UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q




(Mark
One)




R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
quarterly period ended November 30, 2008




or




£
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the transition period from
__________ to ______________







Commission
File Number:  000-51716


CLEAN POWER TECHNOLOGIES
INC.


(Exact
name of registrant as specified in its charter)





Nevada
            98-0413062(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





436
      35thAve N.W., Calgary, Alberta
            T2K
      0C1(Address
      of principal executive offices)
            (Zip
      Code)





(403) 277
2944


(Registrant’s  telephone
number, including area code)





(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


(1) Yes R   No
£


(2)  YesRNo£





Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company.  See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.





Large Accelerated filer  
£                                                                                                Accelerated
filer                    
£





Non-accelerated
filer      £                                                                         
Smaller reporting Company  R


(Do not check if a smaller reporting
company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.)


Yes £   No
R





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate by check mark whether the
registrant filed all documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.


Yes £   No
£





APPLICABLE
ONLY TO CORPORATE ISSUERS





Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date.




66,042,748
common shares outstanding as of December 19, 2008.


1




CLEAN
POWER TECHNOLOGIES INC.


TABLE
OF CONTENTS








PagePART
      IItem
      1.   Financial Statements
            3Item
      2.    Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
            26Item
      3.   Quantitative and Qualitative Disclosures About Market
      Risk
            29Item
      4T.   Controls and Procedures
            29PART
      IIItem
      1.   Legal Proceedings
            29Item
      1A. Risk Factors
            29Item
      2.   Unregistered Sales of Equity Securities and Use of
      Proceeds
            30Item
      3.   Defaults Upon Senior Securities
            30Item
      4.   Submission of Matters to a Vote of Security
      Holders
            30Item
      5.   Other Information
            31Item
      6.   Exhibits
            31Signatures
            34








2


PART
I




ITEM
1.                                FINANCIAL
STATEMENTS





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 210 8-03 of
Regulation S-X.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included.  All such adjustments are of a normal recurring
nature.  Operating results for the three month period ended November
30, 2008, are not necessarily indicative of the results that may be expected for
the fiscal year ending August 31, 2009.  For further information refer
to the audited financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended August 31,
2008.




PageUnaudited
      Consolidated Financial StatementsConsolidated
      Balance Sheets
            5Consolidated
      Statements of Operations and Comprehensive Loss
            6Consolidated
      Statements of Cash Flows
            7
      to 8Notes
      to Unaudited Consolidated Financial Statements
            9
      to 25








3





CLEAN
POWER TECHNOLOGIES INC.




(A
Development Stage Company)




REPORT
AND INTERIM CONSOLIDATED FINANCIAL STATEMENTS




November
30, 2008




(Stated in US
Dollars)







(UNAUDITED)


4


CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
BALANCE SHEETS


(Stated in U.S.
Dollars)


(Unaudited)





ASSETS
                
                November
      30,
                  2008
                
                
                August
      31,
                  2008CurrentCash
                
                $
                514,963
                
                
                $
                1,203,030Amounts
      Receivable - Note 4
                
                
                50,866
                
                
                
                15,071Prepaid
      expense
                
                
                118,486
                
                
                
                18,938684,315
                
                
                
                1,237,039Plant
      and equipment - Note 5
                
                
                608,319
                
                
                
                506,983Deferred
      financing costs, net of accumulated amortization
                  of
      $38,267 as of  November 30, 2008
                
                
                146,733
                
                
                
                169,795Total
      Assets
                
                $
                1,439,367
                
                
                $
                1,913,817Liabilities
      and Stockholders' DeficiencyCurrentAccounts
      payable and accrued liabilities
                
                $
                187,642
                
                
                $
                194,908Prepaid
      deposit
                
                
                83,990
                
                
                
                -Wages
      payable - related party - Note 5
                
                
                204,770
                
                
                
                126,667Stock
      option liability - Note 8(ii)
                
                
                401,279
                
                
                
                380,290Total
      current liabilities
                
                
                877,681
                
                
                
                701,865Due
      to related party - Note 5
                
                
                229,840
                
                
                
                139,521Secured
      convertible notes payable - including $63,111 accrued interest - Note
      7
                
                
                106,200
                
                
                
                47,342Embedded
      derivative liability - Note 7
                
                
                992,902
                
                
                
                1,933,002Warrant
      liability - Note 7
                
                
                2,335,813
                
                
                
                3,372,000Total
      Liabilities
                
                
                4,542,436
                
                
                
                6,193,730Stockholders'
      DeficiencyPreferred
      stock:  100,000,000 Class "A"   preferred shares
      authorized with zero  shares
      outstanding;   100,000,000 Class
      "B"   preferred shares authorized with zero shares
      outstanding;
                
                
                -
                
                
                
                -Common
      Stock, $0.001 par value: 350,000,000 shares authorized;
                  66,042,748
      and 65,785,748 shares issued and outstanding
                  at
      November 30, 2008 and August 31, 2008, respectively.
                
                
                66,043
                
                
                
                65,786Additional
      paid in capital
                
                
                9,587,649
                
                
                
                9,403,842Accumulated
      other comprehensive loss
                
                
                (61,348
                )
                
                
                (51,668
                )Accumulated
      deficit during the development stage
                
                
                (12,695,413
                )
                
                
                (13,697,873
                )Total
      Stockholders' Deficiency
                
                
                (3,103,069
                )
                
                
                (4,279,913
                )Total
      Liabilities and Stockholders' Deficiency
                
                $
                1,439,367
                
                
                $
                1,913,817





SEE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS




5


CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Stated in U.S.
Dollars)





Three
      months ended November 30,Expense
                      
                      2008
                      
                      
                      2007
                      
                      
                      May
      12, 2006 (Date of
                        Inception)
      to November30,
      2008Depreciation
                      
                      $
                      53,673
                      
                      
                      $
                      36,095
                      
                      
                      $
                      314,746Interest
      expense
                      
                      
                      110,303
                      
                      
                      
                      22,236
                      
                      
                      
                      385,934Office
      and administration - Note
                      
                      
                      169,589
                      
                      
                      
                      319,159
                      
                      
                      
                      1,580,530Organization
      costs
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,500Research
      and development
                      
                      
                      61,123
                      
                      
                      
                      36,310
                      
                      
                      
                      837,454Foreign
      exchange loss (gain)
                      
                      
                      (738
                      )
                      
                      
                      -
                      
                      
                      
                      (654
                      )Deferred
      financing amortization costs
                      
                      
                      23,062
                      
                      
                      
                      -
                      
                      
                      
                      36,562Amortization
      of stock option benefits - Note
                      
                      
                      20,988
                      
                      
                      
                      -
                      
                      
                      
                      401,278Derivative
      (income) expense - Note 7
                      
                      
                      (1,976,287
                      )
                      
                      
                      -
                      
                      
                      
                      1,550,304Professional
      fees
                      
                      
                      64,934
                      
                      
                      
                      59,758
                      
                      
                      
                      681,312Professional
      fees settled with shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      633,609Salaries
      and consulting fees - Note 5
                      
                      
                      319,263
                      
                      
                      
                      146,366
                      
                      
                      
                      1,663,375Salaries
      and consulting fees settled with shares - Note 5, Note 8
                      
                      
                      33,630
                      
                      
                      
                      200,000
                      
                      
                      
                      3,770,130Directors'
      fees settled with shares
                      
                      
                      -
                      
                      
                      
                      250,000
                      
                      
                      
                      430,000Administrator
      fees settled with shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      258,000Stock-based
      compensation - Note 8
                      
                      
                      118,000
                      
                      
                      
                      -
                      
                      
                      
                      150,333Net
      income (loss) for the period
                      
                      
                      1,002,460
                      
                      
                      
                      (1,069,924
                      )
                      
                      
                      (12,695,413
                      )Other
      comprehensive income (loss):Unrealized
      foreign exchange on transactions
                      
                      
                      (9,680
                      )
                      
                      
                      12,358
                      
                      
                      
                      (61,348
                      )Comprehensive
      gain (loss) for the period
                      
                      $
                      992,780
                      
                      
                      $
                      (1,057,566
                      )
                      
                      $
                      (12,756,761
                      )Basic
      net (loss) per common share
                      
                      $
                      0.02
                      
                      
                      $
                      (0.02
                      )Diluted
      net (loss) per common share
                      
                      $
                      0.01
                      
                      
                      $
                      (0.02
                      )Weighted
      average number of shares - basic
                      
                      
                      66,019,904
                      
                      
                      
                      56,585,219Weighted
      average number of shares - diluted
                      
                      
                      71,734,189
                      
                      
                      
                      56,585,219





SEE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


6


CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Stated in U.S.
Dollars)





Three
      months ended November 30,2008
                    
                    
                    2007
                    
                    
                    May
      12, 2006
                      (Date
      of
                      Inception)
      to
                      November
      30, 2008Cash
      flows from operating activities:Net
      income (loss)
                    
                    $
                    1,002,460
                    
                    
                    $
                    (1,069,924
                    )
                    
                    $
                    (12,695,413
                    )Adjustments
      to reconcile net income (loss) to cash
                      used
      in operating activities:Depreciation
                    
                    
                    53,673
                    
                    
                    
                    36,095
                    
                    
                    
                    314,746Amortization
      of stock option benefit
                    
                    
                    20,988
                    
                    
                    
                    -
                    
                    
                    
                    401,278Amortization
      of debt discount
                    
                    
                    64,625
                    
                    
                    
                    22,147
                    
                    
                    
                    193,796Amortization
      of deferred financing costs
                    
                    
                    23,062
                    
                    
                    
                    -
                    
                    
                    
                    38,267Interest
      accrued on debt
                    
                    
                    8,697
                    
                    
                    
                    -
                    
                    
                    
                    119,601Interest
      accrued on senior convertible notes
                    
                    
                    40,000
                    
                    
                    
                    -
                    
                    
                    
                    63,111Derivative
      (income) expense
                    
                    
                    (1,976,287
                    )
                    
                    
                    -
                    
                    
                    
                    1,550,304Issuance
      of common stock for professional services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    633,610Issuance
      of common stock for director services
                    
                    
                    -
                    
                    
                    
                    250,000
                    
                    
                    
                    430,000Issuance
      of common stock for consulting services
                    
                    
                    33,630
                    
                    
                    
                    200,000
                    
                    
                    
                    1,170,130Issuance
      of common stock for prior period salary
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,600,000Issuance
      of common stock for administrative services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    258,000Issuance
      of common stock for R&D
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    402,000Stock-based
      compensation
                    
                    
                    118,000
                    
                    
                    
                    -
                    
                    
                    
                    150,333Changes
      in assets and liabilities:Amounts
      Receivable
                    
                    
                    (41,685
                    )
                    
                    
                    2,484
                    
                    
                    
                    (51,708
                    )Prepaid
      expenses and other current assets
                    
                    
                    (112,126
                    )
                    
                    
                    45,817
                    
                    
                    
                    (124,393
                    )Prepaid
      deposit
                    
                    
                    83,990
                    
                    
                    
                    -
                    
                    
                    
                    83,990Accounts
      payable and accrued expense
                    
                    
                    94,284
                    
                    
                    
                    46,695
                    
                    
                    
                    415,338Net
      cash used in operating activities:
                    
                    
                    (586,689
                    )
                    
                    
                    (466,686
                    )
                    
                    
                    (4,047,010
                    )Cash
      flows from investing activities:Acquisition
      of plant and equipment
                    
                    
                    (155,010
                    )
                    
                    
                    (87,009
                    )
                    
                    
                    (907,308
                    )Cash
      acquired from business combination
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    62,070Net
      cash used in investing activities:
                    
                    
                    (155,010
                    )
                    
                    
                    (87,009
                    )
                    
                    
                    (845,238
                    )Cash
      flows from financing activities:Proceeds
      from issuance of senior convertible notes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,815,000Proceeds
      from issuance of common stock
                    
                    
                    -
                    
                    
                    
                    250,000
                    
                    
                    
                    1,743,766Due
      to related party
                    
                    
                    68,289
                    
                    
                    
                    65,971
                    
                    
                    
                    1,897,459Net
      cash provided by financing activities:
                    
                    
                    68,289
                    
                    
                    
                    315,971
                    
                    
                    
                    5,456,225Effect
      of foreign exchange on transactions
                    
                    
                    (14,657
                    )
                    
                    
                    6,751
                    
                    
                    
                    (49,014
                    )Net
      increase (decrease) in cash
                    
                    
                    (688,067
                    )
                    
                    
                    (230,973
                    )
                    
                    
                    514,963Cash
      at beginning of period
                    
                    
                    1,203,030
                    
                    
                    
                    331,279
                    
                    
                    
                    -Cash
      and cash equivalents at end of period
                    
                    $
                    514,963
                    
                    
                    $
                    100,306
                    
                    
                    $
                    514,963





SEE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


7





CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Stated in U.S.
Dollars)





Three
      months ended November 30,Supplemental
      schedule of cash flows:
                    
                    2008
                    
                    
                    2007
                    
                    
                    May
      12, 2006
                      (Date
      of
                      Inception)
      to
                      November
      30, 2008Cash
      paid during the period for interest
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Supplemental
      schedule of non-cash financing and investing activities:Amortization
      of stock option benefit
                    
                    $
                    20,988
                    
                    
                    $
                    -
                    
                    
                    $
                    398,344Amortization
      of deferred financing costs
                    
                    
                    23,062
                    
                    
                    
                    -
                    
                    
                    
                    38,267Interest
      on note payable
                    
                    
                    8,697
                    
                    
                    
                    22,147
                    
                    
                    
                    141,748Interest
      accrued on senior convertible notes
                    
                    
                    40,000
                    
                    
                    
                    -
                    
                    
                    
                    87,342Derivative
      (income) expense
                    
                    
                    (1,976,287
                    )
                    
                    
                    -
                    
                    
                    
                    1,550,304Issuance
      of common stock for professional services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    633,610Issuance
      of common stock for director services
                    
                    
                    -
                    
                    
                    
                    250,000
                    
                    
                    
                    430,000Issuance
      of common stock for consulting services
                    
                    
                    33,630
                    
                    
                    
                    200,000
                    
                    
                    
                    1,170,130Issuance
      of common stock for prior period salary
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,600,000Issuance
      of common stock for administrative services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    258,000Issuance
      of common stock for R&D
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    402,000Stock-based
      compensation
                    
                    
                    118,000
                    
                    
                    
                    -
                    
                    
                    
                    150,333Total:
                    
                    $
                    (1,731,910
                    )
                    
                    $
                    472,147
                    
                    
                    $
                    7,860,078




SEE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


8


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
1                 Nature and Continuance of
Operations





(a)
            Organization





Clean
Power Technologies Inc., (the “Company”) was incorporated in the State of
Nevada, United States of America on October 30, 2003 as Sphere of
Language.  On June 13, 2006, the Company changed its name to Clean
Power Technologies Inc.





The
Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on
May 12, 2006 in the State of Nevada as a wholly-owned
subsidiary.





The
Company is developing a project for a gas/steam or diesel/steam hybrid
technology, and has incorporated a wholly-owned subsidiary, Clean Power
Technologies Limited (“CPTL-UK”), a company based in, and incorporated under the
laws of the United Kingdom on May 10, 2006.  The Company conducts all
of its research and development through CPTL-UK.





The
Company’s fiscal year-end is August 31.





(b)           Development
Stage Activities





The
Company is in the development stage and has not yet realized any revenues from
its planned operations.





The
primary operations of the Company are presently undertaken by CPTL-UK with a
goal of developing two vehicles to prove their concept.  The first
vehicle will be a prototype to demonstrate the technology and the second vehicle
will be an engineered vehicle to be unveiled to the auto industry.  In
November 2007, the Company decided to re-prioritize its development
program.  While development on the automobiles continued, it was
decided that the fastest route to market was to focus on development of
refrigeration units for grocery trucks.





Note
2                 Interim Financial
Statements





While the
information presented in the accompanying three months ended November 30, 2008
interim consolidated financial statements is unaudited, it includes all
adjustments which are, in the opinion of management, necessary to present fairly
the financial position, results of operations and cash flows for the interim
period presented in accordance with accounting principles generally accepted in
the United States of America. It is suggested that these financial statements be
read in conjunction with the Company’s audited consolidated financial statements
for the fiscal year ended August 31, 2008.





Operating
results for the three months ended November 30, 2008 are not necessarily
indicative of the results that can be expected for the fiscal year ending August
31, 2009.





Note
3                 Summary of Significant
Accounting Policies





These
      interim consolidated financial statements have, in management’s opinion,
      been properly prepared within the framework of the significant accounting
      policies summarized below:




(a)  Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company, and its
wholly-owned subsidiaries CEPS and CPTL-UK.  All inter-company
transactions have been eliminated.


9


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
3                 Summary of Significant
Accounting Policies (Continued)




(b)  Development
Stage Company





The
Company is a development stage company as defined in Statement of Financial
Accounting Standards No. 7.  The Company is devoting substantially all
of its present efforts to establish a new business and none of its planned
principal operations have commenced.  All losses accumulated since
inception have been considered as part of the Company’s development stage
activities.




(c)  Continuance
of Operations





These
interim consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
assumes that the Company will be able to meet its obligations and continue its
operations for the next twelve months.  Realization values may be
substantially different from carrying values as shown and these interim
consolidated financial statements do not give effect to adjustments that would
be necessary to the carrying values and classification of assets and liabilities
should the Company be unable to continue as a going concern.  At
November 30, 2008, the Company had not yet achieved profitable operations, has
accumulated losses of $12,695,413 since its inception,
has negative working capital of $193,366 and expects to incur further losses in
the development of its business. The Company is currently seeking additional
financing opportunities.





(d)
            Financial
      Instruments





Financial
instruments, as defined in Financial Accounting Standards No. 107 Disclosures about Fair Value
of Financial Instruments (FAS 107), consist of cash, evidence of
ownership in an entity, and contracts that both (i) impose on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, accounts receivable, accounts payable,
accrued liabilities, notes payable, derivative financial instruments, and
convertible notes payable.





We carry
cash and cash equivalents, amounts receivable, accounts payable and accrued
liabilities at historical costs; their respective estimated fair values
approximate carrying values due to their current nature. We also carry notes
payable and convertible debt at historical cost; however, fair values of debt
instruments are estimated for disclosure purposes (below) based upon the present
value of the estimated cash flows at market interest rates applicable to similar
instruments.





As of
November 30, 2008, the estimated fair value and carrying value of our secured
convertible notes payable is as follows:


Secured
      Convertible Notes Payable:
              
              Carrying
      value
              
              
              Fair
      value$2,000,000
      face value secured convertible notes due July 10, 2010
              
              $
              (43,089
              )
              
              $
              (1,766,834
              )





Derivative
financial instruments, as defined in Financial Accounting Standards No. 133,
Accounting for
Derivative Financial Instruments and Hedging Activities (FAS 133),
consist of financial instruments or other contracts that contain a notional
amount and one or more underlying (e.g. interest rate, security price or other
variable), require no initial net investment and permit net


10


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
3                 Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (cont’d)





settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.





We
generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as debt financing
arrangements, and freestanding warrants with features that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by FAS 133, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.





The
following table summarizes the components of derivative liabilities as of the
quarterly period ended November 30, 2008:





Our
      financing arrangement giving rise to derivative financial
      instruments:
              
              Compound
                Embedded
                Derivative
              
              
              Warrant
                Derivative
              
              
              Total
                Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
              
              $
              (992,902
              )
              
              $
              (2,335,813
              )
              
              $
              (3,328,715
              )





We
estimate fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, we generally use the
Black-Scholes-Merton option valuation technique because it embodies all of the
requisite assumptions (including trading volatility, estimated terms and risk
free rates) necessary to fair value these instruments. For complex derivative
instruments, such as embedded conversion options, puts and redemption features
embedded in hybrid debt instruments, we generally use the Monte Carlo Simulation
valuation technique because it embodies all of the requisite assumptions
(including credit risk, interest-rate risk and exercise/conversion behaviors)
that are necessary to fair value these more complex instruments. For forward
contracts that contingently require net-cash settlement as the principal means
of settlement, we project and discount future cash flows applying
probability-weightage to multiple possible outcomes. Estimating fair values of
derivative financial instruments requires the development of significant and
subjective estimates that may, and are likely to, change over the duration of
the instrument with related changes in internal and external market factors. In
addition, option-based techniques are highly volatile and sensitive to changes
in the trading market price of our common stock, which has a high-historical
volatility. Since derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes. The following table summarizes the
effects on our income (expense) associated with changes in the fair values of
our derivative financial instruments by type of financing for the quarterly
period ended November 30, 2008.


11


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
3                 Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (cont’d)





Our
      financing arrangement giving rise to
                  derivative
      financial instruments and the income effects:
                
                Compound
                  Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
                
                $
                940,
      100
                
                
                $
                1,036,187
                
                
                $
                1,976,287





The
following table summarizes the effects on our income (expense) associated with
changes in the fair values of our derivative financial instruments from
inception through the quarterly period ended November 30, 2008.





Our
      financing arrangement giving rise to derivative financial instruments and
      the income effects:
                
                Compound
                  Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
                
                $
                556,844
                
                
                $
                434,044
                
                
                $
                990,888Day-one
      derivative loss:
                
                
                
                
                
                
                
                
                
                $
                (2,541,192
                )Total
      derivative income (expense):
                
                
                
                
                
                
                
                
                
                $
                (1,550,304
                )





Our
derivative liabilities as of November 30, 2008, our derivative gains during the
quarterly period November 30, 2008 and our derivative losses from inception
through November 30, 2008 are significant to our consolidated financial
statements. The magnitude of derivative income (expense) reflects the
following:





·  The
market price of our common stock, which significantly affects the fair value of
our derivative financial instruments, experienced material price fluctuations.
To illustrate, the closing price of our common stock increased from $0.55 on
July 10, 2008 to $0.65 on August 31, 2008 and decreased to $0.49 on November 30,
2008. The higher stock price on August 31, 2008 had the effect of significantly
increasing the fair value of our derivative liabilities and, accordingly, we
were required to adjust the derivatives to these higher values with charges to
derivative expense.  Alternatively, the lower stock price on November
30, 2008 had the effect of significantly decreasing the fair value of our
derivative liabilities and, accordingly, we were required to adjust the
derivatives to these lower values with charges to derivative
income.





·  In
connection with our accounting for the secured convertible note financing we
encountered the unusual circumstance of a day-one derivative loss related to the
recognition of derivative instruments arising from the arrangement. That means
that the fair value of the bifurcated compound derivative and warrants exceeded
the proceeds that we received from the arrangement and we were required to
record a loss to record the derivative financial instruments at fair value. The
loss that we recorded amounted to $2,541,192. We did not enter into any other
financing arrangements during the periods reported that reflected day-one
loss.


12


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
3                 Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (cont’d)





The
following table summarizes the number of common shares indexed to the derivative
financial instruments as of November 30, 2008:





Our
      financing arrangement giving rise to derivative financial instruments and
      indexed shares:
                
                Compound
                  Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
                
                
                5,714,286
                
                
                
                7,142,858
                
                
                
                12,857,144





During
December 2006, the Financial Accounting Standards Board released FASB Staff
Position FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements, which amended Financial Accounting Standards No.
133 Accounting for
Derivative Financial Instruments and Hedging Activities. Generally, the
standard provides for the exclusion of registration payment arrangements, such
as the liquidated damage provisions that are included in the financing contracts
underlying the convertible debt financing arrangements, from the consideration
of classification of financial instruments. Rather, such registration payments
are accounted for pursuant to Financial Accounting Standards No. 5 Accounting for
Contingencies, which is our current accounting practice. That is, all
registration payments will require recognition when they are both probable and
reasonably estimable. As of November 30, 2008, our management concluded that
registration payments are not probable.





(e)
            Use
      of Estimates in the preparation of the financial
  statements





The
preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those
estimates.





(f)
            Basic
      and diluted loss per share





We
adopted SFAS No. 128, "Earnings per Share". The statement established standards
for computing and presenting earnings per share (EPS). It replaced the
presentation of primary EPS with a basic EPS and also requires dual presentation
of basic and diluted EPS on the face of the income statement. Basic
income/(loss) per share was computed by dividing our net income/(loss) by the
weighted average number of common shares outstanding during the period. The
weighted average number of common shares used to calculate basic income/(loss)
per common share for the periods ended November 30, 2008 and 2007 was 66,019,904
and 56,585,219, respectively. The weighted average number of common shares used
to calculate diluted income/(loss) per common share for the periods ended
November 30, 2008 and 2007 was 71,734,189 and 56,585,219,
respectively.   While the stock options and warrants issued during
fiscal year ended August 31, 2008 were antidilutive at November 30, 2008, the
senior secured convertible notes are dilutive in the current three month period,
therefore, the weighted average shares for basic income/(loss) and diluted
income/(loss) differ during the current period.


13





CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
4                 Amounts
Receivable





Amounts
      receivable of $50,866 consists of refundable tax credits for the Value
      Added Tax (“VAT”) paid on purchases with respect to the operations of
      CPTL-UK in the United Kingdom.  CPTL-UK files quarterly returns
      with respect to the VAT
transactions.





Note
5                 Plant and
Equipment





2008Cost
              
              
              Accumulated
                Amortization
              
              
              Net
      Book ValueVehicles
              
              $
              105,719
              
              
              $
              (38,418
              )
              
              $
              67,301Machinery
              
              
              615,923
              
              
              
              (176,834
              )
              
              
              439,089Computer
      and office equipment
              
              
              146,157
              
              
              
              (83,683
              )
              
              
              62,474Leasehold
      improvements
              
              
              59,079
              
              
              
              (19,624
              )
              
              
              39,455$
              926,878
              
              
              $
              (318,559
              )
              
              $
              608,319





Note
5                       Related PartyTransactions





On July
26, 2006, CPTL-UK entered into a lease agreement with an officer of CPTL-UK to
lease the office and laboratory premises for a term of three years. (see Note
6).  Under the terms of the lease, an expense of $7,563 (£4,500) was
charged during the three months ended November 30, 2008 by an officer of
CPTL-UK as rent.





On April
24, 2006 CPTI entered a research and development agreement (the “Agreement”) to
fund all future costs for research, development, patenting, licensing and
marketing for an alternative hybrid fuel technology that combines diesel and
steam and gas (petrol) and steam technologies for a 100% ownership of the
technology and any associated intellectual rights with two directors and
officers of CPTL-UK.  Under the terms of the Agreement, the Company
agreed to retain one director as the Company’s project director at a fee of
£3,000 (US$5,972) per month for a period of 36 months commencing May 2006 and
the second director as the Company’s project manager at a fee of £6,000
(US$11,945) per month for a period of 36 months commencing May
2006.  During March 2008 the monthly fee for the project manager was
increased to £10,000 (US$19,908).   On August 8, 2008 the project
director and the project manager resigned as directors of CPTL-UK. Concurrently,
the project manager entered into a new employment agreement (the “Employment
Agreement”) with the Company for a term of four (4) years.  Under the
terms of the Employment Agreement, from March 1, 2009 and on each subsequent
anniversary during the term of the Employment Agreement, the project manager is
entitled to an annual salary increase of 10%, as well as the following
performance based compensation:





·
            500,000
      shares of common stock when the Refrigeration Compact Heat Exchanger (the
      “Refrigeration Unit”) for the grocery truck/trailer is successfully
      tested;


·
            1,000,000
      shares of common stock when the first Refrigeration Unit is commercially
      sold;


·
            1,000,000
      shares of common stock each time the heat recovery system for (i) the
      Marine application or   (ii) an Auxiliary Steam Engine for
      trucks or similar engines based on steam recovery is commercially sold to
      the first customer;


·
            1,000,000
      shares of common stock when the first automobile which is developed on the
      heat recovery system is successfully tested and verified by the E.P.A;
      and


·
            1,000,000
      shares of common stock when the first automobile heat recovery system is
      commercially sold.





14


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
5                       Related PartyTransactions
(continued)





During
the period ended November 30, 2008, Michael Burns, the project manager who is
also an officer of wholly-owned subsidiary CPTL-UK was paid $50,415
(£30,000)  under the terms of his employment agreement.





Additionally
under the terms of the above-noted Agreement, the Company agreed to fund all
future costs for research, development, patenting, licensing and marketing of
the technology in exchange for the transfer of all rights and interests in
technology to the Company.  As payment for this technology, the
Company’s subsidiary issued 2,000,000 shares of its common stock at $0.001,
which shares were exchanged for 2,000,000 shares of the Company’s common
stock.  The Company also agreed to fund up to £2,000,000
(US$4,027,800) towards the development of the technology.





Pursuant
to an employment agreement dated May 22, 2008, between the Company and its CEO,
Mr. Abdul Mitha,


Mr. Mitha
invoiced the Company $125,000 with respect to his monthly salary obligation for
the three month period ended November 30, 2008.  During the quarter
Mr. Mitha received payments against his accrued salary totaling $46,897, leaving
$204,770 due and payable to Mr. Mitha in salary obligations as at November 30,
2008.





During
the three month period ended November 30, 2008 Mr. Mitha advanced $68,289 for
operations, under the terms of a convertible debenture approved September 28,
2006.  During the three months ended November 30, 2008 the Company
recorded amortization of loan discount in the amount of $45,767 (2007 -
$24,739).  Unamortized discount at November 30, 2008, which has
been applied to additional paid in capital with respect to the beneficial
conversion feature associated with the provisions of the proceeds during the
three months ending November 30, 2008 totalled $32,434 (2007 - $65,971),
which amount is being amortized over  the term of the note(s) or until
conversion.  As at November 30, 2008 the balance sheet reflects notes
payable to Mr. Mitha of $229,840 which amount reflects convertible loans
including accrued interest of $524,542, net of an unamortized discount of
$294,702.





Note
6                 Commitments





(a)           On
July 26, 2006 CPTL –UK entered into a three year lease agreement for an office
and research facility located in Newhaven, United Kingdom.  The lease
expires on July 25, 2009.  The CPTL—UK lease calls for annual rent in
the amount of $35,838 (£18,000) plus applicable taxes, and is payable
quarterly.





CPTL-UK
is required to make minimum lease payments totalling $17,645 (£10,500) over the
remaining term of the lease.





(b)  Effective
November 13, 2008 the Company entered into a five (5) year lease for office and
warehouse space in a property located in New Haven, East Sussex, U.K., adjacent
to its current leased facilities at an annual rate of $25,207 (£15,000) payable
quarterly commencing March 2009.  Concurrently the Company entered
into an option to purchase the aforementioned property, exercisable March
through August 2010, for a purchase price of  the greater of (i) the
price stated in an Independent Valuation or (ii) £425,000 less any reductions
previously specified and agreed in a former option agreement.





(c)           On
July 1, 2007 CPTL –UK entered into a six month renewable lease agreement for a
corporate apartment located in Surrey, United Kingdom.  The lease
expired on December 31, 2007 and was most recently renewed on July 1,
2008.  The lease calls for monthly rent in the amount of $3,782
(£1,900) plus applicable taxes.  The lease expired without renewal
subsequent to the quarter ended November 30, 2008.


15


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
6                 Commitments(continued)





(d)  On
November 18, 2008 CPTL –UK entered into a six month renewable lease agreement
for a corporate housing facility located in Surrey, United Kingdom for use by
the Company’s CEO, Abdul Mitha.  The lease calls for monthly rent in
the amount of $2,100 (£1,250) plus applicable taxes and expires May 17,
2009.





(e)  The
Company entered into a collaboration agreement dated October 11, 2006 for the
development of a steam accumulator and other related technologies in partnership
for use with the Company’s petrol (gas)/steam and diesel/steam hybrid
technologies project.  The agreement called for funding of
approximately US$400,000 by the partner.  As consideration, the
Company was required to issue 4,000,000 common shares of the
Company.





The
agreement further provides that within 18 months from the first vehicle being
publicly unveiled, the partner will have the option of either seeking cash
reimbursement of its development costs from the Company or retaining the
previously issued shares of common stock of the
Company.  Should the partner seek cash reimbursement then the
partner shall return a total of 3,000,000 shares of common stock to the
Company.  Should development costs exceed US$400,000 then the Partner
has the option to either receive cash reimbursement of the amount in excess of
US$400,000 or to receive additional shares of the Company at a price to be
negotiated.  Should the Company be unable to reimburse the partner on
any call for reimbursement as allowed under the collaboration agreement, the
Company will transfer an equal share of the intellectual property to the Partner
so that the Partner and the Company will own the intellectual property
equally.  On June 13, 2007, the Company issued a total of 4,000,000
shares of restricted Common Stock to Doosan Babcock Energy Ltd. (“Doosan”)
pursuant to the terms and conditions of a subscription agreement, received May
21, 2007 (the “Subscription Agreement”). The Subscription Agreement was executed
pursuant to the terms and conditions of that Collaboration Agreement entered
into between the parties on October 11, 2006.





The
Company will provide an additional 100,000 common shares to Doosan, which shall
be used at their discretion to reward any of their employees who have helped in
the development of the technologies project.  The term of the
agreement is three years.





(f)  During
the year ended August 31, 2007, the Company entered into an agreement with
Abchurch Communications Limited to provide certain integrated financial and
corporate communications services.  Under the terms of the agreement,
Abchurch will provide four (4) phases of services to assist the Company in
securing a listing on the AIM Exchange in London.  Fees payable under
the agreement include a project fee of £40,000 (approximately U.S. $80,000), of
which amount £15,000 (approximately U.S. $31,000) is due upon signing the
agreement.  The remaining £25,000 (approximately U.S. $51,000) was due
in two payments, in July, 2007 and September 2007 respectively.  The
agreement also calls for ongoing quarterly payments of £12,000 (approximately
U.S. $24,400) for the term of the agreement.  The agreement may be
terminated by either party with three (3) months written notice.  As
at August 31, 2008 the Company has remitted a total of £35,000 (approximately
U.S. $70,000) with respect to the costs related to the project fee and a further
£10,500 (approximately U.S. $21,000) with respect to quarterly payment
requirements. The Company renegotiated the quarterly payments required under the
contract effective April 1, 2008 whereby quarterly fees were reduced to £3,000
per month for the period January to March 2008, and thereafter to £2,000 per
month for the remaining term of the contract.





(g)  On March
17, 2008, the Company entered into an agreement with steam technology specialist
Dampflokomotiv-und Maschinenfabrik DLM AG ("DLM") to act as a consultant for the
further development of the Company's Clean Energy Storage and Recovery ('CESAR')
technology. Under the terms of the agreement DLM will provide a preliminary
study to the Company at a cost of 34,375 Euros (approximately U.S. $52,000)
payable in 3 installments as follows:


16


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
6                 Commitments(continued)





·
            25%
      of the total sum upon signing of the
engagement;


·
            25%
      of the total sum upon presentation of the first results but not later than
      three (3) months after engagement date; and·
            Balance
      upon completion
      of work scope payable within 30 days of delivery of delivery of final
      invoice.







During
the quarter the Company received the preliminary study report and remitted all
remaining payments under the terms of the engagement.   The
Company entered into a further agreement regarding prototype specifications for
a Heat Exchanger at a total cost of 12,340 Euros during the quarter, which
amount was remitted at the time of the engagement.





(h)  On July
28, 2008, the Company entered into an agreement with Mr. George McLaine
whereunder Mr. McLaine will serve as a consultant to assist the Company with
introductions to transportation companies in the Province of Alberta, Canada,
and abroad with a purpose of locating collaborative partners to test the
Company’s heat recovery systems in trucks and trailers.  In
consideration for this service, Mr. McLaine will receive 32,000 shares of the
Company’s common stock for each introduction that results in a collaboration
agreement.  Further, Mr. McLaine will receive 25,000 shares of the
Company’s common stock per annum for serving as a consultant to the
Company.  The contract is for a period of two (2) years and may be
renewed by mutual consent.  Mr. McLaine will also receive a 30%
commission for any advance purchase orders received on the advance deposit
required of 1% of the total purchase or $100 per unit ordered. 32,000 shares
were issued under the agreement as of September 8, 2008.





(i)  During
fiscal 2008 the Company’s subsidiary CPTL-UK entered into an employment contract
with an IT specialist whereunder the employee will receive 25,000 shares of the
Company’s common stock after the initial three (3) months, and 25,000 shares of
the Company’s common stock each year on the anniversary of the completion of
certain work projects up to a maximum of 100,000 shares.  25,000
shares were issued under the contract as of September 8, 2008.





(j)  On
October 27, 2008 the Company entered into an employment agreement with Marco
Cucinotta whereby Mr. Cucinotta will receive an annual salary of $151,243
(£90,000) as well as the following performance based compensation:





·
            200,000
      shares of the Company on commencement of
  employment;


·
            100,000
      shares of the Company on completion of the first complete system in test
      cell;


·
            100,000
      shares of the Company on completion of the first truck based
      system;


·
            100,000
      shares of the Company on sale of the first system;
  and


·
            100,000
      shares of the Company upon establishing a UK consultancy firm and
      generating £100,000 in gross
revenue.





As at the
date of this quarterly report the initial 200,000 shares required under the
contract had not yet been issued.


17





CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
7                 Senior Secured Convertible
Note Financings





Senior
Secured Convertible Notes consist of the following financings as of November 30,
2008:





Carrying
      Value8%
      face value $2,000,000 senior secured convertible notes issued July 10,
      2008 and due on July 10, 2010
                
                $
                (43,089
                )





On July
10, 2008 we entered into a financing arrangement with The Quercus
Trust.  The financing arrangement involved the issuance of the
principal face amount of $2,000,000 of 8.0% senior secured convertible notes,
due July 10, 2010 plus warrants to purchase 4,285,715 (Class A Warrants) and
2,857,143 (Class B Warrants) shares of our common stock with exercise prices of
$0.60 and $0.80, respectively, for a period of five years. The senior secured
convertible notes are convertible into our common shares based upon a fixed
conversion price of $0.35, but are subject to full-ratchet anti-dilution
protection if we sell shares or share-indexed financing instruments at less than
the fixed conversion price. The holder has the option to redeem the senior
secured convertible notes for cash in an event of default and certain other
contingent events, including a change in control event and events related to the
common stock into which the instrument was convertible, registration and listing
(and maintenance thereof) of our common stock and filing of reports with the
Securities and Exchange Commission (the “Default Put”). In addition, we extended
registration rights to the holder covering the shares of common stock underlying
the senior secured convertible notes and Class A and Class B warrants that
requires the filing of a  registration statement and continuing
effectiveness thereof in the event we are unable to do so, we would be required
to pay monthly liquidating damages of 1.0% for defaults as provided in the
registration rights agreement.





We
received net proceeds of $1,815,000 from the July 10, 2008 financing
arrangement. Incremental, direct financing costs of $185,000 (including
placement agent warrants valued at $221,588 using the Black-Scholes-Merton
valuation technique) are included in deferred financing costs and are subject to
amortization using the effective method. Accumulated amortization of deferred
financing costs, which is included in interest expense, during the current
quarterly period, amounted to $23,062.





In our
evaluation of the financing arrangement, we concluded that the conversion
features were not afforded the exemption as a conventional convertible
instrument due to the anti-dilution protection; and it did not otherwise meet
the conditions set forth in current accounting standards for equity
classification. Since equity classification is not available for the conversion
feature, we were required to bifurcate the embedded conversion feature and carry
it as a derivative liability, at fair value. We also concluded that the Default
Put required bifurcation because, while puts on debt instruments are generally
considered clearly and closely related to the host, the Default Put is indexed
to certain events, noted above, that are not associated debt instruments. We
combined all embedded features that required bifurcation into one compound
instrument that is carried as a component of derivative liabilities. We
determined that placement agent warrants met the conditions for equity
classification.  However, the investor warrants did not meet the
conditions for equity classification. Therefore, the investor warrants are also
required to be carried as a derivative liability, at fair value. Derivative
financial instruments are carried initially and subsequently at their fair
values.





18


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
7                 Senior Secured Convertible
Note Financings (continued)





We
estimated the fair value of the compound derivative on the inception dates, and
subsequently, using the Monte Carlo valuation technique, because that technique
embodies all of the assumptions (including credit risk, interest risk, stock
price volatility and conversion behavior estimates) that are necessary to fair
value complex, compound derivative instruments. We estimated the fair value of
the warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton valuation technique, because that technique embodies all of
the assumptions (including, volatility, expected terms, and risk free rates)
that are necessary to fair value freestanding warrants.





Derivative
fair values on the inception date of the financing transaction were as
follows:





Compound
      Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value senior secured convertible notes due July 10,
    2010
                
                $
                (1,549,746
                )
                
                $
                (2,769,857
                )
                
                $
                (4,319,603
                )





Derivative
fair values at August 31, 2008 were as follows:





Compound
      Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value senior secured convertible notes due July 10,
    2010
                
                $
                (1,933,001
                )
                
                $
                (3,372,000
                )
                
                $
                (5,305,001
                )





Derivative
fair values at November 30, 2008 were as follows:





Compound
      Embedded
                  Derivative
                
                
                Warrant
                  Derivative
                
                
                Total
                  Derivatives$2,000,000
      face value senior secured convertible notes due July 10,
    2010
                
                $
                (992,902
                )
                
                $
                (2,335,813
                )
                
                $
                (3,328,715
                )





19


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
7                 Senior Secured Convertible
Note Financings (continued)





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of the inception date of the financing are illustrated in the
following tables:


Compound
                  Embedded
                  Derivative$2,000,000
      face value senior secured convertible notes due July 10,
    2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                78.96
                %Equivalent
      term (years)
                
                
                1.82Risk-free
      rate
                
                
                2.30%-2.59
                %Credit-risk
      adjusted yield
                
                
                8.50
                %Interest-risk
      adjusted rate
                
                
                9.48
                %Dividends
                
                
                --





Class
      A
                  Warrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                98.83
                %
                
                
                98.83
                %Term
      (years)
                
                
                5.00
                
                
                
                5.00Risk-free
      rate
                
                
                3.10
                %
                
                
                3.10
                %Dividends
                
                
                --
                
                
                
                --





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of August 31, 2008 are illustrated in the following
tables:





Compound
                  Embedded
                  Derivative$2,000,000
      face value senior secured convertible notes due July 10,
2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                77.12
                %Equivalent
      term (years)
                
                
                1.63Risk-free
      rate
                
                
                2.17%-2.36
                %Credit-risk
      adjusted yield
                
                
                9.21
                %Interest-risk
      adjusted rate
                
                
                9.49
                %Dividends
                
                
                --





20


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
7                 Senior Secured Convertible
Note Financings (continued)





Class
      A
                  Warrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                100.83
                %
                
                
                100.83
                %Term
      (years)
                
                
                4.86
                
                
                
                4.86Risk-free
      rate
                
                
                3.10
                %
                
                
                3.10
                %Dividends
                
                
                --
                
                
                
                --





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of November 30, 2008 are illustrated in the following
tables:





Compound
                  Embedded
                  Derivative$2,000,000
      face value senior secured convertible notes due July 10,
2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                69.06
                %Equivalent
      term (years)
                
                
                1.53Risk-free
      rate
                
                
                0.90%-1.00
                %Credit-risk
      adjusted yield
                
                
                13.57
                %Interest-risk
      adjusted rate
                
                
                6.50
                %Dividends
                
                
                --








Class
      A
                  Warrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                97.61
                %
                
                
                97.61
                %Term
      (years)
                
                
                4.61
                
                
                
                4.61Risk-free
      rate
                
                
                1.93
                %
                
                
                1.93
                %Dividends
                
                
                --
                
                
                
                --





21


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)


Note
8                 Common
Stock





Stock-based compensation:





(i)
            Executive stock
      options




On May
22, 2008, the Board of Directors approved an Employment Agreement (the
“Agreement”) with Mr. Abdul Mitha, a director and executive officer of the
Company (refer to Note 5 above).  Under the terms of the Agreement,
the Company has agreed to enter into a stock option agreement with Mr. Mitha,
granting Mr. Mitha the option to purchase at the end of each anniversary of the
Agreement 1,000,000 shares of the Company’s common stock at
an  exercise price of the average 90 days trading price immediately
preceding the anniversary date of the Agreement  The options vest
immediately upon issuance of the underlying agreement at each anniversary date,
and the option shares shall be exercisable by Mr. Mitha within 5 years from the
date of grant.   Further under the terms of the Agreement, all
options issued to Mr. Mitha in accordance with the Agreement shall become
immediately exercisable as to 100% of the shares of Common Stock not otherwise
vested upon any termination of employment.





Following
is a table outlining the number of options required to be granted as fully
vested under the Agreement at each anniversary date and the term of said
options:






Date
                  
                  Number
      of options
                  
                  Expiry
      dateMay
      1, 2009
                  
                  
                  1,000,000
                  
                  April
      30, 2014May
      1, 2010
                  
                  
                  1,000,000
                  
                  April
      30, 2015May
      1, 2011
                  
                  
                  1,000,000
                  
                  April
      30, 2016May
      1, 2012
                  
                  
                  1,000,000
                  
                  April
      30, 2017May
      1, 2013
                  
                  
                  1,000,000
                  
                  April
      30, 2018May
      1, 2014
                  
                  
                  1,000,000
                  
                  April
      30, 20196,000,000





For
financial reporting purposes, the Company has relied on the guidance provided in
FASB 123R and has valued the options over 1,2,3,4,5 and 6 years at inception
(May 1, 2008) applying variable accounting. The fair value of the shares will be
recalculated at each reporting date using an exercise price of the preceding 90
days applying Volume Weighted Average Pricing (VWAP). The value attributable to
the vested portion of each tranche will be amortized over its requisite period,
with a final value being calculated on the grant date for each tranche applying
the 90 day VWAP immediately preceding the actual date of grant. Additionally, we
have not applied a forfeiture rate to these shares as under the terms of the
Agreement the shares are guaranteed to become fully vested.





22


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
8                 Common Stock
(continued)




Stock-based
compensation:




(i)
            Executive stock
      options (continued)





The fair
value of each option granted was computed using the Black-Scholes method using
the following weighted-average assumptions:





Stock
      Price
                (Issue
      date)
              
              
              Exercise
      price
              
              
              Risk
      Free
                interest
      rate
              
              Date
      of issue
              Expiration
      date
              
              Term
      (years)
              
              
              Volatility
              
              
              Value$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2014
              
              
              2.7096
              
              
              
              89.79
              %
              
              $
              0.25$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2015
              
              
              3.2096
              
              
              
              89.79
              %
              
              $
              0.28$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2016
              
              
              3.7008
              
              
              
              89.79
              %
              
              $
              0.29$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2017
              
              
              4.2110
              
              
              
              89.79
              %
              
              $
              0.31$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2018
              
              
              4.7110
              
              
              
              89.79
              %
              
              $
              0.32$
              0.49
              
              
              $
              0.58
              
              
              
              2.93
              %
              5/1/2008
              5/1/2019
              
              
              5.2110
              
              
              
              89.79
              %
              
              $
              0.34





The fair
value of the vested portion of options granted during the fiscal year ended
August 31, 2008 totals $380,290 which amount has been expensed and recorded
as a current liability on the Company’s balance sheet.  The fair value
of the vested portion of options during the three month period ended November
30, 2008 totals $20,988 which amount has also been expensed and recorded as
a current liability on the Company’s balance sheet.   The
following table summarizes details of the vesting schedule and associated fair
value calculations:





OptionGrant
      date
              
              Option
      Qty
              
              
              Fair
      Market Value as at November 30, 2008
                $
              
              
              Amortization
                Term
                (In
      months)
              
              
              Amortized
      value as at November 30, 2008
                $May
      1, 2009
              
              
              1,000,000
              
              
              
              253,747
              
              
              
              12
              
              
              
              148,019May
      1, 2010
              
              
              1,000,000
              
              
              
              275,009
              
              
              
              24
              
              
              
              80,211May
      1, 2011
              
              
              1,000,000
              
              
              
              293,338
              
              
              
              36
              
              
              
              57,038May
      1, 2012
              
              
              1,000,000
              
              
              
              310,184
              
              
              
              48
              
              
              
              45,235May
      1, 2013
              
              
              1,000,000
              
              
              
              324,895
              
              
              
              60
              
              
              
              37,905May
      1, 2104
              
              
              1,000,000
              
              
              
              338,096
              
              
              
              72
              
              
              
              32,8716,000,000
              
              
              
              1,795,269
              
              
              
              
              
              
              
              401,279





(ii)
            Issuance of stock
      awards





During
the quarter ended November 30, 2008, the Company issued stock awards totaling
257,000 shares to employees and consultants under its 2007 Stock Option and
Award plan as compensation for services rendered.  The shares were
valued at the closing price of the Company’s common stock on the respective
issue dates:





(i)  September
8, 2008, $0.59 per share with respect to 225,000 common shares issued to
employees of wholly-owned subsidiary CPTL-UK, for a total of $132,750;
and





(ii)  September
8, 2008, $0.59 per share with respect to 32,000 common shares, for a total of
$18,800.





Both
amounts have been expensed during the current quarter.





23


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
9                 New Accounting
Standards





Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), BUSINESS
COMBINATIONS. This revision to SFAS No. 141 requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at the acquisition date, at their fair values as of the
acquisition date, with limited exceptions. This revision also requires that
acquisition-related costs be recognized separately from the assets acquired and
that expected restructuring costs be recognized as if they were a liability
assumed at the acquisition date and recognized separately from the business
combination. In addition, this revision requires that if a business combination
is achieved in stages, that the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, be recognized at the full amounts
of their fair values.





In
December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS, an amendment of ARB No. 51.
The objective of this statement is to improve the


relevance,
comparability, and transparency of the financial statements by establishing
accounting and reporting standards for the Noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Company believes
that this statement will not have any impact on its financial statements, unless
it deconsolidates a subsidiary.





In March
2008, FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.





In
April 2008, the FASB issued FASB Staff Position No. 142-3,
DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to
improve the consistency between the useful life of a recognized intangible asset
(under SFAS No. 142) and the period of expected cash flows used to measure
the fair value of the intangible asset (under SFAS No. 141(R)). FSP
No. 142-3 amends the factors to be considered when developing renewal or
extension assumptions that are used to estimate an intangible asset’s useful
life under SFAS No. 142. The guidance in the new staff position is to be
applied prospectively to intangible assets acquired after December 31,
2008. In addition, FSP No. 142-3 increases the disclosure requirements
related to renewal or extension assumptions. The Company does not believe
implementation of FSP No. 142-3 will have a material impact on its financial
statements.





In May
2008, the FASB issued SFAS No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.  This statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  This statement is effective
60 days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “the Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.”





In May
2008, the FASB issued SFAS No. 163,ACCOUNTING FOR FINANCE
GUARANTEE INSURANCE CONTRACTS – AN INTERPRETATION OF FASB STATEMENT NO. 60.The premium revenue
recognition approach for a financial guarantee insurance contract links premium
revenue recognition to the amount of insurance protection and the period in
which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation.  This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008.





24


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


November
30, 2008


(Stated in U.S.
Dollars)


(Unaudited)





Note
9                 New Accounting
Standards(continued)





In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN
SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No.
03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
and is not expected to have a significant impact on the Company’s financial
statements.





None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company's future financial reporting.





Note
10                 Other





On
October 31, 2008 the Company signed a letter of intent (“LOI”) with Flukong
Enterprise Inc. (“Flukong”) for a purchase order of up to 500 of Clean Power’s
steam hybrid engines to provide fuel savings of 40 per cent or better in
refrigerated trailer (“reefer”) applications with Flukong Enterprise Inc., an
Edmonton, Alberta based corporation. The LOI grants distributorship to Flukong
for new customers in both Canada and China, and is renewable annually if Flukong
can demonstrate inter aliaits capacity to meet a sales target of a pre-agreed number of reefer
engines per year.  Under the terms of the LOI, Flukong would purchase
up to 500 of Clean Power’s hybrid refrigeration engines over an 18 month period,
subject to certain conditions.  Furthermore, upon commencement of the
first delivery, Clean Power would grant an option for Flukong to purchase an
additional 1,000 reefer engines per year for two years. To secure these terms
Flukong has paid a US$84,000 deposit to Clean Power Technologies.





During
the quarter, the Company and Quercus agreed to extend the date for the filing of
the registration statement on Form S-1, more particularly described under Note 7
to these interim financial statements to November 19, 2008, on which date the
Company successfully filed its Form S-1.  The registration statement
was declared effective by the SEC on December 4, 2008.





Note
11                 Subsequent
Event





On
December 12, 2008,  the Company entered into a Memorandum of
Understanding (“MOU”) with Farm Fresh Marketing Inc. (“Farm
Fresh”).   The MOU sets out the high-level commercial principles
of the collaboration between the Company and Farm Fresh whereby Farm Fresh will
provide the Company with a Road Load Data Collection Vehicle for installation of
the Company’s data gathering systems to test the fuel and operating efficiencies
of the Company’s heat recovery systems, noise and emission
control.   The parties’ intent under the MOU is to prove the
benefits of the Clean Power technology to Farm Fresh and upon successful
testing, Farm Fresh and Clean Power shall enter into discussion to establish
ongoing collaborations and commercial relationships.  Clean Power had
agreed that for two years following completion of the test, it will make the
Clean Power system (once in production) available to Farm Fresh in such
quantities as Farm Fresh may order at prices and terms as favorable to Farm
Fresh as those offered by the Company to any of its other
customers.  Farm Fresh has acknowledged its intent to purchase at
least 53 systems within the two year period, subject only to the proof of CPTI’s
technology.


25


ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS







This
quarterly report contains forward-looking statements relating to future events
or our future financial performance.  In some cases, you can identify
forward-looking statements by terminology such as "may", "should", "intends",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", or "continue" or the negative of these terms or other comparable
terminology.  These statements are only predictions and involve known
and unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, levels of activity or performance to be materially
different from any future results, levels of activity or performance expressed
or implied by these forward-looking statements.






Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity or
performance.  You should not place undue reliance on these statements,
which speak only as of the date that they were made.  These cautionary
statements should be considered with any written or oral forward-looking
statements that we may issue in the future.  Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results, later events or circumstances or to reflect the
occurrence of unanticipated events.





In this
report unless otherwise specified, all dollar amounts are expressed in United
States dollars and all references to “common shares” refer to the common shares
of our capital stock.





The
management’s discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP").





As used
in this quarterly report and unless otherwise indicated, the terms “we”, “us”,
the “Company” and “Clean Power” refer to Clean Power Technologies
Inc.  and its subsidiaries.





The
Company was incorporated in the State of Nevada, United States of America on
October 30, 2003 as Sphere of Language.  On June 13, 2006, the Company
changed its name to Clean Power Technologies Inc.





The
Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on
May 12, 2006 in the State of Nevada as a wholly-owned
subsidiary.





By
agreement dated May 22, 2006, the Company agreed to issue 30,765,377 common
shares for all the issued and outstanding common shares of Clean Power
Technologies Inc. (“CPTI private”), a privately held company, incorporated on
March 14, 2006 in the State of Nevada.  CPTI private  is
developing a project for a gas/steam or diesel/steam hybrid technology. CPTI
private has incorporated a wholly-owned subsidiary, Clean Power Technologies
Limited, (“CPTL-UK”) a company based in Great Britain and incorporated on May
10, 2006, to carry on all its research and development.  On April 24,
2006, CPTI private entered a research and development agreement to fund all
future costs for research, development, patenting, licensing and marketing for
an alternative hybrid fuel technology that combines diesel and steam and gas
(petrol) and steam technologies for a 100% ownership of the technology and any
associated intellectual rights. CPTI private and CEPS merged on June 20, 2006
with CEPS being the surviving entity. On July 10, 2006 CEPS became a
wholly-owned subsidiary of the Company when the stockholders of CPTI private
tendered their remaining shares.





We
presently have two subsidiaries, Clean Energy and Power Solutions Inc. (“CEPS”),
which is a wholly-owned subsidiary of the Company, and Clean Power Technologies
Ltd. (“CPTL”), which is a wholly-owned subsidiary of CEPS.  We
undertake all of our business operations indirectly through our wholly-owned
U.K. subsidiary, CPTL. These operations are presently focused on the research
and development of our technology, a steam hybrid engine.





Plan
of Operation





Our
Company is committed to developing hybrid fuel technology and alternative fuel
for a range of vehicles, including locomotives, heavy trucks and light cars. The
Company’s proprietary technology significantly reduces pollution through its
Clean Energy Storage and Recovery (CESAR) system, which takes otherwise wasted
heat from the exhaust of a conventional combustion engine and modifies it
through a heat recovery system to generate clean power for
vehicles.





26


The
Company operates out of its development facilities in Newhaven, East Sussex, in
the United Kingdom.





In 2006,
testing of the CESAR system began on a Mazda RX8 passenger vehicle engine, with
trials on a second identical engine commencing later that year. In June 2007,
testing also began on a Caterpillar C18 diesel engine to explore applications,
such as auxiliary power and trailer refrigeration, within the industrial vehicle
and truck industries. Testing on the CESAR process began in late October 2007,
with initial results recording a 40% improvement in fuel
efficiency.





Our CESAR
technology is designed to increase vehicle fuel economy and reduce emissions by
capturing, storing, and reusing otherwise wasted heat from the exhaust of a
conventional combustion engine. A heat exchanger captures waste energy, which is
then stored in the form of steam in an accumulator, for ‘on demand’ use either
in the same ‘primary’ engine, or in a secondary vapour engine. Power can be
produced solely by the secondary vapour engine even after the primary combustion
engine has shut down. Our CESAR system can be used to power auxiliary truck
systems, such as trailer refrigeration and cab coiling or heating, in regulatory
‘no idle’ or ‘quiet’ zones. In additional to initial truck applications, CESAR
can be further applied in our well developed passenger car programmed in
addition to having longer-term potential in the locomotive and marine
sectors.





Our plan
of operation over the next twelve months is to further the research and
development on our technology resulting in a commercial application in mid 2010.
If successful, we intend to license the technology or form partnerships for the
use of the technology with any customers we may identify.





We have
to date been funded by existing working capital, by an offering of our
convertible debentures, and by stockholder loans from a director and officer of
the Company.  On July 11, 2008, the Company closed the amount of two
million ($2,000,000) of a maximum of $5,000,000 of convertible debentures. Under
the terms of the agreement the Company can raise an additional three million
($3,000,000) from one or more investors. During the next twelve (12) months, the
Company will require approximately three and a half million ($3,500,000) dollars
for development and operating costs, of which approximately nine hundred
thousand ($900,000) dollars will be applied to research and development of the
project. The Company anticipates expending approximately $1,400,000 on salaries
for management, employees and consultants, $144,000 in lease and rental payments
for our development facility, $300,000 on patent related fees and legal fees,
$400,000 on taxes, insurance and administration of the project, $120,000 on
audit and accounting related fees and approximately $250,000 on travel,
investor/public relations and miscellaneous corporate expenses. As of November
30, 2008, the Company had available cash of $514,963 as compared to available
cash of $1,203,030 at August 31, 2008. During the three month period covered by
this quarterly report, along with regular monthly operational expenditures, the
Company undertook certain leasehold improvements and acquired certain equipment
further reducing the Company’s cash position by approximately
$155,000.  The Company may need to raise approximately three million
($3,000,000) in additional funds to meet its planned operations for the next
twelve months.  At this time, the Company cannot say with certainty
whether it will be successful in raising the additional three million
($3,000,000). The Company believes that with the closing of the two million
($2,000,000) raised during July, 2008, it is able to continue operations for the
next six months as it believes that it is  able to raise any
additional required capital by way of equity or stockholder
loans.  There can be no assurance that the Company will be able to
raise these required funds. If the Company cannot raise the required funds then
operations may cease.





We
believe that we have validated the theoretical predictions that were the
foundation of the CESAR system. A substantial development component of the
programme has now commenced and will require appropriate augmentation of the
engineering team, which the Company intends to augment over this coming calendar
year. This is essential for design studies of potential applications of the
total system and will commence using the empirical data revealed by the research
programme. These applications include using the CESAR system to provide
refrigeration power for trucks when the main combustion engine is shut down,
with a target of road testing an especially directed system in late summer of
2009. Further applications include provision of auxiliary power derived at low
recurrent cost from the exhaust heat of combustion engines for other
transportation areas, including lighter vehicles than trucks and heavier in the
form of railway locomotives. There is also a promising application in marine
applications, not excluding commercial vessels but particularly attractive for
pleasure craft with their heavy requirement for auxiliary electrical power when
not under way.





For the
lighter design of the CESAR system, for vans and passenger cars for example, a
substantial repetition of all the phases of the test programme commenced in
Spring 2008 using a smaller multi-cylinder reciprocating engine or a Wankel
engine to replace the current Caterpillar C-15 engine. This will require
appropriate and novel valve designs which are currently in hand to control the
fuel and vapour flows. This second programme would provide design support for
all components of the CESAR saturated liquid energy accumulator system with a
target of road testing such a vehicle one year later, in late summer
2009.





27


In order
to meet many challenges relating to the development of the steam technology, the
Company has appointed a Swiss steam technology specialist company called
Dampflokomotiv-und Maschinenfabrik DLM AG (“DLM”) to act as its outside
consultant for the further development of the Company’s Clean Energy Storage and
Recovery (‘CESAR’) technology. DLM will advise and use its in-house expertise to
assist and facilitate the development of the next stage in our CESAR programme
of the Company. DLM has professionally qualified engineers with specialist
experience. DLM will provide knowledge and experience in such areas as the
design of the process to predict and analyse the heat transfer performance and
issues associated with pressure losses for a range of thermal operations
involving liquids and gases with and without change of phase. DLM has experience
of stress analysis including pressure vessel design to European and British
standards. DLM will work with the engineers of the Company on a routine basis.
We intend to continue this development over the next twelve months.





The
Company employed a CAD engineer in mid-January 2008 and work has commenced on
the development of the truck production and vehicle detail design and initial
system configuration feasibility. The CAD engineer is experienced in all aspects
of design and development. The Company has licensed UGS NX5 and S-IDEAS CAD
software to achieve its design objectives.





In early
May 2008, the Company agreed to acquire additional space in Newhaven, UK, to
accommodate its corporate office and expanding test cell
facility.  Effective November 13, 2008 the Company entered into a five
(5) year lease for office and warehouse space in a property located in New
Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual
rate of $25,207 (£15,000) payable quarterly commencing March
2009.  Concurrently the Company entered into an option to purchase the
aforementioned property, exercisable March through August 2010, for a purchase
price of  the greater of (i) the price stated in an Independent
Valuation or (ii) £425,000 less any reductions previously specified and agreed
in a former option agreement.





The
Company has begun a twin track process to design a new refrigeration engine for
reefers, while holding collaborative discussions with major North American
trailer fleet operators. During fiscal 2008, the Company signed a memorandum of
understanding (“MOU”) with one of the USA’s largest grocery chains, under which
the Company used a refrigerated vehicle for data collection on a range of duty
cycles in June, 2008. This was an off site data collection process in order to
validate test results which will be collected in our test cell.





The
Company anticipates that a newly designed reefer engine will be ready for road
testing by late summer of 2009. Following a six month road trial and analysis,
the Company expects to submit the CESAR technology for regulatory approval under
various jurisdictions worldwide, with the hopes of achieving commercialization
during the first half of 2010.





Although
the Company remains focused on completing this US reefer project on schedule,
there is significant interest in its steam hybrid technology for broader
applications (including automotive, marine and military) in a wide range of
countries. The Company continues to respond to these expressions of interest and
will pursue opportunities which may arise and which management believes to be in
the best interests of the Company.





Liquidity
and Capital Resources





As of
November 30, 2008, we have a total of $514,963 in cash on hand.





Results
of Operations





The
Company had no revenues for the period from inception to November 30,
2008.  The Company reported income from its operations totaling
$1,002,460 as compared to a loss from operations totaling $1,069,924 (2007) over
the 3 month periods as a result of the quarterly revaluation of its derivative
financial instruments which resulted in a gain of $1,976,287 with no comparative
entry over the comparative period in the prior year. General and administrative
expenses, net the aforementioned gain during the current period ended November
30, 2008, totaled $973,827, as compared to $1,069,924 in the prior fiscal
year.  General and administrative expenses related primarily to
salaries and consulting fees totaling $319,263 (2007-$146,366), office and
administrative expenses totaling $169,589 (2007 - $319,159), interest expense
totaling $110,303 (2007 - $22,236) associated with the amortization of certain
convertible notes and stock-based compensation expenses totaling $118,000 (2007
– Nil).  The Company also expended a total of $64,934 (2007 – $59,758)
on professional fees, $33,630 (2007 – $200,000) in consulting fees settled by
the issuance of common stock and $61,123 ($36,310)  in research and
development efforts.  Depreciation costs, amortization of stock option
costs and deferred financing costs cumulatively totaled $97,723 during the three
month period as compared to $36,095 in the prior
year.   Additionally during the three month period ended November
30, 2007 the Company expensed $250,000 with respect to certain director’s fees
settled by the issuance of common stock, with no similar expenditure in the
current fiscal quarter.





28


The
Company recorded a gain from foreign exchange of $9,680 during the current three
month period, as opposed to a loss from foreign exchange during the comparative
period from the prior fiscal year totaling $12,358.  The comprehensive
gain for the three month period ended November 30, 2008 totaled $992,780 as
compared to a comprehensive loss totaling $1,057,566 for the three month period
in the prior fiscal year. The Company reported a basic and diluted gain of $0.02
and $0.01per share during the current period as compared to a loss of $0.02 per
share in the same period during the prior fiscal year.  The
comprehensive loss from inception to date totaled $12,756,761 as at November 30,
2008.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to
stockholders.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
applicable.





ITEM
4T.                                CONTROLS
AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (Exchange Act), as of November 30, 2008.  Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to our Company required
to be included in our reports filed or submitted under the Exchange
Act.





Changes
in Internal Controls





There
were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in our internal controls over
financial reporting that occurred during the quarter ended November 30, 2008,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.





PART
II – OTHER INFORMATION









ITEM
1.  LEGAL PROCEEDINGS





The
Company is not a party to any legal proceedings and is not aware of any pending
legal proceedings as of the date of this Form 10-Q.





ITEM
1A.                      RISK
FACTORS





Not
Applicable


29


ITEM
2.                      UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During
the quarter ended November 30, 2008, we issued the following securities which
were issued without registration under the Securities Act of 1933, in reliance
on Section 4(2), and the provisions of Regulation S.  There were no
underwriting discounts or commissions paid in connection with the sale of these
securities.





Name
      & Address
            Number
      of Shares Issued
            Reason
      for IssuanceChris
      Burns
              16
      Corsica Rd,
              Seaford,
      East Sussex, UK BN251BD
            50,000
      Common Shares
            Employee
      Stock AwardPaul
      Burns
              16
      Corsica Rd,
              Seaford,
      East Sussex, UK BN251BD
            50,000
      Common Shares
            Employee
      Stock AwardJulie
      Burns
              16
      Corsica Rd,
              Seaford,
      East Sussex, UK BN251BD
            50,000
      Common Shares
            Employee
      Stock AwardAlex
      Price
              Unit
      7 (W) E-Plan Industrial Estate
              New
      Road, New Haven, East Sussex
              UK
      BN90EX
            50,000
      Common Shares
            Employee
      Stock AwardGeorge
      McLaine
              10723
      Maplebend Dr. SE
              Calgary,
      Alberta Canada T2J1X3
            32,000
      Common Shares
            Consultant
      Stock AwardSteve
      Wilson
              Unit
      7 (W) E-Plan Industrial Estate
              New
      Road, New Haven, East Sussex
              UK
      BN90EX
            25,000
      Common Shares
            Employee
      Stock Award





All of
the shares noted above were sold under the Regulation S exemption in compliance
with the exemption from the registration requirements found in Regulation S
promulgated by the Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933.  The offer and sale to the purchasers was made
in an offshore transaction as defined by Rule 902(h). No directed selling
efforts were made in the U.S. as defined in Rule 902(c).  The offer
and sale to the purchasers was not made to a U.S. person or for the account or
benefit of a U.S. person. The following conditions were present in the offer and
sale:  a) The purchaser of the securities certified that it is not a
U.S. person and did not acquire the shares for the account or benefit of any
U.S. person; b) The purchaser has agreed to resell the securities only in
compliance with Regulation S pursuant to a registration under the Securities
Act, or pursuant to an applicable exemption from registration; and has agreed
not to engage in hedging transactions with regard to the securities unless in
compliance with the Securities Act; c) The purchaser has acknowledged and agreed
with the Company that the Company shall refuse registration of any transfer of
the securities unless made in accordance with Regulation S, pursuant to a
registration statement under the Securities Act, or pursuant to an applicable
exemption from registration; and d) The purchaser has represented that it is
acquiring the shares for its own account, for investment purposes only and not
with a view to any resale, distribution or other disposition of the shares in
violation of the United States federal securities laws. Neither the Company nor
any person acting on its behalf offered or sold these securities by any form of
general solicitation or general advertising.  The shares sold are
restricted securities and the certificates representing these shares have been
affixed with a standard restrictive legend, which states that the securities
cannot be sold without registration under the Securities Act of 1933 or an
exemption therefrom.





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





Not
Applicable





ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.




30


ITEM
5.  OTHER INFORMATION





On
October 31, 2008 the Company signed a letter of intent (“LOI”) with Flukong
Enterprise Inc. (“Flukong”) for a purchase order of up to 500 of Clean Power’s
steam hybrid engines to provide fuel savings of 40 per cent or better in
refrigerated trailer (“reefer”) applications with Flukong Enterprise Inc., an
Edmonton, Alberta based corporation. The LOI grants distributorship to Flukong
for new customers in both Canada and China, and is renewable annually if Flukong
can demonstrate inter aliaits capacity to meet a sales target of a pre-agreed number of reefer
engines per year.  Under the terms of the LOI, Flukong would purchase
up to 500 of Clean Power’s hybrid refrigeration engines over an 18 month period,
subject to certain conditions.  Furthermore, upon commencement of the
first delivery, Clean Power would grant an option for Flukong to purchase an
additional 1,000 reefer engines per year for two years. To secure these terms
Flukong has paid a US$84,000 deposit to Clean Power Technologies.





During
the quarter, the Company and Quercus agreed to extend the date for the filing of
the registration statement on Form S-1, more particularly described under Note 7
to these financial statements to November 19, 2008, on which date the Company
successfully filed its Form S-1.  The registration statement was
declared effective by the SEC on December 4, 2008.





On
November 18, 2008 CPTL –UK entered into a six month renewable lease agreement
for a corporate housing facility located in Surrey, United Kingdom for use by
the Company’s CEO, Abdul Mitha.  The lease calls for monthly rent in
the amount of $2,100 (£1,250) plus applicable taxes and expires May 17,
2009.





On
December 12, 2008,  the Company entered into a Memorandum of
Understanding (“MOU”) with Farm Fresh Marketing Inc. (“Farm
Fresh”).   The MOU sets out the high-level commercial principles
of the collaboration between the Company and Farm Fresh whereby Farm Fresh will
provide the Company with a Road Load Data Collection Vehicle for installation of
the Company’s data gather systems to test the fuel and operating efficiencies of
the Company’s heat recovery systems, noise and emission
control.   The parties’ intent under the MOU is to prove the
benefits of the Clean Power technology to Farm Fresh and upon successful
testing; Farm Fresh and Clean Power shall enter into discussion to establish
ongoing collaborations and commercial relationships.  Clean Power had
agreed that for two years following completion of the test, it will make the
Clean Power system (once in production) available to Farm Fresh in such
quantities as Farm Fresh may order at prices and terms as favorable to Farm
Fresh as those offered by the Company to any of its other
customers.  Farm Fresh has acknowledged its intent to purchase at
least 53 systems within the two year period, subject only to the proof of CPTI’s
technology.








ITEM
6.EXHIBITS







EXHIBIT
      NO.
            IDENTIFICATION
      OF EXHIBIT3.1
            Articles
      of Incorporation
            Incorporated
      by reference to our SB-2 registration statement filed  with the
      Securities and Exchange Commission on March 15, 20043.1
      (i)
            Amendment
      to Articles of Incorporation dated June 12, 2006
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 20063.1(ii)
            Amendment
      to Articles of Incorporation dated June 13, 2006
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 20063.2
            Bylaws
            Incorporated
      by reference to our SB-2 registration statement filed with the Securities
      and Exchange Commission on March 15, 2004


31


3.2(i)
            Amended
      and Restated Bylaws
            Incorporated
      by reference to our Form 10-QSB filed with the Securities and Exchange
      Commission on January 22, 200710.1
            Agreement
      and Plan of Merger between the Company, Clean Energy and Power Solutions
      Inc. and the shareholders of Clean Power Technologies Inc.
      executed
              on
      May 22, 2006.
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 200610.2
            Memorandum
      of Understanding between the Company and Mitsui Babcock Energy Limited
      dated September 11, 2006
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on September 12, 200610.3
            Collaboration
      Agreement between the Company and Mitsui Babcock Limited dated October 11,
      2006
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on October 19, 200610.4
            2007
      Stock Option and Stock Award Plan approved by the Board of Directors and
      the Shareholders
            Incorporated
      by reference to our Form SB-2 registration statement filed with the
      Securities and Exchange Commission on March 23, 200710.5
            Subscription
      Agreement from Doosan Babcock Energy Ltd., executed pursuant to the
      Collaboration Agreement between the Company and Doosan Babcock Energy Ltd.
      dated October 11, 2006
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on June 20, 200710.6
            2008  Stock
      Option and Stock Award Plan approved by the Board of Directors and the
      Shareholders
            Incorporated
      by reference to our Definitive 14-C filed with the Securities and Exchange
      Commission on April 17, 200810.7
            Employment
      Agreement between Abdul Mitha and the Company effective May 1, 2008,
      approved by the Board of Directors on May 22, 2008.
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on May 28, 200810.8
            Stock
      Purchase Agreement dated July 10, 2008, by and between the Company and The
      Quercus Trust
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.9
            Promissory
      Note issued by  the Company to The Quercus Trust
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.10
            Registration
      Rights Agreement by and between the Company and The Quercus
      Trust
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 2008


32


10.11
            Pledge
      Agreement by and between the Company and The Quercus Trust
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.12
            Class
      A Warrant issued by the Company to the Quercus Trust pursuant to the Stock
      Purchase Agreement dated July 10, 2008
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.13
            Class
      B Warrant issued by the Company to the Quecus Trust pursuant to the Stock
      Purchase Agreement dated July 10, 2008
            Incorporated
      by reference to our Form 8-K filed  with the Securities and
      Exchange Commission on July 16, 200810.14
            Cooperation
      Agreement between the Company and Voith Turbo GmbH & Co., KG dated
      August 5, 2008
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on August 8, 200810.15
            Memorandum
      of Understanding between the Company and Farm Fresh Marketing Inc. dated
      December 12, 2008
            Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on December 16, 200810.16
            Lease
      Agreement between Quentin King and Clean Power Technologies Limited
      effective November 13, 2008
            To
      be filed by the registrant on current report on Form 8-K10.17
            Option
      Agreement between Quentin King  and Clean Power Technologies
      Limited effective November 13, 2008
            To
      be filed by the registrant on current report on Form 8-K10.18
            Lease
      Agreement between Mr. Andrew Leaver and Mrs. Hilary Leaver  and
      Clean Power Technologies Limited effective November 18, 2008
            To
      be filed by the registrant on current report on Form 8-K


33





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on this 14th  day
of January, 2009








CLEAN
POWER TECHNOLOGIES INC.








By:    /s/ Abdul
Mitha


Name:  Abdul
Mitha


Title:   President,
Principal Executive Officer








By:    /s/ Diane
Glatfelter


Name:  Diane
Glatfelter


Title:   Secretary,
Treasurer, Principal Financial Officer








34