000 and averaging $227,664 per month in the first quarter
of 1998 and $292,367 per month in the second quarter of 1998. The Company
expects a very strong exchange of the debentures, pursuant to their terms, into
common stock versus monetary redemption at maturity. Over the succeeding twelve
months, maturity on the Company's outstanding indebtedness is $1,928,084 on the
debentures and $415,000 on secured commercial debt (See Footnote 5 to the
Financial Statements for September 30, 1997.)

The Company had an aggregate of $415,000 of commercial bank debt
outstanding as of December 31, 1997 pursuant to a series of one-year term loans
maturing at various dates from March 18, 1998 to August 12, 1998, made by
Citizens Bank & Trust of Baytown, Texas. The loans are for one year on a fully
secured basis, with interest paid quarterly at 7.00-7.35% per annum. The
Company borrowed such funds for working capital and to fund the acquisition of
certain assets from OCS.

CAPITAL EXPENDITURES

In November 1997, the Company entered into an asset sales agreement with
OCS under which the Company acquired the accounts receivable, certain contracts
and certain equipment, including equipment used for testing ZEROS Systems, in
consideration of $100,000 in cash and 3.0 million shares of Series C
Convertible Preferred Stock. Other than such equipment, the Company does not
anticipate the need for significant fixed assets. The Company's capital
expenditures during fiscal 1997 were $16,292, not including obligations under
the Master License Agreement, and $19,644 for the six month period ended June
30, 1997 (excluding the equipment acquired from OCS), primarily for furniture,
fixtures and equipment, including computers, used by the Company's
professionals and staff. The Company currently has no plans for

13
<PAGE> 14
capital expenditures except for additional expenditures for furniture, fixtures
and equipment at levels comparable to prior periods.

REVENUE SOURCES.

The Company anticipates that it will continue to obtain revenues from
the sale of licenses to independent third parties to use the ZEROS System
technology. These licenses are currently priced at $2.7 million per license
payable in annual installments of $900,000 each over a three year period
beginning one year from the effective date. The agreements with the Licensees
provide that they pay a 15% royalty on the tipping fees and on the sale of
by-products from operation of the ZEROS System equipment of which 5%, or one
third, is remitted to M.,Ltd., within thirty days of receipt. Under terms of
ZEROS' agreement with OCS authorizing OCS to manufacture ZEROS System equipment,
the Company anticipates that it will earn 10% of the sales price of ZEROS System
equipment manufactured by OCS. In consideration for certain covenants
restricting Mr. Clark from certain hazardous business activities, the Company
has issued 1.0 million shares of common stock to OCS.

RESEARCH AND DEVELOPMENT

During the company's fiscal year ended March 31, 1997, the Company had
no material research and development expenditures.

ITEM 3. DESCRIPTION OF PROPERTY

The Company currently subleases 4,112 square feet of administrative
offices adequately furnished with furniture, computers, telephones and
facsimile equipment at 507 North Belt East, Suites 155 and 550, Houston, Texas
77060. These offices serve as both the Company's headquarters and as one of
its regional business development offices. The lease term is two years and
expires on December 31, 1998. The Company believes that the current facilities
are adequate but that it will require additional space in January 1999 to
accommodate planned growth. The Company anticipates that additional space will
be available on reasonable terms if needed.

The Company leases the entire first floor of an office building located
on 504 Old Liverpool Road, Liverpool, New York 13088. The lease term is three
years, commencing on October 15, 1997 and expiring on October 15, 2000.

The Company subleases two regional offices in California located at 245
North Murray Street, Banning, CA 92220 and 1000 Atlantic Avenue, Suite 106,
Alameda, CA 94501, respectively. These subleases are month-to-month from
related parties.

ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

SECURITY OWNERSHIP SUMMARY

The following table sets forth, as of January 20, 1998, the number of
shares of each class of equity securities of the Company beneficially owned by
(i) each person known by the Company (based on filings under Section 13(d) or
13(g) of the Exchange Act) to be the holder of more than five percent of the
Company's outstanding common stock, (ii) each of the Company's directors, (iii)
the named executive officers of the Company, and (iv) all of the Company's
directors and officers as a group. Except as otherwise stated below, each
person named below has sole investment power and sole voting power with respect
to all shares attributed to such person.

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<PAGE> 15

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
------------------- -------------- -------------------- ---------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Steve Clark Common 12,407,000(2) 47.0%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 8,500,000 73.4%

Series D Convertible Preferred 7,000 .4%
- -------------------------------------------------------------------------------------------------------------
Jesse Blanco Common 1,134,496(3) 4.3%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 117,830 6.0%
- -------------------------------------------------------------------------------------------------------------
Chet Gutowsky Common 722,666(4) 2.8%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 6,000 .3%
- -------------------------------------------------------------------------------------------------------------
R. J. Simmons, Jr. Common 820,666(5) 3.1%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 4,000 .2%
- -------------------------------------------------------------------------------------------------------------
Susan Smith Common 2,886,119(6) 11.0%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 105,950 5.4%
- -------------------------------------------------------------------------------------------------------------
Celso B. Suarez, Jr. Common 762,666(7) 2.9%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 6,000 .3%
- -------------------------------------------------------------------------------------------------------------
Harendra (Anu) Mahendra Common 2,300,000(8) 8.8%
507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 100,000 .8%

Series D Convertible Preferred - -
- -------------------------------------------------------------------------------------------------------------
OCS, Inc. Common 4,000,000(9) 15.2%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 3,000,000 25.9%

Series D Convertible Preferred - -
- -------------------------------------------------------------------------------------------------------------
</TABLE>

15
<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF
OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP CLASS (1)
------------------- -------------- -------------------- ---------
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CAG Trust Common 1,761,431(10) 6.7%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 19,000 1.0%
- -------------------------------------------------------------------------------------------------------------
Capital American Associates, Inc. Common 1,761,431(11) 6.7%
6507 North Belt East, Suite 550
Houston, TX 77060 Series C Convertible Preferred 416,666 3.6%

Series D Convertible Preferred 19,000 1.0%
- -------------------------------------------------------------------------------------------------------------
All Directors and Executive Common 21,033,613(12) 80.0%
Officers as a Group
Series C Convertible Preferred 11,099,996 95.9%

Series D Convertible Preferred 265,780 13.5%
- -------------------------------------------------------------------------------------------------------------
</TABLE>

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

(1) These percentages are calculated on the basis of 10,690,000
shares of Common Stock, 13,521,796 shares of Company's Series C
Convertible Preferred Stock (convertible into Common Stock at the
rate of one share of common stock for each share of Series C
Convertible Preferred Stock), and 1,971,802 shares of Company's
Series D Convertible Preferred Stock (convertible into Common
Stock at the rate of one share of common stock for each share of
Series D Convertible Preferred Stock), outstanding on January 20,
1998, plus, with respect to each person or entity listed, such
number of shares of Common Stock as such person or entity has the
right to acquire within 60 days pursuant to options, warrants,
conversion privileges or other rights held by such person or
entity.

(2) Includes (i) 2,900,000 shares of Common Stock owned of record by
Steve Clark, (ii) 5,500,000 shares of Common Stock issuable to
Mr. Clark upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Clark, (iii) 7,000 shares of Common
Stock issuable to Mr. Clark upon conversion of the Series D
Convertible Preferred Stock owned of record by Mr. Clark, and
(iv) the (A) 1,000,000 shares of Common stock owned of record by
OCS, Inc. and (B) 3,000,000 shares of Common Stock issuable to
OCS, Inc. upon conversion of the Series C Convertible Preferred
Stock owned of record by OCS, Inc.

(3) Includes (i) 600,000 shares of Common Stock owned of record by
Jesse Blanco, (ii) 416,666 shares of Common Stock issuable to Mr.
Blanco upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Blanco, and (iii) 117,830 shares of
Common Stock issuable to Mr. Blanco upon conversion of the Series
D Convertible Preferred Stock owned of record by Mr. Blanco.

(4) Includes (i) 300,000 shares of Common Stock owned of record by
Chet Gutowsky, (ii) 416,666 shares of Common Stock issuable to
Mr. Gutowsky upon conversion of the Series C Convertible
Preferred Stock owned of record by Mr. Gutowsky, and (iii) 6,000
shares of Common Stock issuable to Mr. Gutowsky upon conversion
of the Series D Convertible Preferred Stock owned of record by
Mr. Gutowsky.

(5) Includes (i) 320,000 shares of Common Stock owned of record by R.
J. Simmons, Jr., (ii) 416,666 shares of Common Stock issuable to
Mr. Simmons upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Simmons, (iii) 4,000 shares of
Common Stock issuable to Mr. Simmons upon conversion of the
Series D Convertible Preferred Stock owned of record by Mr.
Simmons, (iv) 40,000

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<PAGE> 17
shares of Common Stock issuable to Mr. Simmons upon conversion of
the One Year 10% Secured Debentures owned by Mr. Simmons, and (v)
40,000 shares of Common Stock issuable to Mr. Simmons upon
conversion of certain warrants issued by Mr. Clark if acquired
from Mr. Clark and exercised.

(6) Includes (i) 564,022 shares of Common Stock owned of record by
Susan Smith, (ii) 416,666 shares of Common Stock issuable to Ms.
Smith upon conversion of the Series C Convertible Preferred Stock
owned of record by Ms. Smith, (iii) 4,000 shares of Common Stock
issuable to Ms. Smith upon conversion of the Series D Convertible
Preferred Stock owned of record by Ms. Smith, (iv) 70,000 shares
of Common Stock issuable to Ms. Smith upon conversion of the One
Year 10% Secured Debentures owned by Ms. Smith, (v) 70,000 shares
of Common Stock issuable to Ms. Smith upon conversion of certain
warrants issued by Mr. Clark if acquired from Mr. Clark and
exercised, and (vi) beneficial ownership with respect to shares
of Common Stock and securities convertible into Common Stock held
by CAG Trust for which Ms. Smith acts as trustee, including (A)
1,325,765 shares of Common Stock owned of record by CAG Trust,
(B) 416,666 shares of Common Stock issuable to CAG Trust upon
conversion of the Series C Convertible Preferred Stock owned of
record by CAG Trust, and (C) 19,000 shares of Common Stock
issuable to CAG Trust upon conversion of the Series D Convertible
Preferred Stock owned of record by CAG Trust.

(7) Includes (i) 300,000 shares of Common Stock owned of record by
Celso B. Suarez, Jr., (ii) 416,666 shares of Common Stock
issuable to Mr. Suarez upon conversion of the Series C
Convertible Preferred Stock owned of record by Mr. Suarez, (iii)
6,000 shares of Common Stock issuable to Mr. Suarez upon
conversion of the Series D Convertible Preferred Stock owned of
record by Mr. Suarez, (iv) 20,000 shares of Common Stock issuable
to Mr. Suarez upon conversion of the One Year 10% Secured
Debentures owned by Mr. Suarez, and (v) 20,000 shares of Common
Stock issuable to Mr. Suarez upon conversion of certain warrants
issued by Mr. Clark if acquired from Mr. Clark and exercised.

(8) Includes (i) 2,000,000 shares of Common Stock owned of record by
Anu Mahendra, (ii) 100,000 shares of Common Stock issuable to Mr.
Mahendra upon conversion of the Series C Convertible Preferred
Stock owned of record by Mr. Mahendra, and (iii) 100,000 shares
of Common Stock issuable to Mr. Mahendra upon conversion of the
One Year 10% Secured Debentures owned by Mr. Mahendra, and (v)
100,000 shares of Common Stock issuable to Mr. Mahendra upon
conversion of certain warrants issued by Mr. Clark if acquired
from Mr. Clark and exercised.

(9) Includes (i) 1,000,000 shares of Common Stock owned of record by
OCS, Inc., and (ii) 3,000,000 shares of Common Stock issuable to
OCS, Inc. upon conversion of the Series C Convertible Preferred
Stock owned of record by OCS, Inc.

(10) Includes (i) 1,325,765 shares of Common Stock owned of record by
CAG Trust, (ii) 416,666 shares of Common Stock issuable to CAG
Trust upon conversion of the Series C Convertible Preferred Stock
owned of record by CAG Trust, and (iii) 19,000 shares of Common
Stock issuable to CAG Trust upon conversion of the Series D
Convertible Preferred Stock owned of record by CAG Trust.

(11) Includes the following beneficial ownership attributed to Capital
through CAG Trust: (i) 1,325,765 shares of Common Stock owned of
record by CAG Trust, (ii) 416,666 shares of Common Stock issuable
to CAG Trust upon conversion of the Series C Convertible
Preferred Stock owned of record by CAG Trust, and (iii) 19,000
shares of Common Stock issuable to CAG Trust upon conversion of
the Series D Convertible Preferred Stock owned of record by CAG
Trust.

(12) Includes an aggregate of 11,825,776 shares of Common Stock that
such persons have the right to acquire within 60 days pursuant to
warrants, conversion privileges (inclusive of those contained in
the Series C Convertible Preferred Stock, Series D convertible
Preferred Stock and One Year 10% Secured Debentures) or other
rights held by such persons.

17
<PAGE> 18
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The names, ages and positions of the directors and executive officers of
the Company are as follows:

<TABLE>
<CAPTION>
Year First Became
Name Age Position with the Company a Director
--- -------------------------- ----------
<S> <C> <C> <C>
Steve Clark 51 Chief Executive Officer, President and 1997
Director

Jesse Blanco 51 Secretary, General Counsel and Director 1997

Chet Gutowsky 51 Chief Financial Officer and Director 1997

Susan Smith 49 Assistant Secretary and Director 1997

R. J. Simmons, Jr. 74 Director 1997

Celso B. Suarez, Jr. 41 Director 1997

Harendra (Anu) Mahendra 55 Director Nominee --
</TABLE>

Steve Clark, age 51, is the principal organizer of the Company and has
served as the Company's Chief Executive Officer, President and director since
1996. For more than the past five years, Mr. Clark has served as President of
OCS, Inc. ("OCS") and Blowout and Failure, Inc. ("BAF"), two companies wholly
owned by Mr. Clark, which specialize in the oilwell blowout, failures and fires
business as well as project management, construction supervision, inspection,
testing and quality assurance consulting and management. Mr. Clark developed
the predecessor to the ZEROS System in 1988 and further developed the
technology into the ZEROS System after it was conveyed to M, Ltd., in 1993.
Mr. Clark is the majority shareholder of M, Ltd.

Jesse Blanco, age 51, has served as the Company's Secretary, General
Counsel and director since 1996. For more than the past five years, Mr. Blanco
has been practicing law as a sole practitioner. He received his law degree
from the University of Houston and was formerly Assistant Dean of the
University of Houston College of Law.

Chet Gutowsky, CFA, age 51, has served as the Company's Treasurer, Chief
Financial Officer and director since 1996. During the period from 1992 to
1994, Mr. Gutowsky was a senior contract administrator with the Federal
Depository Insurance Corporation and the Resolution Trust Company. Prior to
joining the Company, Mr. Gutowsky served as a consultant at the American
National Mortgage Company of Texas in 1995. He has had twenty years experience
in the banking industry. He received his M.B.A. in finance from the University
of Texas.

Susan Smith, age 49, has served as the Company's Assistant Secretary and
director since 1997. She has served as the President of Capital from 1994 to
1998. Prior to joining Capital, Ms. Smith was the director of client services
for a Houston area staff leasing company from 1991 to 1994. She has a
background in insurance, credit guarantee programs and export-trade
development. Ms. Smith holds a bachelor degree from Louisiana Tech University.
She is the daughter of Raymond Jefferson Simmons, Jr.

Raymond Jefferson (R.J.) Simmons, Jr., age 74, has served as a director
of the Company since 1996. He retired from United Gas Pipe Line Company, a
division of United Energy, in 1986 as Executive Vice President. He has served
on committees of the Gas Research Institute, the International Gas Union and
the Pipeline Research Committee. He is the father of Susan Smith.

Celso B. Suarez, Jr., age 41, has served as a director of the Company
since 1996. Mr. Suarez has been practicing law from 1985 to 1997 as a sole
practitioner. He received his law degree from Drake University and his
undergraduate degree from the University of Houston.

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Harendra (Anu) Mahendra, age 55, has been nominated to serve as a
director of the Company. He is a principal and founding partner of CBM
Engineers, Inc. which has been in practice for over twenty-two years. CBM
Engineers, Inc. is a consulting structural engineering firm has designed many
major buildings in the United States and abroad. Mr. Mahendra is also a member
of numerous professional societies and is a licensed professional engineer.

Other than Steve Clark's experience in connection with OCS, none of the
officers or directors have had prior experience in the field of recycling
waste. The Company believes, however, that the absence of such experience will
not have a material adverse effect on the Company since the Company is not in
the waste recycling business, but rather sells licenses to the ZEROS System
technology. See "Risk Factors."

ITEM 6. EXECUTIVE COMPENSATION

During the fiscal year ended March 31, 1997, none of the executive
officers of the Company received an annual salary. However, certain executive
officers did enter into consulting agreements with the Company. See "Certain
Relationships and Related Transactions." For services rendered in placing the
initial five ZEROS System licenses, certain officers of the Company received
warrants (convertible into shares of Common Stock held by Steve Clark) granted
on January 16, 1997 by Mr. Clark in the following amounts: 400,000 warrants to
Jesse Blanco, 200,000 warrants to Chet Gutowsky, and 200,000 warrants to Susan
Smith. The fair market value of such warrants at the time they were awarded was
$.02 per warrant as determined by an independent appraiser. For services
rendered to the Company, Mr. Clark received 9.0 million shares of Common Stock,
based upon fair market value of services performed.

EMPLOYMENT CONTRACTS

Effective October 1, 1997, the Company entered into an employment
agreement with Steve Clark, pursuant to which Mr. Clark serves as the Chief
Executive Officer and President of the Company. The agreement requires Mr.
Clark to perform faithfully, industriously, and to the employee's ability,
experience, and talents, all of the duties that may be required by the express
and implicit terms of the employment agreement. In exchange, Mr. Clark is
entitled to (i) receive an annual salary of $120,000, (ii) earn an incentive
bonus in accordance with the Company's bonus plan to be established for its
senior executives, (iii) receive a monthly car allowance of $1,000, and (iv)
participate in the Company's other employee benefit plans, which may be adopted.
Mr. Clark's employment agreement is terminable by either party upon sixty days
written notice. If the Company shall terminate the employment agreement, Mr.
Clark shall be entitled to compensation for six months, plus full vested time in
deferred compensation, unless Mr. Clark is in violation of the employment
agreement.

Effective October 1, 1997, the Company entered into an employment
agreement with Jesse Blanco, pursuant to which Mr. Blanco serves as the
Secretary and General Counsel of the Company. The agreement requires Mr. Blanco
to perform faithfully, industriously, and to the employee's ability, experience,
and talents, all of the duties that may be required by the express and implicit
terms of the employment agreement. In exchange, Mr. Blanco is entitled to (i)
receive an annual salary of $120,000, (ii) earn an incentive bonus in accordance
with the Company's bonus plan to be established for its senior executives, (iii)
receive a monthly car allowance of $1,000, and (iv) participate in the Company's
other employee benefit plans, which may be adopted. Mr. Blanco's employment
agreement is terminable by either party upon sixty days written notice. If the
Company shall terminate the employment agreement, Mr. Blanco shall be entitled
to compensation for six months, plus full vested time in deferred compensation,
unless Mr. Blanco is in violation of the employment agreement.

Effective October 1, 1997, the Company entered into an employment
agreement with Chet Gutowsky, pursuant to which Mr. Gutowsky serves as the Chief
Financial Officer of the Company. The agreement requires Mr. Gutowsky to
perform faithfully, industriously, and to the employee's ability, experience,
and talents, all of the duties that may be required by the express and implicit
terms of the employment agreement. In exchange, Mr. Gutowsky is entitled to (i)
receive an annual salary of $78,000, (ii) earn an incentive bonus in accordance
with the Company's bonus plan to be established for its senior executives, and
(iii) participate in the Company's other employee benefit plans, which may be
adopted. Mr. Gutowsky's employment agreement is terminable by either party
upon sixty days written notice. If the Company shall terminate the employment
agreement, Mr. Gutowsky shall be entitled to compensation for six months, plus
full vested time in deferred compensation, unless Mr. Gutowsky is in violation
of the employment agreement.

Effective October 1, 1997, the Company entered into an employment
agreement with Celso Suarez, pursuant to which Mr. Suarez agreed to provide the
Company with legal, regulatory compliance, updates and corporate filings advice.
The agreement requires Mr. Suarez to perform faithfully, industriously, and to
the employee's ability, experience, and talents, all of the duties that may be
required by the express and implicit terms of the employment agreement.

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In exchange, Mr. Suarez is entitled to (i) receive an annual salary of
$84,000, (ii) earn an incentive bonus in accordance with the Company's bonus
plan to be established for its senior executives, (iii) participate in the
Company's other employee benefit plans, which may be adopted. Mr. Suarez's
employment agreement is terminable by either party upon sixty days written
notice. If the Company shall terminate the employment agreement, Mr. Suarez
shall be entitled to compensation for six months, plus full vested time in
deferred compensation, unless Mr. Suarez is in violation of the employment
agreement.

ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Master License Agreement. The Company entered into that certain Master
License Agreement dated as of November 15, 1996, by and between M, Ltd., and
the Company. Steve Clark is the majority shareholder of M, Ltd. Pursuant to
the terms of the Master License Agreement, M, Ltd., granted the Company the
exclusive right and license to sell operating licenses and to sell or lease the
ZEROS System equipment to customers and to use M, Ltd.'s proprietary marks,
indicia and information regarding patents in connection therewith. In exchange
for the grant, the Company agreed to pay a license fee of $4.0 million to be
paid within the first eight years of the execution of the Master License
Agreement and a royalty payment equal to $3.0 million per system for each of
the first four ZEROS Systems sold by the Company to other licensees. In
addition, M, Ltd., shall receive a five percent commission on the Company's
collections arising in connection with the sale of licenses and equipment, five
percent of the tipping fees and five percent of the value of all by-products
produced from the operation of each ZEROS System. The Company is obligated to
pay for and file any subsequent patent applications on the ZEROS System related
technology for the benefit of M, Ltd.

The Master License Agreement further provides that M, Ltd., may
terminate the Master License Agreement in the event M, Ltd., gives written
notice to the Company of a breach of the Master License Agreement, and such
breach is not cured by the Company within thirty days of receipt of such
notice. In addition, the Master License Agreement shall terminate immediately
upon the occurrence of any of the following events: (i) the termination of the
Company's rights to possession of its current offices, unless such termination
is without fault or affirmative action on the part of the Company, (ii) the
bankruptcy of the Company, (iii) the making of a general assignment by the
Company for the benefit of creditors, and (iv) the appointment of a receiver or
similar officer to take charge of the Company's business, or any attachment,
execution, levy, seizure, or appropriation of the Company's interest in the
Master License Agreement.

In the event the Company proposes to sell the business operated pursuant
to the Master License Agreement to any party other than a controlled
corporation, the Company must first notify M, Ltd., of such proposed sale. M,
Ltd., shall have the right to purchase the business on the same terms as stated
in such proposed sale. If M, Ltd., does not notify the Company of its election
to exercise such right within fourteen days, the Company may sell the business
to the third party, but only upon the same terms and conditions and only upon
the consent of M, Ltd.

Independent Contractor Agreements (Steve Clark). The Company entered
into an Independent Contractor Agreement dated as of January 1, 1997 with Steve
Clark, pursuant to which Mr. Clark agreed to provide the Company with
management services, corporate and technical organization, and planning
assistance during the period between January 1, 1997 to December 31, 1997. In
consideration for Mr. Clark's services, the Company agreed to compensate Mr.
Clark $10,000 per month. The Agreement was terminated on October 1, 1997 by
mutual consent of both parties without further obligations on either party.

Independent Contractor Agreements (Jesse Blanco). The Company entered
into an Independent Contractor Agreement dated as of January 1, 1997 with Jesse
Blanco, pursuant to which Mr. Blanco agreed to assist the Company with legal
and regulatory compliance, updates and corporate filings during the period
between January 1, 1997 to December 31, 1997. In consideration for Mr.
Blanco's services, the Company agreed to compensate Mr. Blanco $10,000 per
month. The Agreement was terminated on October 1, 1997 by mutual consent of
both parties without further obligations on either party.

Independent Contractor Agreements (Chet Gutowsky). The Company entered
into an Independent Contractor Agreement dated as of January 1, 1997 with Chet
Gutowsky, pursuant to which Mr. Gutowsky agreed to provide the Company with
financial report, filing and accounting services for management during the
period between January 1, 1997 to December 31, 1997. In consideration for Mr.
Gutowsky's services, the Company agreed to compensate Mr. Gutowsky $2,500 per
month until March 15, 1997 at which time monthly compensation shall be
increased to $6,500 per month. The Agreement was terminated on October 1, 1997
by mutual consent of both parties without further obligations on either party.

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Independent Contractor Agreements (Celso Suarez). The Company entered
into an Independent Contractor Agreement dated as of May 1, 1997 with Celso
Suarez, pursuant to which Mr. Suarez agreed to assist the Company with legal
and regulatory compliance, updates and corporate filings during the period
between May 1, 1997 to December 31, 1997. In consideration for Mr. Suarez's
services, the Company agreed to compensate Mr. Suarez $7,000 per month. The
Agreement was terminated on October 1, 1997 by mutual consent of both parties
without further obligations on either party.

Administrative Services Agreement. The Company entered into that
certain Administrative Services Agreement dated as of January 3, 1997, by and
between the Company and Capital, pursuant to which the Company agreed to
sublease its current office space in Houston, Texas from Capital, and Capital
agreed to provide and implement an administrative plan and support for the
Company. In addition to furnishing the office space to the Company, Capital
also provides administrative services and equipment to the Company on a month-
to-month basis, for which Capital is reimbursed on an out-of-pocket or pro rata
basis. In consideration for entering into the Administrative Services
Agreement, Capital through CAG Trust acquired 416,666 shares of Common Stock
for the initial five ZEROS System licenses placed. Several employees of
Capital are also shareholders and/or directors in the Company.

Aircraft Reimbursement Agreement. The Company has executed an Aircraft
Reimbursement Agreement dated April 1, 1997 (the "Aircraft Reimbursement
Agreement"), with BAF. Under the terms of the Aircraft Reimbursement
Agreement, the Company agrees to make 120 regular payments to BAF of at least
$16,000 per month to provide for a minimum of twenty hours of access per month
calculated at the rate of $800.00 per hour for the use of a 1976 Piper Cheyenne
II airplane, which the Company believes represents the fair market lease rate
for comparably equipped aircraft. Each additional hour shall be billed at
$800.00 per hour. The Company has also provided a non-interest bearing
security deposit of $16,000 with BAF, which is to be returned at the conclusion
of the reimbursement agreement. BAF is wholly owned by Steve Clark.

Asset Sales Agreement. On November 15, 1997, the Company entered into
an asset sales agreement with OCS, a company wholly owned by Steve Clark, under
which the Company acquired the accounts receivable, certain contracts and
certain equipment, including equipment used for testing ZEROS Systems, in
consideration of $100,000 in cash and 3.0 million shares of Series C
Convertible Preferred Stock.

OCS Manufacturing Agreement. On September 30, 1997, the Company entered
into an agreement to issue 1.0 million shares of the Common Stock of the Company
in consideration for an agreement with OCS to authorize OCS to manufacture the
ZEROS System equipment. Pursuant to such agreement, OCS would manufacture,
install, test, and maintain the ZEROS System equipment as well as provide each
licensee with a product warranty, training, inspections, and technical support.
The Company will receive a 10% interest in the revenues resulting from the
design, manufacture, assembly and installation of equipment in connection with
the ZEROS System equipment manufactured by OCS.

Alameda Sublease Agreement. The Company subleases a regional office
from OCS on a month-to-month basis. The monthly payment for the office space
is $4,600, which the Company believes represents the fair market rental rate
based on the rate for comparable properties in the area. OCS is wholly owned
by Steve Clark.

ITEM 8. LEGAL PROCEEDINGS

To the knowledge of management, there is no material litigation pending
or threatened against the Company.

ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

To date there has been no public market for the common shares of the
Company. To the knowledge of the Company, there are no plans, proposals,
arrangements or understandings of any person with regard to the development of a
trading market in any of the Company's securities. As of January 20, 1998,
approximately 17,421,682 shares of Common Stock are subject to outstanding
warrants, debentures and preferred stock issued by the Company, and the Company
had 172 holders of record of the Common Stock.

As of today, the Company has not declared any cash dividends on its
Common Stock. The Company currently intends to retain its earnings, if any, to
finance the expansion of its business and for general corporate purposes and
does not anticipate paying any cash dividends on its Common Stock for the
foreseeable future. Any future dividends will be at the discretion of the Board
of Directors, after taking into account various factors, including among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs and expansion plans, the income
tax laws then in effect, the requirements of Texas law, and any restrictions
that may be imposed by the Company's future credit arrangements.

In general, under Rule 144, if a minimum of one year has elapsed since
the later of the date of acquisition of the restricted securities from the
Company or an affiliate of the Company, the holder (or holders whose shares of
Common Stock are aggregated) of such restricted securities, including holders
who may be deemed "affiliates of the Company," is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. Affiliates may
sell shares not constituting restricted securities in accordance with the
foregoing volume limitations and other requirements but without regard to the
one year holding period. Under Rule 144(k), if a period of at least two years
has elapsed since the later of the date on which restricted securities were
acquired from the Company or the date they were acquired from an affiliate of
the Company, a holder of such restricted securities who is not an affiliate of
the Company at the time of the sale and has not been such an affiliate for at
least three months prior to the sale is entitled to sell the shares immediately
without regard to the volume limitations and other conditions of Rule 144
described above. The foregoing summary of Rule 144 is not intended to be a
complete description thereof and is qualified in its entirety by reference
thereto. The Commission has proposed certain amendments to Rule 144 that would,
among other things, eliminate the manner of sale requirements and revise the
notice provisions of that rule. The Commission has also solicited comments on
other possible changes to Rule 144, including possible revisions to the one-
and two-year holding periods and volume limitations described above. Following
the satisfaction of the current public information standard of Rule 144, which
the Company anticipates will occur within ninety days of the effective date of
this Form 10-SB, 900,000 shares of Common Stock will be eligible for sale under
Rule 144.

The Securities Enforcement and Penny Stock Reform Act of 1990 (the
"Penny Stock Act"), and the rules promulgated thereunder, are part of a
comprehensive effort by Congress and the Securities and Exchange Commission

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("SEC") to reduce fraud and manipulation in the penny stock market and to
provide investors with important information concerning that market. The Penny
Stock Act requires a broker-dealer recommending penny stocks to document the
suitability of the investment for the specific customer and to obtain the
written agreement of the customer to purchase the penny stock. In addition,
the broker-dealers must provide the customers with a Standardized Risk
Disclosure Document, disclosure of market quotations, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction, and
monthly account statements showing the market value of each penny stock held in
the customer's account.

Generally, a penny stock is an equity security of a company that (i) is
priced less than $5.00 (ii) is not approved for quotation on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
registered, or approved for registration upon notice of issuance, on a national
securities exchange which makes transaction reports available or (iii) has net
tangible assets in excess of $2.0 million ($5.0 million if the issuer has been
in continuous operation for less than three years) or average revenue of at
least $6.0 million for the last three years.

In the event the Common Stock of the Company is deemed to be penny
stock, such classification may significantly limit the ability of the Company
to raise capital in the securities market due to the compliance burdens caused
by the rules, the unwillingness of broker-dealer firms to effect transactions
in these securities, or the negative connotation of being classified as a penny
stock.

ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES

Since inception, the Company has issued and sold the following
unregistered securities:

1. During the period from December 1996 to March 1997, the Company
sold a total of $855,000 of One Year 10% Secured Debentures to
officers, directors and accredited investors in a private
placement. The officers and directors of the Company sold all of
the securities without payment of any commission or other
remuneration by any person.

2. During the period from April 1997 through July 1997, the Company
sold an additional $925,260 of the One Year 10% Secured
Debentures in a subsequent private placement. The combined sales
of the One Year 10% Secured Debentures were made to fewer than 35
non-accredited investors plus accredited investors. The officers
and directors of the Company sold all of the securities without
payment of any commission or other remuneration by any person.

3. On June 20, 1997, the Company issued 3.0 million shares of Series
C Preferred Stock to Steve Clark in exchange for 4.0 million
shares of the Company's common shares held by him.

4. During the period from August 1997 through December 1997, the
Company sold an aggregate of $1,259,000 of Series A Five-Year
Twelve Percent Convertible Bond to various investors. The
officers and directors of the Company sold all of the securities
without payment of any commission or other remuneration from any
person.

5. On November 15, 1997, the Company issued to OCS 3.0 million
shares of Series C Convertible Preferred Stock to OCS pursuant to
the Assets Sales Agreement.

6. On September 30, 1997, the Company issued 200,000 shares of
Series C Convertible Preferred Stock to ZEROS Piney Creek
Corporation, a Mississippi corporation, pursuant to that certain
Agreement Incident to Transfer dated February 28, 1997.

7. On September 30, 1997, the Company issued 250,000 shares of
Series C Convertible Preferred Stock to ZEROS California
Corporation, a California corporation, pursuant to that certain
Agreement Incident to Transfer dated March 31, 1997.

8. On September 30, 1997, the Company issued 100,000 shares of
Series C Convertible Preferred Stock to ZEROS Lawson Corporation,
a California corporation, pursuant to that certain Agreement
Incident to Transfer dated May 31, 1997.

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9. In September 30, 1997, the Company issued (i) an aggregate of 2.5
million shares of Series C Convertible Preferred Stock to Steve
Clark and (ii) an aggregate of 2.5 million shares of Series C
Convertible Preferred Stock to various directors, officers, and
key professionals, for services rendered by such individuals in
placing the initial five ZEROS System licenses.

10. On September 30, 1997, the Company issued 1.0 million shares of
Common Stock to OCS in consideration for OCS agreeing to become a
manufacturer of ZEROS System technology for revenue
participation.

11. During the period from August 1997 through December 1997, the
Company issued and sold $1.5 million of Series A Five-Year Twelve
Percent Convertible Bonds. The officers and directors of the
Company sold all of the securities without any commission or
other remuneration from any person.

12. On October 29, 1997, the Company issued 100,000 shares of Series
A Convertible Preferred Stock to ZHM, Inc., a Texas corporation,
pursuant to that certain Agreement Incident to Transfer dated
October 29, 1997.

13. On November 2, 1997, the Company issued 100,000 shares of Series
C Convertible Preferred Stock to ZEROS Western Corporation, a
California corporation, pursuant to that certain Agreement
Incident to Transfer dated November 2, 1997.

14. On November 12, 1996, the Company issued 100,000 shares of common
stock to Capital in exchange for 20,000 shares of 6% convertible
preferred stock, $10.00 stated value, of Genesis Capital
Corporation ("Genesis"). This preferred stock of Genesis is
convertible into common stock of Genesis at the rate of ten
shares of common stock for each share of preferred stock.

15. In January 1998, the Company issued an aggregate of 265,780
shares of Series D Convertible Preferred Stock to certain
directors, officers and key professionals, for services rendered.

The sales and issuances of the securities referenced in numbers 2, 4 and
11 above were exempt from registration under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to Regulation D promulgated by the
SEC, with the recipients representing their intentions to acquire the
securities for their own accounts and not with a view to the distribution
thereof. The Company believes that each investor received full disclosure of
all material facts through the private offering memorandum provided by the
Company for each of the respective offerings.

The issuance of the securities referenced in number 3 above was exempt
from registration under the Securities Act pursuant to Section 3(a)(9) thereof.

The remaining sales and issuances of the securities referenced above
were exempt from registration under the Securities Act pursuant to Section 4(2)
thereof as transactions not involving a public offering.

ITEM 11. DESCRIPTION OF SECURITIES

COMMON SHARES

The Company will file an Amended and Restated Articles of Incorporation
(the "Amended Articles") with the Secretary of State of Texas. The Company's
Amended Articles authorize 200 million shares of capital stock, $.001 par
value, including 125 million shares of Common Stock and 75 million shares of
preferred stock. As of January 20, 1998, the Company has 10,690,000 shares of
Common Stock, 11,549,996 shares of Series C Convertible Preferred Stock and
1,971,802 shares of Series D Convertible Preferred Stock outstanding.

The holders of Common Stock of the Company are entitled to equal
dividends and distributions per share with respect to the Common Stock when, as
and if, declared by the board of directors from funds legally available
therefor. No

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holder of any shares of Common Stock has a pre-emptive right to subscribe for
any securities of the Company nor are any common shares subject to redemption
or convertible into other securities of the Company. Each share of Common
Stock is entitled to one vote for each share held. Holders of the Common Stock
do not have cumulative voting rights.

PREFERRED STOCK

The Company's Amended Articles authorize 75.0 million shares of $.001
par value preferred stock. The Company's board of directors shall have the
power, without further action by the holders of Common Stock, to designate the
relative rights and preferences of the preferred stock, and to issue the
preferred stock in such one or more series as designated by the board of
directors. The designations of rights and preferences could include preferences
as to liquidation, redemption and conversion rights, voting rights, dividends
or other preferences, any of which may be dilutive of the interest of the
holders of the Common Stock or the preferred stock of any other series. The
issuance of preferred stock may have the effect of delaying or preventing a
change in control of the Company without further shareholder action and may
adversely affect the rights and powers, including voting rights, of the holders
of Common Stock. In certain circumstances, the issuance of preferred stock
could depress the market price of the Common Stock. The board of directors
effects an establishment of series designation of each series of preferred
stock by filing with the Secretary of State of Texas an establishment of series
of designation defining the rights and preferences of each such series.

The Company's board of directors has authorized the issuance of the
following series of preferred stock:

1. Series A Convertible Preferred. The Amended Articles authorize
10.0 million shares of $.001 par value of Series A Convertible
Preferred Stock. The Company has no shares of Series A
Convertible Preferred Stock outstanding as of January 20, 1998.
None of the shares of the Series A Convertible Preferred is
entitled to any vote, and each share of the Series A Convertible
Preferred carries a dividend of $0.30 per share, payable
annually, provided that if the price of the Series A Convertible
Preferred Stock is $5 per share or more, the Company has the
option to pay such dividend in Common Stock. If the Company
elects to pay the dividend in Common Stock, the Company will
round up to the next whole number any fractional shares payable
in the total annual dividend to each shareholder. The holder of
the Series A Convertible Preferred Stock, may at any time,
convert the Series A Convertible Preferred Stock into the Common
Stock at the conversion ratio of one share of Series A
Convertible Preferred Stock for one share of Common Stock.

2. Series B Convertible Preferred. The Amended Articles authorize
25.0 million shares of $.001 par value of Series B Convertible
Preferred Stock. The Company has no shares of Series B
Convertible Preferred Stock outstanding as of January 20, 1998.
None of the shares of the Series B Convertible Preferred is
entitled to any vote, and each share of the Series B Convertible
Preferred carries a dividend of $0.10 per share, payable
annually, and receives an additional dividend of 0.10 shares of
common stock, payable annually. The Company will round up to the
next whole number any fractional shares payable in the total
annual dividend to each shareholder. The holder of the Series B
Convertible Preferred Stock, may at any time, convert the Series
B Convertible Preferred Stock into the Common Stock at the
conversion ratio of one share of Series B Convertible Preferred
Stock for one share of Common Stock.

3. Series C Convertible Preferred. The Amended Articles authorize
15.0 million shares of $.001 par value of Series C Convertible
Preferred Stock. The Company has 11,549,996 shares of Series C
Convertible Preferred Stock outstanding as of January 20, 1998.
Each share of the Series C Convertible Preferred Stock is
entitled to one vote for each share held, and receives a dividend
of 0.06 shares of common stock, payable annually. The Company
will round up to the next whole number any fractional shares
payable in the total annual dividend to each shareholder. The
holder of the Series C Convertible Preferred Stock, may at any
time, convert the Series C Convertible Preferred Stock into the
Common Stock at the conversion ratio of one share of Series C
Convertible Preferred Stock for one share of Common Stock.

4. Series D Convertible Preferred. The Amended Articles authorize
20.0 million shares of $.001 par value of Series D Convertible
Preferred Stock. The Company has 1,971,802 shares of Series D
Convertible Preferred Stock outstanding as of January 20, 1998.
None of the shares of the Series D Convertible Preferred Stock is
entitled to any vote, and each share of the Series D Convertible
Preferred Stock

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receives a dividend of 0.10 shares of common stock, payable
annually. The Company will round up to the next whole number any
fractional shares payable in the total annual dividend to each
shareholder. The holder of the Series D Convertible Preferred
Stock, may at any time, convert the Series D Convertible
Preferred Stock into the Common Stock at the conversion ratio of
one share of Series D Convertible Preferred Stock for one share
of Common Stock.

ONE YEAR 10% SECURED DEBENTURES

As of September 30, 1997, the Company sold a total of $1, 928,084 of One
Year 10% Secured Debentures (the "Secured Debentures") to officers, directors
and other accredited investors with the minimum purchase of one $10,000 face
amount debenture. They were all issued at face amount and each one dollar of
Secured Debenture is secured by two shares of common stock currently owned by
Steve Clark. The holder of the Secured Debentures may at any time prior to
maturity exchange the dollar face amount of the Secured Debentures into the
Common Stock at the exchange ratio of $1.00 of Secured Debentures for two
shares of common stock. Interest is due and payable at the maturity of the
Secured Debenture and is waived by the holder if the Secured Debenture is
exchanged for the Common Stock. The Secured Debentures mature one year from
the actual date of issuance. Therefore, the Secured Debentures mature at
different dates depending upon the date of sale. Sales were made by officers
and directors of the Company and no commissions were paid in connection with
the sales.

SERIES A FIVE-YEAR TWELVE PERCENT CONVERTIBLE BOND

During the period from August 1997 to December 1997, the Company sold a
total of $1.5 million of Series A Five-Year Twelve Percent Convertible Bond
(the "Series A Bonds") to officers, directors and accredited investors with the
minimum purchase of one $100,000 face amount unit. Holders of the Series A
Bonds are entitled to receive $100,000 per $100,000 face amount on July 31,
2002, and interest at the rate of twelve (12%) per annum semiannually on the
last day of January and the last day of July of each year, computed from July
31, 1997. The maturity date of the Series A Bonds is July 31, 2002. Subject
to redemption by the Company, the holder of the Series A Bonds may at any time
prior to the maturity date convert the principal amount of the Series A Bonds
into the Company's Series A Preferred Stock at the conversion ratio of $1.00 of
bond principal for one share of Series A Preferred Stock. The Company may at
any time prepay in whole or in part, the principal amount, plus accrued
interest to the date of prepayment, of all outstanding Series A Bonds of this
issue, upon 90 days' written notice by certified or registered mail to the
registered owners of all outstanding Series A Bonds.

SERIES B TEN-YEAR TEN PERCENT CONVERTIBLE BOND

The Company has authorized the creation of the Series B Ten-Year Ten
Percent Convertible Bond (the "Series B Bonds") to be sold to selected
accredited investors. Holders of the Series B Bonds are entitled to receive
$100,000 per $100,000 face amount unit on the maturity date, which has not been
set, and interest at the rate of twelve (12%) per annum semiannually on the
last day of January and the last day of July of each year, computed from the
actual date of issuance. The maturity of the Series B Bonds is ten years.
Subject to redemption by the Company, the holder of the Series B Bonds, may at
any time, prior to the maturity date, convert the principal amount of the
Series B Bonds into the Company's Series B Preferred Stock at the conversion
ratio of $2.00 of bond principal for one share of Series B Preferred Stock.
The Company may at any time prepay in whole or in part, the principal amount,
plus accrued interest to the date of prepayment, of all outstanding Series B
Bonds of this issue, upon 90 days' written notice by certified or registered
mail to the registered owners of all outstanding Series B Bonds.

ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company has adopted provisions in its Amended Articles which limit
the liability of its officers and directors and provisions in its bylaws which
provide for indemnification by the Company of its officers and directors to the
full extent permitted by the Texas Business Corporation Act. The Amended
Articles and the bylaws also permit the advancing of expenses incurred in
defense of claims by officers and directors.

The Company's Amended Articles and the bylaws also permit the Company to
purchase and maintain insurance, at its expense, for the benefit of any
officers and directors. The Company has a one year Directors, Officers and
Corporate

25
<PAGE> 26
Liability Insurance Policy issued by American International Specialty Lines
Insurance Company, effective August 18, 1997 through August 18, 1998. The
policy has an aggregate limit of $1,000,000.

ITEM 13. FINANCIAL STATEMENTS

The attached financial statements of the Company are incorporated hereby
by reference.

ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not Applicable.

ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS

(a) The following financial statements are filed herein as part of the
registration statement.

(b) The following exhibits required by Item 601 of Regulation S-B are
attached.

*3.1 Articles of Incorporation of ZEROS
+3.2 Amended and Restated Articles of Incorporation of
ZEROS
*3.3 Bylaws of ZEROS
+4.1 Designation of Rights and References of Series A
Preferred Stock
+4.2 Designation of Rights and References of Series B
Preferred Stock
+4.3 Designation of Rights and References of Series C
Preferred Stock
+4.4 Designation of Rights and References of Series D
Preferred Stock
4.5 One Year 10% Secured Debentures
4.6 Series A Five-Year 12% Convertible Bond
+4.7 Series B Ten-Year 10% Convertible Bond
4.8 Promissory Note due April 18, 1998 in the amount of
$75,000 with interest at 7.0%
4.9 Promissory Note (Loan Number 01693161) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
4.10 Promissory Note (Loan Number 01693162) due May 30,
1998 in the amount of $100,000 with interest at
7.35%
4.11 Promissory Note due July 7, 1998 in the amount of
$50,000 with interest at 7.00%
4.12 Promissory Note due August 12, 1998 in the amount
of $90,000 with interest at 7.0%
*10.1 Master License Agreement dated November 15, 1996 by
and between ZEROS and M, Ltd.
*10.2 Agreement in Principle to Acquire OCS Assets
*10.3 Reimbursement Agreement dated April 1, 1997 by and
between ZEROS and M, Ltd.
*10.4 Agreement for Sale of ZEROS Approved License dated
May 31, 1997 by and among ZEROS, ZEROS California
Corporation and Lawson ZEROS Corporation
*10.5 Agreement for Sale of ZEROS Indian Approved License
dated March 31, 1997 by and between ZEROS and ZEROS
California Corporation
*10.6 Agreement for Sale of ZEROS Approved License dated
February 28, 1997 by and between ZEROS and ZEROS
Piney Creek
10.7 Agreement for Sale of ZEROS Environmental Approved
License dated October 29, 1997 by and between ZEROS
and ZHM, Inc.
10.8 Agreement for Sale of ZEROS Environmental Approved
License dated November 2, 1997 by and among ZEROS,
ZEROS California Corporation and ZEROS Western
Corporation
*10.9 Form of Financial Services Agreement between ZEROS
and Capital American Associates, Incorporated
*10.10 Directors and Officers Insurance and Company
Reimbursement Policy

26
<PAGE> 27
10.11 Asset Sales Agreement dated November 15, 1997 by
and between ZEROS and OCS, Inc.
10.12 Employment Agreement dated October 1, 1997 by and
between ZEROS and Steve Clark
10.13 Employment Agreement dated October 1, 1997 by and
between ZEROS and Jesse Blanco
10.14 Employment Agreement dated October 1, 1997 by and
between ZEROS and Chet Gutowsky
10.15 Employment Agreement dated October 1, 1997 by and
between ZEROS and Celso Suarez
+10.16 Manufacturing Agreement dated September 30, 1997 by
and between ZEROS and OCS, Inc.
10.17 Supplement to Master License Agreement dated
November 15, 1996 by and between ZEROS and M, Ltd.
+10.18 Professional Services Agreement by and between
ZEROS and James Winchester
+21.1 Subsidiaries of the Registrant
*99.1 Texas Natural Resources letter dated April 29, 1997

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

* Previously filed.
+ To be filed by amendment.

27
<PAGE> 28
SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.

ZEROS USA, INC.

By: /s/ CHET GUTOWSKY
----------------------------------
Chet Gutowsky
Chief Financial Officer

28
<PAGE> 29
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------

26
<PAGE> 30
10.11 Asset Sales Agreement dated November 15, 1997 by
and between ZEROS and OCS, Inc.
10.12 Employment Agreement dated October 1, 1997 by and
between ZEROS and Steve Clark
10.13 Employment Agreement dated October 1, 1997 by and
between ZEROS and Jesse Blanco
10.14 Employment Agreement dated October 1, 1997 by and
between ZEROS and Chet Gutowsky
10.15 Employment Agreement dated October 1, 1997 by and
between ZEROS and Celso Suarez
+10.16 Manufacturing Agreement dated September 30, 1997 by
and between ZEROS and OCS, Inc.
10.17 Supplement to Master License Agreement dated
November 15, 1996 by and between ZEROS and M, Ltd.
+10.18 Professional Services Agreement by and between
ZEROS and James Winchester
+21.1 Subsidiaries of the Registrant
*99.1 Texas Natural Resources letter dated April 29, 1997

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

* Previously filed.
+ To be filed by amendment.

27
<PAGE> 31
ZEROS USA, Inc. and Subsidiary

---------------------------------
Consolidated Financial Statements
---------------------------------

Inception (November 12, 1996)
to March 31, 1997
<PAGE> 32
[GRANT, PALMA & WALKER, P.C. LETTERHEAD]

Independent Auditor's Report

July 3, 1997

To the Board of Directors and Stockholders
ZEROS USA, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheet of ZEROS
USA, Inc. and Subsidiary as of March 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from inception (November 12, 1996) to March 31, 1997. 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.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 ZEROS USA, Inc. and
Subsidiary as of March 31, 1997, and the results of its operations and its cash
flows for the initial period then ended in conformity with generally accepted
accounting principles.

/s/ GRANT, PALMA & WALKER, P.C.

Houston, Texas
<PAGE> 33
ZEROS USA, Inc. and Subsidiary

Consolidated Balance Sheet

March 31, 1997

Assets

<TABLE>
<S> <C>
Current assets:
Cash $ 299,741
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 1,800,000
----------

Total current assets 2,099,741
----------

Property and equipment:
Office equipment 16,292
Less accumulated depreciation (815)
----------

Property and equipment, net 15,477
----------

other assets:
Contracts receivable, noncurrent (Note 2) 2,729,752
Master license costs 30,000
Investment (Note 3) 25,000
organizational costs less
amortization of $2,665 63,385
Permit costs 10,000
----------

2,858,137
----------

Total assets $4,973,355
==========
</TABLE>

See accompanying notes to consolidated financial statements.
-2-
<PAGE> 34

ZEROS USA, Inc. and Subsidiary

Consolidated Balance Sheet

March 31, 1997

Liabilities and Stockholders' Equity
<TABLE>

<S> <C>
Current liabilities:
Debentures payable (Note 5) $ 885,500
Accounts payable 59,992
Accrued interest 9,957
Deferred income taxes (Note 8) 639,600
----------

Total current liabilities 1,595,049

Long-term contract payable (Note 6) 45,096
Deferred income taxes (Note 8) 399,320
Deferred revenue, licensing contracts (Note 7) 1,127,948
Minority interest 3,235
----------

Total liabilities 3,170,648
----------

Stockholders' equity (Notes 9 and 12):
Common stock, no par value,
1,000,000 shares authorized,
1,000,000 issued and outstanding 26,000
Retained earnings 1,776,707
----------

Total stockholders' equity 1,802,707
----------

Total liabilities and
stockholders' equity $4,973,355
==========
</TABLE>

See accompanying notes to consolidated financial statements.
-3-
<PAGE> 35
ZEROS USA, Inc. and Subsidiary

Consolidated Statement of Operations

From Inception (November 12, 1996) to March 31, 1997

<TABLE>
<S> <C>
Revenues - licensing (Notes 1 and 11) $ 3,383,845

General and administrative expenses 536,792

Other income (expense)
Interest expense (55,053)
Interest income 18,172
----------

Earnings before income taxes
and minority interest 2,810,172

Income taxes (Note 8) 1,038,920
----------

Net earnings before minority interest 1,771,252

Minority interest in net loss of
consolidated subsidiary (Notes 1 and 12) 5,455
----------

Net earnings $1,776,707
==========

Earnings per share (Notes 1 and 12) $ 1.78
==========

Earnings per share pro-forma (Note 12) $ .15
==========
</TABLE>

See accompanying notes to consolidated financial statements.
-4-
<PAGE> 36
ZEROS USA, Inc. and Subsidiary

Consolidated Statement of Stockholders' Equity

March 31, 1997

Common Stock Total
---------------------- Retained Stockholders'
Shares Amount Earnings Equity
--------- --------- ---------- ----------

<S> <C> <C> <C> <C>
Balance at
November 12, 1996
(inception) 0 $ 0 $ 0 $ 0

Stock issuance 900,000 1,000 1,000

Stock issuance 100,000 25,000 25,000

Net earnings 1,776,707 1,776,707
--------- --------- ---------- ----------

Balance at
March 31, 1997 1,000,000 $ 26,000 $1,776,707 $1,802,707
========= ========= ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.
-5-
<PAGE> 37
ZEROS USA, Inc. and Subsidiary

Consolidated Statement of Cash Flows

From Inception (November 12, 1296) to March 31, 1997

<TABLE>
<S> <C>
Cash flows due to operating activities:
Net earnings $ 1,776,707

Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation and amortization 3,480
Minority interest in loss of
consolidated subsidiary (5,455)
(Increase) decrease in:
contract receivables, trade (3,401,804)
Increase (decrease) in:
Accounts payable, trade 60,992
Accrued interest 9,957
Deferred income taxes 1,038,920
Accrued interest on contract payable 45,096
------------

Net cash provided (used) by
operating activities (472,107)
------------

Cash flows provided (used) from investing activities:
Purchase of equipment (16,292)
Organization costs (57,360)
Master license costs (30,000)
Permit costs (10,000)

Net cash provided (used) by
investing activities (113,652)
------------
</TABLE>

See accompanying notes to consolidated financial statements.
-6-
<PAGE> 38
ZEROS USA, Inc. and Subsidiary

Consolidated Statement of Cash Flows

From Inception (November 12, 1296) to March 31, 1997

<TABLE>
<S> <C>
Cash flows provided (used) by
financing activities:
Proceeds from debentures 885,500
--------

Net cash provided (used) by
financing activities 885,500
--------

Increase (decrease) in cash and
cash equivalents 299,741

Cash and cash equivalents,
beginning of period 0
--------

Cash and cash equivalents,
end of period $299,741
========

Supplemental cash flow information
non-cash items:

Common stock (900,000 shares) issued
for services rendered $1,000

Common stock (100,000 shares) issued
for investment in preferred stock
of capital corporation at fair value $25,000
</TABLE>

See accompanying notes to consolidated financial statements.
-7-
<PAGE> 39
ZEROS USA, Inc. and Subsidiary Notes to
Consolidated Financial Statements
From Inception (November 12, 1996) to March 31, 1997

Note 1 - Significant accounting policies

Organization

ZEROS USA, Inc. (the "Company") formerly "ZEROS," Inc. (Note 12) was
incorporated in the state of Texas on November 12, 1996. The Company develops
and sells technology for industrial waste systems. The Company has a master
license on the system (the "System") called "Zero Emission Energy Recycling
Oxidation System" or "ZEROS" - an energy recycling oxidation system. The
Company sells licenses for the System to sub-licensees both nationally and
internationally. The books and records of the Company are prepared on the
accrual basis for financial reporting purposes and the cash basis for federal
income tax purposes. The Company has elected a March 31 fiscal year end for
both financial and tax reporting purposes. The financial statements include the
records of the majority (91%) owned subsidiary, ZEROS USA, Inc. - Utah, a Utah
corporation. The subsidiary had no active operations from inception to March
31, 1997. All significant intercompany transactions have been eliminated in
consolidation.

Revenue recognition

The Company sells sub-licenses to the System and recognizes revenue on
licenses based upon milestones in the contract process. The milestones include
contract signing and delivery of the technology (75%), training on the
technology (15%) and testing of the system equipment (10%).

Organization costs

Organization costs, primarily legal costs, are being amortized over a
sixty month (60) period.

Investment

Investments are recorded at an estimated fair market value based upon
the investment held available for sale criteria in accordance with FASB #115 -
Accounting for Certain Debt and Equity Securities.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided
on an accelerated method over the estimated useful lives of the assets as
follows:

Office equipment 5 year

-8-
<PAGE> 40
Property and equipment (continued)

All expenditures for major renewals and betterments are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred.
When property and equipment are retired or disposed of the related costs and
accumulated depreciation are removed from the applicable accounts and any gain
or loss is reflected in income. Depreciation expense from inception to March
31, 1997 was $815.

Acquisition

In February 1997 the Company acquired the majority stock (91%) of
Gunner Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA,
Inc. - Utah. The acquisition was accounted for by using the purchase method for
business combinations. Under the purchase method the purchase price of $90,000
was allocated to assets acquired and liabilities assumed.

Income taxes

The Company accounts for its income taxes using the Financial
Accounting Standards Board Statement No.109, "Accounting for Income Taxes"
(SFAS No. 109) which requires the establishment of a deferred tax asset or
liability for taxable amounts and operating loss and tax credit carryforwards.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be "cash equivalents" for purposes of
the statement of cash flows.

Concentration of credit risk

The Company extends credit to its customers. The Company may extend
certain credit during the normal course of business operations which may be
unsecured. A substantial portion of the customers' ability to pay their debts
(Note 13) to the Company is dependent on the waste management economic sector.

-9-
<PAGE> 41
Use of estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.

Earnings per share

Net earnings per share is based upon the weighted average number of
shares of common stock outstanding. For the period from inception (November 12,
1996) to March 31, 1997 an amount of one million shares was used to compute the
earnings per share. Primary and fully diluted earnings per share are the same
for the period. 11,490,000 shares were used to compute earnings per share pro
forma to give effect to the restructuring of common stock in June 1997 (Note
12). Primary and fully diluted earnings per share are the same for the
pro-forma period.

Note 2 - Contracts receivable

The Company utilized installment contracts to finance the sale of
sub-licenses by the Company. The terms of each contract indicate a license
price of $2,700,000 to be paid in three annual installments of $900,000. These
contracts are secured by certain assets and guarantees of the licensees and
their guarantors. Unamortized discount is based upon an imputed interest rate
of 9%. The analysis of the contracts at March 31, 1997 is as follows:

<TABLE>
<S> <C>
Total contracts receivable $5,400,000
Less current amount 1,800,000
----------
Contracts receivable, noncurrent 3,600,000
Unamortized discount (870,248)
----------
Noncurrent contracts less
unamortized amount $2,729,752
----------
</TABLE>

The Company at March 31, 1997 had two contracts with three year terms.
One contract matures in February 2000 and the other contract matures in March
2000. The contracts include the right of the licensor to charge the licensee a
royalty of 15% of gross income for each operating system. Each licensee obtains
a geographical area and is allowed to sell sub-licenses subject to the approval
of the licensor. The licensor is obligated primarily to provide a training
program and counsel on operational assistance.

Note 3 - Investment

The Company holds an investment in preferred stock of a capital
corporation company with a 6% dividend per annum. The Company holds twenty
thousand shares of preferred stock recorded

-10-
<PAGE> 42
Note 3 - Investment (continued)

at an estimated market value of $25,000. Each preferred stock share is
convertible into ten shares of common stock at the end of two years (December
1998). The common stock of the capital corporation is traded on the NASDAQ
exchange (bulletin board) with a trading range of 1/2 to 1/8 per share at March
31, 1997. The investment is held as available for sale based upon a contributed
cost of $25,000 and estimated fair market value of $25,000. No additional
valuation allowance has been recorded.

Note 4 - Master license costs

The Company acquired a master license for the energy recycling
oxidation system in January 1997. The major terms of the acquisition of the
master license indicates that the Company is to pay $4,000,000 plus certain
legal costs for the master license to a foreign entity ("the Master Licensor")
which is controlled by the President of the Company.

The Company paid $30,000 in legal costs to transfer the master
licensing rights. Per the contract the initial master license cost of
$4,000,000 has been earned by the licensor upon the signing of the contract.
The $4,000,000 contract amount is payable in January 2005. The present value of
the contract of $1,926,848 reflects a discount of 9% imputed interest rate and
has been deferred until paid. The master license cost has been initially
recorded at legal transfer costs of $30,000.

Per the contract an additional $12,000,000 in master licensing costs
will be earned by the Master Licensor when the sale of four equipment systems
occurs by the Company at the rate of $3,000,000 per equipment system sale.
These costs will be payable as the equipment systems construction deposits are
collected.

The contract also indicates that the Company will pay certain
commissions and fees to the Master Licensor as follows:

(1) 5% of license fees sold to third parties.

(2) 5% of gross profit resulting from sales of energy recycling
systems by the licensee to sub-licensees.

(3) 5% of gross income resulting from the sale of products
produced from energy recycling systems sold through
sub-licensees.

(4) 5% royalty fees on gross income on units owned and operated by
the licensee (ZEROS USA, Inc.).

-11-
<PAGE> 43
Note 5 - Debentures payable

The Company has $885,500 debentures payable to various individuals and
entities. The debentures including interest are due and payable on various
dates ranging from January 1, 1998 to March 15, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's President. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
also exchangeable during the term of the debenture into Company common stock
from the President's shares of common stock.

Note 6 - Long term contract payable

The Company has entered into a long term contract payable for the
purchase of the exclusive master license of the "ZEROS" System Technology (Note
4). The purchase price of the contract is $4,000,000 due in January 2005.
Interest expense has been imputed at 9% per annum for the contract with the
calculation as follows:

<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (2,028,056)
Deferred recognition (1,926,848)
-----------
Contract payable long term $ 45,096
===========
</TABLE>

Note 7 - Deferred revenue

Deferred revenue is recorded based upon milestones achieved in the
contract process (Note 2). The milestones include the contract signing and
delivery of the technology (75%), training on the technology (15%) and
engineering support in testing of the equipment used in the system (10%). The
analysis of deferred revenue at March 31, 1997 is as follows:

<TABLE>
<S> <C>
Total contract revenue $ 5,400,000
Less discount on imputed interest at 9% (888,207)
-----------
Total licensing income 4,511,793
Less current portion (3,383,845)
-----------
Total deferred revenue $ 1,127,948
===========
</TABLE>

The deferred revenue represents deferred revenue on installment
contracts from licensees with maturity dates in February and March of 2000.

-12-
<PAGE> 44
Note 8 - Income taxes

The Company's deferred tax assets relate principally to non-deductible
accrued expenses, a net operating loss carryforward, and deferred revenue.
Deferred tax liabilities relate to contracts receivable that are not recognized
for taxable income purposes.

A summary of deferred tax assets and liabilities follows:

<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 442,863
Net operating loss carryforward 192,866
Asset valuation reserve 0
-----------
635,729
Deferred tax liabilities (1,674,649)
-----------
Net deferred tax liabilities $ 1,038,920
===========
</TABLE>

The net operating loss of $522,000 as of March 31, 1997, expires in
the year ending March 31, 2012. The provision for income taxes in the statement
of income for the period ended March 31, 1997, includes the following:

<TABLE>
<S> <C>
Current tax expense $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current 639,600
Deferred - noncurrent 399,320
-----------
Provision for income taxes $ 1,038,920
===========
</TABLE>

Note 9 - Stockholders' equity

In November 1996 the Company was formed with one million shares of
authorized common stock at no par value. The Company issued 900,000 shares of
common stock to its President for a stated value of $1,000 for services
rendered. The Company also issued 100,000 shares of common stock to a business
trust in exchange for twenty thousand shares of preferred stock of a capital
corporation valued at an estimated market value of $25,000.

Note 10 - Related Party transactions

The Company incurred approximately $34,900 in administrative fees for
office expenses from a company controlled by a shareholder. The Company
incurred master license transfer costs of $30,000 from a foreign corporation
controlled by the President and will pay fees and royalties for this master
license based upon certain terms of the agreement with an initial contract
amount of $4,000,000. The Company incurred air charter travel expenses and
administrative expenses of approximately $93,400 and $30,000 respectively from
entities under the control of the President of the Company.

-13-
<PAGE> 45
Note 11 - Major customers

The Company had revenue from licenses sold to two licensees at
approximately $1,692,000 for each licensee. Each sub-license represents
approximately 50% of total revenue.

Note 12 - Subsequent events

In April 1997 the Company entered into a loan agreement with a bank
for a line of credit of $75,000 secured by a certificate of deposit of $78,000
at the bank. The bank line of credit is due in April 1998 at an interest rate
of 7%. As of June 1997 the Company also obtained additional debentures payable
proceeds totaling $808,410. The additional debentures are at 10% per annum
maturing between April 1998 and June 1998 with principal and interest due at
maturity. Each dollar of debenture is securitized by two shares of Company
common stock owned by the Company's President. The debentures are also
exchangeable during the term of the debenture into Company common stock from
the President's shares of common stock.

In June 1997 the Company amended its articles of incorporation to
authorize twenty million shares of common stock at a $.001 par value and ten
million shares of preferred stock at a $5 stated value. The Company also
changed its name from "ZEROS", inc. to ZEROS USA, Inc. The Company then issued
8,100,000 of common stock at $.001 par value to the President for services
rendered in June 1997 fair valued at $8,100 and 900,000 shares rendered in June
1997 of common stock at $.001 to another shareholder for services fair valued
at $900. Effective June 1997 in conjunction with the merger of the parent and
the subsidiary, the Company also purchased the minority shares interest in the
subsidiary by exchanging 1,490,000 shares of common stock of the parent for the
minority shares of the subsidiary on a one share of minority interest for a one
share of parent Company common stock basis.

The effect of earnings per share calculation based upon the
restructuring and merger of the common stock of the Company and Subsidiary is
as follows:

<TABLE>
<CAPTION>
Before After
Restructuring Restructuring
and and
Merger Merger
------ ------
<S> <C> <C>
Primary earnings per share $1.78 .15
Fully diluted earnings per share $1.78 .15
</TABLE>

The net earnings per share before the restructuring and merger is
based upon 1,000,000 shares outstanding. The net pro forma earnings per share
after the merger is based upon the 11,490,000 shares of common stock
outstanding after the restructuring and merger of the common stock. Primary and
fully diluted earnings per share were the same for the period.

-14-
<PAGE> 46
Note 13 - Financial instruments

The Company's financial instruments consist of cash, contracts
receivable, an investment in preferred stock, a long term contract payable, and
debentures payable.

Cash

The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits and a money market investment
account at a brokerage firm. The Company has not experienced any losses and it
believes it is not exposed to any significant credit risks affecting cash. At
March 31, 1997, $88,542 of its cash at a bank was maintained in excess of
federally insured amounts.

Investment

Management believes this investment in preferred stock (Note 3) is
fairly stated at its estimated net realizable value and a reserve for
additional valuation allowances is not required.

Contracts receivable

Management believes the carrying value of contracts receivable (Note
2) is fairly stated at estimated net realizable values and a reserve for
uncollectibility is not required. Management also believes the carrying value
of these contracts receivable represents fair value of these financial
instruments because terms are similar to those in the lending market for
comparable loans with comparable risks using an imputed interest rate of 9%
(Note 2).

Long-term contract payable

Management believes the carrying value of the long term contract
payable represents the fair value of this financial instrument because its
terms are similar to those in the lending market for comparable loans with
comparable risks utilizing a present value rate of 9% (Note 6).

Debentures payable

Management believes the carrying value of debentures payable
represents fair value of these financial instruments because terms are similar
to those in the lending market for comparable loans with comparable risks.

-15-
<PAGE> 47
ZEROS USA, Inc.

--------------------------------
Financial Statements
--------------------------------

Three months ended June 30, 1997

<PAGE> 48
ZEROS USA, Inc.

Balance Sheet - Unaudited

June 30, 1997

Assets

<TABLE>
<S> <C>
Current assets:
Cash $299,248
Certificates of deposit 275,000
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 2,700,000
-----------

Total current assets 3,274,248
-----------

Property and equipment:
Office equipment 19,644
Less accumulated depreciation (1,713)
-----------

Property and equipment, net 17,931
-----------

Other assets:
Contracts receivable, noncurrent (Note 2) 4,211,361
Master license costs 30,000
Investment (Note 3) 25,000
Due from affiliate 216,663
Organizational costs less
amortization of $5,967 60,083
Permit costs 10,000
Deposits 40,000
-----------

Total other assets 4,593,107
-----------

Total assets $ 7,885,286
===========
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-1-
<PAGE> 49
ZEROS USA, Inc.

Balance sheet - Unaudited

June 30, 1997

Liabilities and Stockholders' Equity

<TABLE>
<S> <C>
Current liabilities:
Note payable (Note 5) $ 275,000
Debentures payable (Note 6) 1,780,260
Accrued interest 41,922
Deferred income taxes (Note 9) 982,692
-----------

Total current liabilities 3,079,874

Long-term contract payable (Note 7) 90,191
Deferred income taxes (Note 9) 485,498
Deferred revenue, licensing contracts (Note 8) 1,691,923
-----------

Total liabilities 5,347,486
-----------

Stockholders' equity (Note 10):
Common stock, $.001 par value,
20,000,000 shares authorized,
11,490,000 issued and outstanding 11,490
Paid in capital 26,745
Retained earnings 2,499,565
-----------

Total stockholders' equity 2,537,800
-----------

Total liabilities and
stockholders' equity $ 7,885,286
===========
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-2-
<PAGE> 50
ZEROS USA, Inc.

Statement of Operations - Unaudited

Three months ended June 30, 1997

<TABLE>
<S> <C>
Revenues - licensing (Notes 1 and 12) $ 1,691,923

General and administrative expenses 590,032

Other income (expense)
Interest expense (77,060)
Interest income 127,297
------------

Earnings before income taxes 1,152,128

Income taxes (Note 9) 429,270
------------

Net earnings before $ 722,858
============

Earnings per share (Note 1) $ .65
============
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE> 51

ZEROS USA, Inc.

Statement of Stockholders' Equity - Unaudited

Three months ended June 30. 1997

<TABLE>
<CAPTION>
Common Stock
------------------------ Paid in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------

<S> <C> <C> <C> <C>
Balance at
March 31, 1997 1,000,000 $ 26,000 $ 0 $1,776,707

Amendment of
articles of
incorporation,
June 24, 1997 to
change common stock
to $.001 par value
from no par value 0 (25,000) 25,000

Issuance of common
stock for services
by the company's
President 8,100,000 8,100

Issuance of common
stock for services
by a stockholder 900,000 900

Issuance of common
stock to minority
stockholder of
subsidiary related
to merger 1,490,000 1,490 1,745

Net earnings 722,858
----------- ----------- ----------- -----------

Balance at
June 30, 1997 11,490,000 $ 11,490 $ 26,745 $ 2,499,565
=========== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE> 52
ZEROS USA, Inc.

Statement of Cash Flows - Unaudited

Three months ended June 30, 1997

<TABLE>
<S> <C>
Cash flows due to operating activities:
Net earnings $ 722,858

Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation and amortization 4,201
Common stock issued for services
rendered to the Company 9,000
(Increase) decrease in:
Contract-receivables, trade (1,817,635)
Increase (decrease) in:
Accounts payable, trade (59,992)
Accrued interest 31,965
Deferred income taxes 429,270
Accrued interest on contract payable: 45,096
----------

Net cash provided (used) by
operating activities (635,237)
----------

Cash flows provided (used) from investing
activities:

Deposits (40,000)
Purchase of certificates of deposit (275,000)
Purchase of equipment (3,353)
Due from affiliate (216,663)
----------

Net cash provided (used) by
investing activities (535,016)
----------
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE> 53
ZEROS USA, Inc.,

Statement of Cash Flows - Unaudited

Three months ended June 30, 1997

<TABLE>
<S> <C>
Cash flows provided (used) by
financing activities:
Proceeds from debentures 894,760
Proceeds from bank note payable 275,000
----------

Net cash provided (used) by
financing activities 1,169,760
----------

Increase (decrease) in cash and
cash equivalents (493)

cash and cash equivalents,
beginning of period 299,741
----------

Cash and cash equivalents,
end of period $ $299,248
==========

Supplemental cash flow information
non-cash items:

Common stock (9,000,000 shares) issued
for services rendered to the Company $ 9,000
==========

Common stock (1,490,000 shares) issued
to the subsidiary minority shareholders,
(see Note 9) in connection with the
merger of subsidiary into the Company $ 3,235
==========
</TABLE>

The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE> 54
ZEROS USA, Inc.
Notes to Financial Statements - Unaudited
Three months ended June 30, 1997

Note 1 - Significant accounting policies

Organization

ZEROS USA, Inc. (the "Company") formerly "ZEROS", inc. was
incorporated in the state of Texas on November 12, 1996. The Company develops
and sells technology for industrial waste systems. The Company has a master
license on the system (the "System") called "Zero Emission Energy Recycling
Oxidation System" or "ZEROS" - an energy recycling oxidation system. The
Company sells licenses for the System to sub-licensees both nationally and
internationally. The books and records of the Company are prepared on the
accrual basis for financial reporting purposes and the cash basis for federal
income tax purposes. The Company has elected a March 31 fiscal year end for
both financial and tax reporting purposes.

Basis of presentation and interim period

The accompanying unaudited financial statements, which are for the
interim period, may not include all disclosures provided in the annual audited
financial statements. In the opinion of the Company, the accompanying unaudited
financial statements contain all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of the financial statements. The
results of operations for the three months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the full year.

Revenue recognition

Organization costs

Organization costs, primarily legal costs, are being amortized over a
sixty month (60) period. Amortization expense for the 3 months ended June 30,
1997 was $3,303.

Investment

Investments are recorded at an estimated fair market value based upon
the investment held available for sale criteria in accordance with FASB #115 -
Accounting for Certain Debt and Equity Securities.

-7-
<PAGE> 55

Note 1 - Significant accounting policies (continued)

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided
on an accelerated method over the estimated useful lives of the assets as
follows:

Office equipment 5 year

Acquisition

In February 1997 the Company acquired the majority stock (91%) of
Gunner Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA,
Inc. - Utah. In June 1997, the subsidiary corporation was merged into ZERO USA,
Inc. by issuance of 1,490,000 shares of parent stock on a one share for one
share basis to minority shareholders of the subsidiary and the merger of the
subsidiary into the parent under applicable state corporate law.

Income taxes

The Company accounts for its income taxes using the Financial
Accounting Standards Board Statement No.109, "Accounting for Income Taxes"
(SFAS No.109) which requires the establishment of a deferred tax asset or
liability for taxable amounts and operating loss and tax credit carryforwards.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be "cash equivalents" for purposes of
the statement of cash flows.

-8-
<PAGE> 56

Note 1 - Significant accounting policies (continued)

Concentration of credit risk

The Company extends credit to its customers. The Company may extend
certain credit during the normal course of business operations which may be
unsecured. A substantial portion of the customers' ability to pay their debts
(Note 14) to the Company is dependent on the waste management economic sector.

Use of estimates

Earnings per share

Net earnings per share is based upon the weighted average number of
shares of common stock outstanding. For the three months ended June 30, 1997,
1,115,275 shares was used to compute the earnings per share. Primary and fully
diluted earnings per share are the same for the period.

Note 2 - Contracts receivable

<TABLE>
<S> <C>
Total contracts receivable $ 8,100,000
Less current amount 2,700,000
-----------
Contracts receivable, noncurrent 5,400,000
Unamortized discount (1,188,639)
-----------
Noncurrent contracts less
unamortized amount $ 4,211,361
===========
</TABLE>

The Company at June 30, 1997 had three contracts with three year
terms. The contracts mature in February 2000, March 2000 and April 2000. The
contracts include the right of the licensor to charge the licensee a royalty of
15% of gross income for each operating system. Each licensee obtains a
geographical area and is allowed to sell sub-licenses subject to the approval
of the licensor. The licensor is obligated primarily to provide a training
program and counsel on operational assistance.

-9-
<PAGE> 57

Note 3 - Investment

The Company holds an investment in preferred stock of a capital
corporation company with a 6% dividend per annum. The Company holds twenty
thousand shares of preferred stock recorded at an estimated market value of
$25,000. Each preferred stock share is convertible into ten shares of common
stock at the end of two years (December 1998). The common stock of the capital
corporation is traded on the NASDAQ exchange (bulletin board) with a trading
range of 1/2 to 1/8 per share at June 30, 1997. The investment is held as
available for sale based upon a contributed cost of $25,000 and estimated fair
market value of $25,000. No additional valuation allowance has been recorded.

Note 4 - Master license costs

The Company paid $30,000 in legal costs to transfer the master
licensing rights. Per the contract the initial master license cost of
$4,000,000 has been earned by the licensor upon the signing of the contract.
The $4,000,000 contract amount is payable in January 2005. The present value of
the contract at its signing date of $1,926,848 reflects a discount of 9%
imputed interest rate and has been deferred until paid. The master license cost
has been initially recorded at the transfer costs of $30,000.

The contract also indicates that the Company will pay certain
commissions and fees to the Master Licensor as follows:

(1) 5% of license fees sold to third parties.

(2) 5% of gross profit resulting from sales of energy recycling
systems by the licensee to sub-licensees.

(3) 5% of gross income resulting from the sale of products
produced from energy recycling systems sold through
sub-licensees.

(4) 5% royalty fees on gross income on units owned and operated by
the licensee (ZEROS USA, Inc.).

-10-
<PAGE> 58

Note 5 - Notes Payable

At June 30, 1997 notes payable consisted of:

<TABLE>
<S> <C>
Bank note, due April, 1998 with,
interest at 7.0%, collateralized
by $75,000 certificate of deposit $ 75,000

Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000

Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000
--------
$275,000
========
</TABLE>

Note 6 - Debentures payable

The Company has $1,780,260 debentures payable to various individuals
and entities. The debentures including interest are due and payable on various
dates ranging from January 1, 1998 to June 1, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's President. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
exchangeable during the term of the debenture into Company common stock from
the President's shares of common stock.

Note 7 - Long term contract Payable

<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (1,982,961)
Deferred recognition of cost (1,926,848)
-----------
Contract payable long term $ 90,191
===========
</TABLE>

Note 8 - Deferred revenue

-11-
<PAGE> 59

Note 8 - Deferred revenue (continued)

in testing of the equipment used in the system (10%). The analysis of deferred
revenue at June 30, 1997 is as follows:

<TABLE>
<CAPTION>
For 3 months From contract signing
ended June 30, 1997 date to June 30,
------------------- ---------------------
<S> <C> <C>
Total contract revenue $ 2,700,000 $ 8,100,000
Less discount inputed
interest of 9% (444,103) (1,332,310)
----------- -----------
Total licensing income 2,255,897 6,767,690
Less portion recognized (1,691,923) (5,075,767)
----------- -----------
Deferred revenue $ 563,974 $ 1,691,923
=========== ===========
</TABLE>

The deferred revenue represents deferred revenue on installment
contracts from licensees with maturity dates in February, March, and April of
the year 2000.

Note 9 - Income taxes

A summary of deferred tax assets and liabilities follows:

<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 674,346
Net operating loss carryforward 412,594
Asset valuation reserve 0
-----------
1,086,940
Deferred tax liabilities (2,555,130)
-----------
Net deferred tax liabilities $ 1,468,190
===========
</TABLE>

The net operating losses of $1,116,025 as of June 30, 1997, begins to
expire in the year ending March 31, 2012. The provision for income taxes in
the statement of income for the 3 month period ended June 30, 1997, includes
the following:

<TABLE>
<S> <C>
Current tax expense $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current 343,092
Deferred - noncurrent 86,178
-----------
Provision for income taxes $ 429,270
===========
</TABLE>

-12-
<PAGE> 60

Note 10 Stockholders' equity

Note 11 - Related party transactions

The Company incurred approximately $57,975 in administrative fees for
office expenses from a company controlled by a shareholder.

The Company incurred master license transfer costs of $30,000 from a
foreign corporation controlled by the President and will pay fees and royalties
for this master license based upon certain terms of the agreement with an
initial contract amount of $4,000,000.

The Company incurred air charter travel expenses of approximately
$143,452 from entities under the control of the President of the Company. In
April 1997 the Company entered into an aircraft reimbursement agreement with an
related party which requires the Company to pay 120 regular payments of $16,000
per month for aircraft rental plus other expenses. The commitments for the next
five years based upon a fiscal year ending March 31, are as follows:

<TABLE>
<S> <C>
1998 $ 192,000
1999 192,000
2000 192,000
2001 192,000
2002 192,000
Thereafter 960,000
-----------
Total $ 1,920,000
===========
</TABLE>

At June 30, 1997, $216,663 is carried as an account receivable from an
affiliated company.

-13-
<PAGE> 61

Note 12 - Major customers

The Company since its inception in November 12, 1996, has had revenue
from licenses sold to three licensees of approximately $1,692,000 each. Each
sublicense represents one-third of total revenue since inception of the
Company.

Note 13 - Subsequent events

As Of July 1997 the Company also obtained additional debenture proceeds
totaling $146,600. The additional debentures are at 10% per annum maturing in
July 1998 with principal and interest due at maturity. Each dollar of debenture
is securitized by two shares of Company common stock owned by the Company's
President. The debentures are also exchangeable during the term of the
debenture into Company common stock from the President's shares of common
stock.

The system equipment purchase (OCS assets purchase) from a related
party is currently under discussion. Currently, the Company anticipates
issuance of preferred stock to acquire the OCS assets.

Note 14 - Financial instruments

The Company's financial instruments consist of cash, certificate of
deposit, contracts receivable, an investment in preferred stock, a long term
contract payable, note payable, and debentures payable.

Cash

The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits and a money market investment
account at a brokerage firm. The Company has not experienced any losses and it
believes it is not exposed to any significant credit risks affecting cash. At
June 30, 1997, $306,822 of its cash in banks wan maintained in excess of
federally insured amounts.

Certificates of Deposit

The Company has one year certificates of deposit with the bank which
exceed federally insured limits. The Company has not experienced any losses and
believes it is not exposed to any significant risks affecting certificates of
deposit.

Investment

Management believes this investment in preferred stock (Note 3) is
fairly stated at its estimated not realizable value and a reserve for
additional valuation allowances is not required.

-14-
<PAGE> 62

Note 14 - Financial instruments (continued)

Contracts receivable

Long-term contract payable

Notes payable

Management believes the carrying value of notes payable approximates
fair value of these financial instruments.

Debentures payable

-15-
<PAGE> 63
ZEROS USA, Inc.

Balance Sheet - Unaudited

September 30, 1997

Assets
<TABLE>

<S> <C>
Current assets:
Cash $ 64,915
Certificates of deposit (Note 5) 415,000
Contracts receivable, current net of an
allowance for doubtful contracts
of $0 (Note 2) 2,700,000
----------
Total current assets 3,179,915
----------
Property and equipment:
Office equipment 25,823
Less accumulated depreciation (2,850)
----------
Property and equipment, net 22,973
----------
Other assets:
Contracts receivable, noncurrent (Note 2) 4,372,991
Master license costs (Note 4) 30,000
Investment (Note 3) 25,000
Investments - other 108,764
Organizational costs less
amortization of $9,270 56,780
Permit costs 10,000
Deposits 43,000
----------
Total other assets 4,646,535
----------
Total assets $7,849,423
==========
</TABLE>

The accompanying notes are an integral part of these Financial Statements

<PAGE> 64

ZEROS USA, Inc.

Balance Sheet - Unaudited

September 30, 1997

Liabilities and Stockholders Equity
<TABLE>

<S> <C>
Current liabilities:
Accounts payable $ 46,700
Note payable (Note 5) 415,000
Debentures payable (Note 6) 1,928,084
Accrued interest 92,208
Deferred income taxes (Note 10) 946,836
----------
Total current liabilities 3,428,828

Long-term contract payable (Note 7) 135,287
Series A convertible bonds (Note 8) 135,000
Deferred income taxes (Note 10) 172,276
Deferred revenue, licensing contracts (Note 9) 1,691,923
----------
Total liabilities 5,563,314
----------
Stockholders' equity (Note 11):
Preferred stock, $.001 par value,
20,000,000 authorized, 10,115,000 shares
issued and outstanding 10,115
Common stock $.001 par value, 20,000,000
shares authorized, 12,490,000 shares
issued and 8,490,000 shares outstanding 12,490
Additional paid in capital 440,080

Retained earnings 1,913,424

Less - common stock in treasury,
4,000,000 shares, at cost (Note 11) (90,000)
----------
Total stockholders' equity 2,286,109
----------
Total liabilities and
stockholders' equity $7,849,423
==========
</TABLE>

The accompanying noted are an integral part of theme Financial Statements

<PAGE> 65

ZEROS USA, Inc.

Statement of Operations - Unaudited

Three Months Six Months
ended ended
Sept 30, 1997 Sept 30,1997
------------- ------------

<S> <C> <C>
Revenues-licensing (Notes 1 and 13) $ -0- $ 1,691,923

General and administrative expenses 996,093 1,586,125

Other income (expense)
Interest expense (101,885) (178,945)
Interest income 162,759 290,056
------------- ------------
Earnings (loss) before income taxes (935,219) 216,909

Income tax provision (benefit) (Note 10) (349,078) 80,192
------------- ------------
Net earnings (loss) $ (586,141) $ 136,717
============= ============
Primary earnings (loss) per share (Note 1) $ (.051) $ .021
============= ============
Fully diluted earnings (loss)
per share (Note 1) $ (.047) $ .029
============= ============
</TABLE>

The accompanying notes are an integral part of these Financial Statements

<PAGE> 66

ZEROS USA, Inc.

Statement of Stockholders' Equity - Unaudited

Six Months ended September 30, 1997

Common Stock Preferred Stock
------------------ ------------------- Paid in Retained Treasury
Shares Amount Shares Amount Capital Earnings Stock
--------- ------- ---------- ------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 1,000,000 $26,000 0 $ 0 $ 0 $1,776,707 $ 0

Amendment of articles of incorporation, June 24,
1997 to change common stock to .001
par value from no par value (25,000) 25,000

Issuance of common stock for services performed
by the company's president 8,100,000 8,100

Issuance of common stock for services performed
by the stockholder 900,000 900

Issuance of common stock to minority stockholder
or subsidiary related to merger 1,490,000 1,490 1,745

Issuance of common stock to a related party
for manufacturing rights 1,000,000 1,000 29,000

Issuance of preferred stock to company's
president in exchange for common stock (4,000,000) 3,000,000 3,000 87,000 (90,000)

Issuance of preferred stock to licensees
pursuant to agreements 550,000 550 15,950

Issuance of preferred stock for services performed
by company's president 2,500,000 2,500 72,500

Issuance of preferred stock for services performed
by officers and shareholders 4,065,000 4,065 117,885

Reissue shares of common stock for services
performed by officers and shareholders 91,000

Net earnings 136,717
--------- ------- ---------- ------- -------- ---------- --------
Balance at September 30, 1997 8,490,000 $12,490 10,115,000 $10,115 $440,080 $1,913,424 $(90,000)
========= ======= ========== ======= ======== ========== ========

</TABLE>

The accompanying notes are an integral part of these Financial Statements

<PAGE> 67

ZEROS USA, Inc.

Statement of Cash Flows - Unaudited

Three Months Six Months
ended ended
Sept 30, 1997 Sept 30, 1997
------------- -------------
<S> <C> <C>
Cash flows due to operating activities:
Net earnings (loss) $ (586,141) $ 136,717

Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depreciation and amortization 4,439 8,640
Preferred and common stock
issued for services rendered
to the Company 287,950 296,950
Preferred stock issued to
licensees pursuant to agreements 16,500 16,500
Common stock issued to related
party for manufacturing rights 30,000 30,000
Increase in contract receivables,
trade (161,630) (1,979,265)
Increase (decrease) in:
Accounts payable, trade 46,700 (13,292)
Accrued interest 50,286 82,251
Deferred income taxes (349,078) 80,192
Accrued interest on
contract payable 45,096 90,192
------------- -------------
Net cash used in
operating activities (615,878) (1,251,115)
------------- -------------
Cash flows provided by (used in) investing
activities:
Deposits (3,000) (43,000)
Purchase of certificates of deposit (140,000) (415,000)
Purchase of equipment (6,179) (9,532)
Investments - other 107,900 (108,763)
------------- -------------
Net cash used in
investing activities (41,279) (576,295)
------------- -------------

</TABLE>

<PAGE> 68

ZEROS USA, Inc.

Statement of Cash Flows - Unaudited

Three Months Six Months
ended ended
Sept 30, 1997 Sept 30, 1997
------------- -------------
<S> <C> <C>
Cash flows provided (used in) by
financing activities:
Proceeds from debentures 147,824 1,042,584
Proceeds from notes payable 140,000 415,000
Proceeds from Series A
convertible bonds 135,000 135,000
------------- -------------
Net cash provided by
financing activities 422,824 1,592,584
------------- -------------
Increase (decrease) in cash and
cash equivalents (234,333) (234,826)

Cash and cash equivalents,
beginning of period 299,248 299,741
------------- -------------
Cash and cash equivalents,
end of period $ 64,915 $ 64,915
============= =============
Supplemental cash flow information -
non-cash items:

Common stock (9,000,000 shares) issued
for services rendered to the Company $ 9,000
=============
Common stock (1,490,000 shares) issued
to the subsidiary minority
shareholders in conjunction with the
merger of subsidiary into the Company $ 3,235
=============
</TABLE>

The accompanying notes are an integral part of these Financial Statements

<PAGE> 69

ZEROS USA, Inc.

Notes to Financial Statements - Unaudited

Six Month Period ended September 30, 1997

Note 1 - Significant accounting policies

Organization

ZEROS USA, Inc. (the "Company") formerly "ZEROS", inc. was incorporated in
the state of Texas on November 12, 1996. The Company develops and sells
technology for industrial waste systems. The Company has a master license on the
system (the "System") called "Zero Emission Energy Recycling Oxidation System"
or "ZEROS" - an energy recycling oxidation system. The Company sells licenses
for the System to sub-licensees both nationally and internationally. The books
and records of the Company are prepared on the accrual basis for financial
reporting purposes and the cash basis for federal income tax purposes. The
Company has elected a March 31 fiscal year end for both financial and tax
reporting purposes.

Basis of presentation and interim period

The accompanying unaudited financial statements, which are for the interim
period, may not include all disclosures provided in the annual audited financial
statements. In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the financial statements. The results of
operations for the 3 and 6 month periods ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year.

Revenue recognition

Organization costs

Organization costs, primarily legal costs, are being amortized over a sixty
month (60) period. Amortization expense for the 3 and 6 month periods ended
September 30, 1997 were $3,303 and $6,605, respectively.

<PAGE> 70

Note 1 - Significant accounting policies (continued)

Investment

Investments are recorded at an estimated fair market value based upon the
investment held available for sale criteria in accordance with FASB #115 -
Accounting for Certain Debt and Equity Securities.

Property and equipment

Property and equipment are recorded at cost. Depreciation is provided on an
accelerated method over the estimated useful lives of the assets as follows:

Office equipment 5 year

Acquisition

In February 1997 the Company acquired the majority stock (91%) of Gunner
Holdings, Inc. - a Utah corporation and changed its name to ZEROS USA, Inc. -
Utah. In June 1997, the subsidiary corporation was merged into ZERO USA, Inc. by
issuance of 1,490,000 shares of parent stock on a one share for one share basis
to minority shareholders of the subsidiary and the merger of the subsidiary into
the parent under applicable state corporate law.

<PAGE> 71

Note 1 - Significant accounting policies (continued)

Income taxes

The Company accounts for its income taxes using the Financial Accounting
Standards Board Statement No. 109, "Accounting for Income Taxes" (SFAS No. 109)
which requires the establishment of a deferred tax asset or liability for
taxable amounts and operating loss and tax credit carryforwards. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be "cash equivalents" for purposes of the
statement of cash flows.

Concentration of credit risk

The Company extends credit to its customers. The Company may extend certain
credit during the normal course of business operations which may be unsecured. A
substantial portion of the customers' ability to pay their debts (Note 14) to
the Company is dependent on the waste management economic sector.

Use of estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.

<PAGE> 72

Note 1 - Significant accounting policies (continued)

Earnings per share

Primary earnings per share is based upon the weighted average number of
shares of common stock and common stock equivalents(convertible preferred
stock). Primary earnings per share is computed by dividing (a) net income by (b)
average number of common shares outstanding, increased by common equivalent
shares (convertible preferred stock) determined by using the treasury method.
Fully diluted earnings per share is computed by dividing (a) net income plus
interest on debentures and Series A bonds net of applicable income taxes by (b)
common and common stock equivalents shares outstanding plus shares which would
by issued upon conversion of the debentures and Series A bonds. For the 3 and 6
month periods ended September 30, 1997, 11,567,337 and 6,369,863 shares were
used to compute primary earnings (loss) per share. For the 3 and 6 month periods
ended September 30, 1997, 11,698,762 and 6,435,935 shares were used to compute
fully diluted earnings (loss) per share.

Note 2 - Contracts receivable

The Company utilized installment contracts to finance the sale of
sub-licenses by the Company. The terms of each contract indicate a license price
of $2,700,000 to be paid in 3 annual installments of $900,000. These contracts
are secured by certain assets and guarantees of the licensees and their
guarantors. Unamortized discount is based upon an imputed interest rate of 9%.
The analysis of the contracts at September 30, 1997 is as follows:

<TABLE>

<S> <C>
Total contracts receivable $ 8,100,000
Less current amount 2,700,000
-------------
Contracts receivable, noncurrent 5,400,000
Unamortized discount (1,027,009)
Noncurrent contracts less -------------
unamortized amount $ 4,372,991
=============
</TABLE>

The Company at September 30, 1997 had three contracts with three year terms.
The contracts mature in February 2000, March 2000 and April 2000. The contracts
include the right of the licensor to charge the licensee a royalty of 15% of
gross income for each operating system. Each licensee obtains a geographical
area and is allowed to sell sub-licenses subject to the approval of the
licensor. The licensor is obligated primarily to provide a training program and
counsel on operational assistance.

<PAGE> 73

Note 3 - Investment

The Company holds an investment in preferred stock of a capital corporation
company with a 6% dividend per annum. The Company holds twenty thousand shares
of preferred stock recorded at an estimated market value of $25,000. Each
preferred stock share is convertible into ten shares of common stock at the end
of two years (December 1998). The common stock of the capital corporation is
traded on the NASDAQ exchange (bulletin board) with a trading range of 1/2 to
1/8 per share at September 30, 1997. The investment is held as available for
sale based upon a contributed cost of $25,000 and estimated fair market value of
$25,000. No additional valuation allowance has been recorded.

Note 4 - Master license costs

The Company acquired a master license for the energy recycling oxidation
system in January 1997. The major terms of the acquisition of the master license
indicates that the Company is to pay $4,000,000 plus certain legal costs for the
master license to a foreign entity ("the Master Licensor") which is controlled
by the president of the Company.

The Company paid $30,000 in legal costs to transfer the master licensing
rights. Per the contract the initial master license cost of $4,000,000 has been
earned by the licensor upon the signing of the contract. The $4,000,000 contract
amount is payable in January 2005. The present value of the contract at its
signing date of $1,926,848 reflects a discount of 9% imputed interest rate and
has been deferred until paid. The master license cost has been initially
recorded at the transfer costs of $30,000.

Per the contract an additional $12,000,000 in master licensing costs will be
earned by the Master Licensor when the sale of four equipment systems occurs by
the Company at the rate of $3,000,000 per equipment system sale. These costs
will be payable as the equipment systems construction deposits are collected.

<PAGE> 74

Note 4 - Master license costs (continued)

The contract also indicates that the Company will pay certain commissions and
fees to the Master Licensor as follows:

(1) 5% of license fees sold to third parties.

(2) 5% of gross profit resulting from sales of energy recycling systems
by the licensee to sub-licensees.

(3) 5% of gross income resulting from the sale of products produced
from energy recycling systems sold through sub-licensees.

(4) 5% royalty fees on gross income on units owned and operated by the
licensee (ZEROS USA, Inc.).

Note 5 Notes payable

At September 30, 1997 notes payable consisted of:
<TABLE>

<S> <C>
Bank note, due April, 1998 with
interest at 7.0%, collateralized
by $75,000 certificate of deposit $ 75,000

Bank note, interest due quarterly
at 7.35% and principal due May,
1998 collateralized by $100,000
certificate of deposit 100,000

Bank note, interest due quarterly
at 7.25% and principal due July, 1998
collateralized by $50,000 certificate
of deposit 50,000

Bank note, interest due quarterly
at 7.0% and principal due July, 1998
collateralized by $90,000 certificate
of deposit 90,000
---------
$ 415,000
=========

</TABLE>

<PAGE> 75

Note 6 - Debentures payable

The Company has $1,928,084 of debentures payable to various individuals and
entities. The debentures including interest are due and payable on various dates
ranging from January 1, 1998 to June 1, 1998. The interest rate on the
debentures is 10% per annum. Each dollar of debenture is securitized by two
shares of Company common stock owned by the Company's president. Effective June
1997, the Company authorized 20 million shares of common stock to complete the
securitization of Company stock for the debenture holders. The debentures are
exchangeable during the term of the debenture into Company common stock.

Note 7 - Long-term contract payable

The Company has entered into a long-term contract payable for the purchase of
the exclusive master license of the "ZEROS" System Technology (Note 4). The
purchase price of the contract is $4,000,000 due in January 2005. Interest
expense has been imputed at 9% per annum for the contract with the calculation
as follows:

<TABLE>
<S> <C>
Contract amount $ 4,000,000
Unamortized discount (1,937,865)
Deferred recognition of cost (1,926,848)
------------
Contract payable long-term $ 135,287
============
</TABLE>

Note 8 - Series A convertible bonds

The Company has $135,000 of Series A convertible bonds payable to various
individuals and entities. Principal on the Five year Convertible bonds are due
July 31, 2002. The interest rate on the bonds is 12% per annum and is payable
semiannually. The bonds may be converted at the holder's option for Series A
Preferred Stock. Each dollar of bond principal is convertible into one share of
stock.

Note 9 - Deferred revenue

<PAGE> 76

Note 9 - Deferred revenue (continued)

in testing of the equipment used in the system (10%). The analysis of deferred
revenue at September 30, 1997 is as follows:

From contract
signing date to
September 30, 1997
------------------
<S> <C>
Total contract revenues $ 8,100,000
Less discount inputed interest of 9% (1,332,310)
------------------
Total licensing income 6,767,690
Less portion recognized (5,075,767)
------------------
Deferred revenue $ 1,691,923
==================
</TABLE>

The deferred revenue represents deferred revenue on installment contracts
from licensees with maturity dates in February, March, and April of the year
2000.

Note 10 - Income taxes

The Company's deferred tax assets relate principally to non-deductible
accrued expenses, a net operating loss carryforward and deferred revenue.
Deferred tax liabilities relate to contracts receivable that are not recognized
for taxable income purposes.

A summary of deferred tax assets and liabilities follows:

<TABLE>
<S> <C>
Deferred tax assets:
Temporary differences,
primarily deferred revenue $ 676,857
Net operating loss carryforward 818,915
Asset valuation reserve 0
-------------
1,495,772
Deferred tax liabilities (2,614,884)
-------------
Net deferred tax liabilities $ 1,119,112
=============

</TABLE>

<PAGE> 77

Note 10 - Income taxes (continued)

The net operating losses of $2,215,079 as of September 30, 1997, begins
to expire in the year ending March 31, 2012. The provision for income taxes in
the statement of income for the 3 and 6 month periods ended September 30, 1997,
includes the following:

For 3 Month For 6 month
period ended period ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Current tax expense $ 0 $ 0
Deferred income taxes primarily
related to contracts receivable:
Deferred - current (35,856) 307,237
Deferred - noncurrent (313,222) (227,045)
------------------ ------------------
Income tax provision (benefit) $ (349,078) $ 80,192
================== ==================

</TABLE>

Note 11 - Stockholders' equity

In June 1997 the Company amended its articles of incorporation to
authorize twenty million shares of common stock at a $.001 par value and ten
million shares of preferred stock at a $5 stated value. The Company also changed
its name from "ZEROS", inc. to ZEROS USA, Inc. The Company then issued
8,100,000 of common stock at $.001 par value to the president for services
rendered in June 1997 fair valued at $8,100 and 900,000 shares rendered in June
1997 of common stock at $.001 to another shareholder for services fair valued at
$900. Effective June 1997 in conjunction with the merger of the parent and the
subsidiary, the Company also purchased the minority shares interest in the
subsidiary by exchanging 1,490,000 shares of common stock of the parent for the
minority shares of the subsidiary on a one share of minority interest for a one
share of parent Company common stock basis. The preferred stock was amended in
August 1997 in conjunction with the merger to authorize twenty million shares of
preferred stock at $.001 par value.

<PAGE> 78

Note 11 - Stockholders' equity (continued)

In September 1997 the Company exchanged 3,000,000 preferred stock shares for
4,000,000 common shares of the president's common stock. The Company also issued
1,000,000 shares of common stock to a related party for manufacturing rights and
a split revenue agreement. The Company also issued preferred stock of 550,000
shares, 2,500,000 shares and 4,065,000 shares, respectively, to licensees, the
Company president, key officers and shareholders for services rendered. The
preferred stock is convertible one for one into common stock.

Note 12 - Related party transactions

The Company incurred approximately $75,000 and $133,000 for the 3 and 6 month
periods ended September 30, 1997, respectively in administrative fees for office
expenses including subleases, from affiliated companies.

The Company incurred master license transfer costs of $30,000 from a foreign
corporation controlled by the president and will pay fees and royalties for this
master license based upon certain terms of the agreement with an initial
contract amount of $4,000,000.

<PAGE> 79

Note 12 - Related party transactions (continued)

The Company incurred air charter travel expenses of approximately $96,000
and $239,000 for the 3 and 6 month periods ended September 30, 1997,
respectively from entities under the control of the president of the Company.
In April 1997 the Company entered into an aircraft reimbursement agreement with
a related party which requires the Company to pay 120 regular payments of
$16,000 per month for aircraft rental plus other expenses. The commitments for
the next five years based upon a fiscal year ending March 31, are as follows:

<TABLE>
<S> <C>
1998 $ 192,000
1999 192,000
2000 192,000
2001 192,000
2002 192,000
Thereafter 960,000
----------
Total $1,920,000
==========
</TABLE>

Note 13 - Major customers

The Company since its inception in November 12, 1996, has had revenue from
licenses sold to three licensees of approximately $1,692,000 each. Each
sub-license represents one-third of total revenue since inception of the
Company.

Note 14 - Financial instruments

The Company's financial instruments consist of cash, certificate of deposit,
contracts receivable, an investment in preferred stock, a long-term contract
payable, note payable, debentures payable and Series A convertible bonds.

Cash

The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits and a money market investment account at a
brokerage firm. The Company has not experienced any losses and it believes it is
not exposed to any significant credit risks affecting cash. At September
30, 1997, $288,928 of its cash in banks was maintained in excess of federally
insured amounts.

<PAGE> 80

Note 14 - Financial instruments (continued)

Certificates of Deposit

The Company has one year certificates of deposit with the bank which exceed
federally insured limits. The Company has not experienced any losses and
believes it is not exposed to any significant risks affecting certificates of
deposit.

Investment

Management believes this investment in preferred stock (Note 3) is fairly
stated at its estimated net realizable value and a reserve for additional
valuation allowances is not required.

Contracts receivable

Management believes the carrying value of contracts receivable (Note 2) is
fairly stated at estimated net realizable values and a reserve for
uncollectibility is not required. Management also believes the carrying value of
these contracts receivable represents fair value of these financial instruments
because terms are similar to those in the lending market for comparable loans
with comparable risks using an imputed interest rate of 9% (Note 2).

Long-term contract payable

Management believes the carrying value of the long-term contract payable
represents the fair value of this financial instrument because its terms are
similar to those in the lending market for comparable loans with comparable
risks utilizing a present value rate of 9% (Note 7).

Notes payable

Management believes the carrying value of notes payable approximates fair
value of these financial instruments.

Debentures payable

Management believes the carrying value of debentures payable represents
fair value of these financial instruments because terms are similar to those in
the lending market for comparable loans with comparable risks.

<PAGE> 81

Note 14 - Financial instruments (continued)

Series A convertible bonds

Management believes the carrying value of the series A convertible bond
represents fair value of these financial instruments because terms are similar
to those in the lending market for comparable loans with comparable risks.

<PAGE> 1
EXHIBIT 4.5

SECURED DEBENTURE

<TABLE>
<S> <C>
No
------------------------
$ 10,000
------------------------
City Highlands State Texas Date March 5, 1997
-------------------------------------- --------------- -------------- -----
FOR VALUE RECEIVED, after date, without grace, in the manner, on the dates, and in the amounts so herein stipulated, the
undersigned, ZEROS USA, Incorporated.

PROMISES TO PAY TO THE ORDER OF:
----------------------------------------------------------------------------------------------
at Highlands, Texas sum of Ten thousand dollars ($10,000)
---------------------------------- ---------------------------------------------------------------------------------
in Lawful money of the United States of America, which shall be legal tender, in payment of all debts and dues, public
and private, at the time of payment, and to pay interest thereon from the date until maturity at the rate of 10% per annum.
-------
This Debenture is payable as follows, to-wit:
Interest Payments: Ten percent (10%) per annum
---------------------------------------------------------------------------------------------------
Principal Payment of Ten thousand ($10,000.00 dollars
------------------------------------------------------------------------------------------------
Due on January 1, 1998 .
---------------------------

This corporate Debenture shall be secured by the assignment of: Twenty thousand (20,000)
---------------------------------------------------------------
shares of ZEROS USA, Incorporated, Common Stock
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Debenture Holders, at their option, shall have the right to exchange the
payment of this Debenture for the security herein assigned. Such exchange may
be executed at any time prior to maturity and shall constitute payment of all
principal and interest.

It is agreed that time is of the essence of this agreement, and that in the
event of default in the payment of any installment of principal or interest when
due, the holder of this instrument may declare the entirety of the Debenture
evidenced hereby, immediately due and payable without notice, and failure to
exercise said option shall not constitute a waiver on part of the holder of the
right to exercise the same at any other time. The undersigned agrees to pay all
expenses incurred if this Debenture is placed in hands of any attorney for
collection, or if collected by suit or through probate, bankruptcy or any other
legal proceedings.

Each maker, surety and endorser agrees and consents that this Debenture and
liens securing payment, may be renewed, and the time of payment extended without
notice, and without releasing any of the parties.

The payment of this Debenture is guaranteed by: ZEROS USA, Incorporated and his
hereby executed this 5th day of March 1997:
------ --------

ZEROS USA, Incorporated

By: Secretary
----------------------------

ZEROS USA, Incorporated

By: President
----------------------------

ZEROS USA, Incorporated
Box Z
Highlands, Texas 77562
Phone: (281) 424-2511
Fax: (281) 424-2512

<PAGE> 1

EXHIBIT 4.6

CUSIP 989497 AA O

No. ** $100,000.00 **
-----------------------

ZEROS USA, INC.
507 North Belt East, Suite 550 * Houston, Texas 77060
July 31, 1997
Series A Five-Year Twelve Percent Convertible Bond Due July 31, 2002

ZEROS USA, INC., a Texas corporation, (the "Corporation"), for value
received promises to pay to _____________ or registered assigns, the sum of One
Hundred Thousand Dollars ($100,000.00) on July 31, 2002 (the "maturity date"),
and to pay interest at the rate of twelve percent (12%) per annum semiannually
on the last day of January and the last day of July of each year, computed from
July 31, 1997 (the "issue date"). Payment of principal and interest shall be
made at the offices of the Corporation in Houston, Texas, in lawful money of
the United States of America, and shall be mailed to the registered owner or
owners hereof at the address appearing on the books of the Corporation.

This Bond is one of a duly authorized issue of the Corporation's Bonds
in the aggregate amount of Three Million Dollars ($3,000,000.00) approved July
31, 1997, and issued in this denomination of One Hundred Thousand Dollars,
($100,000.00) all of like tenor and maturity, except variations necessary to
express the number and payee of each Bond.

1. EQUAL RANK. All Bonds of this issue rank equally and ratably
without priority over one another.

2. CONVERSION. The holder or holders of this Bond may at any
time prior to the maturity hereof (except that, if the
Corporation has called this Bond for redemption, the right to
convert shall terminate at the close of business on the second
business day prior to the day fixed as the date for such
redemption), convert the principal amount hereof into the
Corporation's Series A Preferred Stock at the conversion
ration of $1.00 of Bond principal for one share of Series A
Preferred Stock. To convert this Bond, the holder or holders
hereof must surrender the same at the office of the
Corporation, together with a written instrument of transfer in
a form satisfactory to the Corporation, properly completed and
executed and with a written notice of conversion.

3. FRACTIONAL SHARES. In lieu of issuing any fraction of a share
upon the conversion of this Bond, the Corporation shall pay to
the holder thereof for any fraction of a share otherwise
issuable upon the conversion cash equal to the same fraction
on the $5.00 stated value for dividend calculation of the
Series A Preferred Stock.

4. FORBEARANCE FROM SUIT. No Bond Holder of this issue may
institute any suit or proceeding for the enforcement of the
payment of principal or interest unless the holders of more
than fifty percent (50%) or principal or interest in the
amount of all outstanding Bonds of this issue join in the suit
or proceeding.

5. REDEMPTION. The Corporation may at any time prepay in whole
or in part, the principal amount, plus accrued interest to the
date of prepayment, of all outstanding Bonds of this issue,
upon 90 days' written notice by certified or registered mail
to the registered owners of all outstanding Bonds. Such
notice shall be mailed to their addresses appearing on the
Corporation's books.

6. REGISTERED OWNER. The Corporation may treat the person or
persons whose name or names appear on this Bond as the
absolute owner or owners hereof for the purposes of receiving
payment of, or an account of, the principal and interest due
on this Bond and for all other purposes.

7. RELEASE OF SHAREHOLDERS, OFFICERS AND DIRECTORS. This Bond is
the obligation of the Corporation only, and no recourse shall
be had for the payment of any principal or interest hereon
against any shareholder, officer or director of the
Corporation, either directly or through the Corporation, by
virtue of any statute for the enforcement of any assessment or
otherwise. The holder or holders of this Bond, by the
acceptance hereof, and as part of the consideration for this
Bond, release all claims and waive all liabilities against the
foregoing persons in connection with this Bond.

IN WITNESS WHEREOF, the Corporation has signed and sealed this
Bond this 31st day of July 1997.

Corporate ZEROS USA, INC.
Seal

------------------------ ---------------------
President Secretary

<PAGE> 1
EXHIBIT 4.8

<TABLE>
<S> <C> <C>
DO NOT CHARGE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
| ZEROS USA, INC. | | |
| ---------------------------------------- | | |
| | | Loan Number 01693160 |
| ---------------------------------------- | | ----------------------------- |
| P.O. BOX B | CITIZENS BANK AND TRUST CO. | Date 4/18/97 |
| ---------------------------------------- | OF BAYTOWN, TEXAS | ------------------------------------ |
| HIGHLANDS, TEXAS 77562 | 1300 ROLLINGBROOK, P.O. BOX 150 | Maturity Date 4/18/98 |
| ---------------------------------------- | BAYTOWN, TEXAS 77522 | --------------------------- |
| | | Loan Amount $ 75,000.00 |
| ---------------------------------------- | | ---------------------------- |
| | | Renewal Of |
| ---------------------------------------- | | ------------------------------ |
| BORROWER'S NAME AND ADDRESS | LENDER'S NAME AND ADDRESS | |
|"I" includes each borrower above, jointly |"You" means the lender, its successors and | |
| and severally | assigns. | |
- ------------------------------------------------------------------------------------------------------------------------------------
For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of SEVENTY FIVE THOUSAND
AND NO/100 Dollars $ 75,000.00

SINGLE ADVANCE: I will receive all of this principal sum on 4/18/97. No additional advances are contemplated under this note.

MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of principal I can borrow under this note. On ________
_______________________________________ I will receive the amount of $ N/A and future principal advances are contemplated.

CONDITIONS: The conditions for future advances are __________________________________________________________________________
______________________________________________________________________________________________________________________________
______________________________________________________________________________________________________________________________

[ ] OPEN END CREDIT: You and I agree that I may borrow up to the maximum principal sum more than one time. This feature is
subject to all other conditions and expires on ________________________________________.

[ ] CLOSED END CREDIT: You and I agree that I may borrow (subject to all other conditions) up to the maximum principal sum
only one time.

INTEREST: I agree to pay interest on the outstanding principal balance from 4/18/97 at the rate of 7.00% per year until April 18,
1998.

VARIABLE RATE: This rate may then change as stated below.

[ ] INDEX RATE: The future rate will be N/A the following index rate: ______________________________________________________
_________________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________________

[ ] CEILING RATE: The interest rate ceiling for this note is the _____________ ceiling rate announced by the Credit
Commissioner from time to time.

[ ] FREQUENCY AND TIMING: The rate on this note may change as often as _____________________________________________________.
A change in the interest rate will take effect _________________________________________________________________________.

[ ] LIMITATIONS: During the term of this loan, the applicable annual interest rate will not be more than N/A % or less than
N/A %.

EFFECT OF VARIABLE RATE: A change in the interest rate will have the following effect on the payments:

[ ] The amount of each scheduled payment will change. [ ] The amount of the final payment will change.

[ ] _________________________________________________________________________________________________________________________.

ACCRUAL METHOD: Interest will be calculated on a 360 DAY basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as
stated below:

[ ] on the same fixed or variable rate basis in effect before maturity (as indicated above).

[X] at a rate equal to 1% ABOVE REGULAR RATE BUT NOT TO EXCEED MAXIMUM LEGAL RATE.

LATE CHARGE: If a payment is made more than __________ days after it is due, I agree to pay a late charge of ________________.

ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which [X] are [ ] are not included in the
principal amount above: ______________________________________________________________________________________________________.

PAYMENTS: I agree to pay this note as follows:

[ ] INTEREST: I agree to pay accrued interest AT MATURITY 4/18/98
_________________________________________________________________________________________________________________________

[ ] PRINCIPAL: I agree to pay the principal AT MATURITY 4/18/98
_________________________________________________________________________________________________________________________

[ ] INSTALLMENTS: I agree to pay this note in __________ payments. The first payment will be in the amount of $_____________
and will be due ____________________. A payment of $__________ will be due _____________________________________________
thereafter. The final payment of the entire unpaid balance of principal and interest will be due ________________________.

PURPOSE: The purpose of this loan is WORKING CAPITAL.

ADDITIONAL TERMS:

SECURITY INTEREST: I give you a security interest in all of the Property described below that I now own and that I may own in the
future (including, but not limited to, all parts, accessories, repairs, improvements, and accessions to the Property), wherever the
Property is or may be located, and all proceeds and products from the Property.

INVENTORY: All inventory which I hold for ultimate sale or lease, or which has been or will be supplied under contracts of
service, or which are raw materials, work in process, or materials used or consumed in my business.

EQUIPMENT: All equipment including, but not limited to, all machinery, vehicles, furniture, fixtures, manufacturing equipment,
farm machinery and equipment, shop equipment, office and recordkeeping equipment, and parts and tools. All equipment described
in a list or schedule which I give to you will also be included in the secured property, but such a list is not necessary for a
valid security interest in my equipment.

FARM PRODUCTS: All farm products including, but not limited to:
(a) all poultry and livestock and their young, along with their products, produce and replacements.
(b) all crops, annual or perennial, and all products of the crops; and
(c) all feed, seed, fertilizer, medicines, and other supplies used or produced in my farming operations.

ACCOUNTS, INSTRUMENTS, DOCUMENTS, CHATTEL PAPER AND OTHER RIGHTS TO PAYMENT: All rights I have now and that I may have in the
future to the payment of money including, but not limited to:
(a) payment for goods and other property sold or leased or for services rendered, whether or not I have earned such payment by
performance; and
(b) rights to payment arising out of all present and future debt instruments, chattel paper and loans and obligations
receivable.
The above include any rights and interests (including all liens and security interests) which I may have by law or agreement
against any account debtor or obligor of mine.

GENERAL INTANGIBLES: All general intangibles including, but not limited to, tax refunds, applications for patents, patents,
copyrights, trademarks, trade secrets, good will, trade names, customer lists, permits and franchises, and the right to use my
name.

GOVERNMENT PAYMENTS AND PROGRAMS: All payments, accounts, general intangibles, or other benefits (including, but not limited
to, payments in kind, deficiency payments, letters of entitlement, warehouse receipts, storage payments, emergency assistance
payments, diversion payments, and conservation reserve payments) in which I now have and in the future may have any rights or
interest and which arise under or as a result of any preexisting, current or future Federal or state governmental program
(including, but not limited to, all programs administered by the Commodity Credit Corporation and the ASCS).

THE SECURED PROPERTY INCLUDES, BUT IS NOT LIMITED BY, THE FOLLOWING:
CB&TCD #25045, $75,000, RATE 5%, AUTOMATIC RENEWAL, 4-18-98, INO: ZEROS USA, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
| THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, |
| CONTEMPORANEOUS, OR SUBSEQUENT, ORAL AGREEMENTS OF THE PARTIES. |
| THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. |
- ------------------------------------------------------------------------------------------------------------------------------------
If this agreement covers timber to be cut, minerals (including oil and gas), The Property will be used for a [ ] personal
[X] business
100276.1
</TABLE>

<PAGE> 1
<TABLE> EXHIBIT 4.9
<S> <C> <C>
DO NOT CHARGE ACCOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
| ZEROS USA, INC. | | |
| ---------------------------------------- | | |
| | | Loan Number 01693161 |
| ---------------------------------------- | | ----------------------------- |
| P.O. BOX Z | CITIZENS BANK AND TRUST CO. | Date 5/30/97 |
| ---------------------------------------- | OF BAYTOWN, TEXAS | ------------------------------------ |
| HIGHLANDS, TEXAS 77562 | 1300 ROLLINGBROOK, P.O. BOX 150 | Maturity Date 5/30/98 |
| ---------------------------------------- | BAYTOWN, TEXAS 77522 | --------------------------- |
| | | Loan Amount $ 100,000.00 |
| ---------------------------------------- | | ---------------------------- |
| | | Renewal Of |
| ---------------------------------------- | | ------------------------------ |
| BORROWER'S NAME AND ADDRESS | LENDER'S NAME AND ADDRESS | |
|"I" includes each borrower above, jointly |"You" means the lender, its successors and | |
| and severally | assigns. | |
- ------------------------------------------------------------------------------------------------------------------------------------
For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of ONE HUNDRED THOUSAND
AND NO/100 Dollars $100,000.00

SINGLE ADVANCE: I will receive all of this principal sum on 5/30/97. No additional advances are contemplated under this note.

[ ] CLOSED END CREDIT: You and I agree that I may borrow (subject to all other conditions) up to the maximum principal sum
only one time.

INTEREST: I agree to pay interest on the outstanding principal balance from 5/30/97 at the rate of 7.35% per year until MAY 30,
1998.