Edgar Filing: AIRTECH INTERNATIONAL GROUP INC

As filed with the Securities and Exchange Commission on May 14, 2001

Registration No.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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Airtech International Group, Inc.
(Exact name of Registrant as specified in its charter)

Wyoming 3564 98-0120805
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)

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12561 Perimeter, Dallas, Texas 75228
(972) 960-9400
(Address and telephone number of Registrant's principal executive offices)

James R. Halter
Chief Financial Officer and General Counsel
Airtech International Group, Inc.
12561 Perimeter
Dallas, Texas 75228
(972) 960-9400

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Copies to:
John G. Rebensdorf, Esq.
6116 N. Central Expressway
Suite 1313
Dallas, Texas 75206
(214) 696-9388
(Name, address and telephone number of agent for service)

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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement in light of
market conditions and other factors.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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Proposed
Maximum Proposed
Title of Each Class of Offering Price Maximum Amount of
Securities To Be Amount To Be Per Aggregate Registration
Registered Registered(2) Unit Offering Price Fee(3)
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Common Stock, $0.05 Par
Value(1)............... 19,000,000 $0.175 $3,325,000 $831
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(1) Includes shares of Common Stock which may be issued upon exercise of Common
Stock Warrants and upon conversion of the Company's 12% Convertible
Debentures or in payment of interest on the 12% Convertible Debentures by
the Company. For purposes of estimating the number of shares of Common
Stock to be included in this registration statement, the Company calculated
200% of the number of shares of Common Stock issuable upon conversion of
the 12% Convertible Debentures and upon exercise of the Common Stock
Warrants.
(2) Also includes an indeterminate number of shares of Common Stock which may
be issued with respect to such shares by way of a stock dividend, stock
split, stock combination, recapitalization, merger, consolidation or
otherwise in accordance with Rule 416.
(3) The registration fee has been calculated in accordance with Rule 457(c)
under the Securities Act of 1933, as amended, based upon the average of the
closing bid and asked prices for the Registrant's Common Stock as reported
on the OTC Bulletin Board on May 7, 2001.

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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained in this prospectus is subject to completion or +
+amendment. A registration statement relating to these securities has been +
+filed with the Securities and Exchange Commission on Form SB-2. These +
+securities may not be sold nor may an offer to buy be accepted prior to the +
+time the registration statement becomes effective. This prospectus shall not +
+constitute an offer to sell or the solicitation of an offer to buy nor shall +
+there be any sale of these securities in any state in which such offer, +
+solicitation or sale would be unlawful prior to registration or qualification +
+under the securities laws of any state. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED MAY 14, 2001

19,000,000 COMMON SHARES

AIRTECH INTERNATIONAL GROUP, INC.

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Our common shares are traded on the over-the-counter Electronic Bulletin
Board under the symbol "AIRG." There is no public market for our warrants and
we do not intend to list our warrants on any exchange.

This prospectus relates to the resale from time to time by the selling
stockholders identified in this prospectus of up to:

. 1,200,000 shares of our common stock issuable upon exercise of the
warrants;

. 17,800,000 shares of our common stock issuable upon conversion of up to
$1,000,000 in principal amount of our 12% Convertible Debentures Due 2003.

We will receive no proceeds from the sale of our warrants or common stock by
the selling stockholders identified in this prospectus. We will, however,
receive proceeds from the sale of our common stock upon the exercise, if any,
of the warrants.

You should read this prospectus and any supplement carefully before you
invest in Airtech. This prospectus may not be used to make sales of our common
stock or warrants unless accompanied by a prospectus supplement. Investing in
our common stock involves risks. Risk factors begin on page 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

The date of this Prospectus is May , 2001.

The following table of contents has been designed to help you find important
information contained in this prospectus.

TABLE OF CONTENTS

Section Page
------- ----

Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
Description of Securities Purchase Agreement.............................. 10
Plan of Distribution...................................................... 13
Use of Proceeds........................................................... 13
Information on Selling Stockholders....................................... 14
The Company............................................................... 15
Company Properties........................................................ 29
Litigation................................................................ 29
Management's Discussion and Analysis...................................... 30
Directors, Executive Officers, Promoters and Control Persons.............. 35
Executive Compensation.................................................... 37
Summary Compensation Table................................................ 37
Security Ownership of Certain Beneficial Owners and Management............ 40
Certain Relationships and Related Transactions............................ 41
Market for Registrant's Common Equity and Related Stockholder Matters..... 42
Description of Securities................................................. 42
Legal Matters............................................................. 46
Experts................................................................... 46
Where To Find Additional Information...................................... 46
Index to Combined Financial Information................................... F-1

PROSPECTUS SUMMARY

This prospectus summary highlights selected information from this prospectus
and does not contain all of the information that may be important to you. For a
more complete description of this offering, you should read this entire
prospectus as well as the additional documents we refer to under the heading
"Where To Find Additional Information."

Our Company

Our principal business is the development, manufacturing, distribution and
sale of air purification products for commercial and individual use. We
currently manufacture and distribute a product line of purification units for
commercial applications such as hotels, restaurants, bars, offices, print shops
and casinos and residential purification units for individual use. We also
manufacture and distribute a purification unit for use in automobiles, trucks
and public transportation vehicles.

Our Products and Market

Our air purification products and technology can be applied to various
commercial, residential, and medical markets. We market our air purification
products through direct sales efforts from our principal offices, a
distribution network with heating, ventilation and air conditioning companies
and various industry distributors. We also market our products through our
existing franchisees. We have also licensed the distribution rights to use our
name and technology in the countries of Taiwan, the Philippines, Turkey,
Canada, Spain ,the Peoples Republic of China and countries in Central and South
America. Our strategy is to identify national and international market niches
which we believe are in need of air purification solutions and to exploit those
markets through franchising, direct sales, licensing and strategic alliances
with manufacturing representatives. The market for our products has grown based
upon the increased public awareness of indoor air contamination. The
Environmental Protection Agency has identified indoor air pollution as one of
the five most urgent environmental crises in the United States. Air
contamination includes bacteria, pollen, dust mites, smoke, plant and mold
spores, dust, solvents, glues, formaldehyde, carbon monoxide and dioxide and
various viruses.

Summary Financial and Other Data

We are providing the following summary financial information to aid you in
your analysis of the financial aspects of an investment in us. The table
includes summary historical financial data for Airtech for the years ended May
31, 1999 and 2000 and the nine months ended February 28, 2001. We believe that
this presentation is informative to you.

Year Ended Year Ended
May 31, May 31, Nine Months Ended
1999 2000 February 28, 2001
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Assets.............................. $ 2,849,781 $ 5,563,729 $ 5,138,818
Revenues............................ $ 1,030,469 $ 1,627,476 $ 1,437,617
Net Loss............................ $(4,311,459) $(2,441,594) $(1,705,247)
Loss Per Share...................... $ (0.41) $ (0.14) $ (0.09)

Our Securities Purchase Agreement

On March 29, 2001, we entered into a securities purchase agreement with an
investment group to raise up to $1,000,000 through the sale to the investors of
our 12% convertible debentures with attached warrants to purchase up to 600,000
shares of our common stock. Upon execution of the securities purchase
agreement, the investors purchased $800,000 in principal amount of our 12%
debentures with attached warrants to purchase 500,000 shares of our common
stock. The purchase price paid by the investors for the 12% debentures and
attached warrants was $800,000. Under the terms of the securities purchase
agreement, the investors are obligated to purchase the remaining $200,000 in
principal amount of our 12% debentures with attached warrants to purchase
100,000 shares of our common stock on the date the registration statement
relating to the common stock offered by this prospectus is declared effective
by the SEC. This prospectus relates to the resale of our common stock by the
selling stockholders identified in this prospectus either in the open market or
pursuant to negotiated transactions.

RISK FACTORS

Because we have a limited history of operations we may not be able to
successfully implement our business plan.

We have only six years of operational history in our industry. Accordingly,
our operations are subject to the risks inherent in the establishment of a new
business enterprise, including access to capital, acceptance of our products in
the market and limited revenue from operations. We cannot assure you that our
intended activities or plan of operation will be successful or result in
revenue or profit to us.

We have a history of losses and expect future losses.

We have incurred operating losses for our fiscal years ended May 31, 1999
and 2000 and the nine months ended February 28, 2001, and expect to sustain
additional operating losses in the future. Our operating losses are
attributable to the developing nature of our business and have resulted
primarily from:

. significant costs associated with the development of our products

. marketing and distribution of our products

. interest charges and expenses related to our current and previous debt
and equity financings

. minimal sales history of our recently developed products

Our business requires significant expenditures which we must pay before
realizing any revenues.

The development of our business and the development, sale and delivery of
our products and services requires significant expenditures. A substantial
portion of these expenditures must be made before we realize any revenues.
Certain of our expenditures, including marketing, sales and general and
administrative costs are expensed as they are incurred. Other expenditures,
including product design, network design and costs to obtain regulatory
approval, are deferred until the network or product is completed and
operational. We will continue to incur significant expenditures in connection
with the construction, acquisition, development and expansion of our products,
services and customer base. Although we believe the net proceeds from our
recent debt and equity sales are sufficient to implement our plan of operation,
we may require additional financing in the future. We cannot assure you that
any required additional financing will be available to us or that any
additional financing will not materially dilute the ownership of our
shareholders.

We may not have enough authorized but unissued shares of our common stock to
issue upon conversion of our 12% debentures which would obligate us to pay a
conversion penalty to the debenture holders.

Under the terms of the 12% debentures, we are required to use our best
efforts to reserve for issuance at all times a number of shares of our common
stock equal to no less than two times the number of shares actually issuable at
any time upon conversion of all of the 12% debentures and exercise of all of
the attached warrants. As of April 13, 2001, we have reserved 16,800,000 shares
of common stock for issuance upon conversion of the 12% debentures and exercise
of the warrants.

The conversion price of the 12% debentures and the exercise price of the
warrants is dependent upon the trading price of our shares of common stock on
the OTC Bulletin Board. Depending upon the trading price of our shares of
common stock, we may not have a sufficient number of authorized shares of
common stock in the future to reserve for issuance upon conversion of the 12%
debentures and exercise of the warrants or upon actual conversion and exercise.
We have called a special meeting of our stockholders for May 18, 2001 to
approve a proposed amendment to our Articles of Incorporation to increase our
number of authorized shares of common stock from 50,000,000 shares to
100,000,000 shares. The purpose of the meeting and the amendment is to ensure
that we will have an adequate number of authorized shares, if necessary, for
reservation or upon conversion of the 12% debentures and exercise of the
warrants.

We cannot assure you that our stockholders will approve the proposed
increase in our authorized shares or that the trading price of our common stock
will be sufficient to enable us to comply with our reservation and conversion
obligations under the 12% debentures and warrants. If, at any time, we do not
have sufficient authorized but unissued shares of common stock to effect a
requested conversion of the 12% debentures, we are required to pay to the 12%
debenture holders a conversion penalty equal to the remaining principal amount
of the 12% debentures not converted plus accrued interest multiplied by 0.24
and then multiplied by the number of days divided by 365 that the 12%
debentures remain unconverted because of an insufficient amount of authorized
shares. Also, our failure at any time to reserve two times the number of shares
of our common stock for issuance upon conversion of the 12% debentures and
exercise of the warrants is an event of default under the terms of the 12%
debentures and warrants. Our payment of any required conversion penalty or our
breach of the terms of the 12% debentures or warrants could have a material
adverse affect on our business.

Conversion of the 12% debentures could dilute the value of a stockholder's
investment in Airtech.

As of April 30, 2001, $800,000 in principal amount of 12% debentures were
issued and outstanding. The 12% debentures are convertible into a number of
shares of common stock determined by dividing the principal amount converted by
the conversion price in effect. If converted on April 30, 2001, the 12%
debentures would have converted into approximately 9,411,764 shares of our
common stock. This number of shares, however, could be significantly greater in
the event of a decrease in the trading price of our common stock. Purchasers of
our common stock could therefore experience substantial dilution of their
investment upon conversion of the 12% debentures. The 12% debentures are not
registered and may be sold only if registered under the Securities Act or sold
under an applicable exemption from registration. The shares of common stock
into which the 12% debentures may be converted are being registered pursuant to
the registration statement relating to this prospectus.

As of April 30, 2001, warrants to purchase 500,000 shares of common stock
issued to the purchasers of the 12% debentures were outstanding. The warrants
are exercisable over the next ten years at a price equal to the lesser of $0.25
per share or a variable exercise price based upon the trading price of our
common stock at the time of exercise. The exercise price of the warrants may be
adjusted from time to time under certain antidilution provisions. The shares of
common stock issuable upon exercise of the warrants are being registered
pursuant to the registration statement relating to this prospectus.

In the absence of a proportionate increase in our earnings and book value,
an increase in the aggregate number of our outstanding shares of common stock
caused by a conversion of the 12% debentures or exercise of the warrants would
dilute the earnings per share and book value of all of our outstanding shares
of common stock. If these factors were reflected in the trading price of our
common stock, the potential realizable value of a stockholder's investment in
Airtech could be adversely affected.

As of April 30, 2001, we have reserved 5,800,00 shares of our common stock
for issuance upon exercise of our outstanding warrants and options other than
those issued in connection with the 12% debentures. We have reserved an
additional 16,800,000 shares of common stock for issuance upon conversion of
the 12% debentures and exercise of the attached warrants. As of April 30, 2001,
the holders of our 6% debentures also have the right to convert the 6%
debentures with attached warrants into approximately 13,800,000 shares of
common stock.

Increased competition from our competitors could prevent us from penetrating
new markets.

Our business is becoming increasingly competitive. Competition has increased
with society's growing awareness of air quality problems and the related demand
for air purification products. We believe competition will continue to increase
with the identification of new markets, such as:

. the food and beverage industry where smoking problems among smoking and
non-smoking customers exist or local ordinances impose smoking
restrictions

. the growth of cigar bars

. the creation of smoking lounges in airports, office buildings, medical
buildings and other public buildings

. other smoking and non-smoking environmental demands

. air contamination within hospitals and other medical facilities

. air contamination within office buildings and other public buildings and
facilities

. air contamination within vehicle air conditioning systems

. air contamination within homes

As competition increases, we will compete with numerous companies in our
market which have greater financial and technical resources than those
available to us. Our inferior competitive position could have a material
adverse affect on our ability to penetrate a new market and ultimately our
profitability.

Increased technological developments in air purification products could render
our products obsolete.

Our air purification products could be rendered noncompetitive or obsolete
by future technological developments in our industry. We expect these
technological developments to significantly increase competition in our
industry. Many of the companies with which we compete and expect to compete
have greater capital resources and more significant research and development
staffs and marketing and distribution programs and facilities. Our ability to
compete effectively may be adversely affected by the ability of these
competitors to devote greater resources to technological developments and the
sale and marketing of their products than us. Also, one or more of our
competitors may succeed or may have already succeeded in developing
technologies and products of which we are unaware and which may be more
effective than the air purification products we are currently developing or
marketing.

We may not receive approval codes for reimbursement of the cost of our Medicare
Series 950 Unit which could significantly affect our future results of
operations and profitability.

In October 1999, we applied to the Medicare administration for a Medicare
reimbursement code number for our Medicare Series 950 air purification unit.
The reimbursement code number would provide us with access to the large
Medicare market by allowing Medicare recipients to receive reimbursement for
the cost of our Medicare Series 950.

In February 2001, we also applied to the Alpha Numeric Committee of the
Health Care Financing Administration for a health care product code system
number. The code number is commonly referred to in the medical insurance
industry as an HCPCS Code. Although not as large a market as the Medicare
market, the HCPCS Code would enable us to market our Medicare Series 950
directly to the private medical insurance industry. If a private insurance
carrier accepts our Medicare Series 950 with the HCPCS Code, patients who
purchase a Medicare Series 950 would be entitled to receive insurance
reimbursement for the cost of the Medicare Series 950. If we receive a Medicare
reimbursement code, we would automatically receive an HCPCS Code. If we obtain
an HCPCS Code, however, we would not automatically receive a Medicare
reimbursement code.

Approval of our Medicare Series 950 by either Medicare or the Health Care
Financing Administration could significantly increase our profitability. We
have not yet received approval of either of our applications and we cannot
assure you that either application will be approved by the appropriate agency.
If we do not receive Medicare approval or an HCPCS Code, we will continue to
market our Medicare Series 950 through direct sales efforts and our existing
distribution channels. To stimulate these sales efforts, we entered into an
agreement with Southern Therapy, Inc. in April 2000 to market our Medicare
Series 950 to home and durable medical equipment providers. We cannot assure
you that our current marketing efforts will achieve the same

sales results as we could achieve through Medicare approval or an HCPCS Code
which could adversely affect our business and results of operations.

Our stock is traded on the OTC Bulletin Board and the tradability in our stock
may be limited under the penny stock regulations.

Our common stock is traded on the OTC Bulletin Board under the symbol
"AIRG". The OTC Bulletin Board is not a recognized national securities
exchange. If the trading price of our common stock is less than $5.00 per
share, trading in our common stock would also be subject to the requirements of
Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who
recommend low-priced securities to persons other than established customers and
accredited investors must satisfy special sales practice requirements. The
broker/dealer must make an individualized written suitability determination for
the purchaser and receive the purchaser's written consent prior to the
transaction.

SEC regulations also require additional disclosure in connection with any
trades involving a "penny stock", including the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny stock market
and our associated risks. Such requirements may severely limit the liquidity of
our common stock in the secondary market because few brokers or dealers are
likely to undertake such compliance activities. Generally, the term "penny
stock" refers to a stock with a market price of less than $5.00 per share which
is not traded on a national securities exchange or quoted on NASDAQ. An active
trading market in our common stock may never develop because of these
restrictions.

There is a limited public market for our common stock and warrants and any
future trading price of our common stock may decline, making it difficult for
you to sell your stock.

Currently, there are a limited number of market makers for our common stock
and there can be no assurance that a market for our shares will continue with
any consistency. An illiquid market for our common stock may result in price
volatility and poor execution of buy and sell orders for our investors. There
is no public market for our warrants and we cannot assure you that one will
develop. We do not intend to list our warrants on any exchange.

We depend on our key personnel for our future success including our founder, C
J Comu.

Our future success depends to a significant extent upon the continued
employment of our founder C J Comu. Competition for qualified personnel is
intense in our industry, and we cannot assure you that we will be successful in
attracting and retaining qualified, top-level personnel. The limited
availability of qualified individuals could become an issue of increasing
concern in the future. We do not maintain insurance on the lives of any of our
officers or key employees. Our future success largely depends on the ability of
our qualified personnel to manage and conduct our operations and implement our
business plan. The loss of services of our founders or other key officers and
directors could adversely affect our prospects for success.

We recently suspended our franchise program and instituted a new program to
market our residential products through distributors which may adversely affect
our future sales.

We recently suspended our franchise program to market and sell our
residential air purification products utilizing a retail store outlet concept.
Since February 2000, we have sold 8 residential retail franchises of which 5
continue to operate. We suspended our retail franchise program to analyze
whether the retail sale of our residential units is cost effective when
compared to other direct sale distribution channels. We are currently marketing
our residential products through direct sales from our corporate offices,
manufacturing representatives and national distributors. We are also marketing
our Medicare Series 950 to home and durable medical equipment providers through
our agreement with Southern Therapy. We cannot assure you that these marketing
efforts will be successful or that it will be economically feasible to
reinstate our retail franchise

program in the future. Either of these events could negatively impact our
future residential product sales and thus our profitability.

We discontinued offering franchises to sell our commercial products and
instituted a new program to sell these products through distributors which may
adversely affect our future sales.

As of May 31, 2000, we had 18 franchisees who market our commercial
products. During fiscal year 2000, we elected to discontinue offering
additional commercial franchises. We elected to discontinue our commercial
franchise program to enable us to pursue marketing our commercial products
through manufacturing representatives and direct sales efforts from our
corporate offices. In February 2001, we entered into an agreement with W&B
Service Company for the exclusive national distribution of our commercial and
automobile purification products. We cannot assure you that this new marketing
approach for our commercial products will be successful. If unsuccessful, we
may not be able to increase sales from our commercial products which could
materially affect our future profitability.

We have not paid any dividends in the past and do not anticipate paying
dividends in the future.

We anticipate using the proceeds received from our recent debt and equity
sales and any future earnings to promote and increase our business and for
other working capital uses. We have not paid or declared any dividends in the
past. Based upon our present financial status and our contemplated financial
requirements, we do not anticipate paying any dividends upon the shares offered
by this Prospectus for the foreseeable future. While we may declare dividends
at some time in the future, we cannot assure you of the timing of future
dividends, if any.

FORWARD LOOKING STATEMENTS

The statements we make in this prospectus that are not historical fact are
"forward-looking statements" as that term is defined in the Private Securities
Litigation Reform Act of 1995. The words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "believes," "estimates,"
"projects" or similar expressions are intended to identify these forward-
looking statements. These statements are subject to risks and uncertainties
beyond our reasonable control that could cause our actual business and results
of operations to differ materially from those reflected in our forward-looking
statements. The safe harbor provisions provided in the Securities Litigation
Reform Act do not apply to forward-looking statements we make in this
prospectus.

Forward-looking statements are not guarantees of future performance. Our
forward-looking statements are based on trends which we anticipate in our
industry and our good faith estimate of the effect on these trends of such
factors as industry capacity, product demand and product pricing. In addition,
our forward-looking statements are subject to our ability to reverse the
current negative trend in our financial results.

The inclusion of projections and other forward-looking statements should not
be regarded as a representation by us or any other person that we will realize
our projections or that any of our forward-looking statements contained in this
prospectus will prove to be accurate. We will not update any forward-looking
statements other than as required by law.

DESCRIPTION OF SECURITIES PURCHASE AGREEMENT

Our Agreement

On March 29, 2001, we entered into a securities purchase agreement with an
investment group to raise up to $1,000,000 through the sale to the investors of
our 12% Convertible Debentures Due 2003 with attached warrants to purchase up
to 600,000 shares of our common stock. Upon execution of the securities
purchase agreement, the investors purchased $800,000 in principal amount of 12%
debentures with attached warrants to purchase 500,000 shares of our common
stock. The purchase price paid by the investors for our 12% debentures and
attached warrants was $800,000 which represents the total amount we have
received under the purchase agreement through April 30, 2001. Under the terms
of our purchase agreement, the investors are obligated to purchase the
remaining $200,000 in principal amount of our 12% debentures with attached
warrants to purchase 100,000 shares of common stock for a purchase price of
$200,000. The investors are obligated to purchase the additional 12% debentures
on the date the registration statement relating to the common stock offered by
this prospectus is declared effective by the SEC. If the registration statement
is not declared effective, the investors have no obligation to purchase the
additional 12% debentures or the attached warrants.

Description of 12% Debentures

Our 12% debentures have a maturity date of March 30, 2003 at which time the
principal amount and all accrued interest on the 12% debentures is due and
payable. Interest payments on the 12% debentures are due and payable quarterly
commencing June 1, 2001 or at the option of the debenture holder upon
conversion of the 12% debentures into shares of our common stock. If the
debenture holder elects, we will pay any accrued interest on conversion by
issuing shares of our common stock to the debenture holder at a price equal to
the conversion price of our common stock as described below. The 12% debentures
are secured by a security agreement under which we pledged substantially all of
our assets, including our goods, fixtures, equipment, inventory, contract
rights, and receivables.

The 12% debentures are convertible at any time at the option of the holder
into shares of our common stock, provided at no time may a holder of our 12%
debentures and its affiliates own more than 4.9% of our outstanding common
stock without giving us 30 days prior written notice of the debenture holder's
intent to waive the 4.9% ownership limitation. See "Limitation on Stock
Ownership of Debenture Holder" on page 11 of this prospectus. The conversion
price of our common stock used in calculating the number of shares issuable
upon conversion, or in payment of interest on the 12% debentures, is the lesser
of

. 50% of the average of the lowest three trading prices of our common
stock for the twenty trading days ending one trading day prior to the
date we receive a conversion notice from a debenture holder; and

. a fixed conversion price of $0.25.

Also, under the terms of the 12% debentures, if we at any time

. distribute any shares of our common stock in a consolidation, exchange
of shares, recapitalization or reorganization, the 12% debenture holders
are entitled to participate in the distribution as if the debenture
holders had converted the 12% debentures;

. distribute any of our assets to our stockholders as a dividend, stock
repurchase, return of capital, or otherwise, the 12% debenture holders
are entitled to participate in the distribution as if the debenture
holder had converted the 12% debentures; or

. issue or sell any shares of our common stock for no consideration or at
a price less than $0.25 per share, then the fixed conversion price of
$0.25 described above shall be reduced to the price per share we receive
on the issuance or sale.

Description of Warrants

The warrants purchased by the investors on March 29, 2001 entitle the
investors to purchase 500,000 shares of our common stock at an exercise price
equal to the lesser of

. 90% of the average of the lowest three trading prices of our common
stock for the twenty trading days ending one trading day prior to the
date of exercise of the warrant; and

. $0.102 per share.

The warrants expire on March 29, 2004. The warrants are subject to exercise
price adjustments upon the occurrence of certain events including stock
dividends, stock splits, mergers, reclassifications of stock or our
recapitalization. The exercise price of the warrants is also subject to
reduction if we issue any rights, options or warrants to purchase shares of our
common stock at a price less than the market price of our shares as quoted on
the OTC Bulletin Board. Also, if at any time, we declare a distribution or
dividend to the holders of our common stock in the form of cash, indebtedness,
warrants, rights or other securities, the holders of the warrants are entitled
to receive the distribution or dividend as if the holder had exercised the
warrant.

Our Covenants with the 12% Debenture Holders

We may not, without the prior written consent of our 12% debenture holders,
do any of the following:

. pay, declare or set apart for payment any dividend or other distribution
on shares of our capital stock other than shares issued in the form of a
stock dividend;

. redeem, repurchase or otherwise acquire any shares of our capital stock
or any warrants, rights or options to purchase or acquire our shares of
capital stock;

. incur any indebtedness, except to trade creditors or financial
institutions incurred in the ordinary course of our business or to pay
the 12% debentures;

. sell, lease or otherwise dispose of any significant portion of our
assets outside of the ordinary course of our business;

. lend money, give credit or make advances to any person or entity except
in the ordinary course of our business;

. negotiate with any party to obtain additional equity financing that
involves the issuance of our common stock or securities convertible into
our common stock for a period of 180 days from the date the registration
statement relating to the securities offered by this prospectus is
declared effective by the SEC;

. conduct any equity financing during the period ending March 29, 2003
without providing the 12% debenture holders with the opportunity to
participate in the equity financing on the same terms and conditions
offered to the potential investors.

Limitation on Ownership of our Shares of Common Stock by a 12% Debenture Holder

Our securities purchase agreement with the investors provides that at no
time may a 12% debenture holder, together with its affiliates, maintain
ownership of more than 4.9% of our outstanding common stock, unless the
debenture holder gives us at least 30 days prior notice of their intent to
waive the 4.9% ownership limitation.

Registration Rights Agreement with the Investors

Simultaneously with the execution of the securities purchase agreement, we
entered into a registration rights agreement with the investors. The securities
offered by this prospectus are in compliance with our obligations under the
registration rights agreement. The holders of the 12% debentures and attached
warrants

are also entitled under the registration rights agreement to certain "piggy-
back" registration rights if we file a registration statement relating to the
sale of securities for our own account. This means the holders of the warrants
and 12% debentures may participate and sell shares in our public offering,
except for shares registered by us for issuance under our employee stock option
plans or in a merger or exchange in which our shares are issued in exchange for
other securities.

Under the registration rights agreement, if the registration statement
relating to the securities offered by this prospectus is not declared effective
by the SEC on or before July 13, 2001, we are obligated to pay a registration
default fee to the 12% debenture holders equal to $2,000 for each $100,000 in
principal amount of outstanding 12% debentures. We are obligated to pay the
default fee for each 30 day period, prorated for partial periods, that the
registration statement is not declared effective. The default fee is due on the
date the registration statement is declared effective and is payable in cash or
at the option of the 12% debenture holder in shares of our common stock.
Payments in shares of our common stock will be based upon the lowest three
trading prices of our common stock for the twenty trading days prior to the
payment date.

Consent and Standstill Agreement of 6% Debenture Holders

Our 6% debenture holders consented to the sale of our 12% debentures. The 6%
debenture holders also agreed that neither they nor their affiliates would for
a period beginning March 29, 2001 and ending 8 months from the date the
registration statement relating to the securities offered by this prospectus is
declared effective by the SEC

. offer to sell, contract to sell, pledge, grant any rights or otherwise
dispose of any shares of our common stock held by the 6% debenture
holders without the prior consent of the 12% debenture holders; or

. engage in any hedging transactions which are designed or reasonably
expected to lead to or result in a disposition of the shares of our
common stock held by the 6% debenture holders.

The 6% debenture holders may however

. convert the 6% debentures into a maximum of 200,000 shares of our common
stock per month on a non-cumulative basis; and

. sell up to 100,000 shares per month of common stock converted after March
29, 2001 or 200,000 shares if the selling price is at least $0.75 per
share, with any unsold converted shares held in escrow by our legal
counsel

Events of Default

If we commit an event of default under our agreements with the 12% debenture
holders, the 12% debentures are immediately due and payable and we must pay to
the 12% debenture holders an amount equal to the greater of

. 120% of the outstanding principal amount plus accrued interest on the 12%
debentures;

. or the value of the number of shares of our common stock into which the
12% debentures are convertible based upon the trading price of our common
stock on the day preceding the date of payment.

The 12% debenture holders would also have the right to exercise their rights
under the security agreement securing the 12% debentures which could lead to
control of substantially all of our assets.

Events of default include:

. our failure to pay timely any principal and interest due on the 12%
debentures;

. our failure or inability to issue shares of our common stock upon
conversion of the 12% debentures or exercise of the attached warrants;

. our breach of any of the material covenants, representations or
warranties included in the 12% debentures or the related securities
purchase agreement; or

. we file bankruptcy or a receiver or trustee is appointed for a
substantial part of our business or assets.

PLAN OF DISTRIBUTION

The selling stockholders named in this prospectus or their pledgees, donees,
transferees or other successors-in-interest are free to offer and sell their
warrants and common stock at such times, in such manner and at such prices as
they may determine. The types of transactions in which the warrants or common
stock are sold may include transactions in the over-the-counter bulletin board
market (including block transactions), negotiated transactions, the settlement
of short sales of common stock, or a combination of these methods of sale. The
sales will be at market prices prevailing at the time of sale or at negotiated
prices. The transactions may or may not involve brokers or dealers. The selling
stockholders have advised us that they do not have any agreements,
understandings or arrangements with any underwriters or broker-dealers
regarding the sale of their securities.

The selling stockholders may effect transactions by selling our warrants or
common stock directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling stockholders.
Broker-dealers may also receive compensation from the purchasers of our
warrants or common stock for whom they act as agents or to whom they sell as
principal, or both. The compensation to a particular broker-dealer might be in
excess of customary commissions.

The selling stockholders and any broker-dealer that acts in connection with
the sale of warrants or common stock may be deemed to be an "underwriter"
within the meaning of Section 2(11) of the Securities Act. Any commissions
received by broker-dealers and any profit on the resale of our warrants or
common stock sold by them while acting as a principal may be deemed to be
underwriting discounts or commissions. The selling stockholders may agree to
indemnify any agent or broker-dealer that participates in a transaction
involving sales of our warrants or common stock against certain liabilities.

Because the selling stockholders may be deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling stockholders will
be subject to prospectus delivery requirements. We have informed the selling
stockholders that the anti-manipulation rules of the SEC, including Regulation
M under the Exchange Act, may apply to sales by the selling stockholders in the
market and have provided the selling stockholders with a copy of these rules
and regulations.

USE OF PROCEEDS

We are registering our warrants and shares of common stock offered by this
prospectus to satisfy our contractual obligation to the investors. We will not
receive any of the proceeds from the sale of our warrants or common stock by
the selling stockholders under this prospectus. We will, however, receive
proceeds from the issuance of our common stock upon the exercise, if any, of
our warrants.

On March 29, 2001, the investors purchased $800,000 in principal amount of
our 12% debentures with attached warrants to purchase 500,000 shares of our
common stock. The purchase price for the 12% debentures and warrants was
$800,000. We intend to use the proceeds received from the sale of the 12%
debentures as follows:

Reduction of payables.............................................. $150,000
Inventory purchases................................................ 200,000
Product testing.................................................... 110,000
Commissions and expenses on sale of 12% debentures................. 90,000
General corporate purposes......................................... 250,000
--------
TOTAL............................................................ $800,000
========

INFORMATION ON SELLING STOCKHOLDERS

The following table includes certain information with respect to the selling
stockholders as of April 30, 2001. The selling stockholders are not an
affiliate of ours and have not had a material relationship with us or any of
our predecessors during the past three years. The selling stockholders are not
registered broker-dealers or affiliates of any registered broker-dealers.

Approximate
Maximum Number Percentage
of Shares of of Common
Beneficial Ownership Common Stock Stock to be
of Common Stock as Offered for Owned After
of April 30, 2001 Sale Offering
Name -------------------- -------------- -----------

AJW Partners, LLC............. 6,377,647 12,350,000 0%
New Millennium Partners II,
LLC.......................... 3,714,118 6,650,000 0%

The number of shares included in the above table represents an estimate of
the number of shares of common stock to be offered by the selling stockholders.
The actual number of shares of common stock offered by the selling stockholders
is indeterminate, is subject to adjustment and could be materially less or more
than the estimated number. The actual number of shares issuable upon conversion
of the 12% debentures and exercise of the related warrants is dependent on the
future market price of our common stock which we cannot predict. The actual
number of shares of common stock offered in this prospectus, and included in
the registration statement relating to this prospectus, includes an additional
number of shares of our common stock which may be issued or issuable upon
conversion of the 12% debentures and exercise of the related warrants because
of any stock split, stock dividend or similar transaction involving our common
stock, pursuant to Rule 416 of the Securities Act. Under the terms of the 12%
debentures, if the 12% debentures were converted on April 30, 2001, the
conversion price would have been $0.085. Under the terms of the warrants, if
the warrants were exercised on April 30, 2001, the exercise price would have
been $0.102 per share.

Under the terms of the 12% debentures and the related warrants, the 12%
debentures are convertible and the warrants are exercisable by any holder only
to the extent that the number of shares of our common stock issuable on
conversion or exercise, together with the number of shares of our common stock
owned by the holder and its affiliates (but not including shares of common
stock underlying unconverted shares of 12% debentures or unexercised portions
of the warrants) would not exceed 4.9% of our shares of outstanding common
stock as determined in accordance with Section 13(d) of the Securities Exchange
Act. Therefore, the number of shares of our common stock included in the above
table exceeds the number of shares of common stock that a selling stockholder
could own beneficially at any given time through its ownership of the 12%
debentures and the warrants. For this reason, the beneficial ownership of our
common stock by a selling stockholder included in the above table is not
determined in accordance with Rule 13d-3 under the Securities Exchange Act.

AIRTECH INTERNATIONAL GROUP

Organization and Development

Airtech International Group, Inc. was incorporated in the State of Wyoming
on August 8, 1991 under the name Interactive Technologies Corporation, Inc.
Until May, 1998, Interactive Technologies was principally engaged in developing
and producing interactive television and media programming for distribution
through cable, broadcast, direct satellite television and the Internet.
Interactive Technologies conducted this line of business through ownership of
proprietary software and a trademark known as Rebate TV. Rebate TV offered
network viewers rebates through an interactive program accessed by touch-tone
phones. In addition, Interactive Technologies owned licensed rights obtained
from the Federal Communications Commission to operate an interactive video and
data service system in the Melbourne-Titusville, Florida metropolitan area. A
second system owned by Interactive Technologies and located in the Charleston,
South Carolina metropolitan area was sold in 1997.

On May 31, 1998, we acquired all of the outstanding shares of common stock
of Airtech International Corporation, a Texas corporation. Airtech Corporation
was founded in 1994 as a distributor of air purification products for
Honeywell/Envirocaire. In January of 1996, Airtech Corporation outgrew the
distributorship business and began manufacturing two of its own air
purification products. The total purchase price of $22,937,760.00 for the stock
acquisition was paid through the issuance of 10,500,000 shares of Interactive
Technologies' common stock, 11,858,016 shares of Interactive Technologies'
Series "A" Convertible Preferred Stock and $9,000,000.00 in principal amount of
Interactive Technologies' convertible debentures. The shares of common stock
and Series "A" preferred stock were each valued at $0.625 per share. We
accounted for the stock acquisition using the purchase method of accounting,
with Airtech Corporation deemed the purchaser for purposes of our consolidated
financial statements.

On July 31, 1998, the 11,858,016 shares of Series "A" preferred stock and
the $9,000,000 of convertible debentures, including accrued interest, were
converted into 11,858,016 and 13,071,429 shares of our common stock. After
conversion, the total number of outstanding shares of our common stock was
approximately 50,000,000 shares. On October 5, 1998, our shareholders approved
a one for five reverse split of our common stock which reduced the number of
outstanding shares of our common stock to approximately 10,000,000 shares and
increased the par value of our common stock from $0.01 to $0.05 per share. The
reverse stock split was effective as of November 9, 1998.

In February 1998, we discontinued the original line of business of
Interactive Technologies relating to interactive television and media
programming, including the Rebate TV product. The software, trademark and
license rights are the only assets of these discontinued lines of business.
These assets have no carrying value on our financial statements because the
products were discontinued prior to our acquisition of Airtech Corporation. We
discontinued these original lines of business to enable us to concentrate on
the development, manufacture, distribution and sale of the air purification
products offered by Airtech Corporation and its subsidiaries. We are currently
marketing the remaining assets for sale with no firm commitments or agreements
in place.

Since the discontinuation of our original lines of business, we have been
engaged with our wholly-owned subsidiaries, Airtech Corporation, Airsopure,
Inc., and Airsopure International Group, Inc. in the development, marketing and
sale of air purification systems for commercial, residential and automobile
use. Airsopure was incorporated on March 5, 1997 in the State of Texas to
implement and operate a franchise program for the sale of commercial building
air purification products developed and manufactured by Airtech Corporation.
Airsopure International was incorporated on January 5, 2000 in the State of
Nevada to implement and operate a franchise program to facilitate the opening
of consumer retail stores for the sale of our residential air purification
products.

On November 30, 1995, we incorporated McCleskey Sales and Service, Inc. in
the State of Texas to integrate the distribution and sale of air purification
products by Airtech Corporation with the heating,

ventilation and air conditioning service business. Effective May 31, 1999, we
discontinued the operations of McCleskey Sales based upon the incompatibility
of the heating and air conditioning service business with Airtech Corporation's
business of manufacturing and distributing high quality air purification
products. Our cash expenses to discontinue the operations of McCleskey Sales
were minimal.

In January 1999, we formed Airsopure 999, L.P., a Texas limited partnership,
for the purpose of developing, marketing and distributing our Model S-999
automobile air purification system. Our wholly-owned subsidiary, Airsopure, is
the general partner of the limited partnership.

In October 1999, we applied to the Medicare administration for a Medicare
reimbursement code number for our Medicare Series 950. The reimbursement code
number allows Medicare recipients to receive reimbursement for the cost of our
Medicare Series 950. Our Medicare application is pending. We have not yet
received approval for a specific reimbursement code number, although Medicare
has allowed us to invoice Medicare using a non-assigned code number. The non-
assigned code number does not guarantee Medicare reimbursement to Medicare
recipients.

From February 2000 through June 2000, we opened four company owned retail
stores in Addison, Texas, Arlington, Texas, Jackson, Tennessee and Kansas City,
Missouri. During 2000, we sold the two stores located in Jackson, Tennessee and
Kansas City, Missouri to the managers of those stores. We also consolidated the
store located in Arlington, Texas with the store located in Addison, Texas. We
opened these retail stores to facilitate the sale of our home consumer line of
air purification products. We sold the store located in Addison, Texas in March
2001. As of April 30, 2001, we do not own any retail stores and do not intend
to open any company owned stores in fiscal year 2002.

In February 2001, we applied to the Alpha Numeric Committee of the Health
Care Financing Administration for a health care product code system number. The
code number is commonly referred to in the medical insurance industry as an
HCPCS Code. The HCPCS Code would enable us to market our Medicare Series 950
directly to the private medical insurance industry. If a private insurance
carrier accepts our Medicare Series 950 with the HCPCS Code, patients who
purchase a Medicare Series 950 would be entitled to receive insurance
reimbursement for the cost of the Medicare Series 950. Our application is
pending and we have not received an HCPCS Code.

On October 16, 1998, we changed our name from Interactive Technologies
Corporation, Inc. to Airtech International Group, Inc. Our address is 12561
Perimeter, Dallas, Texas 75228. Our telephone number is (972) 960-9400 and our
web site can be accessed at www.airtechgroup.com. The web site of Airsopure can
be accessed at www.airsopure.com.

Business

We are engaged in the development, manufacturing, marketing and sale of
indoor air purification products for commercial and residential use. We also
manufacture and market an air purification system for use in automobiles. Our
strategy is to identify those markets which we believe are in need of solutions
to indoor air contamination problems. We propose to exploit these identified
markets through direct sales, franchising, licensing and strategic alliances
with manufacturing representatives.

Indoor air contamination exists in the form of particulates, gases or
viruses in the air we breathe, whether in an office building, retail or
commercial establishment or our homes. The public is generally aware of the
dangers of outside air pollution through "ozone alert days" which suggest
limited outdoor activities on those days. We believe, however, that the general
public is unaware that exposure to our immune systems of unseen indoor air
contaminants is normally six to seven times more hazardous than outside air.
These air contaminants include bacteria, pollen, dust mites, smoke, plant and
mold spores, dust, solvents, glues, formaldehyde, carbon monoxide, carbon
dioxide, viruses, and diseases such as tuberculosis, meningitis, and hepatitis.
Indoor air contaminants also include volatile organic compounds or "VOCs" which
occur when airborne contaminants

combine and become unstable. Examples of these volatile compounds are benzene,
styrene, arsenic and polychlorinated biphenyls.

For millions of people, exposure to indoor air contaminants means
experiencing headaches, watery eyes, dizziness, lethargy, digestive problems,
nausea, nose and throat irritation. Statistics indicate that many legitimate
employee absences are "respiratory related" and that these absences have a
profoundly negative impact on productivity and profits. Historically, the
methods of addressing and treating indoor air contamination were to open
windows and doors to bring "fresh air" into an area or to use air cleaners such
as ozone generators or electro-static air "cleaners" to attempt to purify the
existing indoor air. We believe that these methods do not effectively handle
the air contamination problems which exist today. Although considered effective
at the time of conception, we regard these cleaners as obsolete in the current
air purification marketplace.

Our air purification products provide an inexpensive solution to air
contamination problems and concerns. Our products can be applied to various
commercial and residential uses and are ideally suited for a variety of users
that experience air contamination problems, including office buildings,
restaurants, bars, public buildings, nursing homes, hospitals, schools, dental
offices, waiting rooms, homes, airplanes, vehicles and residences. Our products
substantially remove or destroy microorganisms in the air, eliminate organic
odors and break down volatile compounds into harmless basic compounds.

Commercial Franchise Operations

We operate a franchise program designed to leverage our expertise with the
energies and investment of a franchise network. We see this as a means of
supplementing our revenues for cash flow purposes from franchise fees, sales of
products to the market and royalty fees based upon the gross sales generated by
the franchisee. We currently have 18 franchisees who sell our commercial
products in various parts of the United States. These franchisees market and
sell our commercial building products through franchise agreements with
Airsopure, Inc., our wholly owned subsidiary. Each franchise agreement has an
initial term of five years and the franchisee may renew the franchise for
successive additional five year periods. Five of our current franchises expire
in fiscal year 2003 and thirteen in fiscal year 2004.

During fiscal year 2000, we elected to discontinue offering our commercial
franchises through Airsopure and began marketing our commercial products
through direct sales efforts from our corporate office. We also implemented a
program to pursue the marketing of our commercial products through
manufacturing representatives. Based upon our estimate of approximately 260,000
manufacturing representatives nationwide, we believe this marketing approach
will provide us with broader exposure of our commercial products. We also
believe this broader exposure will increase the overall market of our
commercial products above the levels previously recognized through our
commercial franchise program.

Residential Franchise Operations

We also operate a franchise program designed to market our residential air
purification units utilizing a retail store outlet concept. We operate this
franchise program through Airsopure International Group, Inc., our wholly owned
subsidiary. Airsopure International is qualified to offer our franchises in 38
states. The start-up costs for purchasing and establishing a retail store
franchise range from $90,000 to $100,000, which includes up to a $25,000
franchise fee to us. The remainder of the costs are estimates for the purchase
of inventory, furniture and fixtures and minimum required working capital.
Since February 2000, we have sold 8 residential retail franchises of which 5
are still operational.

We recently suspended our franchise program to market and sell our
residential retail franchises. We suspended our retail franchise program to
analyze whether the retail sale of our residential units is cost effective when
compared to other direct sale distribution channels. We are currently marketing
our residential products through direct sales from our corporate offices,
manufacturing representatives, existing franchisees and

national distributors. We are also marketing our Medicare Series 950 to home
and durable medical equipment providers through our agreement with Southern
Therapy.

Industry Overview

The Environmental Protection Agency has identified indoor air pollution as
one of the five most urgent environmental concerns in the United States.
According to the EPA, poor air quality may affect one third to one half of the
commercial buildings in the United States. These affected commercial buildings
are referred to in the industry as "sick buildings" and represent a potentially
large market for our air purification systems. The term "sick building" can
also be applied to any commercial or private environment where airborne
contaminants pose a potential health hazard. The EPA asserts that the average
American spends roughly 90 percent of his or her time indoors (Consensus 1988;
EPA 1988) and can be breathing air more seriously polluted than outdoor air in
even the largest and most industrialized cities. Government statistics indicate
that 10 to 25 million people working in 800,000 to 1.2 million commercial
buildings have developed respiratory symptoms related to indoor air pollution.
These statistics translate to a loss in business productivity that we believe
could approach $60 billion a year. People in "vulnerable categories" are
particularly sensitive to indoor air quality and indoor air pollution. These
"vulnerable categories" include many older individuals, those individuals who
are susceptible to allergies, asthma and other respiratory ailments, and young
children. We estimate that more than 30 percent of the U.S. population falls
within these categories.

The rising drug resistance within the U.S. population is also becoming a
major health issue. There are approximately 160 antibiotics available to fight
disease. Many of these antibiotics, however, are no longer effective on certain
virulent organisms, including tuberculosis and certain types of hospital-based
staphylococcus infections. Many viral and bacterial infections are airborne and
are primarily transmitted through the air. The first line of defense against
these diseases is prevention through improvement of indoor air quality.

Health experts have expressed special concern about people with asthma.
These people have very sensitive airways that react to various irritants in the
air which make breathing difficult. The number of people diagnosed with asthma
has significantly increased in recent years. From 1970 to 2000, the number of
asthmatics in the United States has increased 59 percent representing
approximately 9.6 million people. We estimate that as of the year ended 2000,
there are approximately seventeen million asthmatics in the United States.
Asthmatics account for 500,000 hospitalizations and $6.2 billion in health care
costs annually. Asthma in children under 15 years of age has also increased 41
percent during the same period representing a total of 2.6 million children.
The number of deaths from asthma has increased 68 percent since 1979 (Source:
Asthma and Allergy Foundation of America).

Bacteria, molds, pollen and viruses are types of biological contaminants.
These biological contaminants breed in stagnant water and accumulate in air
ducts, humidifiers, drain pans, and areas where water has condensed or
collected on ceiling tiles, carpeting or insulation. Insect, bird and dust mite
droppings can also be a source of biological contaminants. Physical symptoms
related to biological contamination include fatigue, cough, chest tightness,
fever, chills, head and muscle aches, and allergic responses such as mucous
membrane irritation and upper respiratory congestion.

There is a growing awareness of the health hazards of airborne microbes,
also referred to as bioaerosols. Bioaerosols are extremely small living
organisms or fragments of organisms suspended in the air. Dust mites, molds,
fungi, spores, pollen, bacteria, viruses, amoebas, fragments of plant
materials, and human and pet dander are examples of bioaerosols. Bioaerosols
are capable of causing severe health problems. Some bioaerosols, such as
viruses and bacteria, cause infections, like a cold or pneumonia, and others
cause allergic reactions. An allergic reaction occurs when a substance provokes
formation of antibodies in a susceptible person. Bioaerosols may cause allergic
reactions on the skin or in the respiratory tract. Rashes, hay fever, asthma,
breathing difficulties, and runny noses are common allergic reactions.

Bioaerosols build up in closed indoor environments and are passed through an
entire building through central ventilation systems. The contamination of an
entire building through bioaerosols is commonly referred to as "sick building
syndrome." Bioaerosols are found in a variety of settings such as residences,
office buildings, medical and dental offices and hospitals, but cannot be seen
without a magnifying glass or microscope. Exposure to bioaerosols is much
higher in most enclosed locations where people congregate, such as schools,
theaters, airplanes, restaurants and shelters. Occurrences of sick building
syndrome have escalated largely because of the increased demand for reduced
operating costs in public buildings, particularly ventilation systems. The
demand for reduced operating costs created construction of "tight" buildings
which are dependent on mechanical air circulation systems rather than windows.
These air circulation systems recycle bioaerosols throughout the building
creating sick building syndrome.

Research has made it evident that air contaminants found in heating,
ventilation and air-conditioning systems and airtight buildings are responsible
to a large degree for sick building syndrome. The heating and air conditioning
community and the American Society of Heating, Refrigeration and Air
Conditioning Engineers have suggested that the use of higher ventilation rates
utilizing fresh outside air would dilute air contaminants and alleviate the
sick building syndrome to a great extent. In response to this suggestion and in
an effort to improve air quality, building operators have increased ventilation
by bringing in more fresh outside air. This process has resulted in increased
building costs created by having to heat or cool and dehumidify the outside
air. The process is also somewhat ineffective to the extent that polluted
inside air is diluted with polluted outside air.

Products

Our product line consists of the following:

Series 12: Our Series 12 is designed to fit into a 2 x 4-foot space of a
ceiling. This unit filters approximately 1200 cubic feet of air each minute
removing particulates, gases and odors. Markets for this unit include the
food and beverage industry, hospital and nursing homes, print shops, office
buildings and other industries with problems involving cigarette or cigar
smoke, odors and particulates. The retail price of our Series 12 is
$2,475.00. For the 30 months ended February 28, 2001, we have sold 314 of
these units to our franchisees and national accounts.

Series 14: Our Series 14 is designed to mount against a wall at the
joining point of the wall to the ceiling. The unit is approximately 36" x
14" x 14". The unit filters approximately 400 cubic feet of air per minute.
Markets for this unit include those users having problems with any
particulate, gas or odor found in rooms under 400 square feet, such as
hotel rooms, offices, classrooms, patient rooms and small shops. Multiple
units can be installed to accommodate larger rooms. The retail price of our
Series 14 is $1,090.00. For the 30 months ended February 28, 2001, we have
sold 117 of these units to our franchisees and national accounts.

Series 18: Our Series-18 is a commercial unit which can service up to
five offices or rooms with inexpensive flex duct work. The unit is
installed above the ceiling and is out of view. The unit requires no
modifications to the existing heating and air conditioning system and
operates in a very quiet fashion. The retail price of our Series 18 is
$1,850.00. For the 30 months ended February 28, 2001, we have sold 50 of
these units to our franchisees.

Series 30: Our Series 30 is in the preliminary marketing stage. The
Series 30 is a residential unit which is adaptable to existing duct work
used in existing heating, air conditioning and ventilation systems. The
retail price of our Series 30 is $970. For the two months ended February
28, 2001, we have sold 50 of these units.

Series 999: We developed our Series 999 as an automotive after market
product for mounting in the trunk of new and used cars. The unit was
designed to move 100 cubic feet of air per minute with complete air changes
in an automobile every 20 seconds. The retail price of our Series 999 is
$354. For the 30 months ended February 28, 2001, we have sold 600 of these
units. These sales were primarily to

Airsopure 999, L.P. of which Airsopure, Inc., the Company's wholly owned
subsidiary, is the general partner.

Medicare Series 950: Our Medicare Series 950 is a free standing,
portable unit. In October 1999, our Medicare Series 950 unit was submitted
to Medicare for approval and issuance of a Medical reimbursement code
number. The Medicare reimbursement code number would enable Medicare
recipients to receive reimbursement for the cost of the Medicare Series 950
unit. In February 2001, we also applied to the Health Care Financing
Administration for an HCPCS Code. The HCPCS Code would allow us to market
our Medicare Series 950 directly to private medical insurance carriers. We
propose to offer our Medicare Series 950 to Medicare and private insurance
recipients for a retail price of $795. As of February 28, 2001, we have not
sold any of our Medicare Series 950 units to either the Medicare or private
insurance markets.

Consumer Series 950: Our Consumer Series 950 unit is similar to the
Medicare Series 950 with alterations for a larger array of filtration for
contaminants. The estimated retail price of the Consumer Series 950 is
$950.00. As of February 28, 2001, we have sold 438 of these units.

Down Draft Tables: Our down draft tables were designed for the nail
manicure industry and first introduced in January 1996. The units have
largely been discontinued with our remaining inventory of approximately 10
units available for a retail price of $2,000.00. We discontinued our down
draft table line based upon a decline in market demand which resulted in
production and marketing expenses exceeding proposed sales.

Replacement Filters: We manufacture our sorbent media filters by
purchasing pre-filter material in bulk and cutting the material in our
production facility to proper sizes to fit our units. Our hospital grade
HEPA filters are out-sourced for production. The trisorbent filters are
also outsourced for manufacture, but assembled at our production facility.
The life of the filters required by our air purification units varies with
the type of unit and the degree of contamination; however, we estimate that
each unit sold will require an average of one to two complete filter
changes per year. The filters required by our ceiling units have a retail
price of $268 to $462 depending on uses. The automobile unit will require
approximately $100 in replacement filters per year and the portable
residential units approximately $150 per year.

Product Development and Redesign

We do not anticipate any major expenditures during fiscal year 2001 to
develop or redesign our existing products or our products in the developmental
stage which will not be offset by estimated product sales. Instead, we intend
to focus our available capital resources on the marketing and distribution of
our current line of marketable air purification products. We will, however,
adapt or redesign our products to meet changing customer demands or to respond
to requests in the market for made-to-order products. Our decision to redesign
or develop a particular product will be based upon whether estimated sales to
respond to a particular product need will be sufficient to offset estimated
development or redesign costs.

We anticipate redesign costs on our Series 14 units and possibly our other
units which utilize a hardened plastic case requiring injection molding. We
estimate the engineering and mold tooling costs for these units to be in the
range of $500,000. We will not commit to these costs unless our estimated sales
of these units are sufficient to offset the related development and design
costs.

We also intend to evaluate the inclusion of photocatalytic oxidation
technology into both our existing and developmental products for the purpose of
increasing the air purification efficiency of these products. Photocatalytic
oxidation occurs when ultra violet light waves are passed through a titanium
screen creating a chemical reaction. The chemical reaction increases air
purification efficiency by eliminating volatile compounds within the unit.

Operations

We currently maintain a warehouse production facility of approximately
10,000 square feet in Dallas, Texas. In this facility, we are able to assemble
a combined total of approximately 1,000 of our Series S-12, S-14, and S-18
units. We believe our warehouse facility is adequate for our current and
estimated future production needs. The anticipated unit volume sales of the
Series 999 automobile unit, the Series 950 unit and the S-30 unit during fiscal
year 2001 caused management to select out-sourcing for production of these
units.

Competing Products and Technologies

The current air filtration products and technologies available in the market
which compete with our products include the following:

. Activated carbon filters for use in heating, ventilation and air
conditioning units

. High Efficiency Particulate Air ("HEPA") filters

. Ozone generators

. Anti-microbial chemically treated filters

. High energy UV light

. Ionizers

. Electrostatic precipitators

. Media filtration

. Photocatalytic oxidation technology

. Various combinations of the above

These products and technologies are individually designed to provide various
levels of "air filtration" of air contaminants and not "air purification." We
believe a combination of several of these products and technologies must be
implemented to achieve effective "air purification". The individual air
purification ineffectiveness of these products is the result of the following
factors:

Activated carbon filters absorb a number of volatile compounds and large
microorganisms such as dust mite droppings, which stick to dust particles in
the air, but do not remove other microorganisms from the air. The efficiency
rate declines over time as the carbon filters are clogged with pollutants. The
process alone is non-regenerating and the filters can be expensive to operate
due to increased power usage resulting from pressure drops. These pressure
drops occur when filters are clogged, thereby cutting the unit's capacity and
ability to deliver air to remote areas. We use activated carbon filters in our
products in combination with other air purification components.

HEPA filter technology reportedly removes up to 99.7% of air borne particles
and is the dominant technology used in portable room air cleaners over the past
six years. HEPA filters, however, are expensive to use in large applications
such as multi-floor office buildings. HEPA filters are also ineffective in
removing extremely small organic compounds, microorganisms and some viruses.
HEPA filters are thick and produce pressure drops when installed within heating
and air conditioning systems. These pressure drops increase maintenance and
operating expenses. The increased expenses occur because the heating and air
conditioning system must work continuously to compensate for pressure drops. On
its own, HEPA technology does not have the ability to destroy bioaerosols or
trap and breakdown volatile compounds or odors. Our products use HEPA
filtration combined with other components of air purification.

Ozone generation is a type of air cleaner that uses a high-voltage
electrical charge to change oxygen to ozone. A number of companies market ozone
generators as indoor air cleaners. These ozone-producing units

break down volatile compounds because ozone is highly oxidizing. To achieve the
high efficiency required, a very high level of ozone has to be released into
the air. Ozone itself, however, is a respiratory irritant. OSHA has established
a limit of workplace ozone levels over an eight-hour day. The FDA has also set
a limit for ozone levels of electronic air cleaners. We do not employ ozone in
our products.

Anti-microbial chemically treated filters can serve as a pre-filter to the
more effective and expensive HEPA filter, capturing the larger particles
flowing through the product and thereby prolonging the life of the HEPA filter,
which captures the very small particles. On its own, an anti-microbial pre-
filter can introduce additional contaminants into the air, such as volatile
compounds, toxins, endotoxins, and allergens, by degrading microbial organisms
trapped on the anti-microbial filter. We use these filters in our products in
combination with other air purification components.

High energy UV light has proven to be effective in killing microbial life
but is ineffective in destroying volatile compounds. High energy UV light,
however, can pose a danger to humans similar to staring directly into sunlight.
We use a level of UV light in several of our products which is not harmful to
humans in combination with other air purification components.

Air cleaners such as ionizers can be up to 90% efficient which means they
remove 90% of some types of pollutants. We are not aware of any medical
evidence which recommends the use of ionizers to improve air quality for people
suffering from asthma, allergies or upper respiratory problems. Most of these
air cleaners ionize the air and place electrical charges on particles but do
not have any charged collection plates. This means charged particles migrate
through the air and stick to the first surface they run into such as walls,
furniture or lung tissue. The charged particles remain on the surface until
dislodged to re-enter the air again. We do not use ionizers in our products.

Electrostatic methods have no effect on the destruction of volatile
compounds nor are they effective on small bioaerosols that are not attached to
particulate matter. When electrostatic methods trap bioaerosols, either the
bacteria will grow on the collection plates or if the bacteria is incapable of
growing because of the rushing air past the surface, the bacteria will die,
decompose and change to an organic compound and reenter the air stream.
Electrostatic methods have no effect on reducing organic compounds or odors. We
do not use electrostatic methods of air cleaning.

Charged media filters are made from an electric conducting material
stretched across a frame. Applying a high electric voltage to the material
creates an electrostatic field. However, these electrostatic fields are
generally not sufficiently strong to eliminate most particles, severely
reducing effectiveness. We do not use charged media filters in our products.

Photocatalytic oxidation creates a reduction in most volatile compounds.
Photocatalytic oxidation occurs when ultra violet light waves are passed
through a titanium screen creating a chemical reaction. The chemical reaction
eliminates the volatile compounds collected in the air purification unit by
reducing them to harmless components or carbon dioxide and water. We use
photocatalytic oxidation in our products in combination with other air
purification components.

Competition

Our business is becoming increasingly competitive. Competition has increased
with society's growing awareness of air quality problems and the related demand
for air purification technology. We compete in both the commercial and
residential markets for air filtration and purification products.

The major competition for our products and markets is the domestic
commercial and residential heating, ventilation and air conditioning market.
This market is composed of a small number of large manufacturers. The two
market leaders are the Carrier division of United Technologies and Trane Corp.,
a unit of American Standard. Carrier's sales were approximately $8.4 billion in
2000. Trane is second in the industry with

approximately $7,600,000 in sales in 2000. Like Carrier, Trane competes in all
segments of our industry including commercial, residential, air conditioning,
furnaces and heat pumps. Our other competitors include the following companies:

Fedders, Inc. (NASDAQ:FJC) is a holding company which manufactures and sells
a full line of room air conditioners and dehumidifiers, principally for use in
domestic residential markets. Annual sales for 2000 were $410 million.

Trion Inc., a newly acquired subsidiary of Fedders, Inc., has air
purification operations which consist of two principal segments: engineered
products and consumer products. The engineered products group designs,
manufactures and sells commercial indoor air quality and dust collection
equipment. The consumer products division manufactures and markets appliance
air cleaners, including both table top and free standing console units.

Environmental Elements designs equipment and supplies systems and services
to the air pollution industry through the design of large scale systems to
control gaseous emissions. In addition, Environmental Elements designs
electrostatic precipitators, fabric filters and scrubbing systems.

Honeywell, Inc. (NYSE:HON) has both commercial and consumer divisions of air
filtration products with primary sales generated from the consumer division.
Combined sales for these divisions during 2000 were $7.4 billion.

CECO Environmental Corp. (NASDAQ:CECE) has been in the air quality
technologies and services business for over 30 years. Annual sales for 2000
were $325 million. CECO has expanded the applications for its technology to
include wastewater treatment. CECO, through its four subsidiaries, provides a
wide spectrum of air quality and wastewater treatment products and services.
These products and services include industrial air filters, high performance
filter fabrics, environmental maintenance, monitoring and management services,
waste water treatment and air quality improvement systems. CECO is a full-
service provider to the steel, aluminum, automotive, aerospace, semiconductor,
chemical and metalworking industries.

United Air Specialists was established in 1966 to provide commercial and
industrial environmental air cleaning solutions worldwide through a diverse
product offering dust collection systems, industrial fluid coating systems and
industrial oil cleaning equipment. The United Air product line includes the
Smokeater, an electromatic precipitator cleaner. Designed to meet the needs of
each customer, United Air equipment is backed by strong performance guarantees,
technical support and years of experience.

Competition in the commercial indoor air quality market is very specialized
with no one company offering a complete line of air filtration equipment.
Commercial companies tend to specialize in very distinct market segments. In
most major metropolitan areas of the United States, there are also various
small commercial air filtration suppliers. We believe none of these suppliers
has a product line competitive with our commercial units. In the residential
indoor air quality market, many suppliers and manufacturers have a variety of
air filtration products, generally in the lower retail price range of
approximately $250.

We are currently unaware of any company which manufactures or distributes a
highly efficient or trunk-mounted air purification unit for the automobile
comparable to our Series 999. We anticipate, however, that our proposed
penetration of the automobile market will generate significant interest with
competition coming from established automobile manufacturers.

We believe that the applications for our product lines will have broad
appeal, since the implementation costs of our products are small compared to
the cost benefits that typically accrue to the user. We also believe our
technological approach of combining several air purification components into a
single product is a superior method for removing and destroying pollutants in
an indoor air environment. Some of the advantages and benefits of our products
are as follows:

. Biological air contaminants are substantially destroyed and or removed

. The process cleans and purifies the air through multiple air changes

. The process is effective for microbes, endotoxins, toxins, allergens, and
organic compounds

. No toxic chemicals are employed

. No ozone is generated or introduced into the air

. The process works well at room temperature

. The energy needs are low in stand alone systems outside of heating and
air conditioning systems

. Self-cleaning process does not reintroduce air contaminant residue into
the air stream

. After initial purchase, the products are very economical to operate,
including the price of filter replacements

Markets

Our market research has identified the following markets which may benefit
from our products:

. Medical and specialty facilities such as hospitals, clinics, nursing
homes, laboratories, day care centers, and emergency rooms. These
facilities represent a large market for our products. Also, any facility
where indoor air quality is critical to the safety and health of the
patients/customers is a potential market.

. The commercial heating, ventilation and air conditioning market is a
market which generated approximately $9 billion in sales during 1999 and
which we believe will experience continued sales growth in the future.

. The residential market consists of over 60 million homes with central
heating, ventilation and air conditioning systems occupied by individuals
with a need for better indoor air quality.

. The industrial air quality market is estimated to have sales which exceed
$12 billion. Increased local, state, and federal regulations are
continuing to require cleaner indoor industrial air quality.

. The transportation market includes automobiles, ambulances, buses,
limousines, railroads, aircraft, and cruise ships which have a specific
need for improved indoor air quality.

. People who suffer from upper respiratory discomfort and allergic
reactions due to poor indoor air quality at home, at work and in
transportation vehicles.

. People in vulnerable categories including older individuals in nursing
homes and hospitals, individuals who are susceptible to allergies, asthma
and other respiratory ailments, and young children.

Our technology provides an inexpensive solution to many of the indoor air
quality problems which affect the daily lives of these individuals. Health
conscious consumers are also becoming more particular about the air quality in
their environments. We believe this trend will lead to an increase in demand
for better air purification systems. We also believe that our combined
technology approach will outrank the solutions provided by other air filtration
systems that use traditional single methods for indoor air filtration and
purification.

Business Plan and Marketing Strategy

Traditionally, air purification systems are marketed and sold through a
single distribution channel comprised of heating and air conditioning
contractors or repairmen. Our strategy is to approach the market through
multiple distribution channels. We are not aware of any of our competitors who
utilize a multiple channel approach. We have targeted several distribution
channels for direct exposure of our products to educate consumers about the
costs and solutions for indoor air contamination. We believe that this multiple
channel

approach combined with the quality of our products will separate us from our
competition. For example, we currently utilize the following distribution
channels:

Franchises. We currently have 18 commercial franchisees who market and
sell our commercial building air purification products in various parts of
the United States. We also have 5 residential retail franchisees who market
and sell our residential air purification products. We provide a five day
Indoor Air Quality Certification program for all of our approved
franchisees. Each of our franchisees has a protected territory. We also
coordinate an advertising program with our franchisees to provide an
unlimited number of leads and future potential accounts to serve. Our
franchisees are not required to exclusively market our products and may
combine our products with competing products.

International Licenses. We have licensed the distribution rights to our
name and technology in Turkey, Canada, Spain and Central and South America.
Effective May 31, 2000, we entered into a development agreement with Aurora
Products, Ltd. (Shanghai) for the distribution of our products in portions
of Asia and the Pacific Rim through two subsidiaries of Aurora Products.
Aurora Airsopure (China) markets our products in Hong Kong and the Peoples
Republic of China. Aurora Airsopure (Asia) markets our products in Taiwan
and the Phillippines. Aurora Airsopure (China) and Aurora Airsopure (Asia)
each executed a $500,000 demand promissory note payable to us in exchange
for the distribution rights. The notes bear interest at 10% per annum with
all principal and interest due May 31, 2008. As of April 30, 2001, we have
received initial cash payments under each of the notes of $40,200. Under
the terms of the notes, the remaining principle balances are reduced based
upon an allocation of 20% of purchase orders from us and 80% of gross sales
by each distributor. As of April 30, 2001, we have allocated $18,000 in
principle reduction to the Aurora Airsopure (Asia) note.

Our existing international licenses are with one licensee for the entire
country. We may in the future, however, divide a country into several
licensed territories with multiple licensees. We intend to aggressively
pursue additional international distribution relationships during fiscal
year 2001. Our international licenses sell for a minimum of $100,000 per
country or a formula derived from guaranteed projected sales based upon the
population of the licensed territory or country.

Manufacturer's Representatives. We estimate that there are approximately
260,000 heating and air conditioning representatives in the United States.
This unconsolidated group of professionals accounts for a significant
amount of the current sales of air purification and cleaning units. We
intend to make our products available to these representatives through
direct marketing efforts from our principal offices. As of April 30, 2001,
we have entered into agreements with 30 local manufacturing
representatives. These agreements include distribution agreements with
Trinity Resources, Inc. for the exclusive distribution of our products
through AES of Oklahoma (Carrier Corporation) in the State of Oklahoma and
W&B Service Company for the exclusive national distribution of our
commercial and automobile products in the United States and Canada.

Internet Sales. Internet usage has increased over the last several years
and consumer purchasing is expected to continue to grow in accordance with
this usage. Approximately 73% of website users search for information about
products and services and 7.4 million users have made at least one purchase
over the Internet. The demographics of website users also fit well with our
products. Most website users are well educated and earn significantly more
income than the national average. Our websites are www.airsopure.com or
www.airtechgroup.com. Since June of 1999, the Airsopure website was
accessed 104,994 times and the Airtech website 191,390 times. On these
sites, visitors can educate themselves about our products, but cannot order
our products on line.

We intend to spend additional funds to redesign and enlarge our websites
in an effort to direct more Internet traffic to our websites. Our proposed
redesign will include "hyper link" access to our products and the ability
to order online. Hyper link access will enable website users to use generic
words such as "air quality" or "air purification" for immediate referral to
our website. Our websites also provide quicker advertising response times,
direct feedback from customers and instantaneous updating of

information. We believe the keys to successful marketing on the Internet
will be exposure and association with other well-traveled websites,
security, a clean design, ease of use and product testimonials.

Direct Sales. We currently make direct sales through our corporate
offices to national accounts such as TGI Fridays, Bennigan's and Sullivans,
in addition to other local, regional and national accounts involved in the
food and beverage industry. We also intend to employ the direct sales
approach to school systems and government facilities during fiscal year
2001.

Retail Distribution. In February 2000, we opened our first company
retail outlet in Addison, Texas to facilitate the retail sale of our home
consumer products. Since February 2000, we also opened three additional
retail outlets in Arlington, Texas, Jackson, Tennessee and Kansas City,
Missouri. During August 2000, we sold the two stores located in Jackson,
Tennessee and Kansas City, Missouri to the managers of those stores and
consolidated the store located in Arlington, Texas with the Addison, Texas
store.

The purchase price for each of the Jackson and Kansas City stores was
$15,000. The purchase price represents the purchase of existing inventory
at the stores and the assumption by each purchaser of all lease and utility
obligations. The purchase price is payable by each purchaser paying a
premium for each unit of inventory purchased from us above the initial
inventory. The inventory premium for the Jackson store is $100 per unit and
the Kansas City store is $50 per unit. As of April 30, 2001, we have
received $2,600 on the sale of the Jackson store and $2,500 on the Kansas
City store.

In March 2001, we sold the store located in Addison, Texas for a
purchase price of $20,000. The purchase price was paid in $4,000 cash and
the assumption by the purchaser of all lease and utility obligations.

We are also actively pursuing the following additional distribution
channels for our products:

Medicare and Durable Medical Equipment Distributors. Our research
indicates that physicians regularly recommend the use of portable air
filtration systems for patients suffering from chronic and acute episodes
of illness related to allergies, asthma and general upper respiratory
distress, many of whom are Medicare enrollees. These medical conditions are
frequently elevated from a chronic status to acute episodes due to the
inhaling by patients of various airborne contaminants. In the absence of a
Medicare reimbursement code, Medicare patients are generally forced to
incur the expense of such technology on a non-reimbursable basis.

In October 1999, we applied for a Medicare reimbursement code number for
our Medicare Series 950. We have not yet received approval for a specific
reimbursement code number to date, although Medicare has allowed us to
invoice Medicare using a non-assigned code number. The use of the non-
assigned code number does not guarantee Medicare reimbursement to Medicare
recipients. We intend to continue the pursuit of the pending Medicare
application by collecting and submitting additional information required by
Medicare. The date of a final decision on our Medicare application cannot
be determined at this time. The submission of additional information will
allow Medicare to take additional time to evaluate our application. We
cannot predict if, or when, Medicare will approve the Medicare Series 950
for direct cost reimbursement. We believe, however, that the time necessary
to duplicate or invent the technology included in the Medicare Series 950,
to create and test a prototype and to submit an application to Medicare
gives us a competitive lead time advantage over our competitors in this
market.

The Medicare reimbursement code is awarded through a review process
conducted under the direction of the Health Care Financing Administration
and its agencies that include the Statistical Agency for Durable Medical
Equipment Regional Council and the Durable Medical Equipment Regional
Council. Once awarded a Medicare reimbursement code, Medicare patients
suffering from respiratory problems are able to secure through a variety of
durable medical equipment providers, medical technology prescribed by their
attending physicians that will be paid for by Medicare or their insurance
carrier of record. Our research also indicates that third party payors such
as managed care and indemnity insurance plans will

more readily reimburse patients for our Medicare Series 950 after the
product receives a Medicare code. We estimate that approximately 31 million
Medicare enrollees suffer from some sort of upper-respiratory problem.
Although the number of Medicare enrollees has not changed significantly in
the past three years, we believe that the number of enrollees will increase
significantly in the future with the aging of the "baby boomers." These
individuals represent the end-user market for our Medicare Series 950. We
have also developed the Consumer Series 950 unit which is similar to the
Medicare Series 950 unit with alterations for a larger array of filtration
for contaminants.

We have identified a national distribution network composed of durable
medical equipment distributors that have existing sales forces and
marketing infrastructures. Association with these distributors creates an
immediate distribution network for the Medicare and Consumer Series 950
units. This distribution network would eliminate management challenges of
creating and maintaining our own sales force or recreating the existing
client bases of these distributors. The medical equipment distributors
currently interact with physicians providing other medical devices such as
walkers, wheelchairs, hospital beds and electronic monitoring devices. The
Medicare and Consumer Series 950 units will be a new product for medical
equipment distributors within an industry where the introduction of new
products is not common. If we do not receive approval from Medicare of the
Medicare Series 950, we intend to continue our efforts to market the
Consumer Series 950 through direct sales to medical equipment distributors
and by pursuing insurance carriers and health care providers outside of the
Medicare system. To implement this marketing approach, we entered into an
agreement with Southern Therapy, Inc. in April 2000 to market our Medicare
Series 950 to home and durable medical equipment providers. We cannot
predict or forecast the amount of any future sales which may be generated
from the Medicare or Consumer Series 950.

Automobiles and Public Transportation. Our research indicates that there
exists an increasing problem with abundant air contamination in automobiles
and public transportation vehicles across the United States. Our research
also indicates that not only is automobile air contamination immense and
growing, but also that no real technological solutions are being applied to
remove the harmful and irritating smells, gases and micro-particles that
can cause and exacerbate respiratory problems. We have concluded that
solving these issues for the public could provide tremendous economic
rewards and higher auto resale values to a wide variety of customers, such
as car rental companies, automobile dealers and government vehicles. One of
the foremost complaints in the car rental industry and the new and used car
industry, are the odors associated either with new material odors or with
fabrics and materials in the automobile cabin that have absorbed pollutants
like cigarette smoke for prolonged periods of time. The first indication
that a problem exists is the odor detectable when the air conditioning unit
or the air circulation system is activated. It is important, however, to
note that the bacteria might be present before the odor is detected. This
condition is caused by buildup of mold and bacteria in the air
conditioner's evaporator. These fungi and spores can trigger allergic
reactions and upper respiratory problems for car passengers.

Nearly 200 million vehicles are in use across the United States. Of
these vehicles,

. approximately 150 million are passenger vehicles,

. approximately 2 million are owned by the major car rental companies,
and

. approximately 3 million vehicles are government owned and used.

Each year in the United States, approximately 12 million new vehicles
are sold by automobile dealers. The majority of automobiles fall into the
category of used or more than one year old. The average American spends
many hours per day in his vehicle. This much exposure, when added to
outside contaminants such as road pitch, microscopic tire dust, allergens
and hazardous gases and odors, leaves many car drivers with recurring
headaches, eye irritation, nausea and even central nervous system problems.
There are approximately 24,000 franchised new car dealers in the United
States. Some auto makers, such as Mercedes Benz and BMW, are experimenting
with various air cleaning systems.

We believe that all of these vehicles represent potential installations
for our Series S-999. We propose to initially penetrate this market through
agreements with nationwide auto after-market companies. Our proposal is to
wholesale our Series 999 automobile air purification unit for inclusion
with other after-market packages offered in the auto after-market such as
automobile customizing packages (custom pinstripping, gold ornamentation
and custom wheel coverings), fabric sealants and window tints. We believe a
very highly effective and affordable air purification device like our
Series S-999 will be widely accepted in the automobile after-market. To
implement our marketing strategy for the Series S-999, we are currently
developing a marketing strategy with W&B Service Company, our North
American distributor, to market the Series S-999 to auto after-market
companies and the rental car, government vehicle, and automobile dealer
markets.

Government Regulation

We operate under the disclosure document guidelines set forth by the Federal
Trade Commission under an FTC Rule which became effective October 21, 1979.
Under this FTC Rule, we are required to comply with the FTC disclosure format
or issue a Uniform Franchise Offering Circular to all potential purchasers of a
franchise. The uniform circular format is a standard form disclosure document
which is accepted by the FTC and most states as an alternative to the FTC
disclosure format. Our current uniform circular is compliant in 37 states. In
addition to this format, fourteen states require additional information to be
contained within the uniform circular for sales of new franchises within their
states. We are approved in the State of California to offer our franchises, one
of the additional information states. Although we intend to seek approval of
our franchise in other additional information states in the future, we do not
have any pending applications. Any violations under the FTC Rule are considered
unfair or deceptive acts or practices within the meaning of Section 5 of the
Federal Trade Commission Act. In response to the FTC Rule requirements, we
formed wholly-owned subsidiaries, Airsopure, Inc., and Airsopure International
Group, Inc., and registered each entity as a franchisor. Each entity is in
compliance with the FTC Rules regarding its uniform circular.

Permits, Patents, Trademarks, Licenses and Copyrights

We do not own any patents or copyrights for our products or promotional
materials. We do, however, have a registered trademark for the name "Airsopure"
and the related service mark "The Essence of Clean Air." In addition, we have
common law trademark protection for certain of our other trade names and
service marks. We also intend to pursue copyrights for certain of our
promotional and franchise training materials. While we believe our products are
currently a unique implementation of filter and air purification components in
the current market, our products are susceptible to duplication by utilizing
current technology and components. Therefore, we do not believe any of our
products are ultimately patentable and do not intend to apply for patent
protection.

Suppliers

We purchase the supplies and materials used in our business from a number of
suppliers. As of February 28, 2001, our five principal suppliers who provide us
with materials used in our products were Revcor, Glasfloss, Tela Tool, Lesson
Motor and RSE, Inc. We purchase motors, fans, filters and plastic casings from
these suppliers. If we experience production difficulties from any of our
principal suppliers, alternative suppliers and vendors exist in the
marketplace. We may, however, experience production delays to enable an
alternative supplier sufficient time to produce supplies to our specifications.
We do not expect any delays to be material based upon our policy to maintain
inventory levels necessary to avoid production delays.

Estimate of Research and Development Expenditures

We incurred various research and development expenditures of approximately
$15,000 for the fiscal year ended May 31, 2000 and $283,000 for the nine months
ended February 28, 2001. These expenditures included salaries, materials,
finished units, travel and correspondence.

Employees

As of April 30, 2001, we had 14 employees including one part-time employee.

Fiscal Year

Our fiscal year is from June 1 to May 31 of each year.

COMPANY PROPERTIES

We maintain our executive offices and a warehouse facility at 12561
Perimeter, Dallas, Texas. This facility has a total of approximately 10,400
square feet and a total rental cost for fiscal year 2000 of $89,250. We are
committed to our executive office and warehouse lease until August 15, 2001. We
consider our facilities sufficient for our present and currently anticipated
future operations and believe that these properties are adequately covered by
insurance.

LITIGATION

In 1997, we were named as a defendant in a cause of action styled LLB
Realty, L.P.C. v. Interactive Technologies Corp., Cause No. MER-L-1535-97, in
the Superior Court of New Jersey, Mercer County. The complaint alleges damages
relating to a lease agreement entered into with the plaintiff's for office
facilities in New Jersey. We never occupied the space based upon the plaintiff
(lessor) failing to finish-out the space pursuant to our specifications. The
complaint alleges damages of approximately $250,000. The court ruled in favor
of the plaintiffs and set a hearing in June 2001 to determine damages. Although
we are currently in negotiations for a favorable settlement relating to the
complaint, the outcome of these negotiations is uncertain. We have established
a reserve in our consolidated financial statements in the amount of $200,000 in
anticipation of a settlement.

On March 2, 2000, we were named as a defendant in a cause of action styled
H.A.A., Inc. v. Airtech International Group, Inc., Cause No. 00CV-1603 (KMW),
in the United States District Court for the Southern District of New York. The
plaintiff is seeking the specific performance of an alleged contract providing
for our sale to the plaintiff of 1,854,386 shares of our common stock for a
cash purchase price of $419,000. After the original filing, the plaintiffs
amended their original complaint to include alleged damages of approximately
$1,000,000, as an alternative remedy to specific performance. The case is in
the latter stages of discovery and we intend to vigorously defend against the
plaintiff's claims.

We have been named as a defendant in a number of routine lawsuits arising in
the ordinary course of our business. In some of these cases a judgment was
rendered against us. We have answered these routine causes of action where
appropriate, negotiated settlements where appropriate and agreed to a payment
schedule with respect to others. We have fully reserved for these claims and
causes of action in our consolidated financial statements in the aggregate
amount of $45,000.

MANAGEMENT'S DISCUSSION AND ANALYSIS

Background and General

In May 2000, we restated and refiled our financial statements for the year
ended May 31, 1999 and the comparative period ended May 31, 1998. The reason
for the restatement of our 1999 financial statements was to reflect the
acquisition by Interactive Technologies Corporation, Inc., our predecessor in
name, of all of the outstanding shares of common stock of Airtech International
Corporation as a reverse merger as described below.

On May 31, 1998, Interactive Technologies acquired all of the outstanding
shares of common stock of Airtech Corporation for a purchase price of
$22,937,760. Our prior 1999 financial statements reflected the combination
between Interactive Technologies and Airtech Corporation as a merger using the
purchase method of accounting with Interactive Technologies as the acquiring
entity for legal and financial accounting and reporting purposes. This
treatment resulted in reflecting the combination of Interactive Technologies'
assets and the purchase of the goodwill and intellectual properties of Airtech
Corporation at the appraised fair market value.

Our restated 1999 financial statements also reflected the merger between
Interactive Technologies and Airtech Corporation utilizing the purchase method
of accounting for Interactive's assets. Our 1999 restated financial statements,
however, reflected the combination and purchase method as a reverse merger with
Airtech Corporation as the acquiring entity for accounting and reporting
purposes and Interactive Technologies as the surviving entity for legal
purposes. As a result, Interactive Technologies effectively issued shares of
common stock for the outstanding shares of Airtech Corporation, with the
stockholders of Airtech Corporation ultimately acquiring control of Interactive
Technologies. For this reason, Airtech Corporation is considered the acquiring
entity for purposes of our 1999 restated financial statements.

On March 29, 2001, we entered into a securities purchase agreement with an
investment group to raise up to $1,000,000 through the sale to the investors of
our 12% Convertible Debentures Due 2003 with attached warrants to purchase up
to 600,000 shares of our common stock. Upon execution of the securities
purchase agreement, the investors purchased $800,000 in principal amount of 12%
debentures with attached warrants to purchase 500,000 shares of our common
stock. The purchase price paid by the investors for our 12% debentures and
attached warrants was $800,000 which represents the total amount we have
received under the purchase agreement through April 30, 2001. Under the terms
of our purchase agreement, the investors are obligated to purchase the
remaining $200,000 in principal amount of our 12% debentures with attached
warrants to purchase 100,000 shares of common stock for a purchase price of
$200,000. The investors are obligated to purchase the additional 12% debentures
on the date the registration statement relating to the warrants and common
stock offered by this prospectus is declared effective by the SEC. If the
registration statement is not declared effective, the investors have no
obligation to purchase the additional 12% debentures or the attached warrants.

Our current distributorship contractual agreement with Southern Therapy Inc.
should result in additional sales to the medical market. In addition, our
application for approval HCPCS Code for Series S-950 is in process. The actual
granting of an HCPCS Code will not increase sales. We and our distributors,
however, will be in a better position to market the Series S-950 to the larger
medical insurance companies in the United States. The medical market, even
without an HCPCS Code, could result in substantial sales. Our agreement with
Southern Therapy calls for purchases of $1,000,000 in the first year and
substantial increases thereafter, however, Southern Therapy is under no
obligation to purchase that amount.

We have also entered into a distributorship agreement with W & B Service,
Inc. to serve as the commercial distributor for our commercial products in the
United States and Canada. We cannot assure you that there will be additional
sales for these markets, however, our contract requires W & B Service to
purchase a minimum $4,000,000 of our products during the first year, with
increases in years two and three.

We believe that our recently completed financing resources along with
increased sales of our products through industry distributors, increased
foreign sales through in country distributors and increasing market acceptance
of our new Model S-30 will enable us to aggressively pursue the indoor air
purification market with adequate funding.

As the result of our distributorship agreements with Southern Therapy and W
& B Services, we have decreased as of April 1, 2001 our corporate overhead by
approximately $75,000 per month. This represents a 40% decrease in our overhead
expenses compared to August 2000. Our sales and marketing expenses will be
absorbed by these new distributors. The lower profit margins on the sales
through the distributors are expected to be mitigated by the increase in sales.

Results of Operations for Nine Months Ended February 28, 2001 Compared to the
Nine Months Ended February 29, 2000

Revenues

Our consolidated total revenues for the nine months ended February 28, 2001
increased 84% or $658,133 to total $1,437,607 as compared to $779,474 for the
nine months ended February 29, 2000. This increase is due to sales of our
products exceeding the prior period by $808,133. The increase in sales was
partially offset by a decrease of $150,000 in franchise fee revenues and other
income compared to the prior comparable nine-month period. We waived during the
period franchise fees for prospective franchisees that possess direct marketing
skills and indoor air quality experience. The waiver is in lieu of extensive
training and start-up time lags which may exceed the waived franchise fee. We
sold two new franchises for fees during the period as compared to one in the
prior comparable nine month period.

Costs and Expenses

Our total costs and expenses increased $575,195 or 24% to $2,965,742 for the
nine month period ended February 28, 2001 compared to $2,390,547 for the prior
comparable nine month period. Our costs and expenses are as follows:

Cost of sales increased $265,108 to $780,235 compared to $515,127 for the
prior comparable nine-month period. The increase, however, is related to
additional product sales, our cost of sales as a percentage of product sales
decreased from 85% for the nine months ended February 29, 2000 to 55% for the
nine months ended February 28, 2001.

As the result of our operating four franchise retail stores during the nine
months ended February 28, 2001, the salaries and wages expense decreased
compared to the comparable nine months ended February 29, 2000 during which we
operated only one franchise store. The decrease was also related to our
officers electing to take shares of our common stock in lieu of wages during
the nine month period ended February 28, 2001. In addition, we allocated more
salaries and wages to research and development as discussed below. Salaries and
wages decreased $114,239 or 13% to $787,490 for the nine months ended February
28, 2001 compared to the nine months ended February 29, 2000.

Research and development costs increased 183% or $183,927 to $283,927 for
the nine months ended February 28, 2001 compared to the nine months ended
February 29, 2000. This increase was primarily due to increased development and
testing of our new in-line Model S-30 unit, testing our portable Series 950
Unit and upgrading our commercial S-12 unit.

Other general and administrative expenses also decreased $5,529 or 1% to
$639,544 for the nine months ended February 28, 2001 compared to the nine
months ended February 29, 2000. This decrease is attributable to the added
overhead costs of our company franchise stores and offset by decreased general
corporate, legal and accounting expenses during the current period.

Also, advertising and promotional expenses which includes design and
development of brochures increased 51% or $265,108 to $241,358 for the nine
months ended February 28, 2001 as compared to the nine months ended February
29, 2000. This increase is due to additional advertising for our franchise
consumer products and marketing expenses for our new Model S-30 unit and our
portable Series 950 unit.

Depreciation and amortization expenses increased $105,767 to $233,188 for
the nine months ended February 28, 2001 compared to $127,421 for the nine
months ended February 29, 2000. This increase is due to the amortization of the
prepaid royalties during the period ended February 28, 2001 which was not
required during the period ended February 29, 2000.

Interest Expense

Interest expense increased $133,652 to $175,114 for the nine months ended
February 28, 2001 as compared to $41,462 in interest expense for the nine
months ended February 29, 2000. This increase is due to the interest expense
relating to our 12% and 6% convertible debentures which were outstanding during
the nine-month period February 28, 2001 which were not outstanding during the
entire period ended February 29, 2000.

In total, the net loss for the nine months ended February 28, 2001 of
$1,703,249, or $0.07 per share, is 3% greater than, or $0.01 per share less
than the $1,652,535, or $0.08 per share, net loss for the nine months ended
February 29, 2000.

Liquidity and Capital Resources

We reflected a continued liquidity problem during the first nine months of
our fiscal year. Purchases from our material vendors were predominantly on a
cash basis, however, our vendors did not force payment on past due bills. Our
primary available means of liquidity during the nine month period was the
increased use of our common stock as payments for services.

During the calendar year 2000 and the first quarter 2001, the overall
financial markets eroded as exemplified by the NASDAQ Composite Index falling
over 68% during that period. In this environment, we were in discussion with
several investment companies for additional capital. These discussions included
our request that the investment group which purchased $2,500,000 of our 6%
convertible debentures extend the funding date to purchase an additional
$2,500,000 in principal amount of 6% debentures under a conditional warrant
which expired on December 22, 2000. The investment group did not agree to
extend the funding date and the conditional warrant expired under its terms on
December 22, 2000.

To replace the conditional warrant, we completed a $5,000,000 equity
agreement with a private investment company to purchase our 12% convertible
debentures. On March 29, 2001, the investment group purchased $800,000 in
principle amount of 12% debentures and agreed to purchase an additional
$200,000 upon SEC approval of the registration statement relating to the
securities offered by this prospectus. The remaining $4,000,000 will be
negotiated at a future time. We cannot assure that the SEC will approve the
registration statement or that the terms of the remaining $4,000,000 will be
acceptable to us or the investor.

As of February 28, 2001 and prior to the recent sale of our 12% debentures,
we had total current assets of $2,640,749 less current liabilities of
$2,354,645 which resulted in net current assets of $286,104. This is a decrease
in current asset liquidity resulting from the use of the proceeds from the sale
of our 6% debentures during the nine month period. We expect to have sufficient
funds necessary to finance the manufacture, distribution and sale of our
products including management and advertising support for fiscal year 2002. We
also expect that our cash balance and operations are adequate to sustain our
continued operations during fiscal year 2002.

We estimate our sales will be approximately $2,500,000 for fiscal year 2001
which is a decrease from our original forecast of $30,000,000. Our lower than
forecasted sales are the result of the following:

. We estimate our existing commercial product line sales to be $1,300,000
as opposed to forecasted sales of $2,000,000. The lower sales are due to
lower sales for our tobacco abatement products;

. We estimate our Model S-30 sales to be $150,000 as opposed to forecasted
sales of $4,000,000. The lower sales are due to a delay in the
introduction of the Model S-30;

. We estimate our sales to our residential franchisees to be $425,000 as
opposed to forecasted sales of $6,000,000. The lower than forecasted
sales are due to lower than expected sales of franchises to existing
direct sale entrepreneurs. We have temporarily suspended our sale of
residential franchises pending new market awareness and interest;

. We estimate our international sales to be $250,000 as opposed to
forecasted sales of $2,000,000. The lower than forecasted sales are due
to lower than forecasted sales through our Pacific Rim distributors;

. We will not consummate any mergers or acquisitions during fiscal year
2001 because our low stock price made the cost prohibitive to us.
Therefore we did not achieve our forecasted combined product sales of
$6,000,000. We do not anticipate any mergers for fiscal year 2002. We
have, however, entered into strategic alliances with various companies
to market our products or to manufacture our products and component
parts; and

. We did not receive Medicare approval for our Medicare Series 950.
Therefore sales to the medical industry are estimated to be $500,000 as
opposed to forecasted sales of $10,000,000. In February 2001, we applied
to the Health Care Financing Administration for a health care product
code system number. The code number is commonly referred to in the
medical insurance industry as an HCPCS Code. The HCPCS Code would enable
us to market our Medicare Series 950 directly to the private medical
insurance industry. If a private insurance carrier accepts our Medicare
Series 950 with the HCPCS Code, patients who purchase a Medicare Series
950 would be entitled to receive insurance reimbursement for the cost of
the Medicare Series 950 to the governmental, private and supplemental
insurance and medical industries. We cannot assure that we will receive
a HCPCS Code. We will continue to pursue Medicare approval of Medicare
Series 950.

We expect sales of our products to increase in fiscal year 2001. For the
year 2000, our product sales were approximately $543,615 compared to sales of
our products for the year ended May 31, 1999 of $388,412. Our product sales for
the nine month period ended February 28, 2001 were $1,412,607. This trend
indicates the sales of our existing product line is increasing. Although we
believe our sales represent a positive trend, we cannot assure you that this
positive trend will continue. We have forecasted that fiscal year 2002 sales
will be $17,000,000. This estimate is based on the following:

. Estimated sales of $4,000,000 from our existing commercial product line.
We expect these sales due to the continued acceptance of our commercial
products in office buildings and sales from our automobile units;

. Estimated sales of $8,000,000 of our new in-line Model S-30. The Model S-
30 is now in the full production and marketing stage;

. Estimated product sales to our residential franchisees of $1,000,000;

. Estimated international sales of $2,000,000, especially to our Pacific
Rim distributors and our Central and South American distributors;

. Estimated sales of our Medicare Series 950 of $2,000,000 pending approval
of this unit by either Medicare or through the granting of an HCPCS Code.

Our sales projections are based upon our good faith estimates of the
acceptance and marketability of our products and we cannot assure you that we
will achieve these results during fiscal year 2002.

Due to our $18,500,000 of net operating loss carry forwards resulting from
our losses in prior years, we are not projecting any federal tax liability for
fiscal year 2001.

If our current cash and revenues from franchise and product sales are
insufficient to fund our continued growth, we will rely on our external funding
sources to provide continued liquidity.

During fiscal year 2001, we intend to focus on the production, marketing and
sale of our existing line of air purification products, our new in line Model
S-30 and increased promotion of our distributorship program. For this reason,
we do not project significant expenditures during fiscal year 2001 on our
products which are in the research and development stage. We believe our
existing product line is sufficient to sustain our future sales growth. If we
do not receive Medicare approval of, our an HCPCS Code for our Medicare 950, we
intend to actively pursue the marketing of this unit through private health
insurance companies and health care providers outside of the Medicare system.
If we are not successful in these marketing efforts, our failure to obtain
Medicare approval of, or an HCPCS Code for, our Medicare 950 could
significantly affect our future liquidity.

We do not have a large capital expenditures program planned for fiscal year
2002. Therefore, we believe our projected increase in product sales combined
with funds generated from external financing sources will be sufficient to
offset any cash losses from operations. If our current and new product sales,
distributor/franchise sales, new areas of distribution sales and funds from our
external sources are insufficient to maintain operations, the resulting lack of
capital could force us to substantially curtail or cease our operations. Any
curtailment of operations would have a material adverse effect on our ability
to manufacture and distribute our products and our profitability.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

Directors and Executive Officers

The following table includes the names, ages and positions of our directors
and executive officers as of April 30, 2001. A summary of the background and
experience of each of these individuals immediately follows the table.

Our directors are:

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

C J Comu........................ 40 Chairman
James R. Halter................. 51 Director
R. John Harris.................. 51 Director
Samuel S. McKenney, III......... 63 Director
Robert Galvan................... 53 Director

Our executive officer and other officers are:

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

C J Comu........................ 40 Chief Executive Officer
R. John Harris.................. 51 President
James R. Halter................. 51 Chief Financial Officer and General Counsel

C J Comu. Mr. Comu has served as our CEO, chairman and a director since May
1998. Mr. Comu was a co-founder, CEO and chairman of Airtech International
Corporation, our wholly-owned subsidiary, since its formation in 1995. In
January 1994, Mr. Comu co-founded Transworld Leasing Corporation which provided
financing and marketing expertise to the medical, computer and corporate sector
prior to the formation of Airtech International Corporation.

James R. Halter. Mr. Halter has served as our chief financial officer and
general counsel since October, 1999 and a director since November 2000. Mr.
Halter earned a Masters in Business Administration from the State University of
New York at Buffalo in 1977, and a Juris Doctorate from Case Western Reserve
University in 1999. Mr. Halter has been a Certified Public Accountant since
1975. From January 1990 to October 1999, Mr. Halter owned his own tax and
business consulting practice. Concurrently, from September 1996 to January
1999, Mr. Halter attended and received his juris doctor degree from Case
Western Reserve University School of Law in Cleveland, Ohio.

R. John Harris. Mr. Harris has served as our president since October 30,
2000 and as a director since November 1999. Prior to his appointment as
president, Mr. Harris served as our Chief Operating Officer from February 2000
to October 30, 2000. Mr. Harris served as Chief Administrative Officer of
Integrated Concepts, Inc. from June 1998 to October 1999 and as Chief Executive
Officer of PreventCo Inc. from June 1996 to May 1998. Mr. Harris also served as
Vice President and Medical Director of Airtech International Corporation from
May 1994 to May 1996. Prior to 1994, Mr. Harris spent twenty years in various
senior management capacities, and as an international consultant, in the field
of acute medical/surgical hospital administration for leading hospital
management companies such as Hospital Corporation of America and Hospital
Management Professionals. Mr. Harris holds a Bachelors of Science degree from
Oregon State University and a Masters of Hospital Administration from the
University of Alabama.

Samuel S. McKenney, III. Mr. McKenney has served as a director since April
2001. From 1989 to the present he has served as the president and chief
executive officer of W&B Services Company, Inc., a diversified company
primarily serving the heating, ventilation and air conditioning industry.

Robert Galvan. Mr. Galvan has served as a director since November 1999.
Since November 1999, Mr. Galvan has also served as the Associate Dean of the
University of North Texas Health Science College, Fort Worth, Texas. From
November 1998 to November 1999, Mr. Galvan served as the Director of Health for
the

City of Fort Worth, Texas. Mr. Galvan also served as the Director of Health and
Community Development for the City of Plano, Texas from 1992 to October 1998.

Our directors receive no cash compensation for their services as directors.
Our policy is to reimburse non-employee directors for expenses actually
incurred in connection with attending meetings of our board of directors.
Directors and executive officers are also eligible for stock and option grants
under our stock option plans as determined by our board of directors.

EXECUTIVE COMPENSATION

The following table sets forth the cash and other compensation we paid
during the last three fiscal years to our chief executive officer, president
and other individuals who served as executive officers and whose total
compensation was $100,000 or more.

SUMMARY COMPENSATION TABLE

Long Term
Annual Compensation Compensation Awards
-------------------------- ------------------------
Other Annual Restricted Securities
Name and Principal Fiscal Compensation Stock Underlying
Position Year Salary Bonus (1) Awards($) Options(#)
------------------ ------ ------- ----- ------------ ---------- ----------

C J Comu, CEO,
Chairman............... 2000 $41,195 $ 0 $ 0 $ 83,825(2) 250,000
1999 0 0 46,875 424,334(3) 150,000
1998(4) 0 0 0 0 0
John Potter, President.. 2000 40,986 0 0 13,425(5) 250,000
1999 0 0 46,875 424,334(6) 150,000
1998(4) 0 0 0 0 0
Darrell R. Jolley, CFO.. 1999 0 0 58,333 12,500(7) 45,000
Doug S. Keane, President
of Airsopure, Inc...... 2000 24,173 0 0 116,452(8) 0
1999 0 0 77,500 12,500(9) 100,000
1998 0 0 62,917 0 0
R. John Harris, COO..... 2000 27,917 0 0 21,875(10) 0
James R. Halter, CFO and
General Counsel........ 2000 18,227 0 0 46,527(11) 0

--------
(1) See terms of employment agreement for Mr. Comu under the section titled
"Employment Agreements."
(2) Mr. Comu received 249,986 shares of restricted common stock as additional
compensation. The fair market value of the shares was $83,825 in the
aggregate on the five dates of grant. All of these shares were fully
vested on the dates of grant and are not entitled to dividends. As of May
31, 2000, Mr. Comu owned 1,368,864 shares of our restricted common stock
with a market value of $1,753,789.
(3) Mr. Comu received 791,667 shares of restricted common stock for deferred
wages of $250,000 per year for the period from June 1, 1997 through
December 31, 1998. The fair market value of the shares was $395,834 on the
date of grant, January 31, 1999. He also received 150,000 shares of common
stock as additional compensation. The fair market value of the shares was
$28,500 on the date of grant, December 31, 1998. All of these shares were
fully vested on the date of grant and are not entitled to dividends.
(4) Disclosure is made of named executive officers of our subsidiary, Airtech
International Corporation, for fiscal year 1998 for positions
substantially similar to positions held in employment by us for fiscal
years 1999 and 2000.
(5) Mr. Potter received 250,464 shares of restricted common stock as
additional compensation. The fair market value of the shares was $79,028
in the aggregate on the five dates of grant. All of these shares were
fully vested on the dates of grant and are not entitled to dividends. As
of May 31, 2000, Mr. Potter owned 1,213,881 shares of our restricted
common stock with a market value of $1,555,224. Effective November 22,
2000, Mr. Potter resigned as a director and officer and currently serves
as our independent consultant.
(6) Mr. Potter received 791,667 shares of restricted common stock for deferred
wages of $250,000 for the period from June 1, 1997 through December 31,
1998. The fair market value of the shares was $395,834 on the date of
grant, January 31, 1999. He also received 150,000 shares of common stock
as additional compensation. The fair market value of the shares was
$28,500 on the date of grant, December 31, 1998. All of these shares were
fully vested on the date of grant and are not entitled to dividends.
Effective November 22, 2000, Mr. Potter resigned as a director and officer
and currently serves as an independent consultant.

(7) Mr. Jolley received 25,000 shares of common stock as additional
compensation. The fair market value of the shares was $12,500 on the date
of grant, June 16, 1999. Effective September 1999, Mr. Jolley was no
longer employed by us.
(8) Mr. Keane received 100,000 shares of restricted common stock as additional
compensation. The fair market value of the shares was $75,000 on the date
of grant, May 1, 2000. Mr. Keane also received 154,259 shares of
restricted common stock as additional compensation. The fair market value
of the shares was $41,452 in the aggregate on the five dates of grant.
(9) Mr. Keane received 25,000 shares of common stock as additional
compensation. The fair market value of the shares was $12,500 at the date
of grant, June 16, 1999. Effective November 1999, Mr. Keane was no longer
employed by us.
(10) Mr. Harris received 100,000 shares of restricted common stock as
additional compensation. The fair market value of the shares was $21,875
on the date of grant, December 15, 1999. All of these shares were fully
vested on the date of grant and are not entitled to dividends. As of May
31, 2000, Mr. Harris owned 100,000 shares of our restricted common stock
with a fair market value of $128,120.
(11) Mr. Halter received 100,000 shares of restricted common stock as
additional compensation. The fair market value of the shares was $23,440
on the date of grant, December 8, 1999. Mr. Halter also received 35,183
shares of restricted common stock as additional compensation. The fair
market value of the shares was $23,087 on the date of grant, January 6,
2000. All of the shares issued to Mr. Halter were fully vested and are not
entitled to dividends. As of May 31, 2000, Mr. Halter owned 135,193 shares
of our restricted common stock with a fair market value of $173,209.

OPTION GRANTS IN 2000

The following table lists those persons in the previous table who were
granted options to purchase shares of our common stock during fiscal year 2000.

% of Total Options/
Number of Securities SAR's Granted to
Underlying Options/ Employees in Fiscal Exercise Price Marked Price on
Name SAR's Granted Year ($/Share) Date of Grant Expiration Date
---- -------------------- ------------------- -------------- --------------- -----------------

C J Comu................ 250,000 50% $0.25 $0.44 December 17, 2004
John Potter............. 250,000 50% $0.25 $0.44 December 17, 2004

2000 YEAR-END OPTION VALUES

Set forth in the following table is information, with respect to each named
executive officer, as to

. the number of shares acquired during fiscal year 2000 upon each exercise
of options granted to each individual,

. the aggregate value realized upon each exercise which is the difference
between the market value of the shares at exercise and their exercise
price,

. the total number of unexercised options held on May 31, 2000, separately
identified between those exercisable and those not exercisable and

. the aggregate value of in-the-money, unexercised options held on May 31,
2000, separately identified between those exercisable and those not
exercisable.

Number of
Securities Underlying Value of unexercised
Shares Unexercised Options In-the-Money Options
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Name Exercise Received Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ----------- -------- ------------------------- ----------------------------

C J Comu................ 0 0 400,000/0 $374,980/$0
John Potter............. 0 0 400,000/0 $374,980/$0

--------
(1) The value is calculated based on the aggregate amount of the excess of
$1.2182 which is the closing sale price per share for the common stock on
May 31, 2000 over the relevant exercise price(s).

Employment Agreements

We have a ten (10) year employment contract with C J Comu, our Chief
Executive Officer, for annual compensation of $250,000, terminating May 31,
2008. Under the terms of this contract and by agreements between our board of
directors and Mr. Comu, the contract is funded on a cash basis at such time as
we are in a financial position to pay the salary under the contract. Unpaid
compensation under the contract, dating from June 1, 1997 through December 31,
1998, was paid to Mr. Comu effective January 31, 1999 through the issuance to
Mr. Comu of 791,667 shares of our restricted common stock. Effective January
15, 1999, Mr. Comu began receiving cash compensation under the agreement at an
annual rate of $125,000 when cash was available. The remainder of the amounts
due Mr. Comu under the contract will be converted to our restricted common
stock during fiscal year 2001. Effective June 1, 1999, Mr. Comu further agreed
with our board of directors to reduce compensation to $125,000.

Company Stock Plans

Employee Stock Plans. Our board of directors periodically establishes
employee stock grant plans under which unrestricted shares of our common stock
are issued and granted to certain employees, management and consultants for
performance rewards or services rendered. The terms and conditions of stock
grants under the stock plans are within the sole discretion of our board of
directors. We do not have formal written plans and all issuances of shares of
common stock under our stock plans are made pursuant to registration statements
on Form S-8 filed by us from time to time with the SEC.

On June 9, 1998, we filed a Form S-8 registration statement registering
160,000 shares of our common stock. Through July 30, 1998, we issued 56,002
shares of common stock to consultants and 103,998 shares to employees. The
shares of common stock issued were accounted for as consulting services and
employee wages. As of March 23, 2000, all of the shares registered under the
Form S-8 registration statement were issued under our stock plans.

On November 12, 1998, we filed a Form S-8 registration statement registering
800,000 shares of our common stock. Through July 30, 1999, we issued 261,009
shares of common stock to consultants and 538,991 shares to employees. The
shares of common stock issued were accounted for as consulting services and
employee wages. As of March 23, 2000, all of the shares registered under the
Form S-8 registration statement were issued under our stock plans.

On July 30, 1999, we filed a Form S-8 registration statement registering
900,000 shares of our common stock, all of which were issued as of March 23,
2000 under our stock plans. The shares of common stock were accounted for as
consulting services and employee wages.

On November 19, 2000, we filed a Form S-8 registration statement registering
900,000 shares of our common stock. As of April 30, 2001, all of the shares
registered under the Form S-8 registration statement were issued under our
stock plans.

2000 Key Employee Option Plan. Effective May 31, 1999, our board of
directors adopted the Airtech International Group 2000 Key Employee Option Plan
in order to motivate our qualified employees to assist us in retaining
employees and to align the interest of key employees with those of our
shareholders. The 2000 option plan is authorized for key employees including
the chief executive officer, president, chief financial officer, vice president
franchising, vice president production, and vice president finance. The 2000
option plan provides for the grant of "incentive stock options" and "non-
qualified stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986. The approval authorized the issuance of

. a maximum of 1,000,000 shares of our common stock subject to the
options,

. with a range of exercise prices from $0.25 to $2.50 per share,

. vesting over a two to three year period, and

. expiring ten (10) years from the date of grant.

Our board of directors expects to grant option agreements during fiscal year
2000 to the key employees specifying the respective number of options, vesting
periods, exercise prices and incentives, if any. On November 11, 1999, we filed
a Form S-8 registration statement for 900,000 shares of our common stock
issuable with respect to options granted under the 2000 option plan. As of
April 30, 2001, we have granted options to purchase all shares under the 2000
option plan.

Indemnification

The Wyoming Business Corporation Act provides that we may indemnify our
directors, officers, employees and other agents, and persons who serve at our
request as directors, officers, employees or other agents of another
corporation. Subject to Wyoming law, our officers and directors are not
personally liable for monetary damages resulting from breaches of their
fiduciary duty unless:

. the officer or director has breached his fiduciary duty of loyalty to us
or our shareholders;

. the breach or failure to perform constitutes an act or omission not in
good faith or which involves intentional misconduct or a knowing
violation of law; or

. for any transaction from which the director or officer derived an
improper personal benefit.

Our By-Laws also provide indemnification to our directors, officers,
employees and agents, including claims brought under state or Federal
Securities laws, to the full extent allowable under Wyoming law. We have also
entered into indemnification agreements with our directors and executive
officer providing, among other things, that we will provide defense cost
against any such claims, subject to reimbursement in certain events.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 28, 2001, certain information
concerning the beneficial ownership of each class of our voting stock held by:

. each beneficial owner of 5% or more of our voting stock, based on reports
filed with the SEC and certain other information;

. each of our directors;

. each of our executive officers; and

. all executive officers and directors as a group.

Amount and Nature of
Beneficial Percent of Common Stock
Name and Address(1) Ownership of Common Stock(2) Ownership(3)
------------------- ---------------------------- -----------------------

C J Comu................. 2,220,146(4) 7.02%
John Potter.............. 2,065,630(5) 6.53%
Robert Galvan............ 100,000 *
James R. Halter.......... 586,475(6) 1.88%
R. John Harris........... 551,282(7) 1.76%
Officers and Directors as
a Group (4 persons)..... 3,457,903(8) 10.55%

--------
* Less than 1%
(1) The address of each director, officer and principal stockholder is c/o
Airtech International Group, Inc., 12561 Perimeter, Dallas, TX 75228.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities which may be acquired by such person within 60 days
from the date on

which beneficial ownership is to be determined upon the exercise of options,
warrants or convertible securities.
(3) Each beneficial owner's percentage ownership is determined by assuming that
stock options and warrants that are held by that person (but not those held
by any other person) and which are exercisable within 60 days from the date
on which beneficial ownership is to be determined have been exercised.
(4) Represents 1,570,146 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common
stock at $0.50 per share, 250,000 shares owned pursuant to options to
purchase shares of common stock at $0.25 per share and 250,000 shares owned
pursuant to options to purchase shares of common stock at $0.10 per share,
all of which are exercisable within 60 days. Does not include 211,340
shares of common stock owned by Mr. Comu's relatives, Sevim Comu and Cem
Comu, of which Mr. Comu disclaims beneficial ownership.
(5) Represents 1,415,630 shares of common stock owned directly. Also represents
150,000 shares owned pursuant to warrants to purchase shares of common
stock at $0.50 per share, 250,000 shares owned pursuant to options to
purchase shares of common stock at $0.25 per share and 250,000 shares owned
pursuant to options to purchase shares of common stock at $0.10 per share
all of which are exercisable within 60 days. Does not include 432,492
shares of common stock owned by Mr. Potter's relatives, Susan Potter and
John Garth Potter, of which Mr. Potter disclaims beneficial ownership.
(6) Represents 336,475 shares of common stock owned directly. Also represents
250,000 shares owned pursuant to options to purchase shares of common stock
at $0.10 per share, all of which are exercisable within 60 days.
(7) Represents 301,282 shares of common stock owned directly. Also represents
250,000 shares owned pursuant to options to purchase shares of common stock
at $0.10 per share, all of which are exercisable within 60 days.
(8) See notes 4, 5, 6 and 7.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 1999, our president advanced cash to us totaling $100,000. As
of May 31, 2000, we owed $210,338 to our chief executive officer and $216,488
to our president, on advances from each officer, including accrued interest. We
have agreed to repay these advances as cash is available or by issuing our
common stock. We have also agreed to pay interest at 15% per annum on the
outstanding balances. During fiscal year 2000, we paid our chief executive
officer and our president $15,000 each representing accrued interest on the
notes.

Our director, Samuel S. McKenney, III, is the president and chief executive
officer of W&B Services Company, Inc., a distributor of our commercial products
in Canada and the United States. As of April 30, 2001, we have not shipped any
of our products to W&B Services. Commencing May 8, 2001, we began shipping our
products to W&B Services based upon outstanding purchase orders in the amount
of $95,000. W&B Services will purchase our products at the wholesale price for
our products available to our other distributors.

We believe that the terms of the above described transactions are fair and
similar to or better than the terms we could have obtained from arms length
negotiations with third parties.

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our shares of common stock are traded in the "over-the-counter" or "Bulletin
Board" market under the symbol "AIRG." High and low sales prices for the
quarters of fiscal years 2001, 2000 and 1999 were:

High Low
----- -----

Fiscal Year 2001
3rd Quarter.................................................... $0.53 $0.17
2nd Quarter.................................................... 1.09 0.38
1st Quarter.................................................... 1.53 0.75
Fiscal Year 2000
4th Quarter.................................................... $2.59 $1.00
3rd Quarter.................................................... 3.53 0.60
2nd Quarter.................................................... 0.90 0.25
1st Quarter.................................................... 0.75 0.125
Fiscal Year 1999
4th Quarter.................................................... $0.56 $0.12
3rd Quarter.................................................... 1.03 0.14
2nd Quarter.................................................... 1.50 0.47
1st Quarter.................................................... 3.28 0.63

Number of Shareholders and Total Outstanding Shares

As of April 16, 2001, there were approximately 4,127 holders of record of
our common stock and approximately 30,981,573 shares issued and outstanding.

Dividends

We have paid no dividends on our shares of common stock and we have no
current intentions to pay dividends on our shares of common stock in the
future. Holders of our Series "M" Convertible Preferred Stock have a preferred
dividend right to receive quarterly dividend distributions equal to 3.96% of
the gross revenues generated from sales of our Series 950 unit until January 1,
2003. Except for required dividend payments on the Series "M" convertible
preferred stock, we intend to retain any future earnings for reinvestment in
our business. As of February 28, 2001, we have paid no dividends on the Series
"M" convertible preferred stock.

Any future determination to pay cash dividends on our shares of common stock
will be at the discretion of our board of directors and will be dependent upon
our financial condition, results of operations, capital requirements and other
relevant factors.

DESCRIPTION OF SECURITIES

We have summarized below the material provisions of our Articles of
Incorporation, Bylaws and other instruments defining the rights of our
securities holders. Our summary may not contain all of the information that is
important to you. See "Where To Find Additional Information" for information
about how to obtain a copy of the documents we refer to in this section.

Authorized Capital Stock

Under our Articles of Incorporation, we are authorized to issue up to 70
million shares of stock consisting of the following:

. 50 million shares of common stock

. 20 million shares of preferred stock

We have set a special meeting of our stockholders for May 18, 2001 to
approve a proposed amendment to our Articles of Incorporation to increase our
number of authorized shares from 50,000,000 shares to 100,000,000 shares.

Common Stock

Shares of our common stock are not redeemable, do not have any conversion
rights and are not subject to call. Holders of shares of our common stock have
no preemptive, redemption, conversion or other subscription rights and are
entitled to one vote per share on any matter submitted to a vote of our
shareholders. Cumulative voting is prohibited in the election of directors.
This means that the holders of a majority of the outstanding shares of common
stock, voting for the election of directors, can elect all of our directors. In
such event, the holders of the remaining shares will not be able to elect any
of our directors. The holders of shares of common stock are entitled to receive
dividends, if any, as and when declared from time to time by our board of
directors, out of legally available funds, but subject to the prior payment of
dividends to the holders of any outstanding shares of preferred stock. Subject
to the rights of the holders of preferred stock, if any, upon liquidation
dissolution or winding up of our affairs, the holders of shares of our common
stock will be entitled to participate equally and ratably, in proportion to the
number of shares held, in our net assets available for distribution to holders
of all shares of our common stock. The shares of our common stock currently
outstanding are validly issued, fully paid and nonassessable.

Preferred Stock

Our Articles of Incorporation authorize our board of directors to issue up
to 20,000,000 shares of preferred stock, $0.01 par value per share. We may
issue the preferred stock in one or more classes or series. Each class or
series will have the voting rights, designations, preferences and relative
rights as fixed by resolution of our board of directors, without the consent of
our shareholders. Our preferred stock may rank senior to our common stock as to
dividend rights, liquidation preferences, or both. Our preferred stock may also
have extraordinary or limited voting rights.

Series "M" Convertible Preferred Stock and Attached Warrants

We have 990,625 shares of Series "M" convertible preferred stock
outstanding. Holders of our Series "M" preferred have the right to convert
their shares into shares of our common stock on a one-for-one basis at any
time. The Series "M" preferred automatically converts to shares of our common
stock on December 31, 2002. The holders of Series "M" preferred are entitled to
receive quarterly dividend distributions equal to 3.96% of the gross revenues
generated from the sales of our Series 950 unit until January 1, 2003. The
dividends are paid on or before the sixtieth day of each calendar quarter based
upon the gross revenues from our Series 950 air purification units from the
previous quarter. The holders of Series "M" preferred were also issued related
warrants to purchase 993,750 shares of our Common Stock at an exercise price of
$2.00 per share. The warrants expired on May 31, 2000. As of January 1, 2000,
we terminated our offering of Series "M" preferred and do not intend to offer
any additional shares in the future. As of March 31, 2001, no dividends have
been paid to the holders of Series "M" preferred.

Airsopure 999 Limited Partnership Interests

We have $405,000 of limited partnership interests outstanding in Airsopure
999, L.P. ("Airsopure LP"). Airsopure, Inc., our wholly-owned subsidiary
("Airsopure"), is the sole general partner of Airsopure LP. Under the limited
partnership agreement, the limited partners are entitled to receive 1.62% of
the gross revenues generated from sales of our Model S-999 automobile air
purification system with the remaining gross revenues paid to Airsopure. The
limited partners are entitled to receive distributions until December 31, 2003,
at which time 100% of gross revenues are paid to Airsopure. In addition,
Airsopure has guaranteed the limited partners a 150% return on their investment
by December 31, 2003. The guarantee, if payable, may be in the form of shares
of our common stock.

12% Convertible Debentures Due 2005 and Attached Warrants

In January 2000, our board of directors authorized the issuance of up to
$5,000,000 of our 12% Convertible Debentures Due 2004 pursuant to a private
placement memorandum. Effective as of June 2000 , we terminated the offering of
these 12% debentures. At any time after one year from the date of issuance,
holders of our 12% debentures are entitled to convert our 12% debentures on a
dollar for dollar basis into shares of our Common Stock. Semi-annual interest
payments are due and payable on our 12% debentures commencing September 1,
2000. Each 12% debenture in the principal amount of $25,000 includes a warrant
to purchase shares of our common stock at an exercise price of $2.00 per share.
The warrants expire two years from the date of issuance.

At our option, our 12% debentures may be converted on a dollar for dollar
basis or paid in cash at face value on the maturity date. Prior to maturity, we
may with the consent of the holder of our 12% debenture, redeem our 12%
debentures in cash at the following redemption prices together with accrued
interest to the date of redemption:

If Redeemed on or after September 1
of the following years: % of Principal Amount
----------------------------------- ---------------------

2000............................................... 110%
2001............................................... 108%
2002............................................... 106%
2003............................................... 104%
2004............................................... 102%

As of February 28, 2001, we had $300,000 in principal amount of our 12%
debentures outstanding.

6% Convertible Debentures Due 2002 and Attached Warrants

On February 22, 2000, we sold $2,500,000 in principal amount of our 6%
Convertible Debentures Due 2002 to PK Investors LLC. Our 6% debentures have a
maturity date of February 22, 2002 at which time the principal amount and all
accrued interest is due and payable. No interest payments are due prior to
maturity of the 6% debentures. We may, at our option, pay the accrued interest
at maturity by issuing shares of our common stock to the debenture holder at a
price equal to the conversion price of our common stock as described below. Our
6% debentures are convertible at any time at the option of the holder into
shares of our common stock. As of April 30, 2001, we had $2,000,000 in
principal amount of 6% debentures issued and outstanding. The conversion price
of our common stock used in calculating the number of shares issuable upon
conversion, or in payment of interest, is the lesser of:

. 110% of the average closing bid price of our common stock for the five
trading days prior to the date of initial payment; and

. the product obtained by multiplying 0.80 by the average of the three
lowest closing bid prices of our common stock during the thirty trading
days prior to the date we receive a conversion notice from a debenture
holder.

In the event we have a "change of control", the holders of the 6% debentures
may require us to redeem the 6% debentures at a redemption price equal to 125%
of the aggregate outstanding principal and accrued interest on the 6%
debentures. A "change of control" includes:

. acquisition by an entity or group of more than 50% of our voting stock;

. merger or consolidation;

. a change in a majority of our existing board of directors; or

. a sale of substantially all of our assets.

The holders of our 6% debentures also have attached warrants to purchase
250,000 shares of our common stock at an exercise price of $2.6124 per share.
The warrants expire on February 22, 2005. The warrants are subject to exercise
price adjustments upon the occurrence of certain events including stock
dividends, stock splits, mergers, reclassifications of stock or our
recapitalization. The exercise price of the warrants is also subject to
reduction if we issue any rights, options or warrants to purchase shares of our
common stock at a price less than the market price of our shares as quoted on
the OTC Bulletin Board. Also, if at any time, we declare a distribution or
dividend to the holders of our common stock in the form of cash, indebtedness,
warrants, rights or other securities, the holders of the warrants are entitled
to receive the distribution or dividend as if the holder had exercised the
warrant.

. engage in any hedging transactions which are designed or reasonably
expected to lead to or result in a disposition of the shares of our
common stock held by the 6% debenture holders.

The 6% debenture holders may however

. convert the 6% debentures into a maximum of 200,000 shares of our common
stock per month on a non-cumulative basis; and

12% Convertible Debentures Due 2003 and Attached Warrants

On March 29, 2001, we sold $800,000 in principal amount of our 12%
Convertible Debentures Due 2003. Our 12% debentures have a maturity date of
March 30, 2003 at which time the principal amount and all accrued interest is
due and payable. Interest payments are due and payable quarterly commencing
June 1, 2001 or at the option of the debenture holder upon conversion of the
12% debentures into shares of our common stock. If the debenture holder elects,
we will pay any accrued interest on conversion by issuing shares of our common
stock to the debenture holder at a price equal to the conversion price of our
common stock as described below. The 12% debentures are secured by a security
agreement under which we pledged substantially all of our assets, including our
goods, fixtures, equipment, inventory, contract rights, and receivables. As of
April 30, 2001, we had $800,000 in principal amount of 12% debentures issued
and outstanding.

The 12% debentures are convertible at any time at the option of the holder
into shares of our common stock. The conversion price of our common stock used
in calculating the number of shares issuable upon conversion, or in payment of
interest on the 12% debentures, is the lesser of

. 50% of the average of the lowest three trading prices of our common stock
for the twenty trading days ending one trading day prior to the date we
receive a conversion notice from a debenture holder; and

. a fixed conversion price of $0.25.

Also, under the terms of the 12% debentures, if we at any time

The holders of our 12% debentures also have attached warrants to purchase
500,000 shares of our common stock at an exercise price equal to the lesser of

. 90% of the average of the lowest three trading prices of our common
stock for the twenty trading days ending one trading day prior to the
date of exercise of the warrant; and;

. $0.102 per share.

LEGAL MATTERS

The validity of the issuance of the warrants and common stock offered
pursuant to this prospectus is being passed upon for us by John G. Rebensdorf,
P.C.

EXPERTS

Our consolidated financial statements for the year ended May 31, 2000
included in this prospectus and in the registration statement were audited by
Turner, Stone & Company LLP, independent certified public accountants, as set
forth in their report appearing elsewhere in this prospectus and in the
registration statement. Our consolidated financial statements for the nine
months ended February 28, 2001 were also reviewed by Turner, Stone & Company as
set forth in their report appearing elsewhere in this prospectus and in the
registration statement. Our consolidated financial statements are included in
this prospectus in reliance upon such reports given upon the authority of
Turner, Stone & Company as experts in auditing and accounting.

WHERE TO FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form SB-2 in
connection with the securities offered under this prospectus. As permitted by
SEC rules, this prospectus does not contain all of the information contained in
the registration statement or in the exhibits to the registration statement.
For further information you may read and copy documents at the public reference
room of the SEC at 450 5th Street, N.W., Washington, D.C. 20549, and at the
regional offices of the SEC at 7 World Trade Center, Suite 1300, New York, New
York 10048 and at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. The SEC charges a fee for copies.
Copies of this material should also be available through the Internet at the
SEC EDGAR Archive, the address of which is http://www.sec.gov.

INDEX TO COMBINED FINANCIAL INFORMATION

AIRTECH INTERNATIONAL GROUP, INC.

Item Page
---- ----

Report of Independent Certified Public Accountants....................... F-2
Consolidated Balance Sheets as of May 31, 2000 and 1999.................. F-3
Consolidated Statements of Operations for the Years Ended May 31, 2000
and 1999................................................................ F-5
Consolidated Statements of Stockholders' Equity for the Years Ended May
31, 2000 and 1999....................................................... F-6
Consolidated Statements of Cash Flows for the Years Ended May 31, 2000
and 1999................................................................ F-7
Notes to Financial Statements for May 31, 2000 and 1999.................. F-8
Report of Independent Certified Public Accountants....................... F-18
Consolidated Balance Sheets as of February 28, 2001 and 2000............. F-19
Consolidated Statements of Operations for the Nine Months Ended February
28, 2001 and 2000....................................................... F-21
Consolidated Statements of Operations for the Three Months Ended February
28, 2001 and 2000....................................................... F-22
Consolidated Statements of Cash Flows for the Nine Months Ended February
28, 2001 and 2000....................................................... F-23
Notes to Financial Statements for February 28, 2001 and 2000............. F-24

F-1

INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Stockholders
Airtech International Group, Inc.
Dallas, Texas

We have audited the accompanying consolidated balance sheets of Airtech
International Group, Inc. and subsidiaries as of May 31, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Airtech International Group, Inc. and subsidiaries as of May 31, 2000 and
1999, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.

Turner, Stone & Company, LLP

Certified Public Accountants
August 31, 2000

F-2

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MAY 31, 2000 AND 1999

2000 1999
---------- ----------

ASSETS
Current Assets
Cash................................................... $1,487,646 $ 61,808
Trade and licensing fees receivables, net of allowance
for doubtful accounts of $20,000 and $0,
respectively.......................................... 269,971 173,951
Notes receivable, current portion...................... 437,250 143,750
Inventory.............................................. 538,952 242,665
Prepaid expenses....................................... 38,212 --
---------- ----------
Total current assets................................. 2,772,031 622,174
Property and Equipment--net of accumulated depreciation
of $166,589 and $119,634, respectively.................. 156,288 89,569
Notes Receivable--net of current portion, net of
allowance for doubtful accounts of $0 and $0,
respectively............................................ 1,175,000 431,250
Other Assets
Goodwill, net of accumulated amortization of $35,810
and $71,621, respectively............................. 107,432 143,243
Intellectual properties, net of accumulated
amortization of $146,800 and $38,060, respectively.... 940,597 1,049,337
Prepaid royalties and other assets, net of accumulated
amortization of $104,167 and $0, respectively......... 412,381 514,208
---------- ----------
Total other assets................................... 1,460,410 1,706,788
---------- ----------
$5,563,729 $2,849,781
========== ==========

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

F-3

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MAY 31, 2000 AND 1999

2000 1999
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade............................ $ 260,102 $ 510,193
Accrued payroll, other wages and related burden.... 407,134 301,769
Other accrued expenses............................. 415,076 372,534
Advances payable to officers....................... 210,338 216,488
Notes payable...................................... 277,185 277,185
----------- -----------
Total current liabilities........................ 1,569,835 1,678,169
Long-Term Liabilities
Deferred revenue................................... 340,000 400,000
Product marketing obligation....................... 430,000 405,000
Convertible debentures............................. 2,850,000 --
----------- -----------
Total long-term liabilities...................... 3,620,000 805,000
Total liabilities................................ 5,189,835 2,483,169
Commitments and Contingencies........................ -- --
Stockholders' equity
Preferred stock--5,000,000 shares authorized, $.005
par value
Series A cumulative, convertible preferred, no
shares issued and outstanding liquidation
preference of $1 per share........................ -- --
Series M cumulative, convertible preferred,
1,143,750 and 1,143,750 shares issued and
outstanding, respectively; liquidation preference
of $1 per share, aggregating $ and $
respectively...................................... 1,144 1,144
Common stock--$.05 par value, 50,000,000 shares
authorized, 20,939,216 and 13,207,532 shares
issued and outstanding, respectively.............. 1,046,961 660,376
Additional paid-in capital......................... 7,609,256 5,546,965
Retained deficit................................... (8,283,467) (5,841,873)
----------- -----------
Total stockholders' equity....................... 373,894 366,612
----------- -----------
$ 5,563,729 $ 2,849,781
=========== ===========

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

F-4

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED MAY 31, 2000 AND 1999

2000 1999
----------- -----------

Revenues
Product sales...................................... $ 543,615 $ 800,439
Franchisee fees.................................... 1,072,500 229,000
Other revenues..................................... 11,361 1,030
----------- -----------
Total revenues................................... 1,627,476 1,030,469
Costs and Expenses
Salaries, wages and other compensation............. 987,763 1,317,076
Deferred officer wages............................. -- 791,667
Cost of sales...................................... 519,603 664,356
Advertising........................................ 107,216 42,082
Depreciation....................................... 46,955 38,564
Amortization....................................... 248,718 91,370
Loss on impairment of goodwill..................... -- 582,750
Other general & administrative expenses............ 2,050,200 1,678,775
----------- -----------
Total costs and expenses......................... 3,960,455 5,206,640
----------- -----------
Loss From Operations................................. (2,332,979) (4,176,171)
Interest expense..................................... (108,615) (135,288)
----------- -----------
Loss Before Income Taxes............................. (2,441,594) (4,311,459)
Income tax benefit................................... -- --
----------- -----------
Net Loss............................................. $(2,441,594) $(4,311,459)
=========== ===========
Loss Per Common Share--Basic......................... $ (0.14) $ (0.50)
=========== ===========
Loss Per Common Share--Diluted....................... $ (0.14) $ (0.50)
=========== ===========

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

F-5

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED MAY 31, 2000 AND 1999

Pref.
Common Stock Pref. Series M Series A
---------------------- ---------------- ----------- Paid-in Retained
Description Shares $ Shares $ Shares $ Capital Earnings Total
----------- ---------- ---------- --------- ------ ------ ---- ---------- ----------- -----------

BALANCE AT 5/31/98...... 10,059,923 $ 502,996 1,029,750 $1,030 -- $-- $4,049,736 $(1,530,414) $ 3,023,348
Issuance of Series M
preferred stock, net of
offering costs.......... 114,000 114 98,890 99,004
Cancel shares in July... (680,000) (34,000) -- -- -- -- 34,000 -- --
Issuance of common stock
according to S-8
registration............ 670,025 33,500 -- -- -- -- 361,427 -- 394,927
Issuance of common stock
for cash................ 828,000 41,400 234,600 276,000
Issuance of common stock
on exercise of
warrants................ 46,250 2,313 20,812 23,125
Issuance of common stock
for deferred wages to
officers................ 1,583,334 79,167 712,500 791,667
Issuance of common stock
in May.................. 700,000 35,000 35,000 70,000
Net loss during the
year.................... -- -- -- -- -- -- -- (4,311,459) (4,311,459)
---------- ---------- --------- ------ --- ---- ---------- ----------- -----------
BALANCE AT 5/31/99...... 13,207,532 660,376 1,143,750 1,144 0 0 5,546,965 (5,841,873) 366,612
Issuance of common stock
for cash................ 4,196,850 209,842 780,494 990,336
Issuance of common stock
in exchange for
services................ 1,796,879 89,843 526,563 616,406
Issuance of common stock
on exercise of
warrants................ 337,500 16,876 67,544 84,420
Issuance of common stock
to vendors for payment
of trade payables....... 1,400,455 70,024 687,690 757,714
Net loss during the
year.................... (2,441,594) (2,441,594)
---------- ---------- --------- ------ --- ---- ---------- ----------- -----------
BALANCE AT 5/31/00...... 20,939,216 $1,046,961 1,143,750 $1,144 0 $-- $7,609,256 $(8,283,467) $ 373,894
========== ========== ========= ====== === ==== ========== =========== ===========

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

F-6

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED MAY 31, 2000 AND 1999

2000 1999
----------- -----------

Cash Flows from Operating Activities
Net loss............................................ $(2,441,594) $(4,311,459)
Adjustments to reconcile net income to cash
Depreciation and amortization...................... 295,673 129,934
Impairment of goodwill............................. -- 582,750
Net (gain) loss on disposition of assets........... -- (51,672)
Stock payments to employees and consultants........ 616,406 1,129,593
Allowances and write offs.......................... 20,000 411,000
Changes in operating assets and liabilities
Accounts receivable................................ (116,020) (21,814)
Inventory.......................................... (296,287) 41,667
Prepaid expenses and other assets.................. (40,552) 67,214
Notes receivable................................... (1,037,250) --
Accounts payable................................... 507,623 373,238
Accrued expenses................................... 141,757 716,163
Deferred revenue................................... (60,000) --
----------- -----------
Net cash used in operating activities............. (2,410,244) (933,386)
Cash Flows from Investing Activities
Acquisition of property and equipment............... (113,674) --
Disposals of fixed assets........................... -- 66,058
Expenditures for other assets....................... -- (89,837)
----------- -----------
Net cash used in investing activities............. (113,674) (23,779)
Cash Flows from Financing Activities
Proceeds from issuance of preferred stock, net of
offering costs..................................... -- 99,004
Proceeds from issuance of common stock.............. 1,074,756 369,125
Reciepts from product marketing obligation.......... 25,000 405,000
Proceeds from convertible debentures................ 2,850,000 --
----------- -----------
Net cash provided by financing activities......... 3,949,756 873,129
Increase (decrease) in cash.......................... 1,425,838 (84,036)
Cash, beginning of period............................ 61,808 145,844
----------- -----------
Cash, end of period.................................. $ 1,487,646 $ 61,808
=========== ===========
Supplemental Cash Flows Disclosures
Interest paid....................................... $ 30,000 $ 8,319
Income taxes paid................................... $ -- $ --
Non-cash investing and financing activities:
Common stock issued in settlement of accounts
payable.......................................... $ 757,714 $ --
Common stock issued in exchange for services...... $ 616,406 $ 1,129,593

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

F-7

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and business

Airtech International Group, Inc. (the Company), (formerly Interactive
Technologies Corporation, Inc.), was incorporated in the state of Wyoming on
August 8, 1991. The Company manufactures and sells a full line of air
purification products. The Company primarily markets, sells and distributes its
products through a network of franchisees.

On May 31, 1998, the Company acquired all of the outstanding common stock
shares of Airtech International Corporation (AIC), which through its
subsidiaries manufacture and sell various air filtration and purification
products. The total purchase price of $22,937,760 was funded through the
issuance of 2,100,000 of its common stock shares valued at $.625 per share, the
issuance of 11,858,016 of its Series A convertible preferred stock shares
valued at $.625 per share (Note 2) and the issuance of $9,000,000 of
convertible debentures (Note 5). However, because these convertible securities
were converted into common stock within two months following the acquisition,
the Company effectively issued common stock for the outstanding common stock of
AIC and the stockholders of AIC obtained control of the combined company. As a
result, AIC became the acquirer for financial reporting purposes.

Therefore, the transaction was accounted for using the purchase method of
accounting. Accordingly, the purchase price of the net assets acquired has been
allocated among the net assets based on their relative fair values with
$179,053 of the purchase price allocated to goodwill. The acquired goodwill is
being amortized using the straight-line method over 5 years.

Results of operations of Interactive Technologies Corporation are included
in the accompanying consolidated statements of operations beginning June 1,
1998.

Principles of consolidation

The accompanying consolidated financial statements include the general
accounts of the Company and its subsidiaries, AIC, Airsopure, Inc., Airsopure
International Group, Inc. and McCleskey Sales and Service, Inc., each of which
have fiscal year ends of May 31. All material intercompany accounts, balances
and transactions have been eliminated in the consolidation.

Impairment of long-lived assets

The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This Statement establishes accounting standards for
the impairment of long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used, and long-lived assets and
certain identifiable intangibles to be disposed of. The Company periodically
evaluates, using independent appraisals and projected undiscounted cash flows,
the carrying value of its long-lived assets and certain identifiable
intangibles to be held and used whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In
addition, long-lived assets and identifiable intangibles to be disposed of are
reported at the lower of carrying value or fair value less cost to sell.

Amortization

Intellectual property is allocated to the Company's air filtration products
based on expected sales as a percent of total sales by product. The Company
records amortization using the straight-line method over

F-8

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10 years beginning when the product is initially inventoried for sale. For the
years ended May 31, 2000 and 1999, amortization expense totaled $ 108,740 and $
38,060, respectively.

Goodwill recorded in the acquisition of AIC, is being amortized using the
straight-line method over 5 years. For the years ended May 31, 2000 and 1999,
amortization expense totaled $35,811 and $35,810, respectively.

Goodwill relating to the Company's purchase of its McClesky Sales and
Services subsidiary in 1995 was being amortized over 40 years. In May 1999,
this operating segment was discontinued (Note 10) and the remaining unamortized
carrying value was charged to expense.

A prepaid royalty fee, paid pursuant to a December 1995 agreement and
related to the Company's portable medicare unit, is being amortized using the
straight-line method over 24 months beginning in January 2000. For the years
ended May 31, 2000 and 1999, amortization expense totaled $104,167 and $0,
respectively.

Inventories

Inventories are carried at the lower of cost or net realizable value
(market) and include component parts used in the assembly of the Company's line
of air purification units and filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.

At May 31, 2000 and 1999, inventories consisted of the following:

2000 1999
-------- --------

Finished goods............................................. $356,916 $200,506
Component parts............................................ 182,036 42,159
-------- --------
$538,952 $242,665
======== ========

Property and equipment

Property and equipment are stated at cost less accumulated depreciation.
Depreciation of property and equipment is currently being provided by straight
line and accelerated methods for financial and tax reporting purposes,
respectively, over estimated useful lives of five years.

Intellectual properties

Costs incurred by the Company in developing its products consisting
primarily of design, testing and completion of working prototypes, which are
not considered patentable, are capitalized and will be amortized over the
estimated useful life of the related patents once a unit has been placed in
production.

Product marketing obligation

Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 68, the
Company has recorded funds raised in an arrangement to develop, produce and
market its Model S-999 as a product marketing obligation (Note 7).

F-9

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenue recognition

Revenues from the Company's operations are recognized at the time products
are shipped or services are provided. Revenues from franchise sales are
recognized at the time all material services relating to the sale of a
franchise have been performed by the Company and, in some instances, when the
related notes receivable have been collected. Revenues based on the collection
of franchise notes receivable are deferred until the time of collection.

Advertising

Advertising dollars are invested in trade journals, trade shows, travel and
franchise networking. All amounts are expensed as incurred.

Management estimates

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

Cash flow

For purposes of the statement of cash flows, cash includes demand deposits,
time deposits and short term cash equivalent investments with maturities of
less than three months. None of the Company's cash is restricted.

Earnings per share

Basic and diluted loss per share are based upon 17,368,684 and 10,583,635,
respectively, weighted average shares of common stock outstanding. No effect
has been given to the assumed conversion of convertible preferred stock and
convertible debentures and the assumed exercise of stock options and warrants
as the effect would be antidilutive.

Stock split

On October 5, 1998, the shareholders authorized a one for five reverse split
of the Company's common stock. The reverse split was made effective November 9,
1998. Shareholders equity has been restated to give retroactive recognition to
the stock split for all periods presented, such that all references in the
financial statements to number of shares, per share amounts, par values and
stock option data for common shares have been restated. The shareholders also
approved an increase in the Company's authorized common shares to 50,000,000.

2. PREFERRED STOCK

Convertible preferred stock--Series A

In connection with the Company's acquisition of AIC (Note 1), the Company
established this equity class and authorized 15,000,000 shares. The shares have
a par value of $1.00, do not pay dividends and are convertible at the Company's
option at any time within 24 months after issuance for one share of the
Company's common stock for each five shares of preferred stock.

F-10

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Effective July 31, 1998, the Company's Board of Directors voted to convert
the Series A Preferred Stock to Common Stock on the basis of one share of
Preferred to one share of Common, as per the merger agreement. To effect the
conversion of 11,858,016 of Series A preferred, the Company issued 2,371,603
shares of common stock. As described in Note 1, relating to the reverse merger
accounting recognition, the conversion of the preferred stock shares has been
recorded in the accompanying consolidated financial statements as occurring on
May 31, 1998, the date of the AIC acquisition and, therefore, are not shown as
outstanding at May 31, 1998 in the accompanying consolidated statements of
stockholders' equity.

Convertible preferred stock--Series M

During the year ended May 31, 1998, the Company authorized 5,000,000 shares
and established this equity class to raise production funds for the Company's
Model S-950, Medicare air filtration unit. The Series M preferred shareholders
participate by receiving up to 20%, if totally subscribed, of the collected
gross proceeds from the Company's sales of its Model S-950 over a two year
period. Through May 31, 1999, 1,143,750 of these shares were issued for $1.00
cash, net of $203,379 of offering costs. The shares have a par value of $.001,
do not pay dividends and are convertible at the holder's option at any time
within 36 months after issuance for one share of the Company's common stock. In
addition, attached to each share is one warrant to purchase one share of common
stock at a price of $0.25 per share exercisable within two years after
issuance. As of May 31, 1999, the Company had not sold any S-950 units thus has
made no payments under the participation plan. As of May 31, 2000, the Company
had sold 78 of these units and owes $5,364 under the participation plan.

3. NOTES RECEIVABLE

Notes receivable relate to AIC sales of geographic franchise licenses (Note
1), bear interest at 6% to 12%, are payable in terms ranging from 12 to 48
months and are secured by the area franchises. Credit is extended on evaluation
of the payee's financial condition and general credit information. Prior to May
31, 2000, the Company did not strictly enforce collection while it completed
development of its product line of air purification products.

At May 31, 2000 and 1999, notes receivable are comprised of the following:

2000 1999
---------- ---------

Domestic franchise licenses........................... $ 157,250 $ 300,000
International franchise licenses...................... 1,455,000 275,000
---------- ---------
1,612,250 575,000
Less current portion.................................. (437,250) (143,750)
---------- ---------
$1,175,000 $ 431,250
========== =========

4. NOTES PAYABLE

The Company's notes payable consist of loans from various corporations and
individuals provided for working capital purposes. The notes, which contain no
significant restrictions, bear interest at rates of 10.0% to 18.0%, are due
through May 1999 and are unsecured. At May 31, 2000 and 1999, all of these
notes, totaling $277,185, were in default.

F-11

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. CONVERTIBLE DEBENTURES

AIC acquisition debentures

In connection with the Company's acquisition of AIC (Note 1), the Company
also issued $9,000,000 of convertible debentures secured by the AIC shares
acquired. The debentures bear interest at 10%, are payable annually on May 31
of each year, are due on May 31, 2000 and are convertible at the Company's
option at any time within the two years into shares of the Company's common
stock at a conversion price of $.70. As of July 31, 1998, the Company's Board
of Directors voted to convert the debentures and $150,000 of related accrued
interest into common stock. The Company issued 2,614,286 common shares on
conversion. As described in Note 1, relating to the reverse merger accounting
recognition, the conversion of the convertible debentures has been recorded in
the accompanying consolidated financial statements as occurring on May 31,
1998, the date of the AIC acquisition and, therefore, are not shown as
outstanding at May 31, 1998 but included in additional paid in capital in the
accompanying consolidated statements of stockholders' equity.

Convertible debentures (12%)

During the year ended May 31, 2000, the Company issued $350,000 of
convertible debentures maturing on September 1, 2004. Interest is payable at
12% semi-annually beginning September 1, 2000. The debentures are convertible
at the holder's option any time beginning one year after issuance at a
conversion price of $1.00 per share. The Company, with the consent of the
holder, may redeem the debentures at a price ranging from 110% of the principal
amount if redeemed prior to September 1, 2001 to 100% of the principal amount
at maturity of the principal amount of the debentures.

The debentures include warrants to purchase 350,000 common stock shares at a
price of $2.00 per share. The warrants expire two years from the date of
issuance.

Convertible debentures (6%)

During the year ended May 31, 2000, the Company issued $2,500,000 of
convertible debentures maturing on February 22, 2002. Interest accrues at 6%
and is payable in full at maturity. The debentures are convertible at the
holder's option at any time at a conversion price equal to the lesser of (a)
110% of the average closing bid price of the Company's common stock for the
five trading days prior to the date of initial payment or (b) 80% of the
average of the three lowest closing bid prices of the Company's common stock
during the 30 trading days prior to the date a conversion notice is received
from a holder. In the event of a change in control of the Company, the holders'
can require redemption of the debentures at a price equal to 125% of the
aggregate outstanding principal and accrued interest.

The debentures include warrants to purchase 250,000 common stock shares at a
price of $2.61 per share. The warrants expire on February 22, 2005.

Additionally, the holders of these debentures have an option to acquire an
additional $2,500,000 of debentures under the same terms, which include
additional warrants to purchase 250,000 common stock shares at a price of $2.61
per share. This option expires December 22, 2000.

6. LITIGATION

The Company is defendant, and it has filed counter claims, in a lawsuit
filed by the lessor of office space facilities in New Jersey. The Company never
occupied the space due to the lessor's failures to finish out the space to the
Company's specifications. The lessor seeks to recover remaining lease payments
due under the

F-12

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

lease of $606,913 and the Company seeks to recover damages under a capital
lease obligation for equipment located in the New Jersey facilities and
contractually precluded from being removed from the facilities. Although the
Company anticipates a favorable settlement of this lawsuit the outcome of it is
uncertain. As of May 31, 2000 and 1999, a reserve totaling $200,000 has been
established in anticipation of settling this obligation.

The Company is also defendant in a lawsuit filed by a corporation claiming
damages of up to $1 million for breach of a stock purchase agreement, which was
never consummated. Management believes its defenses are strong and plans on
vigorously defending this lawsuit. Although the Company anticipates a favorable
settlement of this lawsuit the outcome of it is uncertain. The Company has not
accrued a loss for this contingency in the accompanying consolidated financial
statements.

7. COMMITMENTS AND CONTINGENCIES

Operating leases

The Company is currently obligated under noncancellable operating leases for
its Dallas office and warehouse facilities, which expire through December 2003.
The leases also provide for payment of the Company's share of operating costs
and contain renewal options at prevailing market rates.

Minimum future rental payments required under the above operating lease is
as follows.

Year ending May 31,
-------------------

2001................................................................ $106,275
2002................................................................ 73,566
2003................................................................ 16,080
2004................................................................ 9,380
--------
$205,301
========

During the years ended May 31, 2000 and 1999, rent expense totaled $102,660
and $80,670, respectively.

Employment agreements

The Company is currently obligated under employment agreements with its
Chief Executive Officer and its President for annual compensation of $250,000
apiece and discretionary bonuses to be determined by the Company's board of
directors. The agreements expire in May 2008. Compensation under such
agreements was deferred during the period from June 1, 1997 through December
31, 1998. At January 31, 1999, the Board of Directors authorized payment of the
deferred amount by issuing restricted common stock at $0.50 per share, issuing
a combined total of 1,583,334 shares. Starting in January 1999, these two
executives began receiving cash compensation at the rate of $125,000 apiece
with the remainder of the contracted amounts being accrued in the accompanying
consolidated financial statements.

During the year ended May 31, 1999, the Company received a claim from a
stockholder and former officer and director in the amount of $250,000 related
to past employment services. However, during the year ended May 31, 2000, this
claim was settled with the Company issuing 100,000 common stock shares to this
stockholder at a fair value of $42,579.

The Company's current compensation benefits do not provide any other post-
retirement or post-employment benefits.

F-13

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Airsopure 999 Limited Partnership

In January 1999, the Company formed a limited partnership, Airsopure 999
Limited Partnership (LP), to fund production of the Company's new automobile,
trunk mounted air filtration unit, the Model S-999. Airsopure, Inc., a
subsidiary of the Company, became the general partner, and the limited
partnership was authorized to sell up to $5 million of partnership interests.
The limited partners are entitled up to a maximum of 20% of the gross sales
from the S-999 over a three year period. Additionally, the Company guaranteed
the limited partners a return of at most 150% of their investment at the end of
the three year term by authorizing conversion of their limited partnership
interests into shares of the Company's common stock. During the years ended May
31, 2000 and 1999, the LP raised $25,000 and $405,000, respectively, which
amount is recorded as product marketing obligation.

8. INCOME TAXES

The Company used the accrual method of accounting for tax and financial
reporting purposes. At May 31, 2000 and 1999, the Company had net operating
loss carry forwards for financial and tax reporting purposes of approximately
$18,500,000 and $16,100,000, respectively. These carry forwards expire through
the year 2012, and are further subject to the provisions of Internal Revenue
Code Section 382.

Pursuant to Statement of Financial Accounting Standards No. 109, the Company
has recognized a $5,510,440 deferred tax asset attributable to the net
operating loss carryover, which has been fully offset by a valuation allowances
in the same amount, as follows:

2000 1999
---------- ----------

Beginning balance..................................... $4,680,290 $2,804,055
Increase during period................................ 830,150 1,876,235
---------- ----------
Ending balance........................................ $5,510,440 $4,680,290
========== ==========

A reconciliation of income tax expense at the statutory federal rate to
income tax expense at the Company's effective tax rate for the years ended May
31, 2000 and 1999 is as follows:

2000 1999
--------- -----------

Tax (expense) benefit computed at statutory
federal rate..................................... $ 830,150 $ 1,465,896
NOL carryover..................................... (830,150) (1,465,896)
--------- -----------
Income tax benefit................................ $ -- $ --
========= ===========

9. FINANCIAL INSTRUMENTS

The Company's financial instruments, which potentially subject the Company
to credit risks and none of which are held for trading purposes, consist of its
cash, accounts and notes receivable, notes payable and convertible debentures.

Cash

The Company maintains its cash in bank deposit and other cash equivalent
investment accounts which, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts, and does not believe
it is subject to any credit risks involving its cash.

F-14

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Accounts and notes receivable, trade

The Company accounts and notes receivable (Note 3) are unsecured and
represent sales not collected at the end of the year. Management believes these
accounts and notes receivable are fairly stated at estimated net realizable
amounts.

Notes payable and convertible debentures

Management believes the carrying value of these notes (Note 4) and
convertible debentures (Note 5) represent the fair value of these financial
instruments because their terms are similar to those in the lending market for
comparable loans with comparable risks.

10. DISCONTINUED OPERATING SEGMENT

In May 1999, the Company discontinued its McCleskey Sales and Services (MSS)
operations which were being conducted through its wholly owned subsidiary by
the same name. The net assets of this operating segment, consisting primarily
of unamortized goodwill relating to the Company's purchase of MSS in 1995 (Note
1), approximated $583,000 and was charged against continuing operations.

11. STOCK OPTIONS AND WARRANTS

During the years ended May 31, 2000 and 1999, the Company issued various
stock options and warrants to employees and others and uses the intrinsic value
method of accounting for these stock options. Compensation cost for options
granted has not been recognized in the accompanying financial statements
because the amounts are not material. The options and warrants expire between
September 2000 and February 2003 and are exercisable at prices from $0.20 to
$10.00 per option or warrant. Exercise prices were set at or above the
underlying common stock's fair market value on the date of grant.

The following is a schedule of the activity relating to the Company's stock
options and warrants. Other than the 432,850 and 205,900 warrant identified
below as granted during the year ended May 31, 2000 and 1999, respectively
(Note 4), all other amounts relate to stock options the Company has issued.

2000 1999
----------------- -----------------
Wgt. Wgt.
Ave. Ave.
Shares Exercise Shares Exercise
(x1,000) Price (x1,000) Price
-------- -------- -------- --------

Options and warrants outstanding at
beginning of year..................... 1,341 $2.06 480 $ 3.93
Granted................................ 1,698 $0.86 917 $ 0.61
Exercised.............................. (437) $0.85 (46) $ 2.00
Expired................................ (591) $0.77 (10) $10.00
----- ----- ----- ------
Options and warrants outstanding at end
of year............................... 2,011 $1.49 1,341 $ 2.06
===== ===== ===== ======
Options and warrants exerciseable at
end of year........................... 2,011 $1.49 1,101 $ 2.06
===== ===== ===== ======
Weighted average fair value of options
and warrants granted during the year.. $0.27 $ 0.60

F-15

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about the Company's stock options
and warrants outstanding at May 31, 2000, all of which are exercisable.

Range of Number Weighted Ave.
Exercise Outstanding Remaining Weighted Average
Prices (x1,000) Contractual Life Exercise Price
-------- ----------- ---------------- ----------------

$.15--$.60 1098 0.9 years $ .34
$2.00--$2.61 660 1.1 years $ 2.28
$3.75--$5.00 240 2.0 years $ 4.17
$10.00 13 1.0 years $10.00

The following pro forma disclosures reflect the Company's net loss and net
loss per share amounts assuming the Company accounted for stock options granted
using the fair value method pursuant to Statement of Financial Accounting
Standards No. 123. The fair value of each option granted was estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 5.6%; no expected dividends; expected
lives of 3 to 10 years; and expected volatility of 220.51%.

Year Ended Year Ended
May 31, May 31,
2000 1999
----------- -----------

Net loss........................................... $(2,576,594) $(4,364,880)
Net loss per share................................. $ (0.15) $ (0.41)

During the years ended May 31, 2000 and 1999, the Company also issued
1,796,879 and 1,583,334 common stock shares, respectively, in exchange for
services. These services were recorded at their fair value of $616,406 and
$791,667, respectively, and were charged to expense. In addition, during the
year ended May 31, 2000, the Company issued 1,400,455 common stock shares to
vendors in payment of trade payables, which were recorded at their fair value
of $757,714.

12. RELATED PARTIES

During the years ended May 31, 2000 and 1999, the Company's chief executive
officer and president made cash operating advances of $0 and $100,000 and
received repayments of $0 and $127,000, respectively. The advances are to be
repaid as cash is available or by the issuance of common stock. These advances
are unsecured but bear interest at 15% per annum. At May 31, 2000 and 1999,
advances payable to these officers totaled $210,338 and $216,488, respectively,
and included $51,338 and $57,488, respectively, of accrued interest. During the
year ended May 31, 2000, $30,000 of accrued interest was paid to the above
individuals.

13. LIQUIDITY ISSUES

The continued operating losses by the Company and its subsidiaries raise
concern about the Company's ability to generate profits from its operations.
Management is currently negotiating several large contracts for its air
filtration products, which will increase the Company's cash flow and its
ability to generate profits. The Company has completed its air purification
product line and is expanding its franchise and distributorship network
throughout the nation and internationally. In addition, the Company is
continuing efforts to raise additional equity capital to provide liquidity
until cash can be generated by operations.

14. SEGMENT INFORMATION

During the years ended May 31, 2000 and 1999, the Company conducted its
operations through two reportable operating segments, each of which was
conducted through separate subsidiaries. Those reportable operating segments
were its manufacture and sale of air purification products and franchises and
its commercial and residential heating and air conditioning services, which was
terminated in May 1999.

F-16

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table reflects certain information about the Company's
reportable operating segments for the year ended May 31, 1999. For the year
ended May 31, 2000, the accompanying consolidated financial statements reflect
operating activities for its remaining reportable operating segment. There are
no inter-segment revenue or expense transactions.

Air HVAC
Products Services Total
----------- --------- -----------

Revenues.............................. $ 618,442 $ 412,027 $ 1,030,469
Net operating loss.................... $(4,153,265) $(158,194) $(4,311,459)
Interest expense...................... $ 126,969 $ 8,319 $ 135,288
Depreciation and amortization......... $ 107,637 $ 22,297 $ 129,934
Consulting services, non cash......... $ 309,854 $ -- $ 309,854
Expenditures for long-lived assets.... $ -- $ -- $ --
Total long-lived assets, net of
accumulated depreciation............. $ 89,569 $ -- $ 89,569

F-17

INDEPENDENT ACCOUNTANT'S REPORT

Board of Directors and Stockholders
Airtech International Group, Inc. and subsidiaries
Dallas, Texas

We have reviewed the accompanying consolidated balance sheet of Airtech
International Group, Inc. and subsidiaries as of February 28, 2001 and the
related statement of operations, stockholders' equity and cash flows for the
three months and nine months then ended. These consolidated financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statement taken
as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that
should be made to the accompanying February 28, 2001 consolidated financial
statements for them to be in conformity with generally accepted accounting
principles.

/s/ Turner, Stone & Company, LLP

Certified Public Accountants
April 13, 2001

F-18

Airtech International Group, Inc. and Subsidiaries

Consolidated Balance Sheets

February 28, 2001 and 2000

2001 2000
---------- ----------

ASSETS
CURRENT ASSETS
Cash................................................... $ 53,368 $ 559,385
Marketable Securities.................................. 0 2,000,000
Trade accounts receivables, net of allowance for
doubtful accounts of $60,000 and $20,000
respectively.......................................... 731,315 225,352
Notes receivable, current portion...................... 437,250 75,000
Inventory.............................................. 1,305,559 317,665
Prepaid expenses and other assets...................... 113,257 204,524
---------- ----------
Total current assets................................. 2,640,749 3,381,926
---------- ----------
PROPERTY AND EQUIPMENT--net of accumulated depreciation
of $198,159 and $149,123 respectively................... 112,740 116,875
NOTES RECEIVABLE--net of current portion, net of
allowance for Doubtful accounts of $0 and $0,
respectively............................................ 1,078,312 575,000
OTHER ASSETS
Goodwill, net of $45,810 and $84,763 of accumulated
amortization, respectively............................ 92,432 94,291
Intellectual properties, net of $167,300 and $58,060 of
accumulated amortization, respectively................ 919,597 968,112
Other, Prepaid Royalties............................... 294,988 519,688
---------- ----------
Total other assets................................... 1,307,017 1,582,091
---------- ----------
$5,138,818 $5,655,892
========== ==========

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

F-19

Airtech International Group, Inc. and Subsidiaries

Consolidated Balance Sheets

February 28, 2001 and 2000

2001 2000
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable--current portion..................... $ 277,185 $ 277,185
Accounts payable, trade............................ 750,526 608,850
Note payable--officers............................. 210,338 216,488
Accrued payroll and payroll taxes.................. 507,753 323,692
Other accrued expenses............................. 608,843 417,511
----------- -----------
Total current liabilities........................ 2,354,645 1,843,726
----------- -----------
LONG-TERM LIABILITIES
Deferred revenue................................... 340,000 400,000
Product Marketing Obligation....................... 430,000 405,000
Convertible Debentures............................. 2,350,000 2,800,000
----------- -----------
Total long-term liabilities...................... 3,120,000 3,605,000
----------- -----------
Total liabilities.............................. 5,474,645 5,448,726
COMMITMENTS AND CONTINGENCIES........................ -- --
STOCKHOLDERS' EQUITY
Series M cumulative, convertible preferred, 990,625
and 1,143,750 outstanding respectively;
liquidation preference of $1.00 per share......... 991 1,143
Common stock--$.05 par value, 50,000,000 shares
authorized; 27,958,641 and 20,364,417 shares
issued and outstanding, respectively.............. 1,397,932 1,018,220
Additional paid--in capital........................ 8,251,966 6,682,210
-----------
Retained deficit................................... (9,986,716) (7,494,407)
----------- -----------
Total stockholders' equity (335,827) 207,166
----------- -----------
$ 5,138,818 $ 5,655,892
=========== ===========

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

F-20

Airtech International Group, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Nine Months Ended February 28, 2001 and 2000

2001 2000
----------- -----------

REVENUES
Product sales...................................... $ 1,412,607 $ 604,474
Franchisee fees and other revenues................. 25,000 175,000
----------- -----------
Total revenues................................... 1,437,607 779,474
----------- -----------
COSTS AND EXPENSES
Salaries and wages................................. 787,490 901,729
Research and Development........................... 283,927 100,000
Cost of sales...................................... 780,235 515,127
Advertising........................................ 241,358 101,197
Depreciation and amortization...................... 233,188 127,421
Other general & administrative expense............. 639,544 645,073
----------- -----------
Total costs and expenses......................... 2,965,742 2,390,547
----------- -----------
LOSS FROM OPERATIONS................................. (1,528,135) (1,611,073)
Interest expense..................................... (175,114) (41,462)
----------- -----------
NET LOSS BEFORE INCOME TAXES......................... (1,703,249) (1,652,535)
Income taxes......................................... -- --
----------- -----------
NET LOSS............................................. $(1,703,249) $(1,652,535)
=========== ===========
LOSS PER COMMON SHARE--BASIC......................... $ (0.07) $ (0.08)
=========== ===========
LOSS PER COMMON SHARE--DILUTED....................... $ (0.07) $ (0.08)
=========== ===========

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

F-21

Airtech International Group, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three Months Ended February 28, 2001 and 2000

2001 2000
--------- ---------

REVENUES
Product sales.......................................... $ 418,034 $ 186,136
Franchisee fees and other revenues..................... 15,000 60,000
--------- ---------
Total revenues....................................... 433,034 246,136
--------- ---------
COSTS AND EXPENSES
Salaries and wages..................................... 285,375 516,591
Research and Development............................... 52,677 50,000
Costs of sales......................................... 220,845 99,478
Advertising............................................ 55,963 51,002
Depreciation and amortization.......................... 72,716 54,665
Other general and administrative expense............... 208,006 318,560
--------- ---------
Total costs and expenses............................. 895,582 1,090,296
--------- ---------
LOSS FROM OPERATIONS..................................... (462,548) (844,160)
Interest expense......................................... ( 52,404) (4,185)
--------- ---------
NET LOSS BEFORE INCOME TAXES............................. (514,952) (848,345)
Income taxes
NET LOSS................................................. $(514,952) $(848,345)
========= =========
LOSS PER COMMON SHARE--BASIC............................. $ (0.02) $ (0.04)
========= =========
LOSS PER COMMON SHARE--DILUTED........................... $ (0.02) $ (0.04)
========= =========

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

F-22

Airtech International Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended February 28, 2001 and 2000

2001 2000
----------- -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss............................................. $(1,703,249) $(1,652,534)
Adjustments to reconcile net income to cash
Depreciation and amortization....................... 233,188 127,421
Stock payments to employees and consultants......... -- 486,189
Changes in operating assets and liabilities
Accounts receivable................................. (461,344) ( 51,401)
Inventory........................................... (766,607) (75,000)
Accounts payable.................................... 490,424 98,657
Accrued expenses.................................... 294,436 88,823
Other Receivables................................... (75,045) (347,955)
----------- -----------
Net cash used in operating activities.............. (1,988,197) (1,325,800)
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for other assets........................ 60,085 (57,212)
(Expenditure for) Redemption Marketable Securities... 1,000,000 (2,000,000)
Repayment of Notes Payable........................... (500,000)
----------- -----------
Net cash used in investing activities.............. 560,685 (2,057,212)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures..... 2,800,000
Proceeds from issuance of common stock............... 993,834 1,080,589
Net cash provided by financing activities.......... 993,834 3,880,589
----------- -----------
INCREASE (DECREASE) IN CASH........................... (1,434,278) 497,577
CASH, BEGINNING OF PERIOD............................. 1,487,646 61,808
----------- -----------
CASH, END OF PERIOD................................... $ 53,368 $ 559,385
=========== ===========

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

F-23

Airtech International Group, Inc. and Subsidiaries

Notes to Financial Statements

Summary of Significant Accounting Policies

Organization

Airtech International Group, Inc. (the Company), formerly Interactive
Technologies Corporation (ITC), was incorporated in the state of Wyoming on
August 8, 1991. As of May 31, 1998, in connection with the acquisition
discussed below, the Company manufactures and sells a full line of air
purification products.

On May 31, 1998, the Company acquired all of the outstanding common stock
shares of Airtech International Corporation (AIC), which through its
subsidiaries, manufactures and sells various air filtration and purification
products. The total purchase price of $22,937,760 was funded through the
issuance of 10,500,000 shares of common stock valued at $.625 per share, the
issuance of 11,858,016 shares of Series A convertible preferred stock shares
valued at $.625 per share and the issuance of $ 9,000,000 of convertible
debentures.

However, because these convertible securities were converted into common
stock within two months following acquisition, the shareholders of AIC obtained
control of the company. As a result, AIC became the acquiror for financial
reporting purposes.

The transaction was accounted for using the purchase method of accounting
with AIC for accounting and reporting purposes the acquiror. Accordingly, the
purchase price of the net assets acquired has been allocated among the net
assets based on their relative fair value of zero.

Principles of consolidation

The accompanying consolidated financial statements include the general
accounts of the Company and its subsidiaries, AIC, Airsopure, Inc., Airsopure
International Group, Inc. and McCleskey Sales and Service, Inc. (dormant) each
of which has a fiscal year ended May 31, and AIC's investment in Airsopure
999LP, a Texas Limited partnership with a December 31 year end. All material
intercompany accounts and balances have been eliminated in the consolidation.
Turner, Stone & Company, the Company's independent accountants, has performed
limited reviews of the interim financial information included herein. Their
report on such reviews accompanies this filing.

Amortization

Intellectual property is allocated to the Company's air filtration products
based on expected sales as a percent of total sales by product. The Company
records amortization beginning when the product is initially inventoried for
sale. Amortization is recorded ratably over a ten-year term.

Goodwill acquired and recorded in the financial acquisition of ITC, is being
amortized under the straight line method over 5 years.

A prepaid royalty fee, paid pursuant to a December 1995 agreement and
related to the Company's portable medical unit, is being amortized using the
straight-line method over 24 months beginning January 2000.

Inventories

Inventories are carried at the lower of cost or net realizable value
(market) and include component parts used in the assembly of the Company's line
of air purification units, filters and finished goods comprised of completed
products. The costs of inventories are based upon specific identification of
direct costs and allocable costs of direct labor, packaging and other indirect
costs.

F-24

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(Continued)

Property and equipment

Product marketing obligation

Property marketing obligations pursuant to Statement of Financial Accounting
Standards, "SFAS" No. 68, the Company has recorded funds raised in an
arrangement to develop, produce and market the Model S-999 as a product
marketing obligation.

Revenue recognition

Revenues from the Company's operations are recognized at the time products
are shipped or services are provided. Revenue from franchise sales are
recognized at the time all material services relating to the sale of a
franchise have been performed by the Company.

Management estimates

Cash flow

For purposes of the statement of cash flows, cash includes demand deposits,
short term cash equivalent investments and time deposits with maturities of
less than three months. None of the Company's cash is restricted.

Loss per share

The basic and diluted loss per share are based upon 25,269,142 and
24,479,321 respectively, weighted average shares of common stock outstanding
over the three and nine month period ending February 28, 2001. No effect has
been given to the assumed conversion of convertible preferred stock,
convertible debentures, product market obligation guarantees and the assumed
exercise of stock options and warrants, as the effect would be antidilutive.

Convertible debentures (6%)

On February 22, 2000, the Company entered into a securities purchase
agreement with PK Investors LLC (PKI') to raise up to $5,000,000 through the
sale to PKI of up to $5,000,000 in principal amount of the Company's 6%
Convertible Debentures (Debentures') and Warrants to purchase up to 500,000
shares of the Company's Common Stock (Warrants'). Upon execution of the
securities purchase agreement, PKI purchased $2,500,000 in principal amount of
the Debentures and Warrants to purchase 250,000 shares of Common Stock for a
purchase price of $2,500,000. The Company was responsible and paid legal,
investment banker commissions, accounting and SEC filing fees totaling
$427,000. Under the terms of the securities purchase agreement, the Company
also issued to PKI a Conditional Warrant to purchase the remaining $2,500,000
in

F-25

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(Continued)

principal amount of Debentures and the remaining Warrants to purchase 250,000
shares of the Company's Common Stock. The Conditional Warrants expired on
December 22, 2000. The Debentures, Warrants, and Conditional Warrant were sold
and issued to PKI in a private transaction exempt from registration under
Section 4 (2) of the Securities Act of 1933.

Convertible Debentures (12%)

During the year ended May 31, 2000, the Company issued $350,000 of
convertible debentures maturing on September 1, 2004. Interest is payable at
12% semi-annually. Interest has been deferred until May 2001. The debentures
are convertible at the holder's option at any time beginning one year after
issuance at a conversion price of $1.00 per share. The debentures include
warrants to purchase 350,000 common shares at a price of $2.00 per share. The
warrants expire two years from the date of issuance.

Convertible Preferred Stock

During the year ended May 31, 1998, the Company, from the 5,000,000 shares,
authorized, issued 1,143,750 of convertible preferred stock for $1 per share.
The shares have a par value of $ .001, do not pay dividends, are convertible at
the holder's option for one share of the Company's common stock, and receive up
to 20%, if totally subscribed, of the gross proceeds from the Company's sales
of its portable individual air purifier for a two-year period. As of February
28, 2001 and 2000, there were 990,625 and 1,143,750 shares of preferred stock
outstanding, respectively.

Commitments and Contingencies

Operating Leases

The company is currently obligated under noncancellable operating leases for
its Dallas office and warehouse facilities, which expire in December 2001 and
January 2004, respectively.

Minimum future rental payments required under the above operating lease is
as follows:

Year ending May 31
------------------

2001................................................................ $100,275
2002................................................................ 73,566
2003................................................................ 16,080
2004................................................................ 9,380
--------
$199,301
========

Financial instruments

The Company's financial instruments consist of its cash, marketable
securities accounts and notes receivable, and trade payables.

Cash and Marketable Securities

The Company maintains its cash in bank deposit and other accounts, which, at
times, may exceed federally insured limits. The Company invests excess cash not
required for operations in U.S. Treasury repurchase agreements in connection
with its cash management account with its primary bank. The Company has not
experienced any losses in such accounts, and does not believe it is subject to
any credit risks involving its cash.

F-26

AIRTECH INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS--(Continued)

Accounts and notes receivable, trade

The Company accounts and notes receivables are unsecured and represent sales
not collected to date. Management believes these accounts and notes receivables
are fairly stated at estimated net realizable amounts.

Stock options and warrants

Through the quarter ended February 28, 2001 and 2000, the Company has issued
various stock options and warrants to employees and others and uses the
intrinsic value method of accounting for these stock options. Compensation cost
for options granted has not been recognized in the accompanying financial
statements because the amounts are not material and its exercise price exceeded
the common stock fair market value at the date of option. The options and
warrants expire between September 2000 and February 2006 and are exercisable at
prices from $0.10 to $10.00 per option or warrant. Exercise prices were set at
or above the underlying common stock's fair market value on the date of grant.

Subsequent event

On November 2, 2000, the Company and its subsidiary entered into a Stock
Purchase Agreement with Southern Therapy, Inc. and its principal shareholders
("STI") to purchase the majority of shares of STI. At this time the Parties
have agreed not to consummate this merger. Under the terms of the Stock
Purchase Agreement, the Company would swap stock for the purchase price. Due to
the decreasing market price of the underlying shares of Company Common Stock
since the Agreement was reached, the Company has decided that the cost of the
transaction has exceeded the number of shares of stock that prudently should be
issued based upon the stock price of the Company Common Stock.

However, recognizing the strengths of STI, the Company has entered into a
Distribution Agreement with STI. STI will exclusively represent the Company in
marketing and selling the portable air-purification unit to the U.S. medical
industry.

F-27

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Officers and Directors

The Wyoming Business Corporation Act provides that indemnification of
directors, officers, employees and other agents of a corporation, and persons
who serve at its request as directors, officers, employees or other agents of
another corporation may be provided by the Company. Subject to Wyoming law, our
officers and directors are not personally liable for personal damages resulting
from breaches of their fiduciary duty unless (i) the officer or director has
breached his fiduciary duty of loyalty to the Company or its stockholders, (ii)
the breach or failure to perform constitutes an act or omission not in good
faith or which involves intentional misconduct or a knowing violation of law;
or for any transaction from which the officer or director derived an improper
personal benefit. The Company's By-Laws provide indemnification to directors,
officers, employees and agents, including claims brought under state or Federal
Securities laws, to the full extent allowable under Wyoming law. The Company
also has entered into indemnification agreements with its directors and
executive officer providing, among other things, that the Company will provide
defense cost against any such claim, subject to reimbursement in certain
events.

Item 25. Other Expenses of Issuance and Distribution

The estimated expenses in connection with the offering are as follows:

Securities and Exchange Commission registration fee................. $ 831
Accounting fees and expenses........................................ $ 1,000
Blue Sky fees and expenses.......................................... $ 2,500
Legal fees and expenses............................................. $15,000
Printing............................................................ $ 5,000
Miscellaneous....................................................... $ 5,000
-------
Total............................................................. $29,331
=======

Item 26. Recent Sales of Unregistered Securities

Principal Price
Amount or per Nature of Issued under
Date Title Shares Issued Share Transaction Exemption
---- ----- ------------- ----- ----------- ------------

March 30, 2001 12% Convertible $800,000 N/A Private Section 4(2)
Debentures with Placement of the
500,000 attached Securities Act
Warrants

March 30, 2001 Common Stock 955,128 $0.19 Shares issued to S-8
employees and Registration
senior Statement
management for
services
rendered

March 30, 2001 Common Stock 105,000 $0.23 Shares issued to Section 4(2)
NIR Group, LLC of the
for placement of Securities Act
12% debentures

February 28, 2001 Common Stock 500,000 $0.18 Shares issued to S-8
employees and Registration
senior Statement
management for
services
rendered

March 27, 2001 Common Stock 308,541 $0.24 Shares issued to Section 4(2)
an accredited of the
investor in Securities Act
conversion of
limited
partnership
interests in
Airsopure 999,
LP

II-1

Principal Price
Amount or per Nature of Issued under
Date Title Shares Issued Share Transaction Exemption
---- ----- ------------- ----- ----------- ------------

January 2001 Common Stock 2,800,000 $0.15 Shares issued to Section 4(2)
accredited of the
investors Securities Act

January 8, 2001 Common Stock 200,000 $0.25 Shares issued to Section 4(2)
accredited of the
investor Securities Act

June 30, 2000 Common Stock 400,000 $0.25 Shares issued in Section 4(2)
exchange of of the
warrants held by Securities Act
holders of
Series M
Preferred Stock

February 22, 2000 6% Convertible $2,500,000 N/A Private Section 4(2)
Debentures with Placement of the
250,000 attached Securities Act
Warrants

January 2000 thru March 12% Convertible $ 350,000 N/A Private Section 4(2)
2000 Debentures Placement of the
Securities Act

January 2000 thru Common 200,000 $0.25 to Private Section 4(2)
February 2000 $0.75 Placement of the
Securities Act

December 31, 1999 Common 300,000 $0.19 Shares issued to S-8
CEO and Registration
President for Statement
services
rendered

August 31, 1999 Common 358,591 $0.34 to Shares issued to S-8
$0.50 investment Registration
bankers, Statement
consultants,
management, CEO
and President
for services
rendered or to
be rendered.

June 30, 1999 Common 1,200,000 $0.10 Shares issued to Section 4(2)
accredited of the
investors, Securities Act
including
500,000 shares
to CR Saulsbury,
Sr. Warrants
attached are
exercisable at
$0.20 and expire
on May 31, 2000

May 31, 1999 Common 700,000 $0.10 Shares issued to Section 4(2)
accredited of the
investors, Securities Act
including
500,000 shares
to Peter Kertes.
Warrants
attached are
exercisable at
$0.20 and expire
on May 31, 2000

February 28, 1999 Common 1,583,134 $0.50 Shares issued to Section 4(2)
CEO and of the
President in Securities Act
consideration of
deferred wages
from June 1,
1997 through
December 31,
1998

December 31, 1998 Common 46,250 $0.50 Warrants Section 4(2)
exercised by of the
holders of Securities Act
Series M
Preferred Stock

November 30, 1998 Common 828,000 $0.33 Shares issued to Section 4(2)
accredited of the
investors Securities Act
including C.R.
Saulsbury, Sr.

II-2

Principal
Amount or Price per Nature of Issued under
Date Title Shares Issued Share Transaction Exemption
---- ----- ------------- --------- ----------- ------------

November 30, 1998 Common 224,000 $0.48 to Shares issued to S-8
$0.69 investment Registration
bankers and Statement
consultants for
services
rendered

August 31, 1998 Common 146,025 $1.25 to Shares issued to S-8
$1.56 consultants and Registration
employees for Statement
services
rendered

July 31, 1998 Common 2,614,286 $0.70 Conversion of Section 4(2)
debentures of the
issued in Securities Act
conjunction with
the acquisition
of AIC

July 31, 1998 Common 2,371,603 One-for-one Conversion of Section 4(2)
Series A of the
preferred stock Securities Act
issued in
conjunction with
the acquisition
of AIC

March 1998 thru Series M 1,143,750 $1.14 Private Section 4(2)
September 1998 Preferred Placement of the
Securities Act

Item 27. Exhibits

Exhibit
Number Document
------- --------

3.1 Restated Articles of Incorporation filed December 27, 1991 of the
Company's predecessor in name, Interactive Technologies Corporation,
Inc. (incorporated by reference to the Company's Registration
Statement on Form SB-2 filed on May 8, 2000, Registration Statement
No. 333-36554)

3.2 Articles of Amendment dated filed May 14, 1997 of the Company's
predecessor in name Interactive Technologies Corporation, Inc.
(incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)

3.3 Articles of Amendment of the Company filed October 16, 1998
(incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)

3.4 Bylaws of the Company's predecessor in name, Interactive Technologies
Corporation, Inc. (incorporated by reference to the Company's Form 10
filed on January 14, 1992)

4.1 Specimen Series "M" Preferred Stock Certificate (incorporated by
reference to the Company's Registration Statement on Form SB-2 filed
on May 8, 2000, Registration Statement No. 333-36554)

4.2 Specimen Common Stock Certificate (incorporated by reference to the
Company's Registration Statement on Form SB-2 filed on May 8, 2000,
Registration Statement No. 333-36554)

4.3 Form of Warrant to purchase shares of Common Stock granted to holders
of Series "M" Convertible Preferred Stock (incorporated by reference
to the Company's Registration Statement on Form SB-2 filed on May 8,
2000, Registration Statement No. 333-36554)

4.4 Form of 6% Convertible Debenture Due 2002 (incorporated by reference
to the Company's Registration Statement on Form SB-2 filed on May 8,
2000, Registration Statement No. 333-36554)

4.5 Form of Warrant to purchase shares of Common Stock granted to holders
of 6% Convertible Debentures Due 2002 (incorporated by reference to
the Company's Registration Statement on Form SB-2 filed on May 8,
2000, Registration Statement No. 333-36554)

II-3

Exhibit
Number Document
------- --------

4.6 Registration Rights Agreement dated February 22, 2000 by and between
the Company and PK Investors LLC relating to the registration of the
Common Stock and Warrants related to Exhibits 4.4 and 4.5
(incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)

4.7 Form of 12% Convertible Debenture Due 2005 (incorporated by reference
to the Company's Form 10-KSB filed on September 7, 2000)

4.8 Form of Warrant to purchase shares of Common Stock granted to holders
of 12% Convertible Debentures Due 2005 (incorporated by reference to
the Company's Form 10-KSB filed on September 7, 2000)

5.1 Legal Opinion of John G. Rebensdorf, P.C. (to be filed)

10.1 Employment Agreement dated May 1, 1997 between the Company and C.J.
Comu (incorporated by reference to the Company's Registration
Statement on Form SB-2 filed on May 8, 2000, Registration Statement
No. 333-36554)

10.2 Form of Franchise Agreement relating to franchises offered by
Airsopure International Group, Inc., a wholly-owned subsidiary of the
Company (incorporated by reference to the Company's Registration
Statement on Form SB-2 filed on May 8, 2000, Registration Statement
No. 333-36554)

10.3 Form of Development Agreement offered to franchisees by Airsopure
International Group, Inc., a wholly-owned subsidiary of the Company
(incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)

10.4 Form of Offering Circular presented to franchisees by Airsopure
International Group, Inc., a wholly-owned subsidiary of the Company
(incorporated by reference to the Company's Registration Statement on
Form SB-2 filed on May 8, 2000, Registration Statement No. 333-36554)

10.5 Securities Purchase Agreement dated March 29, 2001 relating to the
sale of 12% convertible debentures (filed herewith)

10.6 Security Agreement dated March 29, 2001 securing the 12% debentures
(filed herewith)

10.7 Form of 12% Secured Convertible Debenture Due 2003 (filed herewith)

10.8 Form of Stock Purchase Warrant to purchase shares of Common Stock
granted to holders of 12% Debentures Due 2003 (filed herewith)

10.9 Registration Rights Agreement dated March 29, 2001 relating to the
registration of the Common Stock related to Exhibit 10.7 (filed
herewith)

10.10 Lock-up Agreement dated March 30, 2001 between the Company and PKI
Investors, LLC (filed herewith)

10.11 Distributor Agreement dated February 19, 2001 by and between the
Company and W&B Service Company (filed herewith)

10.12 Distributor Agreement dated March 15, 2001 by and between the Company
and Southern Therapy, Inc. (filed herewith)

21 Subsidiaries of the Registrant (filed herewith)

23.1 Consent of Turner, Stone & Company (filed herewith)

23.2 Consent of John G. Rebensdorf, P.C. (to be filed)

24.1 Power of Attorney (included in Part II of the Registration Statement)

II-4

Item 28. Undertakings

The undersigned registrant hereby undertakes:

1. To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement (i) to include any prospectus required by Section
10(a) (3) of the Securities Act of 1933; (ii) to reflect in the prospectus
any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and (iii) to include any additional or changed material
information on the plan of distribution.

2. That, for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment as a new registration
statement of the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.

3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.

II-5

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Dallas, State of Texas,
on the 14th day of May, 2001.

Airtech International Group, Inc.,
a Wyoming corporation (Registrant)

/s/ C J Comu
By: _________________________________
C J Comu
Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints
C.J. Comu and James R. Halter, and each or either of them, his true and lawful
attorney-in-fact with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement and any registration statement that is to be effective upon filing
pursuant to Rule 462 under the Securities Act of 1933, as amended, and to cause
the same to be filed with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
granting to said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing whatsoever requisite
or desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or
either of them, or their substitutes or substitute, may lawfully do or cause to
be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the 14th day of May, 2001 by
the following persons in the capacities indicated.

Signature Title
--------- -----

/s/ C J Comu Director and Chief Executive
______________________________________ Officer
C J Comu

/s/ Samuel S. McKenney, III Director
______________________________________
Samuel S. McKenney, III

/s/ James R. Halter Director, Chief Financial
______________________________________ Officer and General Counsel
James R. Halter (Principal Financial and
Accounting Officer)

/s/ R. John Harris Director and President
______________________________________
R. John Harris

/s/ Robert Galvan Director
______________________________________
Robert Galvan

II-6

EXHIBIT INDEX

Exhibit
Number Document
------- --------

3.4 Bylaws of the Company's predecessor in name, Interactive Technologies
Corporation, Inc. (incorporated by reference to the Company's Form 10
filed on January 14, 1992)

4.1 Specimen Series "M" Preferred Stock Certificate (incorporated by
reference to the Company's Registration Statement on Form SB-2 filed
on May 8, 2000, Registration Statement No. 333-36554)

4.2 Specimen Common Stock Certificate (incorporated by reference to the
Company's Registration Statement on Form SB-2 filed on May 8, 2000,
Registration Statement No. 333-36554)

4.4 Form of 6% Convertible Debenture Due 2002 (incorporated by reference
to the Company's Registration Statement on Form SB-2 filed on May 8,
2000, Registration Statement No. 333-36554)

4.7 Form of 12% Convertible Debenture Due 2005 (incorporated by reference
to the Company's Form 10-KSB filed on September 7, 2000).

4.8 Form of Warrant to purchase shares of Common Stock granted to holders
of 12% Convertible Debentures Due 2005 (incorporated by reference to
the Company's Form 10-KSB filed on September 7, 2000).

5.1 Legal Opinion of John G. Rebensdorf, P.C. (to be filed)

10.1 Employment Agreement dated May 1, 1997 between the Company and C.J.
Comu (previously filed)