SECURITIES AND EXCHANGE COMMISSION

FORM 10-KSB

| | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934    
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| | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
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CLEAN ENERGY COMBUSTION SYSTEMS, INC.



|Delaware(State or other jurisdiction of incorporation or organization) |  | 98-0211550(I.R.S. Employer Identification No.)
|---------------------------------------------------------------------- |  | ----------------------------------------------

7087 MacPherson Avenue, 
Burnaby, British Columbia, Canada, V5J 4N4
(604) 435-9339

Securities registered pursuant to Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Exchange Act:  Common stock, par value $0.0001

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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:   Yes       No

Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB:

The issuer's revenues for its most recent fiscal year (fiscal 2002) was $0.

The aggregate market value of the issuer's voting and non-voting common equity held by the issuer's non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days, was $5,239,432 as of the close of April 13, 2004.

Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court during the past five years:   Yes      No

The number of shares outstanding of each of the registrant's classes of stock as of as of April 12, 2004, the latest practicable date, was 21,648,251 common shares 1,000 series
'A' preferred shares, and 241,668 series 'B' preferred shares.

Documents Incorporated By Reference

The issuer has not incorporated by reference into this annual report: (1) any annual report to the issuer's securities holders, (2) any proxy or information statement, or (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act.

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Table Of Contents

> Business
>     1Introduction
>   1Pulse Combustion Technology And
>     Products
>   1Gasification Technology And
>     Products
>   16Cryogenic Gas Liquification
>     Technology And Products
>   17Marketing Strategy
>   18Pending Projects
>   18Research and Development
>   20Manufacturing Capacity And
>     Suppliers
>   
>   21Subsidiaries
>   
>   21License Agreements
>   
>   21Patents And Proprietary Rights
>   
>   22Employees
>   
>   23Governmental Regulation
>   
>   23Properties
>   24Legal
>       Proceedings
>   24Selected Consolidated
>       Financial Information
>     24Management's Discussion And
>       Analysis Of Financial Condition And Results Of Operations
>     25Overview
>   25Results Of Consolidated Operations
>   26Liquidity And Capital Resources
>   26Plan Of Operation And Prospective
>     Capital Requirements
>   
>   27Other Matters
>   
>   28Uncertainties
>     And Risk Factors That May Affect Our Future Results And Financial Condition
>   29Uncertainties And Risks Generally
>     Relating To Our Company And Our Business
>   
>   29Risks Relating To An Investment
>       In Our Securities
>     34Market
>       Price Of And Dividends On Our Common Shares And Related Shareholder
>       Matters
>   
>   37Market Information
>     
>   37Dividend Policy
>     
>   38Recent Resales Of Unregistered
>     Securities
>   38Submission
>       Of Matters To A Vote Of Securities Holders In Fourth Quarter
>   
>   40Changes
>       In And Disagreements With Accountants On Accounting And Financial
>       Disclosure
>   40Directors
>       And Executive Officers
>   41Executive
>       Compensation
>   41Ownership
>       Of Our Securities By Beneficial Owners And Management
>   41Certain
>       Relationships And Related Transactions
>   41Controls
>     And Procedures
>   41Exhibits, Financial
>       Statements, Schedules And Reports On Form 8-K
>     41

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Introductory
  Notes

The information set forth in the section of this annual report captioned
  "Business" is current as of April 12, 2004, unless an earlier or later date is indicated in that section.  The information set forth in the sections of this annual report other than
  "Business" is current as of December 31, 2003, unless an earlier or later date is indicated in those sections.

We conduct our transactions in the currency of both the United States and Canada, although we consider the United States dollar to be our functional and reporting currency.  All references to
"dollars" in this annual report refer to United States or U.S. dollars unless specific reference is made to Canadian or CDN dollars.  For information relative to rates of exchange and currency conversion, see that section contained in explanatory note 2 to our consolidated financial statements captioned
"Foreign Currency Translation".

Note Relating To Pending Stock Consolidation

On February 17, 2004, our board of directors and shareholders approved an amendment to our certificate of incorporation to implement a one-for-three consolidation of our outstanding common shares, whereby each common share outstanding as of February 18, 2004 would be consolidated into one-third of one common share, with fractional shares rounded up.  We anticipate that this consolidation will be effected on April 28, 2004. Whenever we make any reference in this annual report to the grant or issuance of common shares or options or warrants to purchase common shares, such reference shall, for comparison purposes, be made in reference to pre-consolidation numbers and, in the case of common share purchase options and warrants, pre-consolidation exercise prices, unless we state otherwise.

Special
  Note Regarding Forward-Looking Statements

In this annual report we make a number of statements, referred to as
  "forward-looking statements", which are intended to convey our expectations or predictions regarding the occurrence of possible future events or the existence of trends and factors that may impact our future plans and operating results.  These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe to be appropriate in the circumstances.  You can generally identify forward-looking statements through words and phrases such as
  "seek", "anticipate", "believe", "estimate", "expect",
  "intend", "plan", "budget", "project", "may be",
  "may continue", "may likely result",and similar expressions.  When reading any forward looking statement you should remain mindful that all forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of our company, and that actual results or developments may vary substantially from those expected as expressed in or implied by that statement for a number of reasons or factors, including those relating to: (1) the timing and completion of pending or prospective projects and contracts and receipt of revenues and whether or not markets for our products develop and, if they do develop, the pace at which they develop; (2) our ability to attract the qualified personnel to implement our growth strategies, (3) our ability to develop sales, marketing and distribution capabilities; (4) the accuracy of our estimates and projections; (6) our ability to fund our short-term and long-term financing needs; (7) changes in our business plan and corporate strategies; and (8) other risks and uncertainties discussed in greater detail in the sections of this annual report, including those captioned
  "Risk Factors" and "Management's Discussion And Analysis Of Financial Condition And Results Of Operations".

Each forward-looking statement should be read in context with, and with an understanding of, the various other disclosures concerning our company and our business made elsewhere in this annual report as well as other pubic reports filed with the United States Securities and Exchange Commission (the
"SEC").  You should not place undue reliance on any forward-looking statement as a prediction of actual results or developments. We are not obligated to update or revise any forward-looking statement contained in this annual report to reflect new events or circumstances unless and to the extent required by applicable law.

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BUSINESS

Introduction

Clean Energy Combustion Systems, Inc.
  ("we","our company" or "Clean Energy") is a development stage enterprise.  We market three types of products,
  "burner units" based upon our patented high-frequency valveless "pulse combustion
  technology"; gasification systems using our proprietary ecoPhaser gasification technology which uses heat to convert various biomass feedstocks into
  "clean thermal energy"; and our proprietary mobile modular technology for liquefaction and transportation of natural gas, methane, helium, nitrogen and other gases from remote locations.  Each of these technologies is fully developed and in a position to be commercially marketed.

We recently acquired our gasification technology from ecoTech Waste Management Systems (1991) Inc., a privately-held federal Canadian corporation located in British Columbia, Canada, and our cryogenic technology from Mr. C. Victor Hall, ecoTech's President and principal shareholder, on March 11, 2004 pursuant to a memorandum of understanding dated March 5, 2004.  Under this agreement, we agreed to pay 7,076,300 common shares and 500,000 common shares to ecoTech and Mr. Hall, respectively, for title to their technology.  The common shares were valued at $0.14 per share, or an aggregate of $990,682 for the gasification technology and $70,000 for the cryogenic technology, such amount per share representing the closing trading price for the common shares as of the date that we reached agreement-in-principal with respect to the relative values of the technologies to be acquired and our business and the structure of the transaction.  The sales price was determined on an arms'-length negotiated basis.  No independent valuation was sought from a business/technology appraiser or other third party due to financial constraints.

Our principal executive offices and research and development facilities are located at 7087 MacPherson Avenue, Burnaby, British Columbia, Canada, V5J 4N4, and our telephone number is (604) 435-9339.

We were formed and organized under the name Clean Energy Technologies, Inc. on March 1, 1999, and changed our corporate name to Clean Energy Combustion Systems, Inc. on May 20, 1999.  We are authorized under our Certificate of Incorporation to issue common stock and preferred stock, with respect to the latter of which we have to date authorized the issuance of series
'A' convertible preferred stock, series 'B' convertible preferred stock and series
'C' convertible preferred stock (sometimes referred to in this annual report as "common shares",
"preferred shares", "series'A'preferred shares",
"series'B'preferred shares" and "series'C'preferred shares", respectively).

Pulse Combustion Technology And Products

Overview

A burner unit is a furnace, burner or other combustion chamber which uses the combustion process to convert the chemical energy contained in various fuel sources into heat energy measured in
  "British Thermal Units" or "BTUs".  The use of a burner unit to create heat energy is typically the first of a number of steps in which the heat energy is generated for use in a multiplicity of residential, commercial, municipal or industrial settings, ranging from simple one-step residential and light commercial applications where the heat energy is used merely to heat air or water, such as the case of space or water heaters, to complicated industrial multi-step applications where the heat energy is subsequently converted into one or more other forms of energy.  An illustration of a multi-step industrial application would be electricity generation, where a public utility company first burns oil, natural gas or coal to create heat energy, then uses this form of energy to heat water in a boiler system to create steam energy, then uses this form of energy to run a turbine to create mechanical energy, and ultimately uses this form of energy to create a magnetic field to generate electrical energy.  Since the heat generated by the combustion of fuel in burner units is generally
  "transferred" for other purposes as the end result of the first step in a process, the industry in which we compete, namely, manufacturers and sellers of products incorporating burner units, is commonly referred to as the
  "heat transfer" industry.

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Our "pulse combustion technology" is a high-frequency valveless pulse burner technology which can operate on a variety of carbon-based fuels, including natural gas, propane, powdered coal, as well as hydrogen, a non-carbon-based fuel.  This design facilitates the manufacture of highly-compact burner units that are more energy-efficient, and emit significantly lower levels of pollutants, than conventional steady-state combustion designs.  We believe that the reason for these results can be explained as follows:

- In conventional steady-state combustion, a number of chemical reactions proceed together, principally those that convert chemical energy into heat energy and result in the release of heat, and those chemical reactions that produce unwanted byproducts.  It is not generally possible to have one without the other.  For example, in the case of the combustion of carbon-based fuels, unwanted byproducts include carbon monoxide or
  "CO",oxides of nitrogen or "NOx", sulphur dioxide or "SO

In pulse combustion, the combustion process occurs in a steady series of pressurized pulses that create an extremely hot, turbulent and explosive combustion environment within each short pulse.  These kinetic conditions accelerate the rate at which chemical energy is converted into heat energy, and convert a higher proportion of the chemical energy into heat energy.  The extreme turbulence also maximizes heat transfer capabilities.  The resulting energy efficiencies translate into cost savings.  At the same time, if the pulses occur at a fast enough rate, the chemical byproducts created through the combustion process are reduced due to the accelerated completion of the heat conversion process as well as the more complete conversion of chemical energy into heat energy, thereby leading to reduced exhaust emissions.  The NOx emission levels for our current water heater prototype, for example, tests at less than 10 parts per million, which is less than one-tenth of conventional steady-state combustors.  We believe based upon early testing that our pulse combustion technology will lead to similar reductions with respect to other unwanted byproducts of the combustion process, including CO and, in the case of coal and other
  "dirty" carbon-based fuels, SO

Currently, there are a limited number of pulse combustion products on the market, all of which principally target premium-priced high-efficiency water heater and boiler applications.  These designs utilize a
"tubular" configuration, and operate in the range of 36 to 70 cycles per second depending upon the configuration and application.  Our pulse combustion designs, on the other hand, utilize either an elongated or
"linear" configuration or a "cylindrical" configuration, both of which operate at up to 350 to 1,600 cycles per second depending upon the configuration and application, or 6 to 22 times the rate of conventional tubular pulse combustion, leading to increased energy efficiencies and reduced emission levels.  Due to the compactness, simplicity of design and lack of moving parts inherent in our pulse combustion technology, our designs also allow burner units to be more inexpensively, easily and quickly manufactured, installed and serviced than conventional steady-state and tubular pulse combustion designs.

We have developed or are currently working on production proto-types for the following applications of our pulse combustion technology:

- a large natural gas-fueled industrial dryer for tissue paper, which will act as a lead-in product for the broader industrial pulp and paper market;
- a residential natural gas-fueled water heater, which will act as a lead-in product for the broader industrial, commercial, and residential water heater and boiler market;
- natural gas-fueled burners for natural gas and oil transportation purposes, which will act as a lead-in product for a variety of specialty petroleum industry applications;

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- a hydrogen-fueled burner to combine unwanted hydrogen with air and to then convert it into nitrogen and heat energy for natural gas and oil production and downstream processing purposes;
- natural gas-fueled burners units for a pollution control and fuel cell system;
- a diesel-based burner to be used for heavy-duty special-purpose vehicles heaters; and
- a small powdered coal-fired proto-type to be used to develop larger burners for commercial and municipal electricity generation purposes, which will act as a lead-in for larger industrial coal burning applications.

Most of the testing of our pulse combustion technology to date are fueled by natural gas, powdered coal and hydrogen, although our pulse combustion technology has the capability to use any carbon-based fuel as its energy source.  We have, for example, successfully burned gasoline, diesel, propane, and a powdered coal and natural gas mix.

Natural gas is a logical fuel choice, particularly in North America, due to its relatively abundant supply and clean-burning characteristics when compared to other carbon-based fuels.  The primary barrier to the greater use of natural gas has been transportation, as pipelines are generally required to convey natural gas from source to location of intended use.

Coal is also a logical fuel choice world-wide (including North America) due to its abundant supply, although there are still outstanding environmental issues relating to the burning of coal and the cost of scrubbing and other emission-control technologies required to reduce resultant pollutants, particularly SO

There is also much interest in developing a "hydrogen
economy" using hydrogen-fueled fuel cells due to their high chemical energy conversion efficiencies, the theoretical ability to procure abundant supplies of hydrogen over the next several hundred years from the chemical conversion of sea water into hydrogen and oxygen, and the elimination of pollutants associated with hydrocarbon-based fuel emissions such as CO, SO

We believe the demand for cleaning burning fuels will continue as clean air legislation and public environmental pressures increase, particularly in the industrial countries.  The ability to efficiently burn fuel in order to conserve energy resources, while eliminating or minimizing the various pollutants resulting from the combustion process, has become worldwide economic and political issue as a result of increasing awareness and concerns over the past 25 years relative to energy conservation and the impact of pollution on our environment and health.  One of the consequences of these concerns has been the imposition of ever increasing levels of regulatory restraints on emission levels and, to a lesser degree, fuel usage, particularly in the developing countries of the world.  In the United States, for example, not only does the United States Environmental Protection Agency impose nationwide emission standards, but various states and their political subdivisions impose even more stringent emission standards.  The most visible example of this is California, which imposes the most stringent automobile emission standards in the world, and the South Coast Air Quality Management District, a California regional governmental agency which imposes the strictest pollution control requirements in the world on a broad range of industrial, commercial or municipal emissions in the four counties comprising the Los Angeles metropolitan area.

One of the tools being developed by governments world-wide to combat climate change is the concept of emission credits or allowances, based on pollution reductions.  The development of a commodity trading system, based on lowering emission levels creates an economic value associated with pollution control.

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We believe that our pulse combustion technology, in particular, has the potential to bring dramatic improvements in both efficiency and pollution control, particularly in view of the existing limitations of conventional steady-state combustion and pollution control technologies which we believe are approaching, if not at, their theoretical limits of effectiveness.  We anticipate that the various advantages of our technologies will afford us the opportunity to ultimately develop and introduce a large variety of different burner units cutting across a broad number of diverse industrial, commercial, municipal and residential heat transfer markets through a variety of commercial arrangements with established heat transfer industry partners, including licensing, royalty, joint venture and manufacturing agreements.

We have no revenues to date, nor have we entered into any revenue producing contracts to date, although we are currently working on a number of proto-types under several proposal requests which could lead to development grants by manufacturers or others over the next two to six months, and contract revenues after twelve months.

How Conventional Pulse Combustion Technology Works

Conventional pulse combustion burner technology is a burner unit design comprised of two geometrically-configured adjoining channels and chambers-a combustion chamber and an exhaust channel or
  "tailpipe".  As shown in the illustration below, most conventional pulse combustion burner units use a
  "tubular" configuration, similar to a bottle with an elongated neck.  In operation, fuel and air are first injected from an intake channel into the combustion chamber (at the base of the bottle) where they are ignited with an ignition rod and commence burning (in the bottom portion of the bottle).  The heat created by the combustion process then generates a pressure wave which travels from the combustion chamber through the tailpipe (the elongated neck of the bottle), carrying with it various gases or
  "effluents" resulting from the combustion process.  As the effluent gases exit the tailpipe, a partial vacuum is created within the combustion chamber which, in turn, pulls a new supply of air and fuel into the combustion chamber from the intake channel.  This new fuel-air mixture is then compressed by effluent returning or
  "pulsing back" from the tailpipe, and ignites on its own without the need of the ignition rod as a result of this pressure increase and the remaining heat within the combustion chamber, causing the entire process to repeat.  Most conventional pulse combustion technology, for example, operates at anywhere from 36 to 70 cycles per second depending upon the configuration and application.  It is this oscillating or
  "pulsating" condition-hence, "pulse" combustion-which differentiates pulse combustion from conventional
  "steady-state" combustion, where combustion is provided through the steady or continuous burning of a flame, such as in the case of a kettle of water being heated on a gas stove.

How Our Pulse Combustion Technology Works

The principal drawbacks of conventional pulse combustion technology has been noise and vibration and an inability to efficiently generate large quantities of BTUs through the combustion process.  As discussed in greater detail below, the noise and vibration result from the operation of the conventional pulse combustion burner at relatively low frequencies of 36 to 70 cycles per second.  The conventional pulse combustion
  burner's inability to efficiently generate large quantities of BTUs can be attributed to its geometries.  Specifically, as the dimensions of the
  "bottle" are expanded or elongated in order to increase BTU production capacity, the heat output and heat transfer efficiency of the unit decreases, while emissions and noise and vibration levels increase.

As illustrated below, our company's initial solution to these problems was to maintain the most efficient shape of the
"bottle" in terms of its "cross-section", while extending the "depth" of the bottle in a linear or straight-line direction and adding multiple fuel injectors:

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[ILLUSTRATION COMPARING "CONVENTIONAL" PULSE COMBUSTION CONFIGURATION

TO CLEAN ENERGY'S "LINEAR"
PULSE COMBUSTION CONFIGURATION]

ur design eliminates the noise and vibration levels associated with conventional pulse combustion since the design of our unit allows it to operate at anywhere from 350 to 1,600 cycles per second depending upon the configuration and application.  Moreover, the depth implicit in our design allows us to significantly increase the
unit's overall heat output, without loss of efficiencies and increase of emissions.  Set forth below is a diagram of a water or space heating system containing three combustion chambers based upon our linear configuration:

[ILLUSTRATION OF CLEAN WATER HEATER
OR SPACE HEATING SYSTEM

BASED ON CLEAN ENERGY'S "LINEAR" PULSE COMBUSTION CONFIGURATION]

Note the elongated or "linear" shape of each burner chamber as indicated in the above diagram, both height- and width-wise as they progress from the wider combustion chamber into the narrower tailpipe, as well as depth-wise.  The basic dimensions of each burner chamber, in terms of relative height, width and depth, resembles the shape of a
  "blade".  For this reason our company sometimes refers to our pulse combustion technology as
  "pulse 'blade' combustion" or "PBC" technology, principally to differentiate our original linear blade configuration from the
  "tubular" pulse combustion configuration conventionally used today.

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It is important to note that so long as we maintain the basic geometries of our designs, whether in the linear or cylindrical configurations, we can obtain additional heat output where required, by making one or both of the following simple alterations to the basic design depending upon space and use considerations, which we refer to as
"scaling-up" the configuration:

- extending either (1) the depth of the system (i.e., the length of the existing pulse combustion burner chambers and intervening water or air chambers), while maintaining the width and height of the burner chambers, or (2) the width or height of the burner chambers, while maintaining basic blade design geometries; or
- adding or "stacking" one or more additional pulse combustion burner chambers and intervening water or air chambers on a side-by-side basis, as illustrated above.

We can then regulate or adjust heat output by turning one or more of these adjoining modules on or off.  This on-off capacity, which we refer to as
"modular turn-down capability", allows our unit to operate at a number of differing pre-selected higher or lower output levels while maintaining optimum heat output and heat transfer efficiencies.  Conventional systems have very low efficiencies and high emissions while operating in a lengthy startup modes or partial capacity during low demand periods of operation.

We now use several different pulse combustion designs depending upon the application required, including our initial
"linear" configuration, various newer "cylindrical" variants, and a further variant for hydrogen applications. There are several beneficial aspects of our cylindrical variant, including lower manufacturing costs, innate structural integrity, and elimination of gases collecting in corners.

Competing Pulse Combustion Products

Pulse combustion technology is not a new development.  It has been in the public domain since early in the twentieth century, and was used in World War II to power the infamous V-1
  "buzz bombs".  Until recently, however, its use for commercial heat transferapplications has been relatively limited.

Pulse combustion technology was first applied to the manufacture of boilers in the late
  1950's by Lucas Rotax in its "Pulsamatic" boiler.  The introduction of the technology was short-lived, though, due to lack of strong marketing and the absence of incentive to buy high-efficiency boilers when gas prices were low.

The technology was reactivated in 1979 when Hydrotherm Corporation introduced its high-efficiency residential
  "Hydropulse" series of residential water boilers.  Lennox International, Inc., also incorporated pulse combustion technology into several of its products in 1976 through a collaborative working agreement with the American Gas Association and the Gas Research Institute, and introduced several models of an ultra-high efficiency pulse-forced-air furnace into the marketplace in 1992.

Even though the higher efficiencies afforded by pulse combustion over conventional steady-state combustion is a well known fact in the residential and commercial heating industry, pulse combustion products still have not been widely introduced, and have had limited penetration in the markets they have been introduced into.  We believe the principal reasons for this limited market penetration are higher manufacturing and installation costs, which translate into higher sales prices, as well as noise considerations.  Indeed, to our knowledge the only significant manufacturers and marketers of pulse combustion burner units within the United States today are:

- Hydrotherm Corporation, which markets a line of natural gas-fueled pulse water boiler systems rated at from 100,000 BTUs/hr to 300,000 BTUs/hr used principally for residential and commercial hydronic (radiant) space heating purposes.  In hydronic space heating, hot water is circulated in an enclosed system through a series of interconnected pipes located within a concrete slab in a building.  As the hot water circulates, the heat it emanates warms the air spaces above and below the slab.

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- Lennox International, Inc., which has marketed two natural gas-fueled forced-air pulse combustion furnaces for space heating, ranging from 50,000 BTUs/hr to 100,000 BTUs/hr output.
- Fulton Boiler Works, Inc., which markets:

- two lines of natural gas or propane fueled boilers for commercial and small business purposes, namely, a line of low pressure models rated at between 500,000 to 750,000 BTUs/hr input, and a line of high pressure models rated at between 500,000 to 700,000 BTUs/hr input; and
- a line of pulse boilers used for hydronic heating purposes and heat pump applications, rated at between 300,000 to 2,000,000 BTUs/hr input.

Each of these competitors positioned their pulse combustion products as premium-priced,
"higher efficiency" alternatives to conventional steady-state combustion product lines.

All of Lennox's, Fulton's and Hydrotherm's pulse combustion products utilize conventional valved
"tubular" designs.  For example, in the case of the Lennox unit, the tube is approximately eight feet long and is looped or coiled vertically for space efficiency.  The principal operational feature of the conventional tubular design is the low number of repetitive combustion pulses or cycles at which it operates, typically 36 to 70 cycles per second.

There are also numerous manufacturers and marketers of conventional steady-state combustion products within the United States that compete with pulse combustion products, including Cleaver Brooks, Raypack, Inc., AERCO International Inc. and Weben-Jarco, as well as Lennox, Fulton and Hydrotherm.

Competitive Advantages Of Our Pulse Combustion Technology

Summary Of Competitive Advantages Over Conventional Steady-State Combustion And Conventional Tubular Pulse Combustion Technologies

As discussed below in greater specificity, our pulse combustion technology affords the following principal competitive advantages over conventional steady-state combustion and conventional tubular pulse combustion technologies when burning carbon-based fuels:

- Our pulse combustion technology is highly efficiently, both in terms of ordinary operations as well as
  "on-off" efficiency.  For example, our pulse combustion technology operates at over 95% heat transfer efficiency levels, as compared to the 75% to 85% levels attributable to traditional steady state combustion with comparable surface heating area.  Our overall efficiency level is further enhanced by our rapid warm-up or ramp-up time, as compared to large conventional boiler systems that take some time to get up to temperature from cold start or turn down point.  As a consequence, our pulse combustion typically displays three to five times the heat transfer rates of conventional steady-state combustion technologies, and up to three times the heat transfer rate of conventional tubular pulse combustion designs.
- Our pulse combustion technology enables very fast warm-up or ramp-up time to optimum efficiencies as compared to large conventional boiler systems that take some time to get up to temperature from cold start or turn down point.
- Our pulse combustion technology enables burner units to emit:

- significantly lower emissions than conventional steady-state combustion technology, and

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- significantly lower NOx emission levels than conventional tubular pulse combustion technologies, and comparable or slightly lower emission levels than those technologies with respect to emissions other than NOx, such as CO and, in the case of
  "dirty" fuels such as coal or "heavy" oil, sulphur dioxide and particulates.

- Our pulse combustion technology allows unlimited size or output variations with our pulse blade design, while conventional
  "tubular" pulse burners which have limited scalability and thus are very restricted with respect to size and output.
- Our pulse combustion technology results in significantly smaller and lighter burner units and systems than allowed by both steady-state combustion and conventional tubular pulse combustion technologies due to our compact and simple designs, and the elimination of the need for an external primary heat exchanger.  This advantage is compounded in multi-burner scale-up configurations.  Moreover, our burner units are so much more compact in size that rather than performing complete boiler system replacements that it can actually be installed into the existing boiler unit thereby saving considerable capital cost.  As a consequence, our technology can facilitate a burner unit retrofit at a fraction of the cost of a complete commercial or industrial boiler replacement.
- Our pulse combustion technology allows burner units to be designed for operation at optimum energy conversion efficiencies and low emission levels at differing pre-selected output levels due to our integrated modular design and resultant modular turn-down capability.  While conventional steady-state combustion and tubular pulse combustion units can also operate on a similar modular basis, they can only do so when aligned in a bank of separateburner systems, while our design allows us to incorporate numerous combustion chambers within a singlecombustion system.  This advantage allows us to compound the size and weight advantage which the compact size of our pulse burner technology already affords us on a unit-versus-unit comparison basis.
- Our pulse combustion technology allows burner units to be manufactured and installed at significantly lower costs than steady-state combustion and conventional tubular pulse combustion technologies due to our simplicity of design, compact size and lack of moving parts.

Better Combustion System Efficiencies



Background

- Heat Output Efficiency

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- Heat Transfer Efficiency
- Start-Up Efficiencies

- Energy Conversion Efficiency Advantages of Pulse Combustion Over Conventional Steady-State Combustion

- Heat Output Efficiencies
- Heat Transfer Efficiencies
- Start-Up Efficiencies

- Energy Conversion Efficiency Advantages of Our Pulse Combustion Technology Over Conventional

> Test evaluations by an independent engineering firm, for example, showed overall energy efficiency rates for our pulse combustion water heater in the order of 94%.  An alternative method to calculate heat output efficiency is to evaluate emission levels, since lower emissions means more fuel is being converted into energy.  As discussed in greater detail below, more recent emissions tests on our burners conducted through independent testing agencies show exhaust readings of less than 10 parts per million for both NOx and CO, meaning that almost all of the heat energy of the fuel was liberated in the combustion process.

Lower Emissions

- Background:   There has been increased worldwide awareness and concern over the past 25 years over the effect of atmospheric pollutants from the combustion of carbon-based fuels on the environment and
  people's health, leading to ever-increasing levels of regulatory emissions constraints, particularly in the developed countries of the world.  In order to address these concerns and satisfy current and anticipated regulatory requirements, prospective purchasers are now demanding burner units which emit significantly lower levels of post-burn chemical gases, including NOx, CO SO

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> In designing and operating burner units with an eye toward reducing emissions, manufacturers and operators must consider two inter-related variables, the
> "completeness" of the burning process as evidenced by its heat output efficiency, and the amount of so-called
> "excess air" required to maintain stable combustion based upon the fuel to be burned.  Specifically:

- There is an inverse relationship between heat output efficiency and emission levels.  As previously discussed, heat output efficiencies are a function of the completeness of the burning process.  The more complete the process, the greater amount of the chemical components of the fuel will be converted into heat energy, and the less amount of unconverted fuel, in the form of various post-burn chemical gases, will be emitted as part of the exhaust stream.
- The amount of pollutants is also a function of the level of
  "excess air" used in the combustion process, as measured as a percentage of oxygen contained in the exhaust stream.  Simply put, the combustion process requires, at a minimum, two quantities of oxygen-the first quantity of oxygen representing that amount necessary to bond and chemically react with the fuel as part of the combustion process in order to convert its chemical energy into heat energy, and the second quantity of oxygen representing an additional amount necessary to maintain a
  "stable" combustion environment.  If there are insufficient quantities of this latter amount of additional oxygen in the combustion environment, referred to as
  "excess air", then the combustion process will sputter or be "unstable", resulting in reduced combustion system efficiencies.  By way of example, natural gas-fueled water heaters typically operate with excess air rates of 30% to 40%, which constitutes approximately 30% to 40% of additional oxygen over that required to burn the natural gas and convert it into heat energy and 30% to 40% more heated nitrogen out of the vent stack.

> From an emission control standpoint, the greater amount of excess air the better.  Specifically, the excess air promotes the re-burning of the various post-burn chemical gases from the primary combustion process, and consequentially lowers emissions.  Excess air is not beneficial, however, from a heat transfer efficiency standpoint, since the excess air captures or
> "steals" the heat generated by the primary combustion process, which makes it unavailable for the intended heat transfer purposes.  The more excess air-the greater the loss in heat transfer efficiency.  As a consequence of this dynamic, operators of burner units are faced with the following
> "no-win" choice:if their primary requirement is pollution control-they must operate their burner unit at
>     "richer" oxygen levels and bear the attendant greater fuel costs due to the resulting loss of heat transfer efficiency; and if their primary requirement is lower fuel costs-they must operate their burner unit at increased emission levels.
> -10-

- Emission Control Advantages of Pulse Combustion Over Conventional Steady-State Combustion
- Emission Control Advantages of Our Pulse Combustion Technology Over The Conventional

> The ability of our pulse combustion technology to reduce NOx emissions has been is illustrated by the following independent test results, including tests performed by the Alberta Research Council, Inc. in November 2002, and prior to that with the Canada Centre for Mineral and Energy Technology, or
> "CANMET", the American Gas Association Laboratories, and the Center for Emissions Research, and Certification, Inc., an independent testing agency under the auspices of the Southern California Air Quality Management District.  These tests have all demonstrated NOx levels for natural gas-fueled, natural gas and powdered coal-fueled, and, most recently, hydrogen-fueled burners, of consistently less than 10 ppm or 10 Ng/Joule, and as low as 2 ppm or 2 Ng/Joule for some fuel and air mixtures.
> We believe that our pulse combustion technology is so effective in reducing the emissions of post-burn chemical gases thatit can be utilized as a relatively inexpensive pollution control device, not only for NOx, but also for CO and other hydrocarbons and, in the case of coal, SO

Compact Size

Our pulse combustion burner units are significantly smaller than conventional steady-state and tubular pulse combustion units of equivalent output due to the following considerations:

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- Our burner units require a smaller combustion chamber to generate equivalent heat output and heat transfer capabilities than conventional steady-state and tubular pulse combustion units due to the geometric configuration of our design as well as the higher number of pulse cycles at which our unit operates.
- Conventional steady-state and tubular pulse combustion units require separate, large external heat exchangers to transfer heat energy, regardless of application, while the walls of our burner design act as primary heat exchange surfaces.  This dramatically decreases the size requirement for secondary heat exchange, which is one of the largest cost elements of conventional designs.

This size advantage is extremely important where limited floor or room space considerations apply.  For instance, the core of a 150,000 BTU/hr low pressure boiler system utilizing our pulse combustion configuration is approximately the size of a briefcase, and weighs approximately 50 pounds, exclusive of the jacketing, muffler and a secondary heat exchanger connected to the tailpipe.  By way of comparison, a low pressure boiler system utilizing a conventional pulse combustion tubular design contains a combustion chamber, tailpipes and decoupler combination which is approximately one foot in diameter and three feet in height, and weighs in excess of 200 pounds.  The size of conventional steady-state combustion units, in turn, which consist of a burner and an external heat exchanger, equal or exceed that of conventional tubular combustion units of comparable output.

Integrated Modular Design

As previously discussed, one of the principal advantages of our pulse design is that it lends itself readily to the joining together on a side by side basis of separate but integrated operating
  "modules", each module containing one or more combustion units that work in concert.  This modular design affords the following advantages over both conventional steady-state combustion and tubular pulse combustion designs:

- Modular Turn-down Capability

> As discussed earlier, one of the principal advantages of our pulse combustion designs over both conventional steady-state combustion and tubular pulse combustion designs is that our burner units can be designed to incorporate numerous combustion chambers aligned on a side-by-side basis within a single combustion unit. These combustion chambers can then be engineered to operate together in separate
> "modules" consisting of one or more combustion chambers.  This modular configuration is important since it allows us to regulate or adjust heat output while maintaining maximum heat transfer efficiencies and lower emissions levels, which we refer to as
> "modular turn-down capability", by simply turning one or more modules contained in a combustion unit on or off.  Moreover, the combustion
> units' overall output ability may be increased simply by attaching a new module to the system.
> While conventional steady-state combustion and tubular pulse combustion units can also operate on a similar modular basis, they can only do so when aligned in a bank of separateburner systems, while our designs allow us to incorporate numerous combustion chambers within a singlecombustion system.  This advantage allows us to compound the size advantage which the compact size of our pulse burner technology already affords us on a unit versus unit comparison basis.

- Reduced Downtime For Maintenance and Repair

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No Moving Parts

Conventional tubular pulse designs employ mechanical flapper valves on the air and natural gas intakes.  A mechanical valve, i.e., one that mechanically opens and closes, is limited in speed of operation by the flexibility and durability of the valve material.  Moreover, the maximum speed of operation of a valve operated mechanically is limited to approximately 150 cycles per second.  Our pulse combustion design, on the other hand, is aerodynamically valved and has no moving parts.  As such, our design affords increased operating reliability and reduced manufacturing, maintenance and repair costs, principally because there are no valves to wear out and the design hardware is simpler and less costly to produce.

Ability to Operate on a Wide Range of Fuels

Our pulse combustion burner unit has the capability to use any carbon-based fuel as its energy source.  Although most of our testing to date has been done with natural gas and powdered coal, we have also successfully burned gasoline, diesel, propane, and a powdered coal and natural gas mix.

High Stability Of Operation At Extremely Low Excess Air Levels

Excess air is defined as the amount of air that is in excess of that needed for the total combustion of a given amount of fuel.  Stable operation at
  "zero" and "sub zero" excess air is important because it affords our pulse combustion technology access to application conditions that cause instability in conventional combustion devices.  These applications, such as horizontal down-hole petroleum drilling, methane reforming for the production of hydrogen and industrial catalytic regeneration, require an inert, oxygen free (stoichiometric) or fuel rich (sub-stoichiometric) exhaust stream for their process requirements.  Our technology is extremely stable at these conditions.

Reduced Operating Noise

One of the principal drawbacks of conventional tubular pulse combustion is the cost and effort required to dampen its operating noise to levels commensurate with conventional steady-state combustion units in situations where noise reduction is important, such as commercial and residential applications.  As previously discussed, conventional tubular pulse combustion units operate at approximately 36 to 70 cycles per second due to their configuration.  The oscillating pressure waves from these cycles create a corresponding low frequency standing sound wave, resulting in a very loud, continuous and deep level of operating noise.  Due to the relatively long length of this sound wavelength, technically complicated and expensive dampening technology is required in order to mute the operating noise to levels commensurate with conventional steady-state combustion.

The noise generated by our pulse combustion technology, on the other hand, operates at between 350 and 1,600 cycles per second depending upon the configuration, and can be
"tuned" to create a standing sound wave in that frequency range.  Although this continuous sound wave is equally loud, albeit at a higher pitch, than that associated with conventional tubular pulse combustion, it nevertheless lends itself to relatively simple and inexpensive dampening technologies due to the short longitudinal length of its wavelength, which affords it significant competitive advantages over conventional tubular pulse combustion technology.

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Lower Manufacturing and Installation Costs

Due to the simplicity and compact size of our design, including the lack of moving parts and a reduction in or elimination of the amount of materials needed for heat exchange, including refractory bricks, finned copper tubing and cast iron headers, we believe that we can design, manufacture and install a pulse combustion boiler system with comparable output at a significantly lower cost, and a significantly shorter design-through-installation period.

Competitive Disadvantages Of Our Pulse Combustion Technology

The principal competitive disadvantage of our pulse combustion technology is that our design is new and unique, and no products based upon our pulse combustion technologies and configurations have been commercially produced or sold to date, either by our company or by any of our competitors.  Moreover, while the higher efficiencies afforded by pulse combustion are well known in the residential and commercial heating industry, we believe that conventional pulse combustion products have not been widely accepted in this market segment due to their higher product cost, noise and vibration, limitation in BTU generation capacity, and technical performance issues relating to their tubular design.  In order to establish market acceptance, we will need to both satisfactorily educate prospective purchasers of our products, including burner manufacturers and retailers, relating to the benefits of our technology over both conventional pulse and steady state combustion technologies.  We will also have to develop internal and external manufacturing, sales, marketing and distribution capabilities.  For a more comprehensive description of these issues, see that section of this annual report captioned
  "Uncertainties And Risk Factors-Uncertainties And Risks Generally relating To Our Company And Our Business".

Markets For Burner Units

Burner units are used worldwide for numerous commercial, municipal, industrial, residential and specialty heat transfer applications.  The following list of heat transfer markets applications is instructive:

- Water Heater and Boiler Market:
- Space Heating Market:
- Industrial Drying Market:

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- "One-Of-A-Kind"Industrial Project Market:In this application a burner unit is used for industrial applications best described as
  "one-of-a-kind" which often require custom engineering or fabrication, such as retrofitting of power generation plants, new power plants, and large co-generation installations.
- Stoichiometric And Sub-Stoichiometric Markets :
- Specialty Application Markets:
- Pollution Control Equipment Market:

Development Milestones

Over the past year we have achieved the following milestones which will contribute toward commercializing our combustion technology:

- In early 2003 we conducted a series of characterization studies to measure the performance of our burners through a range of outputs and configurations, and to determine optimum burner dimensions to facilitate stability, performance, and ultra-low (single digit) NOx emission levels.  As a consequence of these studies, we are now able to quickly determine what burner configuration is appropriate for an intended application, and quickly respond to proposal requests.  Prior to this, we characterized and developed a burner on an ad hoc basis in response to each proposal request.
- The characterization studies also generated valuable data enabling us to verify and defend our basic patents, and to better understand the operating principles of our technology to facilitate further product advancements.
- We have increased the output of a single combustion chamber in our burner design from an initial high of 200,000 BTU/hr with a 2.5 to 1 turndown ratio to a high of 830,000 BTU/hr with an 11 to 1 turndown ratio, meaning that a single unit can now operate at anywhere from approximately 75,000 BTU/hr to 830,000 BTU/hr.  This opens the door to additional applications requiring greater heat release from a single burner, such as driving a small steam turbine, and lessens the number of multiple burners required to attain a specified BTU output level.  Similarly, since a lesser number of burners will be required for any particular application, associated manufacturing, operating and maintenance costs will be reduced.
- We have incorporated an innovative design into our burner which enables it to produce ultra-low NOx levels at higher BTU levels (830,000 BTU/hr to date) in a single combustion chamber as compared to 50,000 BTU/hr in previous versions; and are in the process of applying for patent protection.  This advance is significant because burners tend to generate higher NOx levels with higher BTU input levels due to greater heat release.

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- We have modified our burner to operate with only the gas supply pressure, rather than with a mixture of gas and compressed air.  This is an important advancement for potential end users for reasons of both cost and simplicity.  Typical uses would be water heaters which traditionally operate without added air, and remote onsite commercial heaters where added combustion air is either unavailable or too costly to produce.
- We are in the process of further modifying the burner to operate with low or no backpressure and a moderate to high gas supply pressure.  Typical uses would be industrial flare burners or those used in industrial furnaces.
- We are taking addition steps to further reduce the size and to further simplify our technology.  The 830,000 BTU/hr natural-gas pressured unit mentioned above has now been reduced to a cylindrical configuration which is approximately 6 inches in diameter, and 6.5 inches in length.  We know of no other burner technology of comparable output which approaches this small size.  This is significant because it allows very high output by the banking of several small burners in a single, compact array.
- Finally, we have made major steps in designing commercial prototypes of our units for commercial applications.  For example, we have successfully designed, fabricated and tested a cylindrical burner which can be fabricated easily at a low cost, and which uses proper high-temperature materials.  This model has been duplicated several times with the same good combustion and stability results.  It is now being tested for a dryer application, where there is some backpressure and where the high intensity acoustics will be beneficial to the drying process.

Gasification Technology And Products

Overview

Our ecoTech Phaser gasification technology is a system which uses heat to convert various biomass feedstocks into
  "clean thermal energy".  This energy can be used in various heat utilization applications, including the onsite generation of electricity.  The system can be alternatively fired by hydrocarbon fuels, including solid fuel sources such as lignite and sub-bituminous and bituminous coals, peat and leonardite, as well as a wide variety of waste materials, such as pulp and wood wastes, processed agricultural residues and waste such as sugar cane bagasse, and animal wastes such as hog and chicken dung, meat & bone meal wastes, tallow, and certain bio-wastes such as yellow grease and black sewage grease.  The ability to burn both carbon-based fuels and waste matter cleanly and efficiently allows the system to be used in a variety of different environmental and economic settings.  For instance, the system can be used to gasify coal where power generation is the principal purpose.  Alternatively, in cases where the environmentally friendly disposal of industrial, agricultural or animal waste matter is the principal function, the systems burns the waste with minimal emissions and co-generates thermal energy for secondary applications.

The ecoTech Phaser system is a solid-to-gas phase thermal conversion reactor, coupled to an advanced, induced swirl venturi, gas burner.  It is extremely simple, reliable and highly efficient.  In the primary combustion chamber, the biomass is fired in an oxygen-deprived environment at a temperature of approximately 1250 degrees fahrenheit [680 degrees centigrade], where it releases combustion gases such as carbon monoxide, hydrogen, methane and other complex hydrocarbons.  These gases are then mixed with oxygen rich air in the secondary venture cyclone to produce an inflammable gas mixture, and carried to the output nozzle of the secondary combustion chamber, where they are

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ignited.  A blue flame results, similar to that generated by natural gas.  The temperature at the tip of this flame is approximately 2500-3000 degrees fahrenheit [1350-1650 degrees centigrade], which, when the device is coupled to a ceramic lined and cored large volume firebox (tertiary combustion chamber, usually at the base of a boiler or other heat transfer system), ensures complete burnout of particulate matter, splits steam into hydrogen and oxygen and cracks all the hydrocarbons and other gases.  The gasification system ranges in output capacity from 6,000,000 BTUs per hour (for farm or small commercial installations) to 52,000,000 BTUs per hour, used singly or in array to provide heat for major boiler or waste destruction purposes.  Given this high capacity, and the modular concept of Phaser installation, the system can operate as part of a regional power production facility of small to medium scale.

The principal engineering issue with the gasification technology to date has been an extraordinarily long 10 to 20 foot combustion flame produced at the secondary combustion chamber nozzle.  Due to the long length of this flame, it was very problematic to mate the system downstream with heat converters, such as boilers or turbines, which use the heat generated to create steam or electricity.  Clean Energy's pulse combustion burner is able to eliminate the long flame while producing the same amount of heat, yet with better controlability, thereby facilitating the marriage of the system to the heat converters.  Clean Energy was informed by ecoTech Waste Management, from whom it recently acquired the rights to the gasification systems, that our pulse combustion technology was the only combustion technology they could identify that provided a solution.  In addition, our pulse combustion burner substantially reduces NOx emissions to levels of less than 10 ppm, providing the gasification system with an additional valuable competitive advantage.

Markets For Gasification Products

There are two broad-based world-wide markets for our ecoPhaser gasification systems.  The first market consists of commercial, municipal, and industrial users that desire to use the system primarily to cleanly incinerate waste materials while incidentially generating thermal electricity as part of the process.  Wastes which our system can efficiently incinerate include municipal wastes; pulp and wood wastes; processed agricultural residues and waste such as sugar cane bagasse and animal wastes such as hog and chicken dung, meat & bone meal wastes, tallow, and certain bio-wastes such as yellow grease and black sewage grease.  The second market consists of commercial, municipal and industrial users that desire to cleanly burn solid fuel sources such as lignite and sub-bituminous and bituminous coals, peat and leonardite, for the principal purpose of generating thermal electricity.

Competing Gasification Products

There are a variety of gasification systems on the market.  Most systems are custom designed and fabricated by specialized engineering firms.

Cryogenic Gas Liquification
  Technology And Products

Overview

Our cryogenic technology is a proprietary mobile modular technology for the liquefaction and transportation of natural gas, methane, helium, nitrogen and other gases from remote locations.  The technology is comprised of a mobile unit which liquefies the gas, and unique triple-shell composite tanks with the ability to maintain liquid gas temperatures for long periods which are used to transport the gas for up to 2,000 miles while storing the gas in liquefied form. Clean Energy intends to develop and commercialize this technology as a separate business unit owned by the company.

Markets

There are several principal markets for our cryogenic gas liquification technologies.  The principal market will be to service natural gas wells located in remote locations that are not currently connected to a main-line gas gathering system due to the high cost of installation.  The cost of energy required to obtain and liquefy the gas using our technology is approximately 35% of market value.  Since the wells we will service are shut-in (non-producing) due to their lack of connection to a gas gathering system, the use of our technology will allow for income where none was available previously.  Other markets include the coal-bed methane, helium and helium-oxygen mixtures used for offshore diving, and liquid nitrogen.

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Competing Liquification Products

While there are a number of
  large stationary land or ship-based cryogenic gas liquification technologies
  on the markets, there are to our knowledge no mobile versions.

Marketing Strategy

Our technologies have completed their research and development stage, and the next step in exploiting them will be to introduce them to the various markets in order to build market penetration and share and product knowledge and acceptance.  Given the broad range of potential applications and markets for our technologies, we anticipate that we will introduce our technologies to these potential markets through a number of different strategies and approaches, including the following types of arrangements royalty arrangement, licensing agreements, engineered projects, joint-ventures, and product manufacturing arrangements.

In the case of all of our technologies, we will seek royalty arrangements with equipment manufacturers which will permit them to incorporate the use of specific designs in their products, in return for the payment of royalties based upon units sold, an initial up-front fee, or a combination of these.  These agreements will be targeted toward volume producers that will use our technologies as an integral component of their functional product, such as water heaters in the case of our burner technologies.  This is a domain requiring large capital expenditures which will not be recovered for several years, since the end products may be several years away from mass production.

In the case of all of our technologies, we will seek licensing agreements with equipment manufacturers that allow a broader scope in application of our technologies than in royalty agreements.  The end products of these arrangements will likely be commercial systems, such as, in the case of our burner technologies, large boilers and air conditioning equipment for apartment complexes, shopping centers, and schools and hospitals.  License agreements may be consummated by payment of an initial fee, and an annual maintenance payment.

In the case of our burner and gasification technologies, we will seek contracts for site specific, one-of-a-kind projects of a large scale, such as thermal power-plants, co-generation and various food and biomass processing applications.  We believe these will be particularly lucrative projects insofar as they will utilize our technology at high-end outputs where the advantages of modular scale up are most fully realized.

In the case of our burner and gasification technologies, we will seek joint venture arrangements for various industrial projects that lend themselves to those technologies in which we will act as prime contractor, subcontractor or joint venture partner.  Joint venture opportunities of greatest interest to us are in the area of spin-off company formation for development and sale of products with specific end use applications.

We would consider a product manufacturing arrangement in situations where it may be advantageous for us to manufacture, or have subcontractors manufacture, specific products or components for end users.

Pending Projects

Burner Technologies

Our natural gas- and hydrogen-fueled burner designs have completed their primary development stage and are now in a position to be introduced to the market.  We are currently working on a variety of projects using these and other fuel sources.  Described below are some of the projects which we are currently or have recently worked on which could lead to the initial introduction of burner units using our technologies:

- We are currently in discussion with the research and development department of a major water heater manufacturer, with markets both in North America and Europe, who has expressed an interest in incorporating our technology into a number of their products in order to reduce their NOx levels and position their company to take advantage of the evolving post-Kyoto treaty emission credit market and available government grants.   We believe that the simplicity and small size of our burner coupled with its operational efficiencies and ultra-low NOx emission levels make it an ideal burner to advance the
  company's product lines.  Following a lengthy confidentiality agreement process and review of our materials, we are currently conducting an in-depth review of their product specifications to assist us in identifying the best applications of our technology for their product lines.

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- We are designing a drying system for an Oregon company that is engaged in the business of de-watering industrial and municipal waste.  They are drying the waste material by means of a combustion-less chemical adsorption process and are in need of an efficient heat-source dryer for regeneration of the adsorption material.  We are confident that our current burner design, developed through the characterization study recently completed, will provide the appropriate system requirements and will greatly enhance the de-watering of the adsorption material through application of our high frequency acoustic profile.  A prototype is now being designed.
- We are now revisiting applications in the Alberta Oil Patch, previously begun, but set aside pending availability of characterization study data.  There are a number of burners employed in that industry for a wide variety of uses, most of which employ older, polluting technologies.  As environmental restrictions become tighter, we envisage industry players turning to more advanced technologies in order to achieve compliance.  We already have contacts in that industry and will be pursuing projects with them as design work progresses.
- We have received a recent communication from the manufacturer of paper drying equipment with whom we have been working over the past three years.  You may remember that this project, to apply a high frequency pulse combustor to their tissue drying process, had completed two successful phases of a planned three-phase project with financial support from the National Research Council.  Indeed, we found that our pulse combustion technology enhanced the drying process as a result of the pressure waves generated by our combustor.  Phase 3 requires financial and technical input from the industry partner leading to the development of a commercial unit.  They have informed us that, while they definitely have a continuing interest in the project, they have experienced a serious market downturn in their own business and have had to curtail R&D activities for the time being.   They have asked that we maintain contact in the meantime.
- In anticipation of market trends, we have begun an assessment of the status of hydrogen combustion.  There is a quickly growing interest in the use of hydrogen as a combustible fuel during the interim period before the widespread availability of fuel cells and a pervasive hydrogen delivery infrastructure. Because of the low NOx characteristics of our technology, the potential for a good match with the clean fuel aspects of combusted hydrogen is very high.  We have begun preliminary prototype design and expect to be carrying out testing in the near future.

Please note that no orders have been placed or enforceable contracts entered into with respect to any of the foregoing projects to date.  We cannot give you any assurance that we will enter into any licensing, royalty, joint venture or other agreement with any of the foregoing parties or any other parties after we complete the noted prototypes.

Gasification Technologies

We are pursuing a number of commercial leads for our ecoPhaser gasification system through Mr. C. Victor Hall, the developer of the system.  Most of these systems will be individually engineered and fabricated through our company on a turn-key basis.  Applications we are addressing include the following;

- We are targeting medium to large sized biomass processing industries, such as agricultural (sugar cane bagasse, rice mills, etc.) and forestry, sawmill and pulp mill operations, which require electricity, can benefit from cogeneration steam or heat, and which may be able to plug into a local or regional electricity grid.  This size range of operations fits into the size range of one or more ecoPhaser units.  We are, for instance, currently working on a proposal for ecoPhaser units to process bagasse for sugar industry producers in Belize and India, and are also working on a proposal for a wood residue fired systems for forestry producers in Canada.

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- We are also targeting municipal waste and landfill operations for larger cities, including the cities of Dong Guan, Tuayun, Anshan, Shanghai and Chang Su located in the Peoples Republic of China through our strategic partner in that country, Can-Link Technology, Inc.  We are currently in bid stage on a proposal for a 30 MW ecoPhaser for the city of Dong Guan.
- We are also targeting cultivated biomass to power crop plantations, especially near industries which require process heat. We are in current discussions with a number of greenhouse producers relating to their use of our ecoPhaser for this application.
- We are also targeting large coal-fired projects, ranging from 17 MW to 80 MW.  We are currently working on project proposals for industry users in both British Columbia and Venezuela.
- We are currently evaluating small scale applications for rural areas that require small systems in the. 100KW to 1 MW range.
- We are working with two Irish companies to design a system to gasify blood, bone and owfal from pigs to generate processed heat (steam) for other processes due to BSE concerns.  We are currently working on a similar system to address Avian Flue chicken carcasses in British Columbia.

Cryogenic Gas Liquification Technologies

We are currently in discussions relative to a project to transport coal-bed methane from Guizhou to Zhejiang, Peoples Republic of China, through our strategic partner in that country, Can-Link Technology, Inc.

Research and Development

Our research and development activities are currently centered on the full commercialization of our technologies as opposed to pure research and development activities.

The bulk of our research and development activities are currently conducted through Clean Energy Research Inc. ("Clean Energy Research"), a  corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, pursuant to a cost plus research and development agreement entered into effective January 1, 2003.  Under that agreement, Clean Energy Research agreed to provide pre-approved budgeted pulse combustion research and development services to Clean Energy USA, and to invoice the latter company for its budgeted costs, related overhead and a 10% mark-up.  The purpose of entering into a research and development arrangement with Clean Energy Research on the noted arms-length basis was to continue to preserve our ability to indirectly benefit from certain grants and tax-incentive programs offered in both the United States and Canada, which we could not otherwise directly utilize by reason of our becoming a public company whose stock was publicly traded.

Our gross research and development expenses, including amounts paid to Clean Energy Technologies under our pulse combustion research and development contract with that company, amounted to $288,896 and 455,018 for our 2003 and 2002 fiscal periods, respectively.  Our research and development budget for fiscal 2004 is budgeted at $480,000.

One of our objectives in meeting our research and development and commercialization costs is to fund a significant portion of those expenditures through either direct grants or indirect grants through our research and development affiliates.  We have, for example, directly or indirectly through Clean Energy Technologies, funded a total of CDN $82,000 in grants for developmental purposes of our pulse combustion technology from the date of our inception, and our predecessors to this technology funded a total of CDN $1,785,000 in developmental grants prior to our acquisition of that technology.

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In late 2001, the Industrial Research Assistance Program of the Canadian federal
government's National Resource Counsel approved a CDN $82,,000 grant to fund our phase I industrial tissue dryer characterization study. This program later approved the transfer of the remaining funding balance for this program, CDN $25,400, toward the completion of our glycol and heavy oil heating applications.

Manufacturing Capacity and Suppliers

We currently fabricate our burner units at our facilities located in Burnaby, British Columbia, although some components are purchased to our specifications from suppliers or subcontractors.  Most of these components are standard parts or fabrication projects available from multiple sources at competitive prices.  We believe that we would be able to secure alternate supply sources or suppliers or subcontractors if any of these become unavailable.  Given the limitations of our internal manufacturing capability, we anticipate that we will rely upon strategic partners or third party contract manufacturers or suppliers to satisfy future production requirements as demand for our products increase.

Subsidiaries

We have one subsidiary, Clean Energy USA, a Nevada corporation, a wholly-owned subsidiary which we formed in December, 2001 for the dual purpose of managing pulse combustion technology research & development activities and commercializing our pulse combustion technology through licensing and royalty agreements in North America.

License Agreements

We acquired the rights to our pulse combustion technology for consideration of $10 under a Pulse Combustion Technology License dated March 5, 1999 with 818879 Alberta, Ltd., a corporation then owned and controlled by Mr. R. Dirk Stinson, our current President and Chief Executive Officer and a founder, director and principal shareholder of our company.  In June 2001, 818879 Alberta, Ltd. transferred both its ownership of the pulse combustion technology and its interest in the license agreement to Ravenscraig Properties Limited
  ("Ravenscraig Properties"),a corporation also owned and controlled by Mr. Stinson.

Under the terms of the Pulse Combustion Technology License, we hold an exclusive fully-paid royalty-free license to design, engineer, manufacture, market, distribute, lease and sell burner products using the pulse combustion technology within any country in the world other than Finland or Sweden, and to sublicense and otherwise commercially exploit the pulse combustion technology within the permitted countries.  The term of the Pulse Combustion Technology License expires upon the earlier of March 5, 2019 or the lapse of the newest underlying patents for the pulse combustion technology, including any patented improvements.  The oldest pulse combustion technology patent expires in 2006, and the newest current pulse combustion technology patent expires in 2019.  For further information concerning the underlying patents for the pulse combustion technology, see the section of this annual report captioned
"Business-Patents and Proprietary Rights".

We are generally prohibited under the Pulse Combustion Technology License from sublicensing our rights to the pulse combustion technology, or otherwise assigning our rights as licensee under the Pulse Combustion Technology License, to any third party without Ravenscraig
  Properties' prior consent.  Ravenscraig Properties, in turn, is also generally prohibited from selling its rights to the pulse combustion technology, or otherwise assigning its rights as licensor under the Pulse Combustion Technology License, to any third party without our prior consent.

We have sublicensed our rights to the pulse combustion technology to our new, wholly-owned subsidiary, Clean Energy USA Inc. effective January 1, 2002, but have limited commercialization rights to the continent of North America.  This sublicense has been undertaken with the prior consent of Ravenscraig Properties.

We are obligated under the Pulse Combustion Technology License to pay or to reimburse Ravenscraig Properties for all costs its incurs to file and prosecute new or additional patents for the pulse combustion technology in any country.  We are also obligated to pay or to reimburse Ravenscraig Properties for prosecuting and defending patent infringement claims relating to the pulse combustion technology, and to pay any damages arising from these claims.

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We have the right under the Pulse Combustion Technology License to acquire full ownership of the pulse combustion technology from Ravenscraig Properties for the payment of CDN $1 at such time as we procure a listing of our common shares on a
"national market", which is defined under the Pulse Combustion Technology License to constitute The New York Stock Exchange, The American Stock Exchange or The Nasdaq Stock Market (including both the SmallCap and National Markets).  We refer to this purchase right as the
"Pulse Combustion Technology Option".  In order to be approved for listing on a national market, Clean Energy would need to satisfy enumerated quantitative and qualitative listing standards, including requirements relating to minimum bid prices, market capitalization, number of unaffiliated shareholders, net income and
shareholders' equity.  We do not currently qualify for listing on any national market, and we can give no assurance that we will qualify in the future or, if so, make any application.

Should we acquire full title to our pulse combustion technology by reason of exercise of the Pulse Combustion Technology Option, Ravenscraig Properties will nevertheless retain the right under certain circumstances to reacquire our pulse combustion technology should we later become bankrupt or insolvent, or be threatened with bankruptcy or insolvency, or make an assignment in favor of our creditors.

Patents And Proprietary Rights

Our basic pulse combustion technology and a number of design improvements to this technology are protected by the following
  patents

> Patent Description
> Country
> Issued
> Patent #
> StatusFluid Heater Using Pulsating Combustion
> USA
> 7/11/1989
> 4,846,149
> currentImprovments in Pulsating Combustors
> Europe (UK)
> 8/23/1995
> 486,643
> currentImprovments in Pulsating Combustors
> U.S.A. (CIP)
> 4/4/1995
> 5,403,180
> currentImprovments in Pulsating Combustors
> U.S.A
> 9/7/1993
> 5,242,294
> currentPulse Combustion Unit with InteriorHaving Constant-Cross Section
> USA
> 12/4/2001
> 6,325,616
> currentCircular Pulsating Combustors
> USA
> 10/15/2002
> 6,464,490
> current

We anticipate that we will file additional international patent applications in selected foreign countries for our pulse combustion technology as circumstances dictate.  We intend to diligently defend any infringement of our pulse combustion technology patents.  We are not aware of any potential challenges to these patents.  We have not established a fund for defense of these patents, but may do so if significant sales of its products are achieved.  We intend to have all employees and consultants execute trade secret and confidentiality agreements.

We cannot give any assurance that the existing patents granted to us or our licensors will not be invalidated, that patents currently or prospectively applied for by us or our licensors will be granted, or that any of these patents will provide significant commercial benefits.  Moreover, it is possible that competing companies may circumvent patents we or our licensors have received or applied for by developing products which closely emulate but do not infringe our or our
licensor's patents, and consequentially market products that compete with our products without obtaining a license from us.  An adverse decision from a court of competent jurisdiction affecting the validity or enforceability of our patents or proprietary rights owned by or licensed to us could have, depending generally on the economic importance of the country or countries to which these patents or proprietary rights relate, an adverse

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effect on our company and our business prospects.  Legal costs relating to prosecuting or defending patent infringement litigation may be substantial.  Costs of litigation related to successful prosecution of patent litigation are capitalized and amortized over the estimated useful life of the relevant patent.  We cannot give you any assurance that we will be able to successfully defend our patents and proprietary rights, or fund the cost of that litigation.  For further information concerning these risks, see that section of this annual report captioned"Uncertainties And Risk Factors-Uncertainties And Risks Generally relating To Our Company And Our Business-Our Inability To Protect Our Patents And Proprietary Rights Would Force Us To Suspend Our Operations And Possibly Even Liquidate Our Assets And Wind-Up And Dissolve Our Company".

Employees

We currently have two full-time employees and one part-time employee, and also two full-time consultants and two part-time consultants.  A portion of our research and development activities are performed under contract by Clean Energy Research, which currently has three full-time employees and one part-employee.  None of our or McSheahan
  Enterprises' employees are represented by a union.  We believe that our relations with our employees are good.

Government Regulation

The heat transfer industry, which we anticipate will represent the primary purchasers of burner products using our technologies, is subject to evolving and often increasingly stringent federal, state, local and international laws and regulations concerning the environment and energy conservation.  The principal environmental regulations affecting the heat transfer industry in place today that also have a direct bearing on our burner products relate to the control of a variety of atmospheric emissions, principally nitrogen oxides, that result from the combustion process.  These regulations accomplish their objectives in one of three ways-by establishing permitted emission levels for designated pollutants, by prohibiting selected business operations, and by specifying acceptable technologies, commonly known as
  "Best Available Control Technologies".

A representative example of a state regulation governing atmospheric emission standards is the
"Zero Ammonia Technology Policy" adopted by the Massachusetts Department of Environmental Protection on January 9, 1999, which requires all applicants for permits for industrial scrubber technologies to evaluate ammonia-free technologies as the Best Available Control Technology.

A representative example of a local regulation governing atmospheric emission standards is Rule 1146.2, titled
  "Emissions of Oxides of Nitrogen from Large Water Heaters and Small Boilers", adopted by the South Coast Air Quality Management District or
  "SCAQMD", a California regional agency governing Los Angeles, Orange, Riverside and San Bernardino counties.  This regulation, which was adopted in January of 1998:

- Limits nitrogen oxides emission levels for water heaters, boilers or process heaters to be sold in the region after January 1, 2000 to 30ppm for all units with an output between 400,000 to 2 million BTUs/hr, and 55ppm for all units with an output between 75,000 and 400,000 BTUs/hr;
- Prohibits the operation in the region after July 1, 2002 of any water heaters, boilers or process heaters manufactured before 1992 that have nitrogen oxides emissions in excess of 30ppm; and
- Prohibits the operation in the region after January 1, 2006 of any water heaters, boilers or process heaters manufactured before 2000 that have nitrogen oxides emissions in excess of 30ppm.

Each of these regulations is designed to reduce emissions of nitrogen oxides.  The Massachusetts case deals with scrubbers which use ammonia to remove nitrogen oxides after it is formed, while the SCAQMD case regulates the amount of nitrogen oxides allowable in the first place.  These regulations directly impact our business since the attractiveness of our technology is its ability to inhibit the production of nitrogen oxides at the source.  Those applications which are restricted by these regulations will be entirely open to our technology.  Since our technology is a new technology engineered to meet these more stringent requirements, there are no additional costs or liabilities imposed on our business to satisfy these standards.

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Although one of the principal benefits of our burner technologies are their ability to satisfy lower pollution standards, we cannot give you any assurance that emission standards will not be increased by any governmental agency to a level that our technologies will either not satisfy, or which will require significant expenditures in research and development costs in order to satisfy.

We are also subject to laws governing our relationship with our employees, including minimum wage requirements, overtime, working conditions and citizenship requirements.

PROPERTIES

Our executive offices and principal research and development facilities, consisting of approximately 4,300 square feet, are located at 7087 MacPherson Avenue, Burnaby, British Columbia, Canada, V5J 4N4.  This space is currently leased from, McSheahan Enterprises, a personal service corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, for a two-year term, with a two-year option to renew, at an approximate rental rate of CDN $3,400 per month.  Our pro-rata share of this cost, representing approximately one-third of the total, is indirectly charged to us by McSheahan Enterprises in the overhead allowance under our research and development agreement with that company.

Our ability to increase our levels of activity and to pursue a number of business opportunities will require us to acquire expanded premises with increased testing and production space and to increase our staffing levels.  Our ability to acquire and move into expanded premises will be governed by our ability to raise additional capital.

LEGAL
  PROCEEDINGS

As of the date of this annual report, there were no material pending legal or governmental proceedings relating to our company or properties to which we are a party, or to our knowledge any proceeding of this nature which are being contemplated or threatened; and there were, to our knowledge, no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.

SELECTED
  CONSOLIDATED FINANCIAL INFORMATION

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and their explanatory notes, which can be found at the end of this annual report.

The following table presents selected historical consolidated financial data derived from our consolidated financial statements which can be found at the end of this annual report.  The selected statement of loss data set forth below for our fiscal periods ended December 31, 2003 and December 31, 2002, and the selected balance sheet data set forth below as of December 31, 2003 and December 31, 2002, have been audited by Staley, Okada & Partners, independent auditors, as indicated in their report contained in our consolidated financial statements.  The following selected financial data should be read in conjunction with our consolidated financial statements and their explanatory notes, as well as that section of this annual report captioned
"Management's Discussion and Analysis of Financial Condition and Results of Operations".

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> Twelve Months Ended December 31,Consolidated Statement of Operations Data:
> 2003
> 2002Revenue
> $                     
> -
> $                          
> -Administrative and marketing expenses
> 313,807
> 439,455Research and development expenses
> 288,896
> 455,018Net loss
> (602,703)
> (894,473)Net loss per share basic and diluted
> (0.05)
> (0.09)Weighted average common shares outstanding
> 12,989,610
> 10,139,184December 31,Consolidated Balance Sheet Data:
> 2003
> 2002Working capital (deficiency)
> $            
> (479,898)
> $                
> (414,895)Current assets
> 2,985
> 2,873Advances to an affiliated company
> 313,088
> 427,543Patents
> 30,128
> 39,327Property and equipment
> -
> -Total assets
> 346,201
> 469,743Current liabilities
> 482,883
> 417,768Provisions and liabilities related to transfer of ownership of subsidiary
> 351,410
> 468,177Total liabilities and provisions
> 834,283
> 885,945Capital deficiency
> (488,082)
> (416,202)

MANAGEMENT'S
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and their explanatory notes, which can be found at the end of this annual report.

Overview

Clean Energy markets three types of products, burner units based upon our patented high-frequency valveless pulse combustion technology; gasification systems using our proprietary ecoPhaser gasification technology which uses heat to convert various biomass feedstocks into
  "clean thermal energy"; and our proprietary mobile modular technology for the liquefaction and transportation of natural gas, methane, helium, nitrogen and other gases from remote locations.  Each of these technologies IS fully developed and in a position to be commercially marketed.

Our objective is to enter into licensing, royalty, joint venture or manufacturing agreements with established national and international heat transfer industry manufacturers which will result in the introduction of a variety of different burner and gasification units based upon our technologies into various selected market segments.  We have no revenues to date, nor have we entered into any revenue producing contracts to date.  Since we have not generated operating revenues to date, we should be considered a development stage enterprise.

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Results Of Consolidated Operations

Operating Revenues

We had no revenues for our twelve-month fiscal periods ended December 31, 2003 ("fiscal 2003") or December 31, 2002
  ("fiscal 2002").

Net Loss

We incurred an operating loss of $602,703

- a $125,648, or 28.6%, decrease in administrative and marketing expenses from $439,455 to $313,807; and
- a $166,182, or

The $125,648 decrease in administration expense for

Relationships And Transactions On Terms That Would Not Be Available From Clearly Independent Third Parties

During fiscal 2003, we did not enter into any transactions with any parties that are not clearly independent on terms that would be more favorable than that which might have been available from other clearly independent third parties.

Liquidity And Capital Resources

Sources of Cash

Our cash flow requirements for since the beginning of fiscal 2002 have been principally funded by the periodic conversion of short-term advances, wages, fees and other payables due to directors, shareholders, employees and other creditors into common shares, including $823,798 of indebtedness converted into 1,267,242 common shares at an average conversion price of $0.65 per share in September 2002, $356,801 of indebtedness converted into 3,164,382 common shares at an average conversion price of $0.11 per share in August 2003, and most recently, $471,053 of indebtedness converted into 2,080,660 common shares at an average conversion price of $0.23 per share in March 2004.

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Off-Balance Sheet Arrangements

There are no guarantees, commitments, lease and debt agreements or other agreements that could trigger adverse change in our credit rating, earnings, cash flows or stock price, including requirements to perform under standby agreements, other than a default in our obligations under our office lease described in that section of this annual report captioned
  "Properties" and contingent liabilities of Clean Energy Technologies in the amount of $38,313 as of December 31, 2003 which arose from contracts previously entered into by Clean Energy either jointly with, or on behalf of, that company before its transfer in December 2001 by Clean Energy.  These contingent liabilities are included as part of our liabilities relating to Clean Energy Technologies in our consolidated balance sheet.

Cash Position and Sources And Uses Of Cash

Our cash and cash equivalents position as of December

Our operating activities used cash in the amount of 416,103 for fiscal 2003, as compared to cash requirements of $399,263 for fiscal 2002.  The

We used cash in the amount of $0 in investing activities in fiscal 2003, as compared to $3,992 of cash used by investing activities in fiscal 2002.  The principal use of cash for 2002 was for patent additions.

We realized cash in the amount of $416,263 from financing activities in fiscal 2003, as compared to $403,255 of cash realized by investing activities in fiscal 2002.  The principal sources of cash for both 2003 and 2002 were advances from related and affiliated parties.

Plan Of Operation And Prospective Capital Requirements

Our overriding corporate focus is to ramp-up our marketing activities for our various products.  Our ability to continue as a going concern will be dependent upon our entering into revenue producing contracts and raising additional working capital to fund our various projects, to ramp-up our sales and marketing activities, to conduct addition research and development activities through our contract with Clean Energy Research, and fully implement our longer-term business plan and marketing strategies.  We anticipate that we will incur at least $1,000,000 in costs over the next twelve months to fund our projected minimal levels of operations, including $300,000 in general and administrative, $100,000 in sales and marketing, $480,000 in research and development costs, and $120,000in capital expenditures.  Our cost structure will be subject to significant change based upon any contracts we may enter into and/or additional capital we may raise.

As of March 30, 2004, we had approximately $Nil in cash available to fund our costs and expenses.  We have no current arrangements for obtaining the additional cash and working capital we may require.  We will seek to raise cash to meet our operating requirements through the public or private sales of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing.  We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.  Our ability to raise monies has been negatively impacted in part by poor general economic conditions and enhanced risks associated in investing in development stage ventures.  We cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations.

We anticipate that the employees and consultants currently engaged by the company will be able to handle most of our any additional administrative, research and development, sales and marketing, and manufacturing requirements incurred during this period, and therefore do not anticipate that we will need to employ any significant number of additional employees or consultants.  Our current facilities will also be adequate to conduct all of our operations, including manufacturing, during this period.  If we experience significant demand, however, we will expand both our personnel and facilities accordingly.

Our consolidated financial statements for the year ended December 31, 2003 included with this annual report have been prepared assuming that the company will continue as a going concern.  As discussed in note 1 to those financial statements, our continuing losses from inception, working capital deficiency and lack of financial resources to complete our business plan raise substantial doubt about our ability to continue as a going concern.

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Other Matters

Research and Development Expenditures

Research and development expenditures are expensed as incurred.

Foreign Exchange

We recorded a $57,245 foreign currency translation gain in fiscal 2003

Effect Of Inflation

In our view, at no time over the past three fiscal years has inflation or changing prices had an adverse material impact on our operating results.

Critical Accounting Policies

Our consolidated financial condition and results of operations are not currently subject to or impacted by any critical accounting policies involving areas in which subjective or complex judgments are made with respect to methods, assumptions or estimates concerning the effect of matters that are inherently uncertain.

Recent Adopted Accounting Standards

See note 1 to our consolidated financial statements included with this annual report for a description of recently adopted accounting standards impacting our company.

Currency Fluctuations

One market risk that affects our company relates to foreign currency fluctuations between United States and Canadian dollars.  To the extent we maintain our accounts in Canadian funds or enter into transactions denominated in Canadian currency, our financial position could be adversely affected by United States-Canadian currency fluctuations.  We have not previously engaged in activities to mitigate the effects of foreign currency fluctuations due to the absence of Canadian revenues to date, and we anticipate that the exchange rate between the United States and Canadian dollar will remain fairly stable.

If earnings from our Canadian operations were to increase, our exposure to fluctuations in the United States-Canadian exchange rate would also increase, and we would have to consider utilizing forward exchange rate contracts or engage in other efforts to mitigate these foreign currency risks.  We cannot give you any assurance that the use of exchange rate contracts or other mitigation efforts would effectively limit any adverse effects of foreign currency fluctuations on our
Company's international operations and our overall results of operations.

Interest Rate Fluctuations

It is our policy to maintain the bulk of our available cash in U.S. dollar-denominated money-market accounts.  Our interest income from these short-term investments could be adversely affected by any material changes in interest rates within the United States.

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UNCERTAINTIES
  AND RISK FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND FINANCIAL CONDITIONS

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this annual report, may adversely affect our business, operating results and financial condition.  The uncertainties and risks enumerated below as well as those presented elsewhere in this annual report should be considered carefully in evaluating our company and our business and the value of our securities.

Uncertainties and Risks Generally Relating To Our Company And Our
  Busines

We have a limited operating history upon which an investor can evaluate an investment in our business.

To date, we are a development stage company principally engaged in research and development, organizational and startup activities.  While we have introduced our products commercially to the markets, we have not entered into binding contracts for the sale of those products or generated sales revenues from those products.  Our limited operating history will make it difficult, if not impossible, to predict future operating results and to assess the likelihood of our business success in considering an investment in our company.  Risks and issues inherent in the establishment and expansion of a new business enterprise which we face include, among others, problems of entering new markets, marketing new technologies, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls.  As a development stage company, we are also subject to risks and or levels of risk that are often greater than those encountered by companies with established operations and relationships.  Development stage companies often require significant capital from sources other than operations.  Since we are a start-up business, our management and employees will shoulder the burdens of the business operations and a workload associated with company growth and capitalization that is disproportionately greater than that for an established business.  We cannot give you any assurance that we will successfully address these risks.  Our prospects must be considered speculative, which may limit our ability to encourage further investment in our company.

We have accumulated losses since our inception, and currently have no products or services on the market that are generating revenues.  Our inability to generate revenues and profits from products we have introduced onto the market could cause us to go out of business and for you to lose your entire investment.

We have incurred a cumulative operating loss in the amount of $3,856,851 from our inception through December 31, 2003.  While we have introduced our products commercially to the markets, we have not entered into binding contracts for the sale of those products or generated sales revenues from those products.  Our failure to generate meaningful revenues and ultimately profits from these products could force us to reduce or suspend our operations and ultimately go out of business.

Our inability to raise additional working capital at all or to raise it in a timely manner would negatively impact our ability to fund our operations, complete pending or proposed project proposals and introduce burner products using our technologies onto the markets, generate revenues, and to otherwise execute our business plan, leading to the reduction or suspension of our operations and ultimately our going out of business.  Should this occur, the value of your investment in the common shares could be adversely affected, and you could even lose your entire investment.

We will most likely need to raise cash and additional working capital to cover the anticipated shortfall in our cash and working capital until such time as we become cash flow positive based solely on sales and service revenues less operating and other costs.  We had a working capital deficit of $479,898 as of December 31, 2003, and anticipate that we will need to raise at least $1 million to fund our minimum projected operating and project costs over the next twelve months from the date of this annual report to fully implement our longer-term business plan and marketing strategies.  We currently do not have any binding commitments for, or readily available sources of, additional

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financing.  We will seek to raise additional cash and working capital should it become necessary through the public or private sales of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or a combination of the foregoing.  We may also seek to satisfy indebtedness without any cash outlay through the private issuance of debt or equity securities.  We cannot give you any assurance that we will be able to secure any additional cash or working capital we may require to continue our operations.

Our independent auditors stated noted in their report accompanying our financial statements for our fiscal year ended December 31, 2003 that we had incurred net losses since our inception and had a working capital deficit, and stated that those conditions raised substantial doubt about our ability to continue as a going concern.

Even if we are able to raise additional financing, we might not be able to obtain it on terms that are not unduly expensive or burdensome to the company, or which do not adversely affect your rights as a common shareholder or the value of your investment in our common shares, including substantial dilution of your investment in terms of your percentage ownership in the company as well as the book value of your common shares.

Even if we are able to raise additional cash or working capital through the public or private sale of debt or equity securities, the procurement of advances on contracts or licenses, funding from joint-venture or strategic partners, debt financing or short-term loans, or the satisfaction of indebtedness without any cash outlay through the private issuance of debt or equity securities, the terms of such transactions may be unduly expense or burdensome to the company or disadvantageous to our existing shareholders.  For example, we may be forced to sell or issue our securities at significant discounts to market, or pursuant to onerous terms and conditions, including the issuance of preferred stock with disadvantageous dividend, voting, board membership, conversion, redemption or liquidation provision; the issuance of convertible debt with disadvantageous interest rates and conversion features; the issuance of warrants with cashless exercise features, the issuance of securities with anti-dilution provisions; and the grant of registration rights with significant penalties for the failure to quickly register.  If we raise debt financing, we may be required to secure the financing with all of our business assets, which could be sold or retained by the creditor upon our default.  We also might be required to sell or license our products or technologies under disadvantageous circumstances we would not otherwise consider, including granting licenses with low royalty rates and exclusivity provisions.

Our burner products are based upon burner technologies and designs that are generally new, unique and unproven to the markets, and we cannot assure you that the market will accept these products.  The failure or reluctance of the market to accept these products would have a negative impact on our business and the value of your investment.

Products using our burner technologies must compete with established conventional steady-state burner technologies and conventional
  "tubular" pulse combustion technologies which have already achieved market acceptance.  The design for our burner technologies is new and unique, and no products based upon our technologies and configurations have been commercially produced or sold to date, either by our company or by any of our competitors.  Additionally, although there is a market for pulse combustion burner products using differently configured pulse burner technology designs, these products are not widely accepted by the market, and therefore not particularly useful as a precedent for the introduction of our pulse combustion burner technology.  As is typical in the case of any new technology, demand and market acceptance for products based upon new technologies are subject to a high level of uncertainty and risk, including the risk that the marketplace may not accept, or be receptive to, the potential benefits of these new products.  The extent and pace of market acceptance of new burner products based upon our burner technologies will ultimately be a function of many variables, including the efficacy, performance and attributes of these new products; the ability to obtain necessary regulatory approvals to commercially market these new products; the effectiveness of marketing and sales efforts, including educating potential customers as to the distinctive characteristics and benefits of these new products; and the ability to meet manufacturing and delivery schedules; and product pricing.  Because the market for our burner technologies is new and evolving, it is difficult, if not impossible, to predict the future growth rate, and the size of the potential market.

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We will face intense competition from competitors that have greater financial, technical and marketing resources.  These competitive forces may impact our projected growth and ability to generate revenues and profits, which would have a negative impact on our business and the value of your investment.

The market for burner and gasification products is intensely competitive and characterized by rapidly changing technology, evolving industry standards, and price competition.  There are no substantial barriers to entry, and we expect that competition will be intense and may increase. Many of our existing competitors may have substantially greater financial, product development, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do.  As a result, certain of these competitors may be able to develop and expand their product and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other opportunities more readily, devote greater resources to the marketing and sale of their products and services, or aggressively reduce their sales prices below the our costs. We cannot assure you that we will be able compete successfully with existing competitors or new competitors.

We are dependent for our success on a few key executive officers.  Our inability to retain those officers would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment

Our success depends to a critical extent on the continued efforts of services of small senior management and research and development team, including our President and Chief Executive Officer, Mr. R. Dirk Stinson, our consulting Director, Mr. C. Victor Hall, our Vice President of Engineering and Product Development, Mr. Denver Collins, and our Projects Director, Mr. James V. DeFina.  Were we to lose one or more of these key executive officers or employees, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital.  We can give you no assurance that we can find satisfactory replacements for these key executive officers at all, or on terms that are not unduly expensive or burdensome to our company.  We do not have employment agreements in place with either Messrs. Stinson or Hall.  Although Mr. Collins has signed employment agreements providing for his continued service to the company through October 1, 2006, this agreement will not preclude him from leaving the company. We do not currently carry key man life insurance policies on any of our key executive officers or employees which would assist us in recouping our costs in the event of the loss of those persons.

Our inability to hire qualified personnel at all or to raise or in a timely manner could impede our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies, which would have a negative impact on our business and could adversely affect the value of your investment.

We currently have an extremely small staff comprised of three executive officers and four employees.  Although we believe that these officers and employees will be able to handle most of additional administrative, research and development, sales and marketing, and manufacturing requirements in the shorter-term as we ramp up our sales and operations, we will nevertheless be required over the longer-term to hire highly skilled managerial, engineering, technical, sales and marketing and administrative personnel to fully implement our business plan and growth strategies.  We cannot assure you that we will be able to engage the services of such qualified personnel at competitive prices, or at all, particularly given the risks of employment attributable to our limited financial resources and lack of an established track record.

We plan to grow very rapidly, which will place strains on our management team and other company resource to both implement more sophisticated managerial, operational and financial systems, procedures and controls and to train and manage the personnel necessary to implement those functions.  Our inability to manage our growth could impede our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies, which would have a negative impact on our business and the value of your investment.

We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, advertisers, consultants and other third parties. This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and

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financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and retain our anticipated increased employee base.

We may have difficulty in attracting and retaining management and outside independent members of our board of directors as a result of their concerns relating to their increased personal exposure to lawsuits and shareholder claims by virtue of holding these positions in a publicly-held company.

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and shareholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors.  Due to these concerns, directors and management directors are also becoming increasingly concerned with the availability of directors and
  officers' liability insurance to pay on a timely basis the costs incurred in defending shareholder claims.  Directors and officers liability insurance has recently become much more expensive and difficult to obtain than it had been.  If we are unable to obtain directors and officers liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our board of directors.  The fees of directors are also rising in response to their increased duties, obligations and liabilities as well as increased exposure to such risks.  As a development stage company with a limited operating history and limited resources, we will have a more difficult time attracting and retaining management and outside independent directors than a more established company due to these enhanced duties, obligations and liabilities.

Our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies will be adversely affected if the licensees, strategic partners or third party marketing and distribution partners we intent to rely upon to provide a significant part of our marketing and sales function fail to perform as expected.  This failure would have a negative impact on our business and the value of your investment.

We currently have no internal sales, marketing and distribution capabilities, and anticipate that we may rely on third-party licensees, strategic partners or third party marketing and distribution companies to perform a significant part of those functions.  As a consequence of that reliance, our ability to effectively market and distribute our products will be dependent in large part on the strength and financial condition of others, the expertise and relationships of those third-parties with customers, and the interest of those parties in selling and marketing our products.  Prospective third-party licensees, strategic partners and marketing and distribution parties may also market and distribute the products of other companies.  If our relationships with any third-party licensees, strategic partners or marketing and distribution partners were to terminate, we would need to either develop alternative relationships or develop our own internal sales and marketing forces to continue to sell our products.  Even if we are able to develop our internal sales, marketing and distribution capabilities, these efforts would require significant cash and other resources that would be diverted from other uses, if available at all, and could cause delays or interruptions in our product supply to customers, which could result in the loss of significant sales or customers.  We can give you no assurance that we will be successful in our efforts to engage licensees, strategic partners or third party marketing and distribution companies to meet our sales, marketing and distribution requirements.

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Our ability to generate revenues and profits and to otherwise implement our business plan and growth strategies will be adversely affected if the third-party manufacturers or suppliers upon whom we intend to rely to manufacture our products fail to perform as expected.  This failure would have a negative impact on our business and the value of your investment.

We currently have no internal manufacturing capability, and will rely extensively on licensees, strategic partners or third party contract manufacturers or suppliers.  A delay or interruption in the supply of components or finished products could adversely affect our ability to introduce our products onto the market.  Should we be forced to manufacture our products, we cannot give you any assurance that we will be able to develop an internal manufacturing capability or procure third party suppliers.  Moreover, we cannot give you any assurance that any contract manufacturers or suppliers we procure will be able to supply our product in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.

Our inability to protect our intellectual property rights could negatively impact our projected growth and ability to generate revenues and profits, which would have a negative impact on our business and the value of your investment.

We rely on a combination of patent, patent pending, copyright, trademark and trade secret laws, proprietary rights agreement and non-disclosure agreements, and to protect our intellectual properties.  We cannot give you any assurance that these measures will prove to be effective in protecting our intellectual properties.

In the case of patents, we cannot give you any assurance that our existing patents will not be invalidated, that any patents that we currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits.  Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents.  While we intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United States.  We can give you no assurance that we will be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement.  Similarly, we can give you any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights.  Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.

We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection.  We cannot give you any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how.

While we have and will continue to enter into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed by those employees or parties while engaged by our company, we can give you no assurance that courts of competent jurisdiction will enforce those agreements.

Our revenues and profits may be adversely affected by currency fluctuation, regulatory, political and other risks associated with international transactions.

We intend to sell our products and technologies internationally as well as to the United States and within Canada.  This will subject us to various risks associated with international transactions that may adversely effect our results of operations, including risks associated with fluctuating exchange rates, the regulation by the governments of the United States and Canada as well as foreign governments of fund transfers and export and import duties and tariffs; and political instability.  We do not currently engage in activities to mitigate the effects of foreign currency fluctuations, and we anticipate we will be paid in U.S. dollars with respect to any international transactions we may enter into.  If earnings from international operations increase, our exposure to fluctuations in foreign currencies may increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks.  We can give no you assurance as to the effectiveness of these efforts in limiting any adverse effects of foreign currency fluctuations on our international operations and our overall results of operations.

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Risks Relating To An Investment In Our Securities

To date, we have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.

We do not anticipate paying cash dividends on our common shares in the foreseeable future, and we cannot assure an investor that funds will be legally available to pay dividends, or that even if the funds are legally available, that the dividends will be paid.

Our common shares are thinly traded, so you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.

Our common shares are sporadically or "thinly-traded" on the OTCBB, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent.  This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven development stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable.  As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.  We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

The market price for our common shares is particularly volatile given our status as a relatively unknown development stage company with a small and thinly-traded public float, limited operating history and lack of revenues or profits to date for our newly introduced products, which could lead to wide fluctuations in our share price.  The price at which you purchase our common shares may not be indicative of the price that will prevail in the trading market.  You may be unable to sell your common shares at or above your purchase price, which may result in substantial losses to you.

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future.  The volatility in our share price is attributable to a number of factors.  First, we have relatively few common shares outstanding in the
  "public float" since most of our shares are held by a small number of shareholders.  In addition, as noted above, our common shares are sporadically or thinly traded.   As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction.  The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price.  Secondly, we are a speculative or
  "risky" investment due to our limited operating history and lack of revenues or profits to date, lack of capital to execute our business plan, and uncertainty of future market acceptance for our products.  As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer.  The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results, acceptance of our products and services as viable security and technology solutions, government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures, our capital commitments, and additions or departures of our key personnel.  Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance.  We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect, if any, that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

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Volatility in our common share price may subject us to securities litigation.

As discussed in the preceding risk factor, the market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future.  In the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities.  We may in the future be the target of similar litigation.  Securities litigation could result in substantial costs and liabilities and could divert
  management's attention and resources.

The application of the "penny stock" rules could adversely affect the market price of our common shares and increase your transaction costs to sell those shares.

As long as the trading price of our common shares is below $5 per share, the open-market trading of our common shares will be subject to the
  "penny stock" rules. The "penny stock" rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser's written consent to the transaction before the purchase. Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability or decrease the willingness of broker-dealers to sell the common shares, and may result in decreased liquidity for our common shares and increased transaction costs for sales and purchases of our common shares as compared to other securities.

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.

Our officers and directors own or control approximately 69% of our outstanding common shares, which may limit the ability of yourself or other shareholders, whether acting singly or together, to propose or direct the management or overall direction of our company.  Additionally, this concentration of ownership could discourage or prevent a potential takeover of our company that might otherwise result in you receiving a premium over the market price for your common shares.

Currently, our officers and directors beneficially own or control approximately 69% of our outstanding common shares.  These persons will have the ability to control substantially all matters submitted to our shareholders for approval and to control our management and affairs, including extraordinary transactions such as mergers and other changes of corporate control, and going private transactions.

Ravenscraig Properties Ltd., a corporation owned and controlled by Mr. R. Dirk Stinson, our President and a director, currently holds all of our issued series
  'A' preferred shares.  While the holders of our series 'A' preferred shareholders generally do not have the right to vote, we cannot effectuate any of the following transactions or actions without their consent and approval: the declaration or payment of any dividend (other than a stock split) to our

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common or preferred shareholders; the redemption or purchase of common or preferred shares; the sale of our principal assets or business; a merger or consolidation of our company with any other company; the liquidation or dissolution of our company, the assignment of our assets to our creditors, or a filing for bankruptcy by our company.

Our issuance of additional common shares or preferred shares, or options or warrants to purchase those shares, would dilute your proportionate ownership and voting rights.  Our issuance of additional preferred shares, or options or warrants to purchase those shares, would not only dilute your proportionate ownership and voting rights, but could also discourage or prevent the distribution of dividends to you by requiring the consent of the preferred shareholders, prevent the sale of our assets or a potential takeover of our company that might otherwise result in you receiving a distribution or a premium over the market price for your common shares by requiring the consent of the preferred shareholders even though the sale or takeover is approved by a majority of the common shares, or negatively impact the value of your investment in our common shares as the result of preferential dividend rights, disproportionate rights to appoint directors to our board, conversion rights, redemption rights and liquidation provisions granted to the preferred shareholders.

We are entitled under our certificate of incorporation to issue up to 15,000,000 common shares (which will be increased to 25,000,000 shares on April 28, 2004) and 2,000,000
  "blank check" preferred shares.  Upon effectuation of our pending 1-for-3 consolidation and the increase in our authorized common shares to 25,000,000 on April 28, 2004, we will be entitled to issue approximately 17,783,916 additional common shares (subject to adjustment for fractional shares issued in the consolidation) and 1,757,332 additional preferred shares.  Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time.  Any preferred shares we may issues shall have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, board membership rights, conversion rights, redemption rights and liquidation provisions.  It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development and marketing plans.  It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans.  We cannot give you any assurance that we will not issue additional common or preferred shares, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.

Our certificate of incorporation and bylaws contain provisions that make it more difficult for our shareholders to replace a majority of directors and obtain control of our board of directors.

Our certificate of incorporation and bylaws (1) reserve the right to fill any vacancies in any Non-Series A Director positions exclusively to our board of directors; (2) stipulate that our Non-Series A Directors can only be removed for cause; (3) require any action to be taken by our common and series
  'B' preferred shareholders to be effected at a duly called annual or special meeting of those shareholders, (4) prohibit those shareholders from effecting any action by written consent unless approved by a two-thirds affirmative vote of their shares; (5) reserve the right to call special meetings of our common and series
  'B' preferred shareholders exclusively to our board of directors and designated executive officers; and (6) require any amendments to the preceding provisions to be approved by a two-thirds affirmative vote of our shareholders.  These provisions generally make it more difficult for our shareholders to replace a majority of our directors and obtain control of our board of directors.

We are subject to the provisions of the Delaware Business Combination Act, which could discourage or prevent a potential takeover of our company that might otherwise result in you receiving a premium over the market price for your common shares.

As a Delaware corporation, we are subject to the Delaware Business Combination Act which precludes a shareholder who owns 15% or more of our shares from entering into a
  "business combination" involving our company for a period of three years, unless (1) our board of directors approves the combination before the shareholder acquires the 15% interest; (2) the interested shareholder acquires at least 85% of our shares as part of the transaction in which

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he acquired the initial 15%, excluding shares owned by our officers who are also directors and voting stock held by employee benefit plans; or (3) the combination is approved by our board of directors by a majority vote and two-thirds of our other shareholders at a duly called shareholders' meeting.  A
  "business combination" is defined as (1) a merger or consolidation requiring shareholder approval, (2) the sale, lease, pledge, or other disposition of our assets, including by dissolution, having at least 50% of the entire asset value of our company, or (3) a proposed tender or exchange offer of 50% or more of our voting stock.

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights to our directors, officers and employees may result in substantial expenditures by our company and may discourage lawsuits against our directors, officers and employees.

Our certificate of incorporation contains provisions which eliminate the liability of our directors, officers and employees for monetary damages to our company and shareholders to the maximum extent permitted under Delaware corporate law.  Our certificate of incorporation also requires us to indemnify our directors to the maximum extent permitted by Delaware corporate law.  We may also have contractual indemnification obligations under our individual agreements with our directors, officers and employees.  The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup.  These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our shareholders against our directors, officers and employees, even though such actions, if successful, might otherwise benefit our company and shareholders.  To the extent indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of our company under the above provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.

You may not be able to effect service of process upon or enforce a judgment against our company or our executive officers or directors

Since our principal executive offices are located in the province of British Columbia, Canada, and our executive officers and all but one of our directors are resident of countries outside of the United States, it may not be possible for you to effect service of process upon, or enforce a judgment against, our company or our executive officers or directors with respect to any civil actions predicated on the civil liability provisions of United States federal or state securities legislation that you may file in the federal or state courts of the United States or any resultant judgments you obtain in those courts.



Market Information

The common shares have traded over-the-counter on the OTC Bulletin Board under the trading symbol
  "CGBY"since May 16, 2002.  Prior to that there was no public market for the common shares.  The following table lists, by calendar quarter, the high and low sales prices of the common shares on the OTC Bulletin Board for each of the periods indicated.

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|                                        | Sales Price (1)
|--------------------------------------- | ---------------
|Period                                  | High           
|                                       
|2003:                                   |                
|Fourth Quarter                          | $      0.25    
|Third Quarter                           | $      0.54    
|Second Quarter                          | $      0.17    
|First Quarter                           | $      0.25    
|2002:                                   |                
|Fourth Quarter                          | $      0.26    
|Third Quarter (commencement of trading) | $       0.75   

> (1)   Reflects pre-consolidation sales prices.

Our common shares were approved for listing on the OTC Bulletin Board on May 16, 2002.  The closing price for the common shares on the OTC Bulletin Board as of April

A shareholders' list provided by our transfer agent showed 364 registered common shareholders holding 21,648,251 common shares as of April 12, 2004.  Upon effectuation of our pending 1-for-3 consolidation on April 28, 2004, there will be approximately 7,216,084 common shares outstanding, subject to upward adjustment for fractional shares.  We estimate that we have at approximately 539 beneficial holders of our common shares, based upon information provided by our stock transfer agent in connection with the distribution of an information circular on April 6, 2004.

As of April

Dividend Policy

We have never paid any cash dividends on our common shares, and we do not anticipate that we will pay any dividends with respect to those securities in the foreseeable future.  Our current business plan is to retain any future earnings to finance the expansion development of our business.  Any future determination to pay cash dividends will be at the discretion of our board of directors, and will be dependent upon our financial condition, results of operations, capital requirements and other factors as our board may deem relevant at that time.

Recent Sales Of Unregistered Securities

Since January 1, 2003, we have sold or issued the following securities not registered under the Securities Act:

- On July 1, 2003, we agreed to issue 3,164,382 common shares at an average conversion price of $0.11 per share to a group of thirteen directors, shareholders, employees and other creditors in settlement of a total of $356,801 in short-term advances, wages, fees and other payables due to those persons.  Included in that transaction were (1) 865,232 common shares issued to Mr. R. Dirk Stinson, our President and a director, in satisfaction of $53,482 in loans; (2) 514,246 common shares issued to Ravenscraig Properties, Ltd., a corporation owned and controlled by Mr. R. Dirk Stinson, our President and a director, in satisfaction of $53,482 in loans and liabilities assumed; (3)

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> 361,635 common shares issued to McSheahan Enterprises, Ltd., a personal service corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, with respect to loans and unpaid management fees in the amount of $34,490, (4) 276,299 common shares issued to JPT 2 Holdings, Ltd., a personal service corporation owned and controlled by Mr. John P. Thuot, a director, in satisfaction of $28,735 in unpaid management fees relating to when Mr. Thuot was an officer of our company; (5) 274,725 common shares issued to Mr. James V. DeFina, our projects director, in satisfaction of $28,571 in unpaid wages; and (6) 192,308 common shares issued to Mr. Denver Collins, a consultant who later became our Vice President of Engineering and Product Development and a director, in satisfaction of $20,000 in unpaid consulting fees.

- On March 5, 2004, we issued 7,076,300 common shares to ecoTech Waste Management Systems (1991) Inc., in connection with our purchase of a gasification technology from that company.  As part of that transaction, we also issued 500,000 to Mr. C. Victor Hall, the President and principal shareholder of ecoTech Waste Management Systems, for the purshase of his cryogenic technology.  We valued the common shares paid at US $0.14 per share, or an aggregate of $990,682 for the gasification technology and $70,000 for the cryogenic technology.
- On March 8, 2003, we agreed to issue 2,080,660 common shares at an average conversion price of $0.23 per share to a group of thirteen directors, shareholders, employees and other creditors in settlement of a total of $471,053 in short-term advances, wages, fees and other payables due to those persons.  Included in that transaction were (1) 614,391 common shares issued to Ravenscraig Properties, Ltd., a corporation owned and controlled by Mr. R. Dirk Stinson, our President and a director, in satisfaction of $153,598 in loans and liabilities assumed; (2) 263,988 common shares issued to McSheahan Enterprises, Ltd., a personal service corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, with respect to loans and unpaid management fees in the amount of $65,997, (3) 289,268 common shares issued to Clean Energy Research, Inc., a research and development corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, with respect to unpaid fees in the amount of $72,317 under our research and development contract with that company; (4) 316,292 common shares issued to Mr. James V. DeFina, our projects director, in satisfaction of $79,073 in unpaid wages; (5) 53,258 common shares issued to JPT 2 Holdings, Ltd., a personal service corporation owned and controlled by Mr. John P. Thuot, a director, in satisfaction of $13,314 in unpaid management fees relating to when Mr. Thuot was an officer of our company; and (6) 120,000 common shares issued to Mr. Denver Collins, our Vice President of Engineering and Product Development and a director, in satisfaction of $30,000 in unpaid wages.

No underwriting discounts or commissions were payable with respect to any of the following transactions, and none of the offers and sales were effected through any general solicitation or general advertising.

With the exception of the shares issued to Mr. Collins, the issuance of all of the foregoing securities was exempt from the registration requirements of the Securities Act under Regulation S, insofar as (1) none of the creditors were U.S. persons, (2) all of the issuances were effected outside the United States in offshore transactions, (3) there were no directed selling efforts within the United States, and (4) we implemented offering restrictions, including placing restricted stock legends on the shares.

In the case of Mr. Collins, (1) the issuance of common shares to him on July 1, 2003 was exempt from the registration requirements of the Securities Act under Rule 504 insofar as the aggregate offering price did not exceed $1,000,000, after taking into consideration the aggregate offering price for all securities sold by the company under Section 3(b) of the Securities Act within the twelve months preceding the transaction; and (2) the issuance of common shares to him on March 8, 2004 was exempt from the registration requirements of the Securities Act under Rule 506 insofar as he was an accredited investor at such time by virtue of being an executive officer and a director of our company.

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SUBMISSION
  OF MATTERS TO A VOTE OF SECURITIES HOLDERS IN FOURTH QUARTER

Our annual meeting of shareholders was held on November 21, 2003.  At that meeting our shareholders re-elected Messrs. R. Dirk Stinson, Barry A. Sheahan, John P. Thuot, L. Clive Boulton, John L. Howard and Denver Collins as our directors, with their term of office to extend until the next annual meeting of shareholders and until their successors are duly elected and qualified.  The tally of the votes is set forth below:

|                  | Vote     
|----------------- | ---------
|Director Nominees | For      
|                 
|R. Dirk Stinson   | 8,553,748
|Barry A. Sheahan  | 8,553,748
|John P. Thuot     | 8,553,748
|L. Clive Boulton  | 8,553,748
|John L. Howard    | 8,553,748
|Denver Collins    | 8,553,748

At the annual meeting, our shareholders also ratified the adoption of the 2003 Clean Energy Combustion Systems, Inc. Omnibus Equity-Based Compensation Plan by the following vote:  8,434,910

Also at the annual meeting, our shareholders ratified the appointment of Staley Okada & Partners to serve as our independent auditors for our pending fiscal year ending December 31, 2003 by the following vote:  8,553,748shares voting for, 7,022 shares against, and nil shares abstaining or withheld.  There were no broker non-votes with respect to any matter presented for vote at our annual meeting.

CHANGES
  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On March 21, 2003, our board replaced Deloitte & Touche LLP
  ("Deloitte & Touche") as our independent accountants with Staley, Okada & Partners
  ("Staley Okada"), which completed our pending audit for our fiscal year ended December 31, 2002.  The change in accountants was instituted solely for cost savings considerations.

Deloitte & Touche audited our consolidated financial statements for our two fiscal years ended December 31, 2001, and its report accompanying the audit for these fiscal years was not qualified or modified as to audit scope or accounting principles and did not contain an adverse opinion or disclaimer of opinion.  During these two fiscal years and also during the subsequent period through the date of Deloitte &
Touche's replacement, there were:  (1) no disagreements between Clean Energy and Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure; (2) no reportable events as such term is defined in Regulation 229.304(a)(1)(v); and (3) no matters identified by Deloitte & Touche involving our internal control structure or operations which was considered to be material weakness.

During our two most recent fiscal years ended December 31, 2001, and also during the subsequent interim period through the date of Deloitte &
Touche's resignation, Clean Energy did not consult with Staley Okada regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of opinion that might be rendered regarding our financial statements, nor did we consult with Staley Okada with respect to any accounting disagreement or any reportable event at any time prior to the appointment of that firm.

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DIRECTORS
  AND EXECUTIVE OFFICERS

Information relating to our directors and executive officers required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

EXECUTIVE
  COMPENSATION

Information relating to executive compensation required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

OWNERSHIP
  OF OUR SECURITIES BY BENEFICIAL OWNERS AND MANAGEMENT

Information relating to the ownership of our securities by beneficial owners and our management required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

CERTAIN
  RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to certain relationships and related transactions involving our beneficial owners, management and agents required under the rules of the SEC will be contained in our definitive proxy statement to be distributed later this year in advance of our Annual Meeting of Shareholders and, pursuant to those rules, that information is hereby incorporated into this annual report by reference.

CONTROLS
  AND PROCEDURES

Within the ninety days prior to the filing date of this report, our President and Chief Financial Officer, in consultation with our other members of management and advisors as appropriate, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-14 promulgated under the United States Securities Exchange Act of 1934.  Based upon that evaluation, our President and Chief Financial Officer concluded that, as of the date of the evaluation, our disclosure controls and procedures are effective in making known to them on a timely basis material information relating to our company (including consolidated subsidiaries) required to be included in this report.  There were no significant changes in our internal controls or in other factors that could significantly affect these controls, known to our President or Chief Financial Officer, subsequent to the date of the evaluation, including any significant deficiencies or material weaknesses that would require corrective action.

EXHIBITS,
  FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

Consolidated Financial Statements:

> Independent Auditors Report (Staley, Okada & Partners)
> F-1Independent Auditors Report (Deloitte & Touche LLP)
> F-2Consolidated Balance Sheets at December 31, 2003 and 2002
> F-3

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> Consolidated Statements of Operations for the twelve-month periods ended
> December 31, 2003 and December 31, 2002
> F-4Consolidated Statements of Capital Deficiency from inception (March 1, 1999)
>  through December 31, 2003
> F-5Consolidated Statements of Cash Flows for the twelve-month periods ended
> December 31, 2003 and, December 31, 2001
> F-6Notes To Consolidated Financial Statements
> F-7

Schedules required by Regulation S-X are filed as an exhibit to this report:

> Independent Auditors'Report on Schedules and ConsentSchedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements notes thereto

Exhibits

> 3.1    Certificate of Incorporation filed in the Office of the Delaware Secretary of State on March 1, 1999  (1)3.2    Certificate of Amendment to Certificate of Incorporation filed in the Office of the Delaware Secretary of State on May 20, 1999 (1)
>     3.3    Certificate of Amendment to Certificate of Incorporation filed in the Office of the Delaware Secretary of State on November 12, 1999 (1)3.4    Bylaws (as restated to reflect corporate name change) (1)4.1    Specimen common stock certificate (1)4.2    Specimen series
>     'A' preferred stock certificate (1)4.3    Specimen series
>     'B' preferred stock certificate (1)4.4    Form of Option Certificate under 1999 Clean Energy Technologies, Inc. Stock Plan relating to grants of options on March 5, 1999 to John D. Chato, John P. Thuot, Barry A. Sheahan and James V. DeFina (1)10.1    Pulse Combustion Technology License dated March 5, 1999, with 818879 Alberta, Ltd. (1)
>     10.2    Diesel Fuel Combustion Technology License dated March 5, 1999, with John D. Chato (1)10.3    Employment Agreement dated March 5, 1999, with James V. DeFina (1)10.4    Letter Agreement dated March 20, 2001 with 818879 Alberta Ltd. (3)10.5    Research and Development Agreement dated January 1, 2003 with McSheahan Enterprises, Ltd. (6)10.6    Employment Agreement dated October 1, 2003with Denver Collins *10.7    Memorandum Of Understanding dated March 5, 2004 between Clean Energy Combustion Systems, Inc. ecoTech Waste Management Ltd. (1991) and C. Victor Hall (7)21    List of
>     subsidiaries *23    Consent of Independent Auditors (Staley, Okada & Partners) *32.1    Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act *

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> 32.2   
>     Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act *

* Filed herewith

1. Previously filed by our company as an exhibit to our registration statement on form SB-2 filed on September 30, 1999 (Commission File No. 333-88207)
2. Previously filed by our company as an exhibit to pre-effective amendment no. 1 to our registration statement on form SB-2 filed on February 25, 2000
3. 
4. Previously filed by our company as an exhibit to post-effective amendment no. 2 to our registration statement on form SB-2 filed on December 6, 2001
5. Previously filed by our company as an exhibit to our annual report on form 10-K for our fiscal year ended December 31, 2001 as filed on April 1, 2002
6. 
7. 

-43-

---





Independent Auditors'

Report and Consolidated Financial Statements of:



CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(A Development Stage Enterprise)



December 31, 2003





---

Staley, Okada & Partners
Chartered Accountants
Suite 400, 889 West Pender Street
Vancouver, BC, Canada
Phone: (604) 585-8300
Fax: (604) 5855-8377
info@staleyokada.com
www.staleyokada.com

Independent Auditors' Report

To the Shareholders of Clean Energy Combustion Systems, Inc.:

We have audited the consolidated balance sheet of Clean Energy Combustion Systems, Inc. (a development stage enterprise) as at
December 13,  2003 and December 31, 2002, and the consolidated statements of operations, capital deficiency and cash flows for the years then
ended, and the consolidated statements of operations, capital deficiency and cash flows
for the years then ended and the amounts for the years ended December 31, 2003 and
December 31, 2002 included in the cumulative amounts for the period from
inception ( January 1, 1999) to 31 December 2003. These financial statements are the responsibility of the
company's management.  Our responsibility is to express an opinion on these financial statements based on our audit.

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

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at
December 31, 2003 and December 31, 2002 and the results of its operations and it's cash flows for the years then ended
December 31, 2003 and December 31, 2002 included in the cumulative amounts for
the period from inception ( January 1, 1999) to December 31, 2003 in accordance with accounting principles generally accepted in the United States of America.

The accompanying financial statements for the year ended 31 December 2003 have been prepared assuming that the company will continue as a going concern.  As discussed in note 1 to the financial statements, the
company's recurring losses from operations and lack of liquid assets raise substantial doubt about its ability to continue as a going concern.
Management's plans concerning these matters are also described in note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

|Vancouver, British Columbia, Canada
April 14, 2004 | Staley, Okada & Partners
|-------------------------------------------------- | ------------------------

---

> 



|As at December 31                                                                 | 2003                                                                                                                                                                                                | 2002                     
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------
|                                                                                 
|ASSETS                                                                            |                                                                                                                                                                                                     |                          
|CURRENT                                                                           |                                                                                                                                                                                                     |                          
|                                                                                  | Cash and cash equivalents                                                                                                                                                                           | $
160                    
|                                                                                  | Prepaid expenses                                                                                                                                                                                    | 2,825                    
|                                                                                 
|                                                                                  |                                                                                                                                                                                                     | Total current assets     
|ADVANCES TO AN AFFILIATED COMPANY (note

4)                                       | 313,088                                                                                                                                                                                             | 427,543                  
|PATENTS                                                                           | 30,128                                                                                                                                                                                              | 39,327                   
|                                                                                 
|TOTAL ASSETS                                                                      | $        346,201                                                                                                                                                                                    | $        469,743         
|                                                                                 
|LIABILITIES                                                                       |                                                                                                                                                                                                     |                          
|CURRENT                                                                           |                                                                                                                                                                                                     |                          
|                                                                                  | Accounts payable                                                                                                                                                                                    | $        275,377         
|                                                                                  | Accrued expenses (including accrued interest of $ Nil and $3,123
as of December 31, 2003 and December 31, 2002, respectively                                                                        | 136,772                  
|                                                                                  | Advances from related parties (note
5)                                                                                                                                                              | 70,734                   
|                                                                                 
|                                                                                  |                                                                                                                                                                                                     | Total current liabilities
|PROVISIONS AND LIABILITIES RELATED TO TRANSFER
OF OWNERSHIP OF SUBSIDIARY (note4) | 351,401                                                                                                                                                                                             | 468,177                  
|                                                                                 
|TOTAL LIABILITIES AND PROVISIONS                                                  | 834,284                                                                                                                                                                                             | 885,945                  
|                                                                                 
|Going concern (note 1)                                                            |                                                                                                                                                                                                     |                          
|Commitments and contingencies (note 12)                                           |                                                                                                                                                                                                     |                          
|CAPITAL DEFICIENCY                                                                |                                                                                                                                                                                                     |                          
|Authorized capital (note 6):                                                      |                                                                                                                                                                                                     |                          
|                                                                                  | Preferred stock; par value $0.0001 per share, 2,000,000 shares                                                                                                                                      |                          
|                                                                                  | Common stock; par value $0.0001 per share, 15,000,000 shares                                                                                                                                        |                          
|Issued capital (note 6):                                                          |                                                                                                                                                                                                     |                          
|                                                                                  | Series
'A' convertible preferred stock;
Liquidation preference $1 per share, or $1,000 total; 1,000 shares issued and
outstanding as of December 31, 2003 and December 31, 2002, respectively       | 1                        
|Going concern (note 1)                                                            |                                                                                                                                                                                                     |                          
|                                                                                  | Series
'B' convertible preferred stock;
Liquidation preference $2 per share, or $483,336 total; 241,668 shares issued
and outstanding as of 
 December 31, 2003 and December 31, 2002, respectively | 242                      
|                                                                                  | Common stock; 14,571,951 and 11,407,269 shares shares issued and outstanding
as of December 31, 2003 and December 31, 2002, respectively                                                            | 1,457                    
|Additional paid-in capital                                                        | 3,309,823                                                                                                                                                                                           | 2,836,562                
|Accumulated other comprehensive income                                            | 57,245                                                                                                                                                                                              | -                        
|Deficiency accumulated during the development stage                               | (3,856,851)                                                                                                                                                                                         | (3,254,148)              
|                                                                                 
|TOTAL CAPITAL DEFICIENCY                                                          | (488,083)                                                                                                                                                                                           | (416,202)                
|                                                                                 
|TOTAL LIABILITIES AND CAPITAL DEFICIENCY                                          | $       346,201                                                                                                                                                                                     | $        469,743         
|                                                                                 



The accompanying notes to consolidated financial statements 
are an integral part of these consolidated balance sheets

F-1

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.(a development stage enterprise)(expressed in U.S. dollars)
>   CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               | Twelve Months Ended
December 31,                            | Jan. 1, 1999
to
Dec. 31, 2003     
|-------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------
|                                                              
|                                                               | 2003                                                        | 2002                              
|ADMINISTRATION AND MARKETING EXPENSES                          |                                                             |                                   
|                                                               | Accounting                                                  | $            20,221               
|                                                               | Administrative wages, benefits and contract fees            | 94,304                            
|                                                               | Amortization                                                | -                                 
|                                                               | Communications, including telephone and website maintenance | 9,176                             
|                                                               | Foreign exchange (gain) loss                                | 3,713                             
|                                                               | Interest                                                    | 2,068                             
|                                                               | Legal and patent maintenance                                | 104,044                           
|                                                               | Marketing                                                   | 52,074                            
|                                                               | Occupancy                                                   | 10,160                            
|                                                               | Office and miscellaneous                                    | 5,453                             
|                                                               | Write-down of patents                                       | 9,199                             
|                                                               | Professional fees                                           | -                                 
|                                                               | Transfer agent fees                                         | 3,395                             
|                                                              
|                                                               |                                                             | Total administration and marketing
|                                                              
|RESEARCH AND DEVELOPMENT EXPENSES                              |                                                             |                                   
|                                                               | Wages and other direct costs                                | 236,595                           
|                                                               | Overhead                                                    | 52,301                            
|                                                              
|                                                               |                                                             | Total research and development    
|                                                              
|TOTAL EXPENSES AND NET LOSS FOR THE PERIOD                     | $        (602,703)                                          | $       (894,473)                 
|                                                              
|BASIC AND DILUTED NET LOSS PER SHARE OF
 COMMON STOCK (note 2) | $              (0.05)                                       | $            (0.09)               
|                                                              
|WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING            | 12,989,610                                                  | 10,139,184                        
|                                                              

The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements of operations

F-2

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.(a development stage enterprise)(expressed in U.S. dollars)
>   CONSOLIDATED
>   STATEMENTS OF
>   CAPITAL DEFICIENCY
>   
>   Series
> 
> 'A'
> Preferred Stock
> Series 'B'
>  Preferred Stock
> Common Stock
> Additional
>  Paid-in
> Capital
> Accumulated
> Other
> Comprehensive
> Income
> Deficiency Accumulated 
> During The 
> Development StageShares
> Amount
> Shares
> Amount
> Shares
> Amount
> Period
> CumulativeIssued on incorporation
> 1,000
> $          1
> -
> $         -
> 9,643,750
> $          964
> $             535
> $                   -
> $                -
> $          1,500Private placement
> -
> -
> 250,001
> 250
> -
> -
> 499,752
> -
> -
> 500,002Vesting of previously issued but unexercised
> warrants granted to consultant (note 6)
> -
> -
> -
> -
> -
> -
> 2,000
> -
> -
> 2,000Net loss for the period ended December 31, 1999
> -
> -
> -
> -
> -
> -
> -
> -
> (639,404)
> (639,404)Balance, December 31, 1999
> 1,000
> 1
> 250,001
> 250
> 9,643,750
> 964
> 502,287
> 
> (639,404)
> (135,902)Vesting of previously issued but unexercised
> warrants granted to consultant (note 6)
> -
> -
> -
> -
> -
> -
> 18,500
> -
> -
> 18,500Issued on conversion of promissory note
> -
> -
> -
> -
> 487,944
> 49
> 975,838
> -
> -
> 975,887Net loss for the year ended December 31, 2000
> -
> -
> -
> -
> -
> -
> -
> -
> (907,826)
> (907,826)Balance, December 31, 2000
> 1,000
> 1
> 250,001
> 250
> 10,131,694
> 1,013
> 1,496,625
> -
> (1,547,230)
> (49,341)Vesting of previously issued but unexercised
> warrants granted to consultant (note 6)
> -
> -
> -
> -
> -
> -
> 30,601
> -
> -
> 30,601Disposition of subsidiary (note 4)
> -
> -
> -
> -
> -
> -
> 294,522
> -
> -
> 294,522Net loss for the year ended December 31, 2001
> -
> -
> -
> -
> -
> -
> -
> -
> (812,445)
> (812,445)Balance, December 31, 2001
> 1,000
> 1
> 250,001
> 250
> 10,131,694
> 1,013
> 1,821,748
> -
> (2,359,675)
> (536,663)Conversion of series 'B'convertible preferred 
> stock into common stock
> -
> -
> (8,333)
> (8)
> 8,333
> 1
> 7
> -
> -
> -Conversion of loans and other debt to common stock
> -
> -
> -
> -
> 1,267,242
> 127
> 823,581
> -
> 
> 823,708Reduction of provision for liability related to 
> transfer of subsidiary (note 4)
> -
> -
> -
> -
> -
> -
> 191,226
> -
> -
> 191,226Net loss for the year ended December 31, 2002
> -
> -
> -
> -
> -
> -
> -
> -
> (894,473)
> (894,473)Balance, December 31, 2002
> 1,000
> 1
> 241,668
> 242
> 11,407,269
> 1,141
> 2,836,562
> -
> (3,254,148)
> (416,202)Foreign currency translation adjustment
> -
> -
> -
> -
> -
> -
> -
> 57,245
> -
> 57,245Conversion
>   of loans and other debt to common stock
> -
> -
> -
> -
> 3,164,682
> 316
> 356,485
> -
> -
> 356,801Reduction of provision for liability related to 
> transfer of subsidiary (note 4)
> -
> -
> -
> -
> -
> -
> 116,776
> -
> -
> 116,776Net loss for the year ended December 31, 2003
> -
> -
> -
> -
> -
> -
> -
> -
> (602,703)
> (602,703)Balance, December 31, 2003
> 1,000
> $          1
> 241,668
> $        242
> 14,571,951
> $      1,457
> $    3,309,823
> $            57,245
> $   (3,856,851)
> $    (488,083)

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of capital deficiency.

F-3

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> (a development stage enterprise)(expressed in U.S. dollars)
>   CONSOLIDATED STATEMENTS OF CASH FLOW



> December 31,
> Jan. 1, 1999 to
> Dec. 31, 20032003
> 2002
> (Cumulative)OPERATING ACTIVITIESTotal expenses and net loss
> $          (602,703)
> $          (894,473)
> $        (3,856,851)Adjustments to reconcile total expenses and net loss to 
> net cash utilized in operating activities:Amortization
> -
> -
> 45,027Non-cash consulting expense
> -
> -
> 51,101Write-down of patents
> 9,199
> -
> 9,199Change in operating assets and liabilities:Accounts receivable and prepaid expenses
> 48
> (2,873)
> (21,144)Accounts payable
> 88,704
> 407,400
> 1,065,011Accrued liabilities
> 88,649
> 90,683
> 319,141Payroll taxes
> -
> -
> -Net cash used in operating activities
> (416,103)
> (399,263)
> (2,388,516)INVESTING ACTIVITIESProceeds from sale of short-term investment
> -
> -
> -Additions to patents
> -
> (3,992)
> (39,327)Purchase of property and equipment
> -
> -
> (92,791)Net cash provided by (used in) investing activities
> -
> (3,992)
> (132,118)FINANCING ACTIVITIESRepayment of advances from (advances to) an affiliated company
> 171,700
> 32,136
> 155,995Advances from (to) shareholders (note 5)
> -
> -
> 291,816Advances from (to) related parties
> 244,563
> 371,119
> 597,645Net proceeds from disposal of subsidiary
> -
> -
> (2,051)Proceeds from issue of common stock
> -
> -
> 976,887Proceeds from issue of series'A'convertible preferred stock
> -
> -
> 500Proceeds from issue of series 'B'convertible preferred stock
> -
> -
> 500,002Net cash provided by financing activities
> 416,263
> 403,255
> 2,520,794NET DECREASE IN CASH AND CASH EQUIVALENTS
> 160
> -
> 160CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
> -
> -
> -CASH AND CASH EQUIVALENTS, END OF PERIOD
> $                     160
> $                    -
> $                    160SUPPLEMENTAL SCHEDULE OF INTEREST AND INCOME TAXES PAID
> Interest paid for the years ended December 31, 2003 and 2002 and the cumulative period ended December 31, 2003 was $2,068, $46,134 and $92,058, respectively, and income taxes paid for each of the years ended December 31, 2003 and 2002 and the cumulative period ended December 31, 2003 was $0.
> NON-CASH INVESTING AND FINANCING ACTIVITIES
> During the year ended December 31, 2003, amounts totaling $356,801 outstanding with respect to wages, loans, interest thereon and other payables owed to officers, directors, employees, shareholders and other creditors were converted into 3,164,682 common shares.  Also during 2003, the Advances to an affiliated company increased by $57,245 in connection with a foreign exchange adjustment.  Provisions and Liabilities related to transfer of ownership of subsidiary were reduced by $116,777 during 2003 with a corresponding increase in additional paid-in capital.
> During the year ended December 31, 2002, (i) amounts totaling $823,708 outstanding with respect to wages, loans, interest thereon and other payables owed to officers, directors, employees, shareholders and other creditors were converted into 1,267,242 common shares, and (ii) 8,333 series
> "B"preferred shares were converted into 8,333 common shares.  Provisions and liabilities related to transfer of ownership of subsidiary were reduced by $191,226 during 2002 with a corresponding increase in additional paid-in capital.

The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements of cash flows

F-4

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> (a development stage enterprise)(expressed in U.S. dollars)
>   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Nature Of
  Business; Organization And Operations; Going Concern
2. Significant
  Accounting Policies

F-5

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





F-6

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





F-7

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





F-8

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Research And
  Development Activities

F-9

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Disposition Of
  Subsidiary Company

F-10

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Advances From
  Related Parties

F-11

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Share Capital

F-12

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Employee And
  Director Stock Options

> Summary of Plans

Clean Energy has adopted two adopted two formal employee and director-based stock plans to date, (1) the 1999 Clean Energy Combustion Systems, Inc. Stock Plan (the

> The 1999 Plan was adopted by our board and approved by our shareholders on March 5, 1999.  The 2003 Plan was adopted by our board on August 4, 2003 and approved by our shareholders on November 21, 2003.

F-13

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



> Summary of Grants Under 1999 Plan

We have summarized below all stock option grants under the 1999 Plan for our two fiscal years ended December 31, 2003.  There were no grants of any awards other than stock options under the 1999 Plan during this period.

|                                   | 2003                        |                                 | 2002
|---------------------------------- | --------------------------- | ------------------------------- | ----
|Common Share 
Purchase Options     | Common
Shares
Under
Options | Weighted
Average
Exercise
Price |     
|                                  
|Outstanding at beginning of year   | 638,000                     | $     2.06                      |     
|Granted                            | 12,000                      | $     2.00                      |     
|Exercised                          | -                           | -                               |     
|Cancelled or lapsed                | (60,000)                    | $     2.00                      |     
|Outstanding at end of year         | 590,000                     | $     2.10                      |     
|Exercisable at end of year         | 506,000                     |                                 |     
|                                  
|Available for grant at end of year | 410,000                     |                                 |     
|                                  

We have summarized below all outstanding options under the 1999 Plan as of December 31, 2003:

|Type Of Option                           | Grant 
Dates        |                        | Exercise 
Prices |  | As of December 31, 2003
|---------------------------------------- | ------------------- | ---------------------- | ---------------- |  | -----------------------
|Outstanding                              |                     | Vested and Exercisable
|                                        
|Options granted to directors             | 1-20-01
 to 3-15-02 |                        | $2.00            |  | 220,000                
|Options granted to executive officers(1) | 3-5-99
 to 9-1-03   |                        | $2.00            |  | 270,000                
|Options granted to employees             | 3-5-99
 to 2-8-01   |                        | $2.00 
to $3.00  |  | 100,000                
|                                        
|                                         |                     |                        |                  |  | 590,000                
|                                        

> (1)   Includes options granted to executive officer-directors in their capacities as employees.

The director options outstanding as of December 31, 2003 generally vest one-third each on the first through third anniversaries of the grant date, respectively, based upon the continued provision of services as a director.  Except for options issued under management service agreements described below, the executive officer and employee options outstanding as of December 31, 2003 generally vest over five years from the grant date, based upon the continued provision of services as an executive officer or employee, although some employee options provide for one-year vesting.  The exercise prices for the options, which range from $2 to $3, were fixed before Clean
Energy's common shares were publicly traded, and were based upon the prior sales price for convertible series
'B' preferred shares to non-related parties.  All of the director, executive officer and employee options generally lapse, if unexercised, five years from the date of vesting.

F-14

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Effective April 1, 2001 Clean Energy entered into annually-renewable management services agreements with JPT 2 Holdings and McSheahan Enterprises, personal service corporations controlled by Messrs. John P. Thuot and Barry A. Sheahan, respectively, pursuant to which Mr. Thuot provided management services as President to Clean Energy and Mr. Sheahan provided management services as Chief Financial Officer of Clean Energy, respectively.  Under these agreements, each corporation was granted options to purchase 1,000 common shares at an exercise price of $2 per share for each month of service provided by the executive officer.  These options expire five years subsequent to their date of grant (see note 12).  The agreement for JPT 2 Holdings was amended in 2002 and no further options are available to JPT2 Holdings under this agreement.

> Summary of Grants Under 2003 Plan

No common shares reserved under the 2003 Plan have been granted to date under the 2003 Plan.  Clean Energy has granted a performance-based stock award to one our executive officers, Mr. Denver Collins, pursuant to which he will earn a quarterly performance bonus payable in common shares through December 31, 2006.  This performance bonus will equal 1.25% of Clean
Energy's revenues (net of sales discounts) attributable to the sale of products or licensing or joint venture net income for that quarter recorded by Clean Energy, but not to exceed 50,000 cumulative shares in any calendar year.

> Compensation Expense Associated With Grant Of Options

Pursuant to APB 25, we have not recorded any compensation expense relating to the grant of common share purchase options for any period in these consolidated financial statements insofar as the exercise price for all of such options equaled or exceeded the fair value of the underlying common shares on the effective date of grant.  See note 2.  Had we elected to follow the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation", we would have recorded additional compensation costs of approximately $5,450 and $25,481 for the twelve-month periods ended December 31, 2003 and December 31, 2002, respectively.  These amounts were determined using an option pricing model assuming no dividends are to be paid, an average vesting period of five years, a weighted average annualized volatility of our share price of 166% and 81% for the twelve-month periods ended December 31, 2003 and 2002, respectively, and a weighted average annualized risk free interest rate of 2.8% and 4.61% for the twelve-month periods ended December 31, 2003 and 2002, respectively

Summarized below is pro forma financial information for the two twelve-month periods ended December 31, 2003 which presents the net loss for the period and loss per common share for the period calculated in accordance with SFAS No. 123:

|December 31                                       | 2003             | 2002            
|------------------------------------------------- | ---------------- | ----------------
|                                                 
|Net loss for the period as reported               | $   (602,703)    | $   (894,473)   
|Compensation expense computed under SFAS No. 123  | (5,450)          | (25,481)        
|Pro forma net loss for the period                 | $   (608,153)    | $   (919,954)   
|                                                 
|Pro forma basic and diluted loss per common share | $         (0.05) | $         (0.09)
|                                                 

F-

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> (a development stage enterprise)(expressed in U.S. dollars)
>   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Common
  Share Purchase Warrants

1. Income Taxes
2. Related
  Party Transactions

> Related party transactions and balances not disclosed elsewhere in these financial statements are as follows:
> 
> 
> On September 13, 2002 we entered into an agreement with one of our shareholders, Ravenscraig Properties Ltd., a corporation owned and controlled by Mr. R. Dirk Stinson, our President and Chief Executive Officer and one of our directors, to convert $444,585 in loans and other amounts payable to that corporation into 683,976 common shares at the conversion rate of $0.65 (CDN $1) per share.
> On September 13, 2002 we entered into an agreement with Mr. John D. Chato, a past director and principal shareholder through his wholly-owned and controlled personal service company J9 Holdings Ltd., to convert $87,544 of wages payable to him and accrued interest thereon into 134,683 common shares at the conversion rate of $0.65 (CDN $1) per share.
> On September 13, 2002 we entered into an agreement with another of our shareholders, JPT 2 Holdings, a personal service corporation owned and controlled by Mr. John P. Thuot, a director and past executive officer, to convert $34,138 of fees and interest thereon payable to that corporation with respect to management services provided by Mr. Thuot under a management services agreement with that corporation, into 52,520 common shares at the conversion rate of $0.65 (CDN $1) per share.

F-16

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> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



> On September 13, 2002 we entered into an agreement with another of our shareholders, McSheahan Enterprises, a personal service corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, to convert $34,138 of fees and interest thereon payable to that corporation with respect to management services provided by Mr. Sheahan under a management services agreement with that corporation, into 52,520 common shares at the conversion rate of $0.65
>   (CDN $1) per share.
> On September 13, 2002 we entered into an agreement with another of our shareholders and a director, Mr. L. Clive Boulton, to convert $10,346 in loans and interest thereon payable to Mr. Boulton into 15,917 common shares at the conversion rate of $0.65 (CDN $1) per share.
> On September 13, 2002 we entered into an agreement with BO Gas Limited, a corporation with common directors and shareholders, to convert $14,407 in loans and interest thereon payable to that corporation into 22,165 common shares at the conversion rate of $0.65 (CDN $1) per share.
> On September 13, 2002 we entered into an agreement with a relative of Mr. Barry A. Sheahan, our Chief Financial Officer and a director, to convert $128,502 in loans and interest thereon payable to that relative into 197,695 common shares at the conversion rate of $0.65 (CDN $1) per share.

> The foregoing settlements arose in conjunction with the listing of our common shares on the OTC Bulletin Board as of May 16, 2002, and the pre-existing rights of Ravenscraig, JPT 2 Holdings and McSheahan Enterprises to convert their indebtedness into common shares.  Specifically, these parties each had the right under various agreements they had previously entered into with Clean Energy to convert their indebtedness into common shares on or after July 16, 2002 (two months after the date of commencement of trading on the OTC Bulletin Board) at a conversion rate equal to 80% of the average market trading price for the twenty business days prior to conversion, but not to exceed $2 per share.  The conversion rate under that formula would have been approximately $0.20 per share, however, these parties, together with the other related parties named above and other consenting creditors, agreed on a collective basis to convert their indebtedness into common shares at the much less favorable rate of $0.65 per share.  The foregoing shares were issued by Clean Energy in March 2003.

> In addition to the above, on September 13, 2002 we converted $70,048 of trade payable to unrelated parties into $107,766 common shares at the conversion rate of $0.65 (CDN $1) per share.

Effective as of July 1, 2003, we settled the following indebtedness to the following persons on the terms described for the purpose of preserving our cash-flow:

> We converted $89,984 and $53,482 in loans and payables and interest thereon payable to Ravenscraig Properties Limited and Mr. Stinson into 865,232 and 514,246 common shares, respectively, at the conversion rate of $0.10 per share.

F-17

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



> We converted $34,490 in management fees payable to fees and interest thereon payable to McSheahan Enterprises Ltd. under a management services agreement with that corporation, into 331,635 common shares at the conversion rate of $0.10 per share.
>     We converted $20,000 in consulting fees payable to Mr. Denver Collins, who has since become our Vice President of Engineering and Product Development and is one of our directors and director-nominees, into 192,308 common shares at the conversion rate of $0.10 per share.
> We converted $28,735 in payables and interest thereon payable to a shareholder owned by a relative of Mr. Thuot into 276,299 common shares at the conversion rate of $0.10 per share.
> In addition to the above, we converted $130,110 in trade payables to unrelated parties into 984,962 common shares at the conversion rate of $0.10 per share.

In addition to the amounts of indebtedness settled above, there remain at December 31, 2003, unpaid fees to HMJ Corporation (a personal service corporation owned by one of our former directors, Dr. William D. Jackson), JPT 2 Holdings Ltd. and McSheahan Enterprises Ltd. in the amounts of $21,116, $3,673 and $34,556 respectively.  As well, Dr. Jackson alleges an additional $45,000 of unpaid fees to HMJ Corporation, which has been accrued in these financial statements, but is currently under dispute.

As well, we are indebted to Mr. Denver Collins, one of our directors and an officer, for unpaid salary of $24,000 at December 31, 2003 and to DC Consultants, a company owned and controlled by Mr. Collins for $31,000 of unpaid consulting fees.



Our financial instruments consist of accounts payable, accrued liabilities, advances to an affiliated company and advances from related parties.  The fair value of these financial instruments approximates our carrying values due to the short-term maturity of these financial instruments and similarity to current market rates.

It is management's opinion that Clean Energy is not exposed to significant interest, currency or credit risks arising from these financial instruments.

Effective April 1, 2001 Clean Energy entered into management services agreements with JPT 2 Holdings and McSheahan Enterprises, personal service corporations controlled by Messrs. John P. Thuot and Barry A. Sheahan, respectively, pursuant to which Mr. Thuot provided management services as President to Clean Energy and Mr. Sheahan provided management services as Chief Financial Officer of Clean Energy, respectively.  Each agreement has a one-year initial term, renews automatically for successive one-year terms, and replaces a prior employment agreement with the named executive officer.  Under the initial agreement, Clean Energy agreed to pay each corporation CDN $8,000 per month for the provision of management services by the executive officer, and to grant options to 1,000 common shares at an exercise price of $2 per share for each month of service by the executive officer.  These options expire five years subsequent to their date of grant.  Both agreements were renewed on April 1, 2002, with the payment increased to CDN $8,400 per month.  Effective September 1, 2002, the agreement with JPT 2 Holdings was amended to reduce the payment under that agreement to CDN $2,000 per month, and to terminate the grant of options effective August 2, 2002.  This amendment, and the underlying agreement have expired effective September, 2003.  The agreement with McSheahan Enterprises was renewed on April 1, 2003, with the payment increased to CDN $8,800 per month.
The total amount of fees incurred under these contracts in 2003 were: $12,606 (CDN
$18,000) to JPT 2 Holdings Ltd. and $73,678 (CDN $105,600) to McSheahan
Enterprises Ltd.

F-18

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1. Subsequent Events

On September 28, 2001, Clean Energy's Board of Directors approved an amendment to our Certificate of Incorporation to increase the number of common shares we are authorized to issue from 15,000,000 to 25,000,000, and to increase the number of preferred shares we are authorized to issue from 1,000,000 to 1,500,000 (the
"Authorized Share Increase").  This action was then approved on the same date by a majority of our shareholders entitled to vote on that matter.  The Authorized Share Increase will be effected upon the filing of the amendment with the Delaware Secretary of State, which cannot be effected until we circulate an information circular to our shareholders.  The information circular was mailed to our shareholders on April 6, 2004, and we intend to file the Amendment with the Delaware Secretary of State on or about April 28, 2004.

On February 17, 2004, Clean Energy's Board of Directors and shareholders approved an amendment to our Certificate of Incorporation to implement a one-for-three consolidation of our common shares, whereby each common share outstanding as of February 18, 2004 would be consolidated into one-third of one common share (the
"Consolidation").  .  This action was then approved on the same date by a majority of our shareholders entitled to vote on that matter.  The Consolidation will be effected upon the filing of the amendment with the Delaware Secretary of State, which cannot be effected until we circulate an information circular to our shareholders.  The information circular was mailed on April 6, 2004, and we intend to file the Amendment with the Delaware Secretary of State on or about April 28,
2004.

F-19

---

> CLEAN
>   ENERGY COMBUSTION SYSTEMS, INC.
> 
>   (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



On March 5, 2004, Clean Energy entered into a Memorandum of Understanding for the acquisition of a gasification technology from ecoTech Waste Management Systems (1991) Inc., a privately-held federal Canadian corporation located in British Columbia, Canada, for 7,076,300 pre-consolidation common shares, and a cryogenic technology from Mr. C. Victor Hall, ecoTech's President and principal shareholder, for 500,000 pre-consolidation common shares.  Clean Energy was given to March 17, 2004 to complete its due diligence as to the technologies and to terminate the memorandum should the results of the due diligence prove unsatisfactory.  On March 11, 2004, Clean Energy's management completed the due diligence and our Board of Directors approved the acquisition of the technologies, thereby waiving its right to terminate the memorandum.  The pre-consolidation common shares payable for the technologies were valued at US $0.14 per share, or an aggregate of $990,682 for the gasification technology and $70,000 for the cryogenic technology, such amount per share representing the closing trading price for the common shares as of the date that the parties reached agreement-in-principal with respect to the relative values of the technologies and the business of CECSI and the structure of the transaction contemplated by the memorandum.  The sales price was determined by the parties on an arms'-length negotiated basis.  No independent valuation was sought from a business/technology appraiser or other third party due to financial constraints.

On March 8, 2004, we entered into agreement with various unrelated creditors of the company to satisfy our indebtedness to them in the amount of $56,745 through the issuance of 423,461 pre-consolidation common shares, at an average conversion rate of $0.13 per share.  As well, we issued
1,657,198 pre-consolidation common shares to be paid to various officers and employees of Clean Energy to satisfy wages or other indebtedness owed to them in the amount of
$414,299, at a conversion rate of $0.25 per share.

F-20

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SIGNATURES
  OF EXECUTIVE OFFICERS

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this annual report on form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized on April 14, 2004.

Burnaby, British Columbia, Canada

| | CLEAN ENERGY COMBUSTION SYSTEMS, INC.,
a Delaware corporation                        
| | -------------------------------------------------------------------------------------
| | By:                                                                                  
| | R. Dirk Stinson
President and Chief Executive Officer
(principal executive officer)  
| | By:                                                                                  
| | Barry A. Sheahan
Chief Financial Officer
(principal accounting and financial officer)

SIGNATURES OF
BOARD OF DIRECTORS

Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on form 10-K has been signed below by the following persons on behalf of the registrant on the dates and in the capacities indicated.

|By:                           | /s/  R. Dirk Stinson                                               | President, Chief Executive Officer and Director
(principal executive officer) | April 14, 2004
|----------------------------- | ------------------------------------------------------------------ | ----------------------------------------------------------------------------- | --------------
|R. Dirk Stinson              
|                              |                                                                    |                                                                              
|By:                           | /s/  Barry A. Sheahan                                              |                                                                               |               
|Barry A.Sheahan               | Chief Financial Officer and Director
(principal executive officer) | April 14, 2004                                                               
|                              |                                                                    |                                                                              
|By:                           | /s/  John P. Thuot*                                                | Director                                                                      | April 14, 2004
|John P. Thuot                 |                                                                    |                                                                              
|                              |                                                                    |                                                                              
|By:                           | /s/  L. Clive Boulton*                                             | Director                                                                      | April 14, 2004
|L. Clive Boulton              |                                                                    |                                                                              
|                              |                                                                    |                                                                              
|By:                           | /s/  John L. Howard*                                               | Director                                                                      | April 14, 2004
|John L. Howard                |                                                                    |                                                                              
|                              |                                                                    |                                                                              
|By:                           | /s/  Denver Collins*                                               | Director                                                                      | April 14, 2004
|Denver Collins                |                                                                    |                                                                              
|                              |                                                                    |                                                                              
|By:                           | /s/  C. Victor Hall*                                               | Director                                                                      | April 14, 2004
|C. Victor Hall                |                                                                    |                                                                              
|                              |                                                                    |                                                                              
|* By:                         | /s/  R. Dirk Stinson                                               |                                                                               |               
|R. Dirk Stinson
Agent-In Fact |                                                                    |                                                                              

-44-

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CERTIFICATION
OF PRINCIPAL EXECUTIVE OFFICER

I, R. Dirk Stinson, certify that

1. I have reviewed this annual report on form 10-K of Clean Energy Combustion Systems, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 promulgated under the United States Securities Exchange Act of 1934) for the registrant and we have:
5. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
6. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
  "Evaluation Date"); and
7. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
8. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
  registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

1. all significant deficiencies in the design or operation of internal controls which could adversely affect the
  registrant's ability to record, process, summarize and report financial data and have identified for the
  registrant's auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other employees who have a significant role in the
  registrant's internal controls; and

1. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date: April 14, 2004 | By:                                                                                 | /s/  R. Dirk Stinson
|-------------------- | ----------------------------------------------------------------------------------- | --------------------
|                     | R. Dirk Stinson
President and Chief Executive Officer
(principal executive officer)

-45-

---

CERTIFICATION OF PRINCIPAL ACCOUNTING AND FINANCIAL
OFFICER

I, Barry A. Sheahan, C.A., certify that:

1. I have reviewed this annual report on form 10-K of Clean Energy Combustion Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 promulgated under the United States Securities Exchange Act of 1934) for the registrant and we have:

1. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the
  "Evaluation Date"); and
3. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

1. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the
  registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
2. all significant deficiencies in the design or operation of internal controls which could adversely affect the
  registrant's ability to record, process, summarize and report financial data and have identified for the
  registrant's auditors any material weaknesses in internal controls; and
3. any fraud, whether or not material, that involves management or other employees who have a significant role in the
  registrant's internal controls; and
4. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

|Date:  April 14, 2004 | By:                                                                                   | /s/  Barry A.Sheahan
|--------------------- | ------------------------------------------------------------------------------------- | --------------------
|                      | Barry A. Sheahan
Chief Financial Officer
(principal accounting and financial officer)

-45-