ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Capital/Financing Update 2004

Oct 21, 2004

ENVIRONMENTAL SOLUTIONS INTERNATIONAL LTD

20 October 2004

To ESI Shareholders

PERTH OFFICE

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21 TEDDINGTON ROAD PO RAY LLA BURSWOOD WA 6100 AUSTRALIA TELEPHONE: 61 8 9470 4004 FACSIMILE: 61 8 9355 0450

WEBSITE: www.environ.com.au

MELBOURNE OFFICE

SUITE 6, 28 YOUNG STREET MOONEE PONDS VIC 3039 TELEPHONE: 61 3 9326 2980 FACSINILE: 61-3-9326-2142

BRISBANE OFFICE

7 BAROONA ROAD, MILTON QLD 4064 PO Box 1974, MILTON QLD 4064 TELEPHONE: 61 7 3876 4011 FACSIMILE: 61 7 3876 4022

Shareholders may have seen a report that the Company has entered into a preliminary arrangement with Zenon International Inc (ZENON) of Canada. The arrangement is subject to a formal agreement with ZENON and to shareholder approval and is in the following terms.

• Upon approval by ESI shareholders ZENON will take an allotment of 35,000,000 $\bullet$ shares at 7.5 cents per share which will raise \$2,625,000.
• ZENON will have the option exercisable within 12 months of subscribing for 55,000,000 further shares at 8 cents per share.
• ZENON will have a further option exercisable within 2 years of subscribing for a $\bullet$ further 50,000,000 at 9 cents per share.

In addition to providing a significant boost to working capital which will allow ESI to continue with its penetration of the Australian market with its leading SBR and anaerobic technology. ESI envisions a number of potential synergies resulting from working together with ZENON including:

• taking advantage of ZENON's preferred component purchasing arrangements;
• gaining access to ZENON's products and processes for water treatment including $\bullet$ reverse osmosis systems, military systems, mobile systems and packaged commercial systems;
• better positioning ESI to grow into the Southeast Asian and other Asian markets; $\bullet$
• becoming a global leader in the new membrane technologies in which ESI has particular skills and expertise.

Two members from ZENON management will join the Board of ESI.

ZENON is a world leader in providing advanced membrane products and services for water purification, wastewater treatment and water reuse to municipalities and industries worldwide.

The 2003 recipient of the prestigious Stockholm Industry Water Award, ZENON was selected as the award winner because of the company's innovative approach to the development of water and wastewater process technologies along with its contributions to environment improvement. ZENON is listed on the Toronto Stock Exchange and has a market capitalisation of in excess of \$650 million Canadian.

The Board considers the proposal reasonable for the following reasons:

1. the losses the Company incurred have significantly depleted its cash reserves;

• 1. the Board considers that there is no realistic chance of obtaining significant borrowings and that a capital raising is essential:
• 1. the Company has approximately \$11 million of bank guarantees outstanding. The Bank has been putting strong pressure on the Company to find an additional facility, and also to get further capital into the Company:
• 1. the Company had two other proposals in addition to the ZENON proposal. The first involved control of ESI being ceded but at a price significantly lower than the price being paid by ZENON. The other involved buying all the assets of ESI at a price around about the market capitalisation of the Company. The Directors decided the ZENON proposal would be the most attractive from the point of view of shareholders;
• 1. If this proposal proceeds it will give shareholders the prospect of some upside. The Directors believe that the relationship with ZENON will provide the opportunity for ESI to sell its innovative water and wastewater solutions overseas using the ZENON network which should significant enhance profitability. This is in addition to the other benefits the association with ZENON will bring.

The Board recognises that shareholders are entitled to be upset with the losses which have been incurred, however, the Board firmly believes that what is proposed is the best chance that shareholders have to recover their investment.

Unfortunately, we are not in a position to seek shareholder approval at the Annual General Meeting. Assuming a final agreement is reached with ZENON we will be calling an Extraordinary General Meeting of shareholders to approve the agreement.

Yours sincerely TEO'Connor QC Chairman