content: SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
  
  
                                   FORM 8-K
  
  
                                CURRENT REPORT
                Pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934
  
  
       Date of Report (Date of earliest event reported): December 7, 2004
  
  
                              SONEX RESEARCH, INC.
                (Exact name of registrant as specified in Charter)
  
  
           Maryland                  000-14465              52-1188993
        (State or other           (Commision file         (IRS employer
        jurisdiction of               number)           identification no.)
         incorporation)
  
  
                       23 Hudson Street, Annapolis, MD 21401
                      (Address of principal executive offices)
  
  
                                (410) 266-5556
               (Registrant's telephone number, including area code)
  
  
                                      N/A
           (Former name or former address, if changed since last report)
  
  
  
  Check  the  appropriate  box  below  if the  Form  8-K  filing  is  intended  to
  simultaneously  satisfy the filing obligation of the registrant under any of the
  following   provisions  (see  General  Instruction  A.2.  below):
  
  [ ]  Written communications  pursuant to Rule 425 under the Securities Act
       (17 CFR 230.425)
  [ ]  Soliciting  material  pursuant to Rule 14a-12  under the Exchange Act
       (17 CFR 240.14a-12)
  [ ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the
       Exchange  Act (17 CFR  240.14d-2(b))
  [ ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the
       Exchange Act (17 CFR 240.13e-4(c))
  
  
  
  
  
  
  ITEM 8.01 - OTHER EVENTS
  
  On December 7, 2004, the Registrant  posted the  "Shareholder  Update - November
  2004", presented here as Exhibit 1, on its website  (www.sonexresearch.com)  and
  delivered  it  with  the  proxy   materials  for  its  2004  Annual  Meeting  of
  Shareholders  to be held on  Monday,  December 20,  2004 at  10:00  a.m.  at the
  Hampton Inn & Suites in Annapolis, Maryland.
  
  
  
  SIGNATURES
  
  Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned hereunto duly authorized.
  
  
  December 7, 2004
  
  SONEX RESEARCH, INC.
  Registrant
  
  
  /s/ George E. Ponticas
  ----------------------
  George E. Ponticas
  Chief Financial Officer and Secretary
  
  
  
  
                                                                         EXHIBIT 1
  
  
                                SONEX RESEARCH, INC.
                                  23 Hudson Street
                                 Annapolis, MD 21401
                        Tel: 410-266-5556; Fax: 410-266-5653
                              E-mail: info@sonex-na.com
                           Website: www.sonexresearch.com
  
  
                                 SHAREHOLDER UPDATE
  
                                   November 2004
  
  
  Dear Fellow Shareholders:
  
  Sonex  Research,  Inc.  (OTCBB:  SONX)  will  hold its 2004  Annual  Meeting  of
  Shareholders in Annapolis on Monday,  December 20, 2004. This Shareholder Update
  is  being  provided  with  the  proxy  materials  for the  Annual  Meeting.  The
  accompanying  Annual Report on Form 10-KSB for the year ended  December 31, 2003
  provides a comprehensive  explanation of the Company's business  initiatives and
  finances  as of April 2004 when the Form  10-KSB  was filed  with the SEC.  This
  Shareholder Update brings us forward to the present, including a brief financial
  overview  derived from our September 30, 2004  Quarterly  Report on Form 10-QSB.
  The complete Annual Report,  Quarterly Report, and Proxy Statement as filed with
  the SEC are  available  by  following  the link to SEC  Filings  provided in the
  Investor Relations section of our website  www.sonexresearch.com.  The documents
  on the SEC's  website are in plain text format and do not contain most  standard
  document formatting  features.  You can request formatted versions directly from
  the Company, either in electronic format or in hard copy.
  
  
  CURRENT ENGINE PROGRAMS
  
  In July 2004 the  Company  received a follow-on  task from the Defense  Advanced
  Research  Projects  Agency (DARPA) to continue  development of a  multi-cylinder
  "heavy fuel" engine (HFE) combustion process for potential Department of Defense
  (DoD)  applications such as unmanned aerial vehicles (UAVs).  Under the existing
  contract,  Sonex has adapted a lightweight gasoline automotive engine to a Sonex
  Combustion System (SCS)  unthrottled,  direct fuel injection  combustion process
  based on the Sonex  Controlled  Auto-Ignition  (SCAI)  technology to run on JP5,
  military kerosene-based heavy fuel. The SCAI process is enabled by a proprietary
  piston  technology  that achieves  in-cylinder  chemical  kinetics at a moderate
  compression  ratio for auto ignition of the JP5. The laboratory HFE features the
  proprietary Sonex pistons,  electronically controlled common rail fuel injection
  system and extensive instrumentation.
  
  The DARPA contract was extended to add a task to: enhance the 6-cylinder HFE for
  higher power output; achieve boosted HFE combustion  optimization;  perform data
  collection-analyses;  and  provide a  technical  readiness  demonstration.  This
  project is  sponsored by DARPA as a technology  feasibility  demonstration  of a
  means for lightweight  piston engines to comply with a DoD policy directive that
  mandates  kerosene-based  "heavy"  fuel for all  engines.  Gasoline  engines are
  typically 25% to 30% lighter than diesel engines; thus, fully qualified, adapted
  gasoline engine designs that could burn low cetane (hard to ignite, diesel type)
  heavy fuel would address DoD performance, logistics and safety requirements.
  
  Achievement  of the technical  readiness  demonstration  is expected to form the
  basis for  in-depth  discussions  with the major DoD prime  contractor  which is
  building a UAV for DARPA that  requires  such a  high-powered  HFE. In addition,
  outcomes from the DARPA program  could  validate the sparkless  SCAI process for
  in-cylinder  control of ignition and combustion that could be applied later to a
  gasoline  powered version for use in automobiles to achieve better fuel economy.
  Sonex  also  believes  the   availability   of  the  resultant   multi-cylinder,
  four-stroke HFE from a successful outcome of the DARPA project could lead to use
  in other military engine  programs,  as well as having  potential for use in the
  commercial  marine  market.  During  2004  the  Company  expanded  the  range of
  lightweight,  spark-ignited,  two-stroke,  gasoline  engines  it  has  converted
  successfully  to heavy fuel  operation  through  application of its SCS starting
  system and modified combustion  chamber.  The Company seeks to capitalize on the
  success to date with SCS HFEs by participation in new DoD programs, particularly
  for smaller  UAVs,  whose  sponsors are obliged to make an effort to comply with
  the directive on the elimination of gasoline as a battlefield fuel.
  
  Under a Department of Energy (DOE) subcontract awarded late in 2002 by DOE prime
  contractor  Compact Membrane Systems,  Inc. (CMS), Sonex undertook an evaluation
  of the diesel engine emissions  reduction potential of combining the SCS and the
  CMS polymer membrane  technology for the addition of nitrogen enriched air (NEA)
  to the combustion process. Sonex conducted the testing on an advanced, research,
  three-cylinder,  common rail direct injected,  turbo-charged,  automotive diesel
  engine developed by a major international vehicle manufacturer in the joint U.S.
  government and automotive industry funded PNGV (Partnership for a New Generation
  Vehicle)   program.   Initial  testing   focused  on  the  emissions   reduction
  capabilities  of the SCS Low Soot Diesel Design (LSDD)  pistons  without the NEA
  membrane.
  
  The  Company  was not able to achieve  the LSDD  performance  achieved  in other
  engines with conventional  injection  systems.  Sonex encountered  difficulty in
  controlling the characteristics of the common rail injection system and matching
  its requirements with the design requirements of the SCS pistons,  which must be
  compatible with the fuel injection system and computer  control.  Achieving this
  synergy  proved to be very  challenging  since many  critical  parameters of the
  engine baseline and electronic engine control unit (ECU) were not made available
  to Sonex. In addition,  initial testing with the NEA membrane  demonstrated  the
  limited viability for  commercialization of the CMS membranes in this automotive
  size  application.  During the first quarter of 2004, CMS suspended further work
  on the program.  Sonex  developed and presented in April 2004 to the DOE program
  sponsor a plan to understand the  difference  between the common rail system and
  earlier injection systems when used with LSDD pistons;  however, the DOE did not
  reinstate the funding to Sonex.
  
  Sonex will utilize the automotive  diesel engine as a laboratory asset and as an
  LSDD  demonstrator.  To  overcome  the  difficulties  encountered  with  the ECU
  provided,  Sonex has replaced it with a commercial  ECU and now has full control
  of the common rail fuel injection system. This will allow demonstrating the full
  capabilities  of the LSDD in this  engine and thereby  provide  SCS  in-cylinder
  emissions  reduction  data on a modern  multi-cylinder  diesel engine for engine
  manufacturers  to evaluate the  potential for SCS designs to reduce the cost and
  complexity of future exhaust aftertreatment systems.
  
  
  ORGANIZATIONAL CHANGES
  
  During  2004 the  Company  experienced  a number of  significant  organizational
  changes.  In February  following the resignation of its three outside directors,
  who cited other business  responsibilities  as the reason for  resignation,  the
  Board was  reconstituted and a new president was hired to fill the position that
  had been vacant. The Company's new president, who was also named chief executive
  officer  in July 2004,  was  brought  on to  develop,  raise  capital  for,  and
  implement an updated  business plan, the primary goal of which was to transition
  Sonex  from  a  research  and   development   company  into  a  technology   and
  manufacturing enterprise. The Company, however, has been unable to date to raise
  sufficient  capital to complete and  implement  this updated  business  plan. In
  October 2004 the Company's new president and chief executive  officer  resigned,
  and I took over those roles.
  
  As a result of other recent changes in its  membership,  the Company's  Board of
  Directors now consists of our chief  financial  officer,  George  Ponticas,  and
  myself.  Our intention is to add to the Board one or more qualified  individuals
  who have no current  affiliation with the Company towards a goal of constituting
  a Board  with a majority  of  independent  directors.  In  addition,  we hope to
  determine  the proper  course of action to move Sonex  forward.  The  Company is
  pursuing new  opportunities  for revenue as  development  work  continues on the
  current engine projects and is attempting to secure relationships with companies
  which have technologies complementary to the Sonex processes.
  
  
  
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  From the second  half of 2002  through  2003,  Sonex saw  substantial  growth in
  revenue,  but we have been unable to maintain that momentum in 2004. We continue
  to minimize disbursements through the voluntary deferral of current compensation
  by Company officers,  flexible payment  arrangements  with consultants,  and the
  securing  of  short-term  loans  from  shareholders.   The  Company's  long-term
  viability,  however,  is  dependent  upon its ability to enter into  significant
  funded contracts for the further development of its technology,  establish joint
  ventures or strategic  partnerships with major industrial concerns,  or secure a
  major capital  infusion.  There is no assurance  that we will be able to achieve
  these objectives.  In the event sufficient funding is not available, the Company
  would have to substantially reduce the level of its operations. Such a reduction
  could  have a  material  adverse  effect  on the  Company's  relationships  with
  government funding sources, strategic partners and potential customers.
  
  The following are summary  figures for, and a brief  discussion  of,  results of
  operations for the nine-month periods ended September 30, 2004 and 2003.
  
  
                                                     Nine months ended
                                                       September 30,
                                              ------------------------------
                                                  2004             2003
                                              ------------     -------------
  
  
  Revenue                                     $    249,907     $     603,648
                                              ------------     -------------
  
  Cost of revenue                                  388,104           403,931
  Research & development                            33,488           180,901
  General & administrative                       1,027,305           298,974
  Interest expense, net of interest income          11,949             7,330
                                              ------------     -------------
                                                 1,460,846           891,136
                                              ------------     -------------
  
  Net loss                                    $ (1,210,939)    $    (287,488)
                                              ============     =============
  
  
  Revenue  decreased  59% from the first  nine  months  of 2003 to the  comparable
  period in 2004, as work wound down in 2004 on the two major government  projects
  discussed previously which were awarded to the Company during the second half of
  2002.  Combined  revenue from these two projects  decreased from $547,948 in the
  first nine months of 2003 to $178,991 in the current period. With respect to the
  first project,  in July 2004 the Company received a $192,932 follow-on task from
  DARPA.  To date,  $88,591 of this total has been billed and  received,  while an
  additional  $104,341  remains to be billed for work to be performed  through the
  completion  of the  task.  Further  funding  for  the  second  project,  the DOE
  subcontract, has been discontinued.
  
  Total costs and expenses increased 64% from the first nine months of 2003 to the
  comparable  period in 2004. A  significant  portion of the increase in costs and
  expenses  resulted from the  organizational  changes undergone by the Company in
  2004.
  
  Cost of revenue  primarily  consists of direct  labor  charges and other  direct
  expenditures, including those for technical consulting services, attributable to
  funded programs, as well as allocated fringe benefits,  payroll taxes, and labor
  overhead charges. While cost of revenue during the first nine months of 2003 was
  67% of revenue,  in the first nine months of 2004 cost of revenue  substantially
  exceeded  revenue,  primarily  due to  significant,  unanticipated  project cost
  overruns  during  the  first  and  second  quarters  of 2004 and a higher  labor
  overhead rate in 2004 versus 2003.
  
  General and administrative (G&A) expenses consisted of the following amounts:
  
  
                                                     Nine months ended
                                                       September 30,
                                              ------------------------------
                                                  2004             2003
                                              ------------     -------------
  
  Employee compensation, taxes & benefits     $    358,376     $     118,614
  Consulting fees                                  433,309            99,860
  Professional fees                                157,046            29,082
  Other expenses                                    78,574            51,418
                                              ------------     -------------
  
  Total G&A expenses                          $  1,027,305     $     298,974
                                              ============     =============
  
  
  Total G&A  expenses for the first nine months of 2004 more than tripled from the
  comparable  period  in  the  prior  year,  largely  due to  substantial  charges
  resulting  from  the  hiring  of a new  president  in  February  2004.  Employee
  compensation  increased  by  $239,762  from  2003 to 2004,  as  charges  for the
  compensation of the new president, who was also named chief executive officer in
  July 2004,  totaled $220,052.  This figure includes amounts related to stock and
  stock option compensation,  the award of a cash bonus for which payment is being
  deferred  until 2006,  and  salary,  nearly 50% of which has been  deferred.  In
  October 2004 the Company's new president and chief executive officer resigned.
  
  Consulting  fees  increased  by  $333,449  from 2003 to 2004.  Charges  for 2004
  include $262,500  associated with a consulting  agreement  effective in February
  2004 for services to assist in the  transition  of the Company into a technology
  and  manufacturing  enterprise  under the updated business plan being developed.
  Such  charges  consist of $195,000  for the value of common  stock  issuable and
  $67,500 for the estimated fair value of warrants to purchase common stock. Other
  charges in 2004 totaling  $92,500,  including  $33,600  payable in common stock,
  represent fees for various business advisory  services from individuals  engaged
  by the Company's new president.
  
  The  increase  in  professional  fees of  $127,964  from  2003 to 2004 is almost
  entirely  due to a charge  in the  first  quarter  of 2004 for a  non-refundable
  retainer  payable in stock valued at $120,000 to the  Company's  new  securities
  legal  counsel in March 2004.  This firm  subsequently  invoiced  the Company an
  additional  $102,000 for  services  rendered  through  June 30, 2004.  Sonex has
  disputed the firm's entitlement to the fees claimed and is presently represented
  by another  attorney on a pro bono basis in  connection  with this  matter.  The
  Company has requested,  but has not received, an explanation of, and the billing
  support  for,  the  amounts  invoiced  by this firm.  While the  outcome of this
  dispute is uncertain and may have an adverse  effect on the Company's  financial
  condition, we believe that the Company has a defensible position.
  
  
  Closing
  
  My belief in the SCS technology and the Company remains  steadfast.  I extend my
  gratitude  to my fellow  shareholders  for their  continued  support  and to our
  employees and consultants for their dedication and commitment. I look forward to
  seeing many of you at the 2004 Annual  Meeting of  Shareholders  in Annapolis on
  Monday, December 20, 2004.
  
  
                                     Sincerely,
  
  
  
  
                                     Andrew A. Pouring, D.Eng.
                                     Chairman of the Board of Directors
                                     Chief Executive Officer and President
  
  
  
  CAUTION REGARDING FORWARD-LOOKING STATEMENTS
  
  "Forward-looking"  statements  contained in this report, as well as all publicly
  disseminated  material about the Company, are made pursuant to the "safe harbor"
  provisions of the Private  Securities  Litigation Act. Such statements are based
  on current  expectations,  estimates,  projections and assumptions by management
  with respect to matters such as commercial acceptance of the SCS technology, the
  impact of  competition,  and the  Company's  financial  condition  or results of
  operations.  Readers are cautioned  that such  statements  are not guarantees of
  future  performance and involve risks and uncertainties  that could cause actual
  results to differ  materially from those  expressed in any such  forward-looking
  statements.  Additional  information  regarding  the  risks  faced  by  Sonex is
  provided in the  Company's  periodic  filings with the  Securities  and Exchange
  Commission  (SEC) under the heading "Risk  Factors".  Such filings are available
  upon  request  from the  Company  or  online  in the  SEC's  EDGAR  database  at
  www.sec.gov.
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text: SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
  
                                   FORM 8-K
  
                                CURRENT REPORT
                Pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934
  
       Date of Report (Date of earliest event reported): December 7, 2004
  
                              SONEX RESEARCH, INC.
                (Exact name of registrant as specified in Charter)
  
           Maryland                  000-14465              52-1188993
        (State or other           (Commision file         (IRS employer
        jurisdiction of               number)           identification no.)
         incorporation)
  
                       23 Hudson Street, Annapolis, MD 21401
                      (Address of principal executive offices)
  
                                (410) 266-5556
               (Registrant's telephone number, including area code)
  
                                      N/A
           (Former name or former address, if changed since last report)
  
  Check  the  appropriate  box  below  if the  Form  8-K  filing  is  intended  to
  simultaneously  satisfy the filing obligation of the registrant under any of the
  following   provisions  (see  General  Instruction  A.2.  below):
  
  [ ]  Written communications  pursuant to Rule 425 under the Securities Act
       (17 CFR 230.425)
  [ ]  Soliciting  material  pursuant to Rule 14a-12  under the Exchange Act
       (17 CFR 240.14a-12)
  [ ]  Pre-commencement communications pursuant to Rule 14d-2(b) under the
       Exchange  Act (17 CFR  240.14d-2(b))
  [ ]  Pre-commencement communications pursuant to Rule 13e-4(c) under the
       Exchange Act (17 CFR 240.13e-4(c))
  
  ITEM 8.01 - OTHER EVENTS
  
  On December 7, 2004, the Registrant  posted the  "Shareholder  Update - November
  2004", presented here as Exhibit 1, on its website  (www.sonexresearch.com)  and
  delivered  it  with  the  proxy   materials  for  its  2004  Annual  Meeting  of
  Shareholders  to be held on  Monday,  December 20,  2004 at  10:00  a.m.  at the
  Hampton Inn & Suites in Annapolis, Maryland.
  
  SIGNATURES
  
  Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
  registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
  undersigned hereunto duly authorized.
  
  December 7, 2004
  
  SONEX RESEARCH, INC.
  Registrant
  
  /s/ George E. Ponticas
  ----------------------
  George E. Ponticas
  Chief Financial Officer and Secretary
  
                                                                         EXHIBIT 1
  
                                SONEX RESEARCH, INC.
                                  23 Hudson Street
                                 Annapolis, MD 21401
                        Tel: 410-266-5556; Fax: 410-266-5653
                              E-mail: info@sonex-na.com
                           Website: www.sonexresearch.com
  
                                 SHAREHOLDER UPDATE
  
                                   November 2004
  
  Dear Fellow Shareholders:
  
  Sonex  Research,  Inc.  (OTCBB:  SONX)  will  hold its 2004  Annual  Meeting  of
  Shareholders in Annapolis on Monday,  December 20, 2004. This Shareholder Update
  is  being  provided  with  the  proxy  materials  for the  Annual  Meeting.  The
  accompanying  Annual Report on Form 10-KSB for the year ended  December 31, 2003
  provides a comprehensive  explanation of the Company's business  initiatives and
  finances  as of April 2004 when the Form  10-KSB  was filed  with the SEC.  This
  Shareholder Update brings us forward to the present, including a brief financial
  overview  derived from our September 30, 2004  Quarterly  Report on Form 10-QSB.
  The complete Annual Report,  Quarterly Report, and Proxy Statement as filed with
  the SEC are  available  by  following  the link to SEC  Filings  provided in the
  Investor Relations section of our website  www.sonexresearch.com.  The documents
  on the SEC's  website are in plain text format and do not contain most  standard
  document formatting  features.  You can request formatted versions directly from
  the Company, either in electronic format or in hard copy.
  
  CURRENT ENGINE PROGRAMS
  
  In July 2004 the  Company  received a follow-on  task from the Defense  Advanced
  Research  Projects  Agency (DARPA) to continue  development of a  multi-cylinder
  "heavy fuel" engine (HFE) combustion process for potential Department of Defense
  (DoD)  applications such as unmanned aerial vehicles (UAVs).  Under the existing
  contract,  Sonex has adapted a lightweight gasoline automotive engine to a Sonex
  Combustion System (SCS)  unthrottled,  direct fuel injection  combustion process
  based on the Sonex  Controlled  Auto-Ignition  (SCAI)  technology to run on JP5,
  military kerosene-based heavy fuel. The SCAI process is enabled by a proprietary
  piston  technology  that achieves  in-cylinder  chemical  kinetics at a moderate
  compression  ratio for auto ignition of the JP5. The laboratory HFE features the
  proprietary Sonex pistons,  electronically controlled common rail fuel injection
  system and extensive instrumentation.
  
  The DARPA contract was extended to add a task to: enhance the 6-cylinder HFE for
  higher power output; achieve boosted HFE combustion  optimization;  perform data
  collection-analyses;  and  provide a  technical  readiness  demonstration.  This
  project is  sponsored by DARPA as a technology  feasibility  demonstration  of a
  means for lightweight  piston engines to comply with a DoD policy directive that
  mandates  kerosene-based  "heavy"  fuel for all  engines.  Gasoline  engines are
  typically 25% to 30% lighter than diesel engines; thus, fully qualified, adapted
  gasoline engine designs that could burn low cetane (hard to ignite, diesel type)
  heavy fuel would address DoD performance, logistics and safety requirements.
  
  Achievement  of the technical  readiness  demonstration  is expected to form the
  basis for  in-depth  discussions  with the major DoD prime  contractor  which is
  building a UAV for DARPA that  requires  such a  high-powered  HFE. In addition,
  outcomes from the DARPA program  could  validate the sparkless  SCAI process for
  in-cylinder  control of ignition and combustion that could be applied later to a
  gasoline  powered version for use in automobiles to achieve better fuel economy.
  Sonex  also  believes  the   availability   of  the  resultant   multi-cylinder,
  four-stroke HFE from a successful outcome of the DARPA project could lead to use
  in other military engine  programs,  as well as having  potential for use in the
  commercial  marine  market.  During  2004  the  Company  expanded  the  range of
  lightweight,  spark-ignited,  two-stroke,  gasoline  engines  it  has  converted
  successfully  to heavy fuel  operation  through  application of its SCS starting
  system and modified combustion  chamber.  The Company seeks to capitalize on the
  success to date with SCS HFEs by participation in new DoD programs, particularly
  for smaller  UAVs,  whose  sponsors are obliged to make an effort to comply with
  the directive on the elimination of gasoline as a battlefield fuel.
  
  Under a Department of Energy (DOE) subcontract awarded late in 2002 by DOE prime
  contractor  Compact Membrane Systems,  Inc. (CMS), Sonex undertook an evaluation
  of the diesel engine emissions  reduction potential of combining the SCS and the
  CMS polymer membrane  technology for the addition of nitrogen enriched air (NEA)
  to the combustion process. Sonex conducted the testing on an advanced, research,
  three-cylinder,  common rail direct injected,  turbo-charged,  automotive diesel
  engine developed by a major international vehicle manufacturer in the joint U.S.
  government and automotive industry funded PNGV (Partnership for a New Generation
  Vehicle)   program.   Initial  testing   focused  on  the  emissions   reduction
  capabilities  of the SCS Low Soot Diesel Design (LSDD)  pistons  without the NEA
  membrane.
  
  The  Company  was not able to achieve  the LSDD  performance  achieved  in other
  engines with conventional  injection  systems.  Sonex encountered  difficulty in
  controlling the characteristics of the common rail injection system and matching
  its requirements with the design requirements of the SCS pistons,  which must be
  compatible with the fuel injection system and computer  control.  Achieving this
  synergy  proved to be very  challenging  since many  critical  parameters of the
  engine baseline and electronic engine control unit (ECU) were not made available
  to Sonex. In addition,  initial testing with the NEA membrane  demonstrated  the
  limited viability for  commercialization of the CMS membranes in this automotive
  size  application.  During the first quarter of 2004, CMS suspended further work
  on the program.  Sonex  developed and presented in April 2004 to the DOE program
  sponsor a plan to understand the  difference  between the common rail system and
  earlier injection systems when used with LSDD pistons;  however, the DOE did not
  reinstate the funding to Sonex.
  
  Sonex will utilize the automotive  diesel engine as a laboratory asset and as an
  LSDD  demonstrator.  To  overcome  the  difficulties  encountered  with  the ECU
  provided,  Sonex has replaced it with a commercial  ECU and now has full control
  of the common rail fuel injection system. This will allow demonstrating the full
  capabilities  of the LSDD in this  engine and thereby  provide  SCS  in-cylinder
  emissions  reduction  data on a modern  multi-cylinder  diesel engine for engine
  manufacturers  to evaluate the  potential for SCS designs to reduce the cost and
  complexity of future exhaust aftertreatment systems.
  
  ORGANIZATIONAL CHANGES
  
  During  2004 the  Company  experienced  a number of  significant  organizational
  changes.  In February  following the resignation of its three outside directors,
  who cited other business  responsibilities  as the reason for  resignation,  the
  Board was  reconstituted and a new president was hired to fill the position that
  had been vacant. The Company's new president, who was also named chief executive
  officer  in July 2004,  was  brought  on to  develop,  raise  capital  for,  and
  implement an updated  business plan, the primary goal of which was to transition
  Sonex  from  a  research  and   development   company  into  a  technology   and
  manufacturing enterprise. The Company, however, has been unable to date to raise
  sufficient  capital to complete and  implement  this updated  business  plan. In
  October 2004 the Company's new president and chief executive  officer  resigned,
  and I took over those roles.
  
  As a result of other recent changes in its  membership,  the Company's  Board of
  Directors now consists of our chief  financial  officer,  George  Ponticas,  and
  myself.  Our intention is to add to the Board one or more qualified  individuals
  who have no current  affiliation with the Company towards a goal of constituting
  a Board  with a majority  of  independent  directors.  In  addition,  we hope to
  determine  the proper  course of action to move Sonex  forward.  The  Company is
  pursuing new  opportunities  for revenue as  development  work  continues on the
  current engine projects and is attempting to secure relationships with companies
  which have technologies complementary to the Sonex processes.
  
  FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  From the second  half of 2002  through  2003,  Sonex saw  substantial  growth in
  revenue,  but we have been unable to maintain that momentum in 2004. We continue
  to minimize disbursements through the voluntary deferral of current compensation
  by Company officers,  flexible payment  arrangements  with consultants,  and the
  securing  of  short-term  loans  from  shareholders.   The  Company's  long-term
  viability,  however,  is  dependent  upon its ability to enter into  significant
  funded contracts for the further development of its technology,  establish joint
  ventures or strategic  partnerships with major industrial concerns,  or secure a
  major capital  infusion.  There is no assurance  that we will be able to achieve
  these objectives.  In the event sufficient funding is not available, the Company
  would have to substantially reduce the level of its operations. Such a reduction
  could  have a  material  adverse  effect  on the  Company's  relationships  with
  government funding sources, strategic partners and potential customers.
  
  The following are summary  figures for, and a brief  discussion  of,  results of
  operations for the nine-month periods ended September 30, 2004 and 2003.
  
                                                     Nine months ended
                                                       September 30,
                                              ------------------------------
                                                  2004             2003
                                              ------------     -------------
  
  Revenue                                     $    249,907     $     603,648
                                              ------------     -------------
  
  Cost of revenue                                  388,104           403,931
  Research & development                            33,488           180,901
  General & administrative                       1,027,305           298,974
  Interest expense, net of interest income          11,949             7,330
                                              ------------     -------------
                                                 1,460,846           891,136
                                              ------------     -------------
  
  Net loss                                    $ (1,210,939)    $    (287,488)
                                              ============     =============
  
  Revenue  decreased  59% from the first  nine  months  of 2003 to the  comparable
  period in 2004, as work wound down in 2004 on the two major government  projects
  discussed previously which were awarded to the Company during the second half of
  2002.  Combined  revenue from these two projects  decreased from $547,948 in the
  first nine months of 2003 to $178,991 in the current period. With respect to the
  first project,  in July 2004 the Company received a $192,932 follow-on task from
  DARPA.  To date,  $88,591 of this total has been billed and  received,  while an
  additional  $104,341  remains to be billed for work to be performed  through the
  completion  of the  task.  Further  funding  for  the  second  project,  the DOE
  subcontract, has been discontinued.
  
  Total costs and expenses increased 64% from the first nine months of 2003 to the
  comparable  period in 2004. A  significant  portion of the increase in costs and
  expenses  resulted from the  organizational  changes undergone by the Company in
  2004.
  
  Cost of revenue  primarily  consists of direct  labor  charges and other  direct
  expenditures, including those for technical consulting services, attributable to
  funded programs, as well as allocated fringe benefits,  payroll taxes, and labor
  overhead charges. While cost of revenue during the first nine months of 2003 was
  67% of revenue,  in the first nine months of 2004 cost of revenue  substantially
  exceeded  revenue,  primarily  due to  significant,  unanticipated  project cost
  overruns  during  the  first  and  second  quarters  of 2004 and a higher  labor
  overhead rate in 2004 versus 2003.
  
  General and administrative (G&A) expenses consisted of the following amounts:
  
                                                     Nine months ended
                                                       September 30,
                                              ------------------------------
                                                  2004             2003
                                              ------------     -------------
  
  Employee compensation, taxes & benefits     $    358,376     $     118,614
  Consulting fees                                  433,309            99,860
  Professional fees                                157,046            29,082
  Other expenses                                    78,574            51,418
                                              ------------     -------------
  
  Total G&A expenses                          $  1,027,305     $     298,974
                                              ============     =============
  
  Total G&A  expenses for the first nine months of 2004 more than tripled from the
  comparable  period  in  the  prior  year,  largely  due to  substantial  charges
  resulting  from  the  hiring  of a new  president  in  February  2004.  Employee
  compensation  increased  by  $239,762  from  2003 to 2004,  as  charges  for the
  compensation of the new president, who was also named chief executive officer in
  July 2004,  totaled $220,052.  This figure includes amounts related to stock and
  stock option compensation,  the award of a cash bonus for which payment is being
  deferred  until 2006,  and  salary,  nearly 50% of which has been  deferred.  In
  October 2004 the Company's new president and chief executive officer resigned.
  
  Consulting  fees  increased  by  $333,449  from 2003 to 2004.  Charges  for 2004
  include $262,500  associated with a consulting  agreement  effective in February
  2004 for services to assist in the  transition  of the Company into a technology
  and  manufacturing  enterprise  under the updated business plan being developed.
  Such  charges  consist of $195,000  for the value of common  stock  issuable and
  $67,500 for the estimated fair value of warrants to purchase common stock. Other
  charges in 2004 totaling  $92,500,  including  $33,600  payable in common stock,
  represent fees for various business advisory  services from individuals  engaged
  by the Company's new president.
  
  The  increase  in  professional  fees of  $127,964  from  2003 to 2004 is almost
  entirely  due to a charge  in the  first  quarter  of 2004 for a  non-refundable
  retainer  payable in stock valued at $120,000 to the  Company's  new  securities
  legal  counsel in March 2004.  This firm  subsequently  invoiced  the Company an
  additional  $102,000 for  services  rendered  through  June 30, 2004.  Sonex has
  disputed the firm's entitlement to the fees claimed and is presently represented
  by another  attorney on a pro bono basis in  connection  with this  matter.  The
  Company has requested,  but has not received, an explanation of, and the billing
  support  for,  the  amounts  invoiced  by this firm.  While the  outcome of this
  dispute is uncertain and may have an adverse  effect on the Company's  financial
  condition, we believe that the Company has a defensible position.
  
  Closing
  
  My belief in the SCS technology and the Company remains  steadfast.  I extend my
  gratitude  to my fellow  shareholders  for their  continued  support  and to our
  employees and consultants for their dedication and commitment. I look forward to
  seeing many of you at the 2004 Annual  Meeting of  Shareholders  in Annapolis on
  Monday, December 20, 2004.
  
                                     Sincerely,
  
                                     Andrew A. Pouring, D.Eng.
                                     Chairman of the Board of Directors
                                     Chief Executive Officer and President
  
  CAUTION REGARDING FORWARD-LOOKING STATEMENTS
  
  "Forward-looking"  statements  contained in this report, as well as all publicly
  disseminated  material about the Company, are made pursuant to the "safe harbor"
  provisions of the Private  Securities  Litigation Act. Such statements are based
  on current  expectations,  estimates,  projections and assumptions by management
  with respect to matters such as commercial acceptance of the SCS technology, the
  impact of  competition,  and the  Company's  financial  condition  or results of
  operations.  Readers are cautioned  that such  statements  are not guarantees of
  future  performance and involve risks and uncertainties  that could cause actual
  results to differ  materially from those  expressed in any such  forward-looking
  statements.  Additional  information  regarding  the  risks  faced  by  Sonex is
  provided in the  Company's  periodic  filings with the  Securities  and Exchange
  Commission  (SEC) under the heading "Risk  Factors".  Such filings are available
  upon  request  from the  Company  or  online  in the  SEC's  EDGAR  database  at
  www.sec.gov.