Securities And Exchange CommissionWashington, D.C. 20549_________________
FORM 10-K_________________
[ X ]

Annual

For the fiscal year ended December 31, 2002

[   ]

Transition Report Pursuant to Section 13 or 15(d) of the Securities        Exchange Act of 1934
 
For the transition period from ___________ to ___________

Commission file number: 333-88207
**CLEAN ENERGY COMBUSTION SYSTEMS, INC.(Exact name of registrant as specified in its charter)
**Delaware(State or other jurisdiction of incorporation or        organization)
 **98-0211550(I.R.S. Employer Identification No.)
**7087 MacPherson Avenue, Burnaby, British Columbia, Canada, V5J4N4(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 435-9339

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

Securities registered pursuant to Section 12(g) of the Act: Common stock, parvalue $0.0001 per share.

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject to suchfiling requirements for the past 90 days:   [ X ] Yes   [    ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,and will not be contained, to the best of registrant's knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K:   [    ]

Indicate by check mark whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Act): [    ] Yes    [X ] No

The aggregate market value of the registrant's voting and non-voting commonequity held by non-affiliates computed by reference to the price at which thecommon equity was last sold on the OTC Bulletin Board as of June 30, 2002, thelast business day of the registrant's most recently completed second fiscalquarter, was $3,366,019. For purposes of calculating this amount only, alldirectors and executive officers of the registrant have been treated asaffiliates. This assumption regarding affiliate status is not necessarily aconclusive determination for other purposes.

The number of shares outstanding of each of the registrant's classes of stockas of as of March 27, 2003, the latest practicable date, was 11,407,269 commonshares 1,000 series 'A' preferred shares, and 241,668 series 'B' preferredshares.
**Documents Incorporated By Reference**
Information required by Part III (Items 10, 11, 12 and 13) is incorporatedinto this annual report by reference to the registrant's definitive proxystatement to be disseminated in advance of its annual meeting of shareholders tobe held later in fiscal 2003.
**Table Of Contents

**Business**

**  1**
** 
Introduction

 1
** 
Overview

1
** 
How Conventional Pulse Combustion    Technology Works

3
** 
How Our Pulse Combustion Technology    Works

4
** 
Competing Pulse Combustion Products

6
** 
Competitive Advantages Of Our Pulse    Combustion Technology

7
** 
Competitive Disadvantages Of Our    Pulse Combustion Technology

13
** 
Markets For Burner Units

13
** 
Marketing Strategy

14
** 
Pending Projects

15
** 
Research and Development

17
** 
Manufacturing Capacity And    Suppliers

18
** 
Subsidiaries

18
** 
License Agreements Governing Our    Principal Technologies

18
** 
Patents And Proprietary Rights

19
** 
Employees

20
** 
Governmental Regulation

20

**P****roperties**

**2****1**

**L****egal      Proceedings**

**2****1**

**S****ubmission      Of Matters To A Vote Of Securities Holders In Fourth Quarter**

**2****1**

**M****arket      Price Of And Dividends On Our Common Shares And Related Shareholder      Matters**

**2****2**
** 
Market Information

22
** 
Dividend Policy

23

**Selected Consolidated      Financial Information**

**23**

**Management's Discussion And      Analysis Of Financial Condition And Results Of Operations**

**24**
** 
Overview

24
** 
Results Of Consolidated Operations

24
** 
Liquidity And Capital Resources

25
** 
Plan Of Operation And Prospective    Capital Requirements

27
** 
Other Matters

28
****Quantitative And Qualitative       Disclosure About Market Risk**

**2****9**
 
Currency Fluctuations

29
** 
Interest Rate Fluctuations

30
**U****ncertainties    And Risk Factors That May Affect Our Future Results And Financial Condition**
**30**
** 
Uncertainties And Risks Generally    Relating To Our Company And Our Business

30**** 
Risks Relating To Our Securities

35

**Consolidated Financial      Statements And Supplementary Data**

**38**

**C****hanges      In And Disagreements With Accountants On Accounting And Financial      Disclosure**

**38**

**D****irectors      And Executive Officers**

**38**

**E****xecutive      Compensation**

**38**

**O****wnership      Of Our Securities By Beneficial Owners And Management**

**38**

**C****ertain      Relationships And Related Transactions**

**39**
**C****ontrols    And Procedures**
**39**

**Exhibits, Financial      Statements, Schedules And Reports On Form 8-K**

**39**

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******Introductory Notes**
The information set forth in the section of this annual report captioned"*Business*" is current as of March 27, 2003, unless an earlieror later date is indicated in that section. The information set forth in thesections of this annual report other than "*Business*" is currentas of December 31, 2002, unless an earlier or later date is indicated in thosesections.

We conduct our transactions in the currency of both the United States andCanada, although we consider the United States dollar to be our functional andreporting currency. All references to "*dollars*" in this annualreport refer to United States or U.S. dollars unless specific reference is madeto Canadian or CDN dollars. For information relative to rates of exchange andcurrency conversion, see that section contained in explanatory note 2 to ourconsolidated financial statements captioned "*Foreign CurrencyTranslation*".
**Special Note Regarding Forward-Looking Statements**
In this annual report we make a number of statements, referred to as "*forward-lookingstatements*", which are intended to convey our expectations orpredictions regarding the occurrence of possible future events or the existenceof trends and factors that may impact our future plans and operating results.These forward-looking statements are derived, in part, from various assumptionsand analyses we have made in the context of our current business plan andinformation currently available to us and in light of our experience andperceptions of historical trends, current conditions and expected futuredevelopments and other factors we believe to be appropriate in thecircumstances. You can generally identify forward-looking statements throughwords and phrases such as "*seek*", "*anticipate*","*believe*", "*estimate*", "*expect*","*intend*", "*plan*", "*budget*","*project*", "*will be*", "*will continue*","*will likely result*",**and similar expressions.Forward-looking statements contained in this report would, for example, includestatements relating to the timing and completion of pending or prospectiveprojects and contracts and receipt of revenues and various other statementsgenerally contained in those sections of this annual report captioned "*Business*"**and "*Management*'*s Discussion And Analysis Of FinancialCondition And Results Of Operations*"*.*

When reading any forward looking statement you should remain mindful thatactual results or developments may vary substantially from those expected asexpressed in or implied by that statement for a number of reasons or factorsincluding, by way of example and not limitation, (1) the various risks anduncertainties described in this special note or elsewhere in this annual report,and (2) our current and prospective financial requirements and current andprospective lack of capital; our inability to satisfactorily complete pending ornew project proposals (including with prospective licensee or joint venturepartners) and enter into binding revenue-producing contracts based upon thoseproposals; our overall inability or that of our licensees or joint venturepartners, if any, to design, test, manufacture and sell pulse combustors on aprofitable basis, including as a result of insufficient consumer acceptance ofand demand for pulse combustors; regulatory constraints, and changes in ourbusiness plan and corporate strategies or those of our joint venture partners.Each forward-looking statement should be read in context with, and with anunderstanding of, the various other disclosures concerning our company and ourbusiness made elsewhere in this annual report as well as other pubic reportsfiled with the United States Securities and Exchange Commission (the "*SEC*").You should not place undue reliance on any forward-looking statement as aprediction of actual results or developments.

We are not obligated to update or revise any forward-looking statementcontained in this annual report to reflect new events or circumstances unlessand to the extent required by applicable law. All forward-looking statementscontained in this annual report constitute "forward-lookingstatements" within the meaning Section 21E of the United States SecuritiesExchange Act of 1934 and, to the extent it may be applicable by way of theincorporation of statements contained in this annual report by reference orotherwise, Section 27A of the United States Securities Act of 1933, each ofwhich establishes a safe-harbor from private actions for forward-lookingstatements as defined in those statutes.

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******Business****Introduction

Clean Energy Combustion Systems, Inc. ("*we*"*,*"*ourcompany*" or "*Clean Energy*") is a development stageenterprise formed and organized to market "burner units" based uponour patented high-frequency valveless "pulse combustion technology".Our principal focus to date has been to develop applications for our pulsecombustion technology, which we believe has a wide variety of applications andcompetitive advantages. We have made significant progress in developing thistechnology, and a number of applications are now in a position to be introducedto the market having completed their primary development stage.

Our principal executive offices and research and development facilities arelocated 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 CombustionSystems, Inc. on May 20, 1999. We are authorized under our Certificate ofIncorporation to issue common stock and preferred stock, with respect to thelatter 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).
**Overview**
A burner unit is a furnace, burner or other combustion chamber which uses thecombustion process to convert the chemical energy contained in various fuelsources into heat energy measured in "*British Thermal Units*" or"*BTUs*". The use of a burner unit to create heat energy istypically the first of a number of steps in which the heat energy is generatedfor use in a multiplicity of residential, commercial, municipal or industrialsettings, ranging from simple one-step residential and light commercialapplications where the heat energy is used merely to heat air or water, such asthe case of space or water heaters, to complicated industrial multi-stepapplications where the heat energy is subsequently converted into one or moreother forms of energy. An illustration of a multi-step industrial applicationwould 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 heatwater in a boiler system to create steam energy, then uses this form of energyto run a turbine to create mechanical energy, and ultimately uses this form ofenergy to create a magnetic field to generate electrical energy. Since the heatgenerated by the combustion of fuel in burner units is generally"transferred" for other purposes as the end result of the first stepin a process, the industry in which we compete, namely, manufacturers andsellers of products incorporating burner units, is commonly referred to as the"*heat transfer*" industry.

Our "pulse combustion technology" is a high-frequency valvelesspulse burner technology which can operate on a variety of carbon-based fuels,including natural gas, propane, powdered coal, as well as hydrogen, anon-carbon-based fuel. This design facilitates the manufacture of highly-compactburner units that are more energy-efficient, and emit significantly lower levelsof pollutants, than conventional steady-state combustion designs. We believethat 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**2",*and    particulates. These differing chemical reactions do not, however, start up    and proceed at the same rate. Chemical reactions that release heat in the    combustion process, for example, generally occur earlier and finish more    quickly than those that create unwanted by-products.
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****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, SO2.
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;
-  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.

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****
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 SO2 or "acid  rain".
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, SO2  and particulates. The primary issue in developing a hydrogen-based economy is  economically creating hydrogen through the conversion of sea water, since  hydrogen does not naturally exist is large quantities. Hydrogen can also be  produced through reforming methane and other forms of natural gas, however,  there are also a number of environmental issues relating to this process gas,  including the creation of CO. Should this economy develop, our hydrogen-fueled  pulse combustion burner would offer a proven alternative to fuel cells to  generate electricity which could be significantly less expensive to operate  and which could also approach the efficiencies afforded by fuel cells.
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.

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 aburner unit design comprised of two geometrically-configured adjoining channelsand chambers-a combustion chamber and an exhaust channel or"tailpipe". As shown in the illustration below, most conventionalpulse combustion burner units use a "tubular" configuration, similarto a bottle with an elongated neck. In operation, fuel and air are firstinjected from an intake channel into the combustion chamber (at the base

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****
of the bottle) where they are ignited with anignition rod and commence burning (in the bottom portion of the bottle). Theheat created by the combustion process then generates a pressure wave whichtravels from the combustion chamber through the tailpipe (the elongated neck ofthe bottle), carrying with it various gases or "effluents" resultingfrom the combustion process. As the effluent gases exit the tailpipe, a partialvacuum is created within the combustion chamber which, in turn, pulls a newsupply of air and fuel into the combustion chamber from the intake channel. Thisnew fuel-air mixture is then compressed by effluent returning or "pulsingback" from the tailpipe, and ignites on its own without the need of theignition rod as a result of this pressure increase and the remaining heat withinthe combustion chamber, causing the entire process to repeat. Most conventionalpulse combustion technology, for example, operates at anywhere from 36 to 70cycles per second depending upon the configuration and application. It is thisoscillating or "pulsating" condition-hence, "pulse"combustion-which differentiates pulse combustion from conventional"steady-state" combustion, where combustion is provided through thesteady or continuous burning of a flame, such as in the case of a kettle ofwater being heated on a gas stove.**How Our Pulse Combustion Technology Works**
The principal drawbacks of conventional pulsecombustion technology has been noise and vibration and an inability toefficiently generate large quantities of BTUs through the combustion process. Asdiscussed in greater detail below, the noise and vibration result from theoperation of the conventional pulse combustion burner at relatively lowfrequencies of 36 to 70 cycles per second. The conventional pulse combustionburner's inability to efficiently generate large quantities of BTUs can beattributed to its geometries. Specifically, as the dimensions of the"bottle" are expanded or elongated in order to increase BTU productioncapacity, 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 tomaintain the most efficient shape of the "bottle" in terms of its"cross-section", while extending the "depth" of the bottlein a linear or straight-line direction and adding multiple fuel injectors:

[ILLUSTRATION COMPARING"CONVENTIONAL" PULSE COMBUSTION CONFIGURATION

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

Our design eliminates the noise and vibration levels associated withconventional pulse combustion since the design of our unit allows it to operateat anywhere from 350 to 1,600 cycles per second depending upon the configurationand application. Moreover, the depth implicit in our design allows us tosignificantly increase the unit's overall heat output, without loss ofefficiencies and increase of emissions. Set forth below is a diagram of a wateror space heating system containing three combustion chambers based upon ourlinear configuration:

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****
[ILLUSTRATION OF CLEAN WATER HEATEROR SPACE HEATING SYSTEM

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

Note the elongated or "linear" shape of each burner chamber asindicated in the above diagram, both height- and width-wise as they progressfrom the wider combustion chamber into the narrower tailpipe, as well asdepth-wise. The basic dimensions of each burner chamber, in terms of relativeheight, width and depth, resembles the shape of a "blade". For thisreason 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.

It is important to note that so long as we maintain the basic geometries ofour designs, whether in the linear or cylindrical configurations, we can obtainadditional heat output where required, by making one or both of the followingsimple alterations to the basic design depending upon space and useconsiderations, 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 byturning 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 loweroutput levels while maintaining optimum heat output and heat transferefficiencies. Conventional systems have very low efficiencies and high emissionswhile operating in a lengthy startup modes or partial capacity during low demandperiods of operation.  We now use several different pulse combustiondesigns depending upon the application required, including our initial"linear" configuration, various newer "cylindrical"variants, and a further variant for hydrogen applications. There are severalbeneficial aspects of our cylindrical variant, including lower manufacturingcosts, innate structural integrity, and elimination of gases collecting incorners.  
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 **** 
Competing Pulse CombustionProducts
 
Pulse combustion technology is not a newdevelopment. It has been in the public domain since early in the twentiethcentury, and was used in World War II to power the infamous V-1 "buzzbombs". Until recently, however, its use for commercial heat transfer****applicationshas been relatively limited.

Pulse combustion technology was first applied tothe 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 lackof strong marketing and the absence of incentive to buy high-efficiency boilerswhen gas prices were low.

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

Even though the higher efficiencies afforded bypulse combustion over conventional steady-state combustion is a well known factin the residential and commercial heating industry, pulse combustion productsstill have not been widely introduced, and have had limited penetration in themarkets they have been introduced into. We believe the principal reasons forthis 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 ofpulse 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.  
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 pulsecombustion products as premium-priced, "higher efficiency"alternatives to conventional steady-state combustion product lines.
All of Lennox's, Fulton's and Hydrotherm's pulsecombustion products utilize conventional valved "tubular" designs. Forexample, in the case of the Lennox unit, the tube is approximately eight feetlong and is looped or coiled vertically for space efficiency. The principaloperational feature of the conventional tubular design is the low number ofrepetitive combustion pulses or cycles at which it operates, typically 36 to 70cycles per second.
There are also numerous manufacturers andmarketers of conventional steady-state combustion products within the UnitedStates that compete with pulse combustion products, including Cleaver Brooks,Raypack, Inc., AERCO International Inc. and Weben-Jarco, as well as Lennox,Fulton and Hydrotherm.

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****

Competitive Advantages Of Our Pulse CombustionTechnology
*Summary Of Competitive Advantages Over Conventional Steady-State CombustionAnd Conventional Tubular Pulse Combustion Technologies*

As discussed below in greater specificity, our pulse combustion technologyaffords the following principal competitive advantages over conventionalsteady-state combustion and conventional tubular pulse combustion technologieswhen 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
-  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 *separate*burner systems, while our design allows us to    incorporate numerous combustion chambers within a *single*combustion    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.
   
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 ****    -  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: Among the principal******considerations is evaluating a burner unit are its "energy  conversion efficiencies", which simply refers to its overall ability to  convert the maximum amount of chemical energy contained in the fuel into heat  energy through the combustion process, and to then apply or transfer this heat  for the intended purpose. The ultimate economic measure of energy conversion  efficiencies is fuel savings. Essentially, a burner unit which has greater  energy conversion efficiencies will use a lesser amount of fuel to generate  and transfer a required level of heat than a less efficient combustion unit.  The energy conversion efficiencies of a burner unit can be generally broken  down into the following constituent elements:
*Heat Output Efficiency: As    discussed earlier, a burner unit uses the combustion process to convert the    chemical energy contained in various fuel sources into heat energy measured    in BTUs. The term "*heat output efficiency*" simply refers to    the ability of the combustion process to effectively convert the maximum    amount of chemical energy contained in the selected fuel into heat energy.    For example, ten cubic feet of natural gas could potentially produce about    10,000 BTUs of heat energy assuming its entire chemical energy was converted    into heat energy through the combustion process (although, as a practical    matter, perfect heat output efficiency never occurs due to a number of    variables). To the extent chemical energy is not converted into heat energy,    it is discharged as part of the exhaust stream in the form of various    post-burn chemical gases including CO, NOx and SO2-resulting    in unextracted or "wasted" heat energy potential.*Heat Transfer Efficiency: As    previously discussed, one commercial application of a burner unit is to act    as a "*heat transfer*" device to heat water or air. The term    "*heat transfer efficiency*" simply refers to the ability of    the heat transfer surfaces of the combustion unit to effectively    "transfer" the maximum amount of heat energy generated by the    combustion process to heat water or air, instead of allowing any of this    heat energy to be discharged as part of the exhaust stream-resulting in    unapplied or "wasted" heat energy.*Start-Up Efficiencies: All    combustion units, including both conventional steady-state and pulse    combustion units, require a period of time to "warm-up" before    they attain optimum combustion temperatures. The warm-up time can vary    between 30 seconds or two hours depending upon the mass of water, steel and    cast iron used to construct the unit. Generally speaking, the bigger the    combustion unit in terms of BTU output capacity, the longer the warm-up    period.
*Energy Conversion Efficiency Advantages of    Pulse Combustion Over Conventional Steady-State Combustion: Energy  conversion efficiencies associated with pulse combustion are significantly  higher than those of conventional steady-state combustion for the following  reasons:
*Heat Output Efficiencies: Pulse    combustion results in significantly higher heat output efficiencies than    conventional steady-state combustion, since the more turbulent combustion    environment and internal combustion pressures resulting from the repetitive    pulse combustion cycles promote more thorough combustion. Consequently, a    greater proportion of chemical energy per unit of fuel is converted into    heat energy instead of being wasted or discharged as part of the exhaust    stream.*Heat Transfer Efficiencies: In    conventional steady-state combustion, a zone of air called a "boundary    layer" is created adjacent to the interior surfaces of the combustion    unit, including those being used for heat transfer purposes. This layer acts    as a barrier which essentially channels the heat energy generated by the    combustion process away from the exterior surface areas and down the middle    of the exhaust pathway, allowing a significant portion of the heat energy    created to be wasted without application for heating purposes. This boundary    layer affect is greatly reduced in pulse combustion, however, since the more    turbulent combustion environment and internal combustion pressures resulting    from the repetitive pulse 

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combustion cycles forces a greater proportion    of the heat energy to circulate against the heat transfer surfaces,    resulting in less wasted heat energy than conventional steady-state    combustion. As a consequence, burner units using pulse combustion will have    a higher heat transfer efficiencies than conventional steady-state units    when comparing burner units with equal heat surface areas. The only way to    increase the relative heat transfer efficiency of the conventional    steady-state burner would be to significantly increase its heat transfer    surfaces at additional manufacturing costs For example, most conventional    steady-state combustion units have a heat transfer efficiency rating in the    70% to 85% range, meaning that a corresponding percentage of the heat    created is actually transferred to the targeted medium. By way of    comparison, most conventional "tubular" pulse combustion units on    the market today have a heat transfer efficiency rating in the range of 90%    to 96%.
Start-Up Efficiencies: As the    result of its repetitive on-off cycling, pulse combustion can attain optimal    combustion temperatures much more quickly than conventional steady-state    combustion, which translates into both fuel savings and less operational    downtime while the burner unit warms-up.
*Energy Conversion Efficiency Advantages of    Our Pulse Combustion Technology Over Conventional "***Tubular***"***Pulse Combustion******:***The various energy conversion  efficiencies afforded by pulse combustion result from the more turbulent  combustion environment and internal combustion pressures resulting from the  repetitive pulse combustion cycles. Our pulse combustion design, as a  consequence, can deliver greater energy conversion efficiencies than  conventional tubular pulse combustion designs as a result of the greater  number of burning cycles at which our design operates. Conventional tubular  pulse combustion units, for instance, generally operate at only 36 to 70  cycles per second. Our pulse combustion technology, on the other hand,  operates at anywhere from 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 better heat output, heat transfer and  start-up efficiencies.

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 SO2 (inthe case of coal and other dirty fuels) and other residual gases such asunburned hydrocarbons, while maintaining the energy conversion efficienciesnecessary to minimize fuel costs.
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.

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****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.
*Emission Control Advantages of Pulse    Combustion Over Conventional Steady-State Combustion: As  previously discussed, if the pulses occur at a fast enough rate, the chemical  byproducts created through the kinetic 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, test 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, such as CO and other hydrocarbons, and we are conducting  characterization tests to confirm these early observations. Of equal  importance, pulse combustion can maintain stable combustion at significantly  lower excess air rates than conventional steady-state combustion as a result  of its combustion dynamics. As a result, higher heat transfer efficiencies can  be maintained with pulse combustion as compared to conventional steady-state  combustion, resulting in improved fuel savings, while at the same time  lowering emission levels.***Emission Control Advantages of Our Pulse    Combustion Technology Over The Conventional "***Tubular***"***Pulse Combustion******:***The ability of the pulse  combustion unit to completely burn fuel results from the more turbulent  combustion environment and internal combustion pressures resulting from the  repetitive pulse combustion cycles. Our pulse combustion design, as a  consequence, has demonstrated significantly reduced NOx emissions than  conventional tubular pulse combustion designs, and also shows reduced amounts  of CO as a result of the turbulent environment's effective mixing of the  hydrocarbons in the fuel and oxygen in the air. As previously noted, pulse  burner units using the conventional tubular pulse combustion configuration  typically operate at 36 to 70 cycles per second. Our pulse combustion  technology, on the other hand, operates at anywhere from 350 to 1,600 cycles  per second depending upon the configuration and application, which translates  into significantly lower emissions.

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.

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 We believe that our pulse combustion technology  is so effective in reducing the emissions of post-burn chemical gases that****it  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, SO2.  In these cases our burner units would be installed as secondary combustors to  re-burn the emissions-laden exhaust from a commercial or industrial process,  while at the same time generating heat  energy which can be used for various heat transfer applications, such as  electricity co-generation, consequentially reducing operating costs. The cost  to manufacture, install and operate our burner units for these applications  should be significantly cheaper than current scrubber applications, which  reduce NOx emissions but do not make use of the waste fuel energy and which,  themselves, become a waste product.***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:
-  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 that 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: All    conventional and pulse burners operate at optimum energy conversion    efficiencies and emission levels based upon their design, measured in terms    of BTU output. A 100,000 BTU/hour conventional steady-state furnace, for    example, is designed to operate most efficiently at a level of fuel-mixture,    which would generate 100,000 BTUs of heat energy per hour after taking into    consideration the inefficiencies inherent in that particular design. If the    unit is operated at levels above or below the rated optimum output in order    to regulate or adjust heat output by either increasing or decreasing the    amount of incoming air and fuel, then the heat output and heat transfer    efficiencies will vary and emission levels could increase.

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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, he 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 *separate*burner    systems, while our designs allow us to incorporate numerous combustion    chambers within a *single*combustion 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:    The modular design of our pulse combustion technology also allows    for easy assembly and disassembly, enabling the operator to repair or    replace sections of the burner unit in most configurations. This feature is    particularly important in commercial and industrial applications such as    hospitals and schools, where the significant costs incurred in repairs and    routine maintenance of the heating system and, in some cases, the cost of    backup units, are virtually eliminated.
***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 

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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.
***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 DisadvantagesOf Our Pulse Combustion Technology**
The principal competitive disadvantage of ourpulse combustion technology is that our design is new and unique, and noproducts based upon our pulse combustion technologies and configurations havebeen commercially produced or sold to date, either by our company or by any ofour competitors. Moreover, while the higher efficiencies afforded by pulsecombustion are well known in the residential and commercial heating industry, webelieve that conventional pulse combustion products have not been widelyaccepted in this market segment due to their higher product cost, noise andvibration, limitation in BTU generation capacity, and technical performanceissues relating to their tubular design. In order to establish marketacceptance, we will need to both satisfactorily educate prospective purchasersof our products, including burner manufacturers and retailers, relating to thebenefits of our technology over both conventional pulse and steady statecombustion technologies. We will also have to develop internal and externalmanufacturing, sales, marketing and distribution capabilities. For a morecomprehensive description of these issues, see that section of this annualreport captioned "*Uncertainties And Risk Factors-Uncertainties And RisksGenerally relating To Our Company And Our Business*"*.***Markets For Burner Units**
Burner units are usedworldwide for numerous commercial, municipal, industrial, residential andspecialty heat transfer applications. The following list of heat transfermarkets applications is instructive:*Water Heater and Boiler Market: In  these applications heat generated by a burner unit is used to either heat  water in an unpressurized water heating system, or to heat water to create  steam or pressurized hot water in a pressurized boiler system. Hot water is  required in a variety of residential, commercial, municipal and industrial  uses, including homes, apartment buildings, schools, hospitals, hotels, office  buildings, restaurants, stores, laundries, car washes, warehouses, industrial  plants, boats/ships and recreational vehicles. Steam or pressurized hot water  is used for many commercial, municipal or industrial applications, including  both direct applications such as steam cleaning and indirect applications  where steam is used to run a turbine in order to generate electricity. As  discussed in greater detail below in that section of this annual report  relating to our pending projects, we are currently working on this type of  project to retrofit boiler systems for public buildings, and are also working  on water heater applications.***Space Heating Market: In this  application heat generated by a burner unit called a furnace is used to heat  airspace in a variety of residential, commercial, municipal and industrial  settings, including those mentioned above in the discussion relating to water  heaters. As discussed in greater detail below in that section of this annual  report relating to our pending projects, we are currently working on this type  of project for heavy-duty special-purpose vehicles.

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*****Industrial Drying Market: In this  application heat generated by a burner unit is used in industrial processes to  dry materials or break them into small pieces, known as  "atomization". Industries which employ industrial burners include  the food processing, plastic, polymer, rubber, chemical, mineral, pulp and  paper, and pharmaceutical industries. As discussed in greater detail below in  that section of this annual report relating to our pending projects, we are  currently working on a tissue dryer for a pulp and paper manufacturer.
-  "***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 : There are a number of industrial processes or operations    such as horizontal down-hole petroleum drilling, methane reforming for the    production of hydrogen and industrial catalytic regeneration, that 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. As discussed in greater detail below in that    section of this annual report relating to our pending projects, we have    developed production proto-types for several types of these applications.***Specialty Application Markets: There    are literally hundreds if not thousands of specialty applications which    utilize burner technologies. By way of example, burners are used for a    variety of purposes in the petroleum industry, such as heating glycol and    heavy oil for natural gas and oil transportation purposes. As discussed in    greater detail below in that section of this annual report relating to our    pending projects, we are currently working on several of these specialty    applications.***Pollution Control Equipment Market: In    this application a burner unit is used as a secondary pollution control    device to "reburn" industrial flue gases generated by a primary    industrial or commercial processes in order to remove the pollutants    contained in these gases. Typical industrial and commercial settings which    require the use of pollution control equipment are manufacturing facilities,    power plants, chemical plants, refineries and paper mills.
**Marketing Strategy**
Our pulse combustiontechnology has completed its research and development stage, and the next stepin exploiting this technology is to introduce it to the various markets in orderto build market penetration and share and product knowledge and acceptance.Given the broad range of potential applications and markets for pulse combustiontechnologies, we anticipate that we will introduce our technologies to thesepotential markets through a number of different strategies and approaches,including the following types of arrangements:*Royalty Agreements: We will seek  royalty arrangements with equipment manufacturers which will permit them to  incorporate the use of specific pulse combustion burner unit 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 pulse combustion technology  as an integral component of their functional product, such as water heaters  and low emission vehicles. This is a domain requiring large capital  expenditures which will not be recovered for several years, since the end  products, such as electric automobiles, will be several years away from mass  production.***Licensing Agreements: We will seek  licensing agreements with equipment manufacturers that allow a broader scope  in application of our burner technologies than in royalty agreements. The end  products of these arrangements will likely be commercial systems, such as  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.

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*****Engineered Projects: 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 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.***Joint Ventures: We will seek joint  venture arrangements for various industrial projects that lend themselves to  pulse combustion technology 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.***Product Manufacturing: 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**
Our natural gas- andhydrogen-fueled burner designs have completed their primary development stageand are now in a position to be introduced to the market. We are currentlyworking on a variety of projects using these and other fuel sources. Describedbelow are some of the projects which we which we are currently or have recentlyworked on which could lead to the initial introduction of burner units using ourtechnologies:*Natural Gas-Fueled Pulse Combustion Burner    For Industrial Tissue Paper Drying Applications: We have completed  the first stage of a three-phase proposal for a Montreal-based manufacturer of  pulp and paper industrial dryers, pursuant to which Clean Energy is developing  a large natural gas-fueled pulse combustion industrial dryer for tissue paper.  This company was referred to Clean Energy by The Canadian Center For Mineral  And Energy Technology ("*CANMET*"), which had previously tested  and evaluated the pulse combustion technology and found that the acoustic wave  associated with pulse combustion, when applied to drying applications,  provided a 22% mechanical advantage over conventional drying technologies  because of the acoustic signal's physical manipulation of the drying  environment. We believe that this 22% advantage, when added to the 90%+ heat  output efficiency of our pulse combustion technology, can offer the highest  levels of overall system efficiency. In completing the first stage of the  proposal, we confirmed to the manufacturer that not only did our pulse  combustion technology offer higher heat transfer efficiencies than traditional  drying technology, but that those efficiencies increased as the unit operated  with high frequencies. The manufacturer is now evaluating technical matters  unrelated to the operation of our unit before deciding to proceed to phase II,  pursuant to which we would design and manufacture a proto-type unit for a  small paper making machine, and then progress to phase III, pursuant to which  we would design and manufacture a demonstration unit for the manufacturer's  marketing purposes. We anticipate that the manufacturer will bear the full  cost of phases II and III. We believe that the successful commercial  introduction of our technology for the tissue drying portion of this market  will represent a beta-site opportunity for Clean Energy to demonstrate the  additional advantages of our pulse combustion technology for the larger  industrial pulp and paper drying market.***Natural Gas-Fueled Pulse Combustion Burner    For Natural Gas and Oil Transportation: We are currently working on  several projects for an Alberta-based oil and natural gas transportation  service company. The first project, which we are in the process of completing,  is a natural gas-fueled demonstration unit to be used to heat glycol to  dehydrate or take water out of natural gas. Our second project which we will  shortly commence is a natural gas-fueled demonstration unit used to heat heavy  crude oil to facilitate pipeline transport.***Natural Gas-Fueled Instantaneous Pulse    Combustion Water Heaters And Boilers: We have made significant  advances in reducing the size and costs of our pulse combustion water heater  and boiler designs, and are currently in discussions with several residential  water heater manufacturers and their largest customers relative to joint  ventures to manufacture natural gas-fueled residential water heaters for their  product lines. We further believe that the successful commercial introduction  of our technology for the residential water heating market will represent a  beta-site opportunity for Clean Energy to demonstrate the additional  advantages of our pulse combustion technology for the industrial and  commercial water heating and boiler markets.

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*****Pulse Combustion Burner For Hydrogen Flare    Gas: Over the past year we have developed a hydrogen-fueled pulse  combustion burner which can burn hydrogen gas at high rates of efficiencies  and at ultra-low NOx levels (1-2 ppm). We are currently approaching several  oil & gas production and down-stream refining companies relative to the  use of this technology to burn hydrogen which is currently flared off in  drilling and refining processes. This technology will afford a number of  benefits to this application, including electricity co-generation, the  production of nitrogen as a by product of the combustion process (nitrogen is  a valuable inert chemical used in down-hole drilling processes), and emissions  reductions due to the extremely low NOx emissions associated with this unit.  As previously discussed in this annual report, there is also a high level of  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, and the  elimination of emissions associated with hydrocarbon-based fuels such as CO,  CO2,  sulphur dioxide and particulates. Should this economy develop, our  hydrogen-fueled pulse combustion burner would offer a proven alternative to  fuel cells to generate electricity which could be significantly less expensive  than that technology to operate and which could also approach the efficiencies  afforded by fuel cells.***Pulse Combustion Burner to Create "***Zero  Oxygen***"***Stoichiometric Low Excess Air Reducing Gas:***We  have developed several different proto-type burner units which can deliver a  100% oxygen-free hydrogen reducing gas. For the first application, we  successfully designed and tested a 365,000 BTU/hr proto-type burner unit which  delivered hydrogen reducing gas which enhanced the operation of an industrial  catalytic absorption pollution control system. This application was not  finalized due to a change in the manufacturer's line of business. Under the  second application, we designed and successfully tested an 8,000 BTU/hr  proto-type burner unit which delivered a hydrogen reducing gas that could be  used to enhance the production of electricity by a recently developed line of  fuel cells. This application was not finalized as the result of technical  issues not related to our technology. Although these proposals did not lead to  contracts, there are many industrial processes which require oxygen-free  hydrogen reducing gases, and we intend to pursue these opportunities in the  longer-term given our success in designing and developing proto-types.***Pulse Combustion Burners for Burning Coal: In  December 2000 in connection with a proposal request to develop a 13 million  BTU/hr coal-burning burner for commercial and municipal electricity generation  purposes, we successfully designed, constructed and operated a 330,000 BTU/hr  proto-type burner, including controls and coal feeder, which could burn  relatively poor-quality coal in a powdered form. As anticipated, the burner  resulted in high heat output efficiencies and relatively low NOx emission  levels. As well, our testing also indicated an extremely low sulfur dioxide  emission rate, which has led to additional investigation of this beneficial  aspect of the high-frequency pulse burn given potential acid rain-reduction  industrial applications.  Due to financial, manpower and time  constraints, in early 2001 we stayed further development work on this project  necessary to design an improved coal feeding system and to further modify the  design in an attempt to further reduce emission levels. Moreover, we did not  have available the significant funds required to scale-up the proto-type in  order to test and fabricate a full-sized operating proto-type, including  capital necessary to fund the acquisition of a significantly larger research  & development and testing facility and to procure the necessary  engineering personnel. Based upon this initial work, however, in August 2001  we received a request by the Alberta Ministry of Innovation and Science to  prepare a grant proposal to the Alberta Energy Research Institute ("*AERI*")  to fund the testing and development of large industrial coal burning pulse  combustion burners for electrical generation plants, which would be beneficial  for the province given its large coal reserves. The AERI was established by  the province in August 2000 to invest for research in technology to enhance  the sustainable economic development of Alberta's energy resources. The  development of clean coal burning for electricity generation is one of the  primary 

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****
targeted areas for research and development  stated by AERI. We anticipate that we would request in the range of CDN $5 to  $10 million in funds as an Industrial Research Program grant, which focuses on  projects that involve a step-change in energy technology and/or environmental  performance. While we have commenced work on this grant proposal, it has  nevertheless been delayed while we focused our efforts on projects using our  proven natural-gas burning technology that could be brought to market in a  comparatively short period of time without excessive cost and manpower. We  nevertheless intend to complete this grant proposal and proceed with this  project as soon as we are in a position to do so.

Please note that no orders have been placed orenforceable contracts entered into with respect to any of the foregoing projectsto 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 orany other parties after we complete the noted prototypes.
**Research and Development**
Our research and development activities arecurrently centered on the full commercialization of our technology under theauspices of Dr. William Jackson, one of our directors and a consultant to ourcompany and our recently appointed Vice President of Research and Engineering,and Mr. Denver Collins, a consultant to our company and our recently appointedChief Product Development Engineer. Dr. Jackson also heads our grant procurementactivities.

The bulk of our research and developmentactivities are currently conducted through McSheahan Enterprises Ltd. ("*McSheahanEnterprises*"), a personal service corporation owned and        controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and adirector, pursuant to a  cost plus research and developmentagreement entered into effective January 1, 2003.  Under that agreement,McSheahan Enterprises agreed to provide pre-approved budgeted pulsecombustion research and development services to Clean Energy USA, and to invoicethe latter company for its budgeted costs, related overhead and a 10% mark-up.  The purpose ofentering into a research and development arrangement with McSheahan Enterpriseson the noted arms-length basis was to continue to preserve our ability toindirectly 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 ourbecoming a public company whose stock was publicly traded.

Prior to entering into the noted agreement withMcSheahan Enterprises, we conducted the bulk of our research and developmentactivitiesunder a similar cost plus research and development agreement from January 1,2002 through Clean Energy Technologies(Canada) Inc., a British Columbia corporation ("*Clean EnergyTechnologies*"), which was our wholly-owned research and developmentsubsidiary through December 31, 2001.  In anticipation of our stockbecoming publicly traded in fiscal 2002, we transferred ownership of Clean EnergyTechnologies on December 31, 2001 to Mr. John D. Chato, a principal shareholderand a director of our company at that time, pursuant to a letter of intent. The purpose ofmaking the transfer on the noted arms-length basis was to continue to preserveour ability to indirectly benefit from certain grants and tax-incentive programsoffered in both the United States  and Canada as discussed above. No pro forma disclosure has been provided, as Clean Energy  continued to incur research and development expenditures through our contract  with Clean Energy Technologies, resulting in no significant change to our  operating expenses.Effective January 1,2003, we terminated this agreement and entered into the noted agreement withMcSheahan Enterprises. Subsequentto that date, Clean Energy Technologies transferred its property and equipmentand assigned its leasehold interests to McSheahan Enterprises, while McSheahanEnterprises assumed certain liabilities of Clean Energy Technologies. 
Our gross research and development expenses,including amounts paid to Clean Energy Technologies under our pulse combustionresearch and development contract with that company, amounted to $455,018,$397,006 and $400,377 for our 2002, 2001 and 2000 fiscal periods, respectively.Our research and development budget for fiscal 2003 is budgeted at $400,000.

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One of our objectives in meeting our research anddevelopment and commercialization costs is to fund a significant portion ofthose expenditures through either direct grants or indirect grants through ourresearch and development affiliates.  We have, for example, directly or indirectlythrough Clean Energy Technologies, funded a total of CDN $56,600 in grants fordevelopmental purposes of our pulse combustion technology from the date of ourinception, and our predecessors to this technology funded a total of CDN$1,785,000 in developmental grants prior to our acquisition of that technology.

In late 2001, the Industrial Research Assistance Program of the Canadian federalgovernment's National Resource Counsel approved a CDN$90,000 grant to fund our phase I industrial tissue dryer characterization study.  This program later approved the transferof the remaining funding balance for this program, CDN $22,000, toward thecompletion of our glycol and heavy oil heating applications.

We had previously applied for approximately$400,000 in matching grants from CE-CERT and ICAT with respect to thedevelopment of a residential natural gas-fueled water heater for the Californiamarket. This application was declined in 2001 after being short-listed, however,we have been requested to reapply for this program for a lesser amount and willproceed with that application when we have sufficient available time andmanpower to do so.

We have also been requested to file a grantapplication with the Alberta Energy Research Institute to fund the testing anddevelopment of large coal burning pulse combustion burners for electricalgeneration plants, and also intend to proceed with that application when we havesufficient available time and manpower to do so.

Dr. Jackson is also coordinating our contactswith the U.S. Department of Energy and the South Coast Air Quality ManagementDistrict, to name a few, in our efforts to further promote the development ofour technologies and to have them designated as best available technologies.
**Manufacturing Capacity andSuppliers**
We currently fabricateour burner units at our facilities located in Burnaby, British Columbia,although some components are purchased to our specifications from suppliers orsubcontractors. Most of these components are standard parts or fabricationprojects available from multiple sources at competitive prices. We believe thatwe would be able to secure alternate supply sources or suppliers orsubcontractors if any of these become unavailable. Given the limitations of ourinternal manufacturing capability, we anticipate that we will rely uponstrategic partners or third party contract manufacturers or suppliers to satisfyfuture production requirements as demand for our products increase.**Subsidiaries**
We have one wholly-owned subsidiary, Clean Energy USA, a Nevada corporation,which we formed in December, 2001 for the dual purpose of managing pulsecombustion technology research & development activities and commercializingour pulse combustion technology through licensing and royalty agreements inNorth America.
**License Agreements Governing Our PrincipalTechnologies**
We acquired the rights to our pulse combustion technology for considerationof $10 under a Pulse Combustion Technology License dated March 5, 1999 with818879 Alberta, Ltd., a corporation then owned and controlled by Mr. R. DirkStinson, 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 itsinterest in the license agreement to Ravenscraig Properties Limited ("*RavenscraigProperties"),*a corporation also owned and controlled by Mr. Stinson.

Under the terms of the Pulse Combustion Technology License, we hold anexclusive fully-paid royalty-free license to design, engineer, manufacture,market, distribute, lease and sell burner products using the pulse combustiontechnology within any country in the world other than Finland or Sweden, and tosublicense and otherwise commercially exploit the pulse combustion technologywithin the permitted countries. The term of the Pulse Combustion TechnologyLicense expires 

-18-
****
 upon the earlier of March 5, 2019 or the lapse of the newestunderlying patents for the pulse combustion technology, including any patentedimprovements. The oldest pulse combustion technology patent expires in 2006, andthe newest current pulse combustion technology patent expires in 2019. Forfurther information concerning the underlying patents for the pulse combustiontechnology, see the section of this annual report captioned "*Business-Patentsand Proprietary Rights*"*.*
We are generally prohibited under the Pulse Combustion Technology Licensefrom sublicensing our rights to the pulse combustion technology, or otherwiseassigning our rights as licensee under the Pulse Combustion Technology License,to any third party without Ravenscraig Properties' prior consent. RavenscraigProperties, in turn, is also generally prohibited from selling its rights to thepulse combustion technology, or otherwise assigning its rights as licensor underthe Pulse Combustion Technology License, to any third party without our priorconsent.

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

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

We have the right under the Pulse Combustion Technology License to acquirefull ownership of the pulse combustion technology from Ravenscraig Propertiesfor the payment of CDN $1 at such time as we procure a listing of our commonshares on a "national market", which is defined under the PulseCombustion Technology License to constitute The New York Stock Exchange, TheAmerican Stock Exchange or The Nasdaq Stock Market (including both the SmallCapand National Markets). We refer to this purchase right as the "*PulseCombustion Technology Option*"*.* In order to be approved forlisting on a national market, Clean Energy would need to satisfy enumeratedquantitative and qualitative listing standards, including requirements relatingto minimum bid prices, market capitalization, number of unaffiliatedshareholders, net income and shareholders' equity. We do not currently qualifyfor listing on any national market, and we can give no assurance that we willqualify in the future or, if so, make any application.

Should we acquire full title to our pulse combustion technology by reason ofexercise of the Pulse Combustion Technology Option, Ravenscraig Properties willnevertheless retain the right under certain circumstances to reacquire our pulsecombustion technology should we later become bankrupt or insolvent, or bethreatened with bankruptcy or insolvency, or make an assignment in favor of ourcreditors.
**Patents And Proprietary Rights**
Our basic pulse combustion technology and a number of design improvements tothis technology are protected by a number of United States patents, the oldestof which expires in 2006, and the newest of which expires in 2019. We anticipatethat we will make international patent applications in selected foreigncountries for our pulse combustion technology as circumstances dictate.

We intend to diligently defend any infringement of our pulse combustiontechnology patents. We are not aware of any potential challenges to thesepatents. We have not established a fund for defense of these patents, but may doso if significant sales of its products are achieved. We intend to have allemployees and consultants execute trade secret and confidentiality agreements.

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****
We cannot give any assurance that the existing patents granted to us or ourlicensors will not be invalidated, that patents currently or prospectivelyapplied for by us or our licensors will be granted, or that any of these patentswill provide significant commercial benefits. Moreover, it is possible thatcompeting companies may circumvent patents we or our licensors have received orapplied for by developing products which closely emulate but do not infringe ouror our licensor's patents, and consequentially market products that compete withour products without obtaining a license from us. An adverse decision from acourt of competent jurisdiction affecting the validity or enforceability of ourpatents or proprietary rights owned by or licensed to us could have, dependinggenerally on the economic importance of the country or countries to which thesepatents or proprietary rights relate, an adverse effect on our company and ourbusiness prospects. Legal costs relating to prosecuting or defending patentinfringement litigation may be substantial. Costs of litigation related tosuccessful prosecution of patent litigation are capitalized and amortized overthe estimated useful life of the relevant patent. We cannot give you anyassurance that we will be able to successfully defend our patents and proprietary rights, or fund the cost of that litigation. For furtherinformation concerning these risks, see that section of this annual reportcaptioned**"*Uncertainties And Risk Factors-Uncertainties And RisksGenerally relating To Our Company And Our Business-Our Inability To Protect OurPatents And Proprietary Rights Would Force Us To Suspend Our Operations AndPossibly Even Liquidate Our Assets And Wind-Up And Dissolve Our Company*".
**Employees**
We currently have two full-time employees and onepart-time employee, and also two full-time consultants and two part-timeconsultants. A portion of our research and development activities are performedunder contract by McSheahan Enterprises, which currently has three full-timeemployees and one part-employee. None of our or McSheahan Enterprises'employees are represented by a union. We believe that our relations with ouremployees are good.**Government Regulation**
The heat transfer industry, which we anticipate will represent the primarypurchasers of burner products using our technologies, is subject to evolving andoften increasingly stringent federal, state, local and international laws andregulations concerning the environment and energy conservation. The principalenvironmental regulations affecting the heat transfer industry in place todaythat also have a direct bearing on our burner products relate to the control ofa variety of atmospheric emissions, principally nitrogen oxides, that resultfrom the combustion process. These regulations accomplish their objectives inone of three ways-by establishing permitted emission levels for designatedpollutants, by prohibiting selected business operations, and by specifyingacceptable technologies, commonly known as "*Best Available ControlTechnologies*".

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

A representative example of a local regulationgoverning atmospheric emission standards is Rule 1146.2, titled "*Emissionsof 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 SanBernardino 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;   
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 ****    -  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 reduceemissions of nitrogen oxides. The Massachusetts case deals with scrubbers whichuse ammonia to remove nitrogen oxides after it is formed, while the SCAQMD caseregulates the amount of nitrogen oxides allowable in the first place. Theseregulations directly impact our business since the attractiveness of ourtechnology is its ability to inhibit the production of nitrogen oxides at thesource. Those applications which are restricted by these regulations will beentirely open to our technology. Since our technology is a new technologyengineered to meet these more stringent requirements, there are no additionalcosts or liabilities imposed on our business to satisfy these standards.  Although one of the principal benefits of ourburner technologies are their ability to satisfy lower pollution standards, wecannot give you any assurance that emission standards will not be increased byany governmental agency to a level that our technologies will either notsatisfy, or which will require significant expenditures in research anddevelopment costs in order to satisfy.  We are also subject to laws governing ourrelationship with our employees, including minimum wage requirements, overtime,working conditions and citizenship requirements.  
Properties
 
Our executive offices and principal research anddevelopment facilities, consisting of approximately 4,300 square feet, arelocated at 7087 MacPherson Avenue, Burnaby, British Columbia, Canada, V5J 4N4.This space is currently leased through our affiliate, McSheahanEnterprises, for a two-year term, with a two-year option to renew, at anapproximate rental rate of CDN $3,400 per month. Our pro-rata share of thiscost, representing approximately one-third of the total, is indirectly chargedto us by McSheahan Enterprises in the overhead allowance under our researchand development agreement with that company.

Our ability to increase ourlevels of activity and to pursue a number of business opportunities will requireus to acquire expanded premises with increased testing and production space andto increase our staffing levels. Our ability to acquire and move into expandedpremises will be governed by our ability to raise additional capital.
 
LegalProceedings
 
As of the date of this annual report:
-  there are 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 are, 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.
   
SubmissionOf Matters To A Vote Of Securities Holders In Fourth Quarter
 
Our annual meeting of shareholders was held on October18, 2002. At that meeting our shareholders re-elected Messrs. John D. Chato,John P. Thuot, Barry A. Sheahan, R. Dirk Stinson, L. Clive Boulton, William D.Jackson and John L. Howard as our directors, with their term of office to extenduntil the next annual meeting of shareholders and until their successors areduly elected and qualified. The tally of the votes is set forth below:

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******Vote
**Director Nominees
**For
 **Withhold
 **Abstain

John D. Chato

1,684,030
 
-
 
-

John P. Thuot

1,684,030
 
-
 
-

Barry A. Sheahan

1,684,030
 
-
 
-

R. Dirk Stinson

1,684,030
 
-
 
-

L. Clive Boulton

1,684,030
 
-
 
-

William D. Jackson

1,684,030
 
-
 
-

John L. Howard

1,684,030
 
-
 
-

Our shareholders also ratified the appointment of Deloitte & Touche LLPto serve as our independent auditors for our pending fiscal year which will endDecember 31, 2002 by the following vote: 1,684,030 sharesvoting for, nil shares against, and nil shares abstaining or withheld. Therewere no broker non-votes with respect to any matter presented for vote at ourannual meeting.  On March 21, 2003, we nevertheless engaged Staley Okada      & Partners as our independent auditors solely for cost      considerations.  See that section of this annual report captioned      "Changes In And Disagreements With      Accountants On Accounting And Financial Disclosure".
**Market Price Of And Dividends On OurCommon sharesAnd Related Shareholder Matters

Market Information**
The common shares have traded over-the-counter on the OTCBulletin Board under the trading symbol "*CGBY*"**since May16, 2002. Prior to that there was no public market for the common shares. Thefollowing table lists, by calendar quarter, the volume of trading and the highand low sales prices of the common shares on the OTC Bulletin Board for each ofthe periods indicated.
** **** **
**Sales              Price**

**Period**

**Volume**

**High**

**Low**

2002:
   
Fourth Quarter

216,400

$ 0.20

$ 0.07

Third Quarter              (commencement of trading)

238,500

$ 0.75

$ 0.1

Our common shares were approved for listing on the OTCBulletin Board on May 16, 2002. The closing price for the common shares on theOTC Bulletin Board as of March 27,2003 was $0.14.
A shareholders' list provided by our transfer agent showed 370 registeredcommon shareholders holding 11,407,269 common shares as of March 19, 2003. Weestimate that we have at approximately 487 beneficial holders of our commonshares, based upon information provided by our stock transfer agent inanticipation of our last annual meeting of shareholders held on October 18,2002.

As of March 27, 2003, there were also outstanding 1,000 series 'A' preferredshares held by one shareholder, and 241,668 series 'B' preferred shares held byfive shareholders, for which no trading market presently exists. The series 'A'and series 'B' preferred shares are each convertible into one common share.

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******Dividend Policy**
We have never paid any cash dividends on shares of our capital stock, and wedo not anticipate that we will pay any dividends in the foreseeable future. Ourcurrent business plan is to retain any future earnings to finance the expansiondevelopment of our business. Any future determination to pay cash dividends willbe at the discretion of our Board of Directors, and will be dependent upon ourfinancial condition, results of operations, capital requirements and otherfactors as our Board may deem relevant at that time.
**Selected Consolidated FinancialInformation**
The following discussion of our consolidated financial condition and resultsof operations should be read in conjunction with our consolidated financialstatements and their explanatory notes, which can be found at the end of thisannual report.

The following table presents selected historical consolidated financial dataderived from our consolidated financial statements which can be found at the endof this annual report. The selected statement of loss data set forth below forour fiscal period ended December 31, 2002, and the selected balance sheet dataset forth below as of December 31, 2002, have been audited by Staley, Okada& Partners, independent auditors, as indicated in their report contained inour consolidated financial statements. The selected statement of loss data setforth below for our fiscal period ended December 31, 2001, and the selectedbalance sheet data set forth below as 

of December 31, 2001 and December 31, 2000, have been audited by Deloitte& Touche LLP, independent auditors, as indicated in their report containedin our consolidated financial statements. The following selected financial datashould be read in conjunction with our consolidated financial statements andtheir explanatory notes, as well as that section of this annual report captioned"*Management*'*s Discussion and Analysis of Financial Condition andResults of Operations*".
** **
**Twelve              Months Ended December 31,**

**Consolidated Statement              of Operations Data:**

**2002**

**2001**

**2000**

Revenue

$ -

$ -

$ -

Administrative and              marketing expenses

439,455

415,439

507,449

Research and development              expenses

455,018

397,006

400,377

Net loss

(894,473)

(812,445)

(907,826)

Net loss per share basic              and diluted

(0.09)

(0.09)

(0.09)

Weighted average common              shares outstanding

10,139,184

10,131,694

10,131,694

 
** **
**December              31,**

**Consolidated Balance              Sheet Data:**

**2002**

**2001**

Working capital              (deficiency)

$ (414,895)

$ (283,311)

Current assets

2,873

-

Advances to an affiliated              company

427,543

370,716

Patents

39,327

35,335

Property and equipment

-

-

Total assets

469,743

406,051

Current liabilities

417,768

283,311

Provisions and              liabilities related to transfer of ownership of subidiary

468,177

659,403

Total liabilities and              provisions

885,945

942,714

Capital deficiency

(416,202)

(536,663)

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**Management's Discussion And Analysis OfFinancial Condition And Results Of Operations**
The following discussion of our consolidated financial condition and resultsof operations should be read in conjunction with our consolidated financialstatements and their explanatory notes, which can be found at the end of thisannual report.
**Overview**
Clean Energy was formed on March 1, 1999, for the principal purpose ofacquiring exclusive world-wide license rights entitling us to design, engineer,manufacture, market, distribute, license and otherwise commercially exploit ourpulse blade combustion technology. This technology has completed the primarydevelopment stage and is in a position to be commercially exploited. Ourobjective is to enter into licensing, royalty, joint venture or manufacturingagreements with established national and international heat transfer industrymanufacturers which will result in the introduction of a variety of differentburner units based upon this technology into various selected market segments.We have no revenues to date, nor have we entered into any revenue producingcontracts to date, although we are currently working on a number of proto-typesunder several proposal requests which could lead to development grants bymanufacturers or others over the next two to six months, and contract revenuesafter twelve months. Since we have not generated operating revenues to date, weshould be considered a development stage enterprise.
**Results Of Consolidated Operations
*Operating Revenues***
We had no revenues for our twelve-month fiscal periods ended December 31,2002 ("*fiscal 2002*"), December 31, 2001 ("*fiscal 2001*"),or December 31, 2000 ("*fiscal 2000*").
***Net Loss***
We incurred an operating loss of $894,473 for fiscal 2002, as compared to$812,445 and $907,826 for fiscal 2001 and fiscal 2000, respectively.

The $82,028 or 10% increase in our operatingloss for fiscal 2002 over fiscal 2001 was primarily attributable to thefollowing changes in costs and expenses:
-  a $58,012, or 14.6%, increase in research and    development expense from $397,006 to $455,018; and  
a $24,016, or 5.8%, increase in    administration expense from $415,439 to $439,455;
   The $95,381or 10.5% decrease in our operatingloss for fiscal 2001 over fiscal 2000 was primarily attributable to thefollowing changes in costs and expenses:    -  a $92,010, or 18.1%, decrease in    administration expense from $507,449 to $415,439; and  
a $3,337, or 0.8%, decrease in research and    development expense from $400,377 to $397,006.
   The increase in administration expense for fiscal2002 over fiscal 2001 was primarily attributable to increases in legal andpatent maintenance costs and interest partially offset by decreases in wages andbenefits, marketing expense, amortization expense and occupancy costs resultingin most part to the divestiture of our research and development subsidiary,Clean Energy Technologies, and our subsequent contracting of research anddevelopment services on a cost-plus 10%   
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 ****   contract basis. The $92,010 decrease in administration expensefor fiscal 2001 over fiscal 2000 was primarily attributable to reductions inwages and benefits and marketing costs, offset by across-the-board net increasesin costs to support our increased level of business activities, the mostsignificant of which were accounting and legal fees.  In comparing fiscal 2002 to fiscal 2001, itshould be noted that, as the result of the divestiture of Clean EnergyTechnologies and its attendant research and development personnel and activitiesas of the end of fiscal 2001, we effectively shifted a portion of amortizationexpense and occupancy costs included in administration expense from thataggregate expense grouping to the research and development expense grouping,insofar as these costs are now indirectly recorded by us under the monthly costplus 10% research and development fee that is charged to us under the researchand development contract we entered into with Clean Energy Technologies. As aconsequence of that divestiture, we recorded a $47,138 overall net reduction incombined administration and research and development expense over fiscal 2002,reflecting an overall reduction in our level of activities and attendantdecreases in materials and labor costs for this period as compared to fiscal2001.  ***Relationships And Transactions On Terms ThatWould Not Be Available From Clearly Independent Third Parties***
During fiscal 2002, we did not enter into anytransactions with any parties that are not clearly independent on terms thatwould be more favorable than that which might have been available from other clearly independent third parties.
**Liquidity And CapitalResources
*Sources of Cash***
Our cash flow requirements from our inceptionthrough December 31, 2002 have been principally funded by:
-  $500,002 in gross proceeds from a private    placement of series 'B' preferred shares which closed on April 6, 1999,  
$975,887 in short-term advances from a    director and principal shareholder, which amounts were subsequently    converted in fiscal 2000 into 487,944 common shares at a conversion price of    $2 per share in August 2000 pursuant to the terms of our financing agreement    with that creditor;
a $659,403 reduction in liabilities to date    as the result of the transfer of ownership of our wholly-owned subsidiary,    Clean Energy Technologies, on December 31, 2001; and
-  $823,798 in short-term advances, wages, fees    and other payables due to a group of directors, shareholders, employees and    other creditors, who collectively agreed in September 2002 to convert that    indebtedness into 1,267,242 common shares at a conversion price of $0.65 per share. 
The $975,887 in short-term advances noted abovewere extended to Clean Energy by Mr. R. Dirk Stinson, our current President andChief Operating Officer and a director and principal shareholder, pursuant to anunsecured revolving promissory note dated August 8, 1999. Under the terms ofthis note Clean Energy was required to repay all amounts advanced under thenote, plus interest accrued on these amounts at the rate of prime plus 2% perannum, by August 10, 2000. Mr. Stinson was also afforded the right under thenote to convert any portion of the outstanding indebtedness under the note intocommon shares at any time at the conversion rate of one common share per $2 ofindebtedness. On or about August 10, 2000, Mr. Stinson agreed to amend the termsof the note to provide for the repayment of any outstanding balances to thirtydays of demand. On August 15, 2000, Mr. Stinson converted then current balanceof the loan as of that date, $975,887, into 487,944 common shares pursuant tothe terms of the note.
After the conversion noted above, Mr. Stinsoncontinued to make advances to Clean Energy under the note and to assume otherliabilities of the company. In September, 2001, the company extended to Mr.Stinson the right, should the common shares be listed on the OTC Bulletin Board,to convert any portion of outstanding indebtedness under the note that accruedon or prior to the date that occurs two months after the date of listing, at aconversion rate equal to 80% of 

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 the market trading price as of that date, butnot to exceed $2 per share. Clean Energy's common shares were listed on the OTCBulletin Board on May 16, 2002, and on July 16, 2002 Mr. Stinson became entitledunder the foregoing terms to convert his outstanding indebtedness under the loanat the rate of $0.20 per share. On September 13, 2002, as part of a globalagreement with a group of the company's creditors, Mr. Stinson agreed to convertthe outstanding balance of the company's indebtedness to him as of that date, $444,585, into 683,976 common shares at the less favorable rate of $0.65 pershare. The company's indebtedness to Mr. Stinson as of December 31, 2002 was $0.The $444,585 noted above represented the highest balance of the company'sindebtedness to Mr. Stinson in fiscal 2002.
In September 2001, similar promissory notes weresigned by Clean Energy Technologies in favor of Messrs. John P. Thuot and BarryA Sheahan and their respective personal service corporations, JPT 2 HoldingsLtd. and McSheahan Enterprises, respectively, related to unpaid wages andfees totaling, in the aggregate, CDN $153,000. Those notes required Clean EnergyTechnologies to repay the CDN $153,000, plus any additional future unpaid wagesand/or fees, plus interest accrued on these amounts at the rate of prime plus 2%per annum, by September 30, 2002. Messrs. Thuot and Sheahan and their respectivepersonal service corporations were also afforded the right under the notes toconvert any portion of the outstanding indebtedness under the notes into commonshares of Clean Energy (then the parent of Clean Energy Technologies) at anytime at a conversion rate determined at the time of conversion based on a 20%discount to market trading price, or $2 per share if Clean Energy's shares arenot trading at the time of conversion. As previously noted, Clean Energy'scommon shares were listed on the OTC Bulletin Board on May 16, 2002, and on July16, 2002 Messrs. Thuot and Sheahan and their respective personal servicecorporations became entitled under the foregoing terms to convert theoutstanding indebtedness under the loan at the rate of $0.20 per share. OnSeptember 13, 2002 as part of a global agreement with a group of the company'screditors, Messrs. Thuot and Sheahan and their respective personal servicecorporations agreed to convert a portion of the company's outstanding balance ofthe company's indebtedness to them as of that date, $34,138 each, into 52,520common shares each at the less favorable rate of $0.65 per share. The company'sremaining indebtedness to Messrs. Thuot and Sheahan and their respectivepersonal service corporations as of December 31, 2002 was $23,279 and $30,091,respectively. The highest balance of the company's indebtedness to each ofMessrs. Thuot and Sheahan and their respective personal service corporations infiscal 2002 was $57,417 and $64,229, respectively.
There are no guarantees, commitments, lease anddebt agreements or other agreements that could trigger adverse change in ourcredit rating, earnings, cash flows or stock price, including requirements toperform under standby agreements, other than a default in our obligations underour office lease described in that section of this annual report captioned"*Properties*" and contingent liabilities of Clean EnergyTechnologies in the amount of $40,634 as of December 31, 2002 which arose fromcontracts previously entered into by Clean Energy either jointly with, or onbehalf of, that company before its transfer in December 2001 by Clean Energy.These contingent liabilities are included as part of our liabilities relating toClean Energy Technologies in our consolidated balance sheet.
*Cash Position and Sources And Uses Of Cash*
Our cash and cash equivalents position as ofDecember 31, 2002 was $0, as compared to $0 and $2,122 as of December 31, 2001and December 31, 2000, respectively. Our cash and cash equivalents position forfiscal 2002 remained unchanged as the result of the offset of $399,263 in cashused in operating activities and $3,992 in cash used by investing activities by$403,255 in cash generated by financing activities. The $2,122 decrease in ourcash and cash equivalents position for fiscal 2001 was attributable to $266,473in cash used in operating activities which was partially offset by $322 in cashgenerated by investing activities and $264,029 in cash generated by financingactivities.
Our operating activities used cash in the amountof $399,263 for fiscal 2002, as compared to cash requirements of $266,473 forfiscal 2001. The $399,263 in cash used in operating activities for fiscal 2002reflected our net loss of $894,473 for that period, as decreased for non-cashdeductions and a net increase in non-cash working 

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 capital balances. The $266,473in cash used in operating activities for fiscal 2001 reflected our net loss of$812,445 for that period, as decreased for non-cash deductions and a netincrease in non-cash working capital balances.
We used cash in the amount of $3,992 in investingactivities in fiscal 2002, as compared to $322 of cash realized by investingactivities in fiscal 2001. The principal use of cash for 2002 was for patentadditions, while the principal source of cash for fiscal 2001 was from the saleof a short-term investment, partially offset by the use of cash to acquireproperty and equipment.
We realized cash in the amount of $403,255 fromfinancing activities in fiscal 2002, as compared to $264,029 of cashrealized by investing activities in fiscal 2001. The principal sources of cashfor both 2002 and 2001 were advances from related and affiliated parties.

Plan Of Operation AndProspective Capital Requirements

Our ability to continue as a going concern willbe dependent upon our entering into revenue producing contracts and raisingadditional working capital to fund these contracts, conduct addition researchand development activities through our contract with McSheahan Enterprises and fully implement our longer-term business plan and marketing strategies. Weanticipate that we will need to raise at least $850,000 to fund our projectedoperating, research and development and project costs over the next twelvemonths assuming we continue to stay our China coal project, and at least$5,000,000 in working capital (including the $850,000 noted above) to fullyimplement our business plan and marketing strategies including the acquisitionof the necessary plant, equipment and personnel to pursue our China coalproject. These estimates will be subject to significant change based upon anycontracts we may enter into and/or additional capital we may raise, includingany grant monies we receive from our proposed Alberta coal burning project grantapplication.

Our operating expenses are currently being fundedprimarily through advances made by Mr. Stinson under the terms of the promissorynote previously described. Mr. Stinson has indicated that he would be willing tocontinue to make advances on these terms for the indefinite future, should hispersonal financial situation permit it. We cannot give you any assurance thatMr. Stinson will remain in a position to fund our operations notwithstanding hisdesire to do so. We have made no binding arrangements or received bindingcommitments to obtain additional working capital as of the date of this annualreport other than the advances described above which Mr. Stinson may make.

Our intent is to raise additional working capitalto fund our ongoing capital and operational requirements in one or moreincrements through contract advances, public or private sales of debt or equitysecurities, debt financing or short-term loans, or a combination of theforegoing. We currently are in contact with, and over the past year have alsobeen in contact with, a number of financing sources, including investors,lenders and finders, relative to funding our ongoing capital requirements. Wehave not to date, however, received commitments from any of these sources onterms our board deems acceptable. Our ability to raise monies has also beenimpacted in part by poor general economic conditions and enhanced risksassociated in investing in development stage ventures

In view of our limited operating history and lackof revenues and profits to date, we cannot give you any assurance that we willbe able to secure the additional capital we require at all, or on terms whichwill not be objectionable to our company or our shareholders, includingsubstantial dilution or the sale or licensing of our technologies. Our failureor inability under these circumstances to obtain additional capital onacceptable terms or at all would have a material adverse effect on our companyand our business, which would result in our being forced to materially scaleback or even suspend our operations, or even force us to seek a merger with orto sell our business to a third party. In view of these considerations, note 1of our financial statements states that if we do not raise sufficient capitalthere is substantial doubt as to our ability to continue as a going concern.

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Other Matters
*Research and Development Expenditures*

Research and development expenditures areexpensed as incurred.
***Foreign Exchange***
We recorded a $78 foreign currency translationgain in fiscal 2002 as an administration expense recovery item on our statementsof operations and deficiency in assets in consolidating our books for financialreporting purposes as the result of the fluctuation in United States-Canadiancurrency exchange rates during that period. We cannot giveyou any assurance that our future operating results will not be similarlyadversely affected by currency exchange rate fluctuations. See that section ofthis annual report captioned "*Quantitative and Qualitative DisclosureAbout Market Risk*" for a description of other aspects of our companythat may be potentially affected by foreign exchange fluctuations.

***Effect Of Inflation***
In our view, at no time over the past threefiscal years has inflation or changing prices had an adverse material impact onour operating results.
***Critical Accounting Policies***
Our consolidated financial condition and resultsof operations are not currently subject to or impacted by any criticalaccounting policies involving areas in which subjective or complex judgments aremade with respect to methods, assumptions or estimates concerning the effect ofmatters that are inherently uncertain.
***Recent Adopted Accounting Standards***
In August 2001, the FASB issued SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. SFAS No. 144 addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets to be held and used, to be disposed of other than by sale, and to bedisposed of by sale. We adopted SFAS No. 144 in the first quarter of 2002 on aprospective basis. The adoption of SFAS No. 144 did have significant impact onour consolidated financial position or results of operations.

In June 2001, the Financial Accounting StandardsBoard ("*FASB*") introduced Statement of Financial AccountingStandards ("*SFAS*") No. 141, *Business Combinations*, andSFAS No. 142, *Goodwill and Other Intangible Assets*. SFAS No. 141addresses the initial recognition and measurement of goodwill and otherintangible assets acquired in a business combination. SFAS No. 142 addresses theinitial recognition of intangible assets acquired outside of a businesscombination whether acquired individually or with a group of other assets. Thesestandards require all future business combinations to be accounted for using thepurchase method of accounting. Goodwill will no longer be amortized but insteadwill be subject to impairment tests at least annually. We adopted SFAS No. 141on a prospective basis as of July 2001, and SFAS No. 142 in January 2002. Theadoption of SFAS No. 141 and SFAS No. 142 did not have an impact on ourconsolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections*. Among other things, SFAS No. 145 rescinds both SFASNo. 4, *Reporting Gains and Losses from Extinguishment of Debt*, and theamendment to SFAS No 4, SFAS No. 64, *Extinguishments of Debt Made to SatisfySinking-Fund Requirements*. Through this rescission, SFAS No. 145 eliminatesthe requirement (in both SFAS No. 4 and SFAS No. 64) that gains and losses fromthe extinguishment of debt be aggregated and, if material, classified as anextraordinary item, net of the related income tax effect. Generally, SFAS No.145 is effective for transactions occurring after May 15, 2002. The adoption ofSFAS No. 145 did not have a significant impact on our consolidated financialposition or results of operations.

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In October 2002, the FASB issued SFAS  No. 147, *Acquisitions of Certain Financial Institutions*.  SFAS No.  147 requires that acquisitions of financial institutions be accounted in  accordance with SFAS Nos. 141 and 142, and put any intangible asset therefrom  under the guidance of SFAS No. 144.  We adopted SFAS No. 147 in the  fourth quarter of 2002 on a prospective basis.  The adoption of SFAS No.  147 did not have a significant impact on our consolidated financial position  or results of operations.

In December 2002, the FASB issued SFASNo. 148, *Accounting for Stock Based Compensation - Transition and Disclosure*. SFAS No. 148 amends SFAS No. 123, *Accounting for Stock Based Compensation*,to provide methods of transition for a voluntary change to the fair value basedmethod of accounting for stock-based employee compensation, as well as requiringprominent disclosure about the method and effect of accounting for stock-basedcompensation.  We adopted SFAS No. 148 in the fourth quarter of 2002 on aprospective basis.  The adoption of SFAS No. 148 did not have a significantimpact on our consolidated financial position or results of operations.

***Recent Issued Accounting Standards Not YetAdopted***
In August 2001, the FASB issued SFAS No. 143, *Accountingfor Asset Retirement Obligation*. SFAS No. 143 requires entities to recordthe fair value of a liability for an asset retirement obligation in the periodin which it is a cost by increasing the carrying amount of the relatedlong-lived asset. Over time, the liability is accreted to its present value eachperiod, and the capitalized cost is depreciated over the useful life of therelated obligation for its recorded amount or incurs a gain or loss uponsettlement. SFAS No. 143 will be effective for exit or disposal activitiesinitiated after December 31, 2002. We do not anticipate that our adoption ofSFAS No. 146 will have a material impact on our consolidated financial positionor results of operations. We do not anticipate that our adoption of SFAS No.143, as required on January 1, 2003, will have a material impact on ourconsolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*. SFAS No. 146 requiresthat the liability for a cost associated with an exit or disposal activity berecognized at its fair value when the liability is incurred. Under previousguidance, a liability for certain exit costs was recognized at the date thatmanagement committed to an exit plan, which was generally before the actualliability has been incurred. SFAS No. 146 will be effective for exit or disposalactivities initiated after December 31, 2002. We do not anticipate that ouradoption of SFAS No. 146, as required on January 1, 2003, will have a materialimpact on our consolidated financial position or results of operations.
**Quantitativeand Qualitative Disclosure About Market Risk

Currency Fluctuations**
One market risk that affects our company relatesto foreign currency fluctuations between United States and Canadian dollars. Tothe extent we maintain our accounts in Canadian funds or enter into transactionsdenominated in Canadian currency, our financial position could be adverselyaffected by United States-Canadian currency fluctuations. We have not previouslyengaged in activities to mitigate the effects of foreign currency fluctuationsdue to the absence of Canadian revenues to date, and we anticipate that theexchange rate between the United States and Canadian dollar will remain fairlystable.

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

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******Interest Rate Fluctuations**
It is our policy to maintain the bulk of ouravailable cash in U.S. dollar-denominated money-market accounts. Our interestincome from these short-term investments could be adversely affected by anymaterial changes in interest rates within the United States.
**UncertaintiesAnd Risk Factors That MayAffect Our Future Results And Financial Condition**
We have described below a number of uncertaintiesand risks which, in addition to uncertainties and risks presented elsewhere inthis annual report, may adversely affect our business, operating results andfinancial condition. The uncertainties and risks enumerated below as well asthose presented elsewhere in this annual report should be considered carefullyin evaluating our company and our business and the value of our securities.
**Uncertainties and RisksGenerally Relating To Our Company And Our Business
*As a recently formed company with a limitedoperating history, we are subject to all the risks and issues inherent in theestablishment and expansion of a new business enterprise, and our failure toaddress these risks and issues will adversely affect our ability to completepending project proposals, introduce our products to the market, generaterevenues and profits, and raise additional working capital***
We have a limited operating history and have notto date introduced our products commercially to the markets or entered intobinding contracts to do so. We are, as a consequence, subject to all the risksand issues inherent in the establishment and expansion of a new businessenterprise. Our failure to successfully address these risks would adverselyaffect our ability to complete our pending project proposals and introduceburner products using our technologies onto the market and to compete, withconsequential delays in our ability to generate revenues and profits; and raiseadditional working capital.

Our activities through the date of this annualreport have been limited to completing our pending project proposals andintroduce burner products using our technologies onto the market and to compete,with consequential delays in our ability to generate revenues and profits;developing our business plan; obtaining license rights to our burnertechnologies; establishing administrative offices and laboratory facilities;engaging administrative and research and development personnel; and commencingwork on various burner proto-types under pending projects intended to lead tocommercial contracts.

Risks and issues inherent in the establishmentand expansion of a new business enterprise which we face include, among others,problems of entering new markets, marketing new technologies, hiring andtraining personnel, acquiring reliable facilities and equipment, andimplementing operational controls. In general, development stage companies aresubject to risks and or levels of risk that are often greater than thoseencountered by companies with established operations and relationships.Development stage companies often require significant capital from sources otherthan operations. The management and employees of startup business shoulder theburdens of the business operations and a workload associated with company growthand capitalization that is disproportionately greater than that for anestablished business. Our limited operating history makes it difficult, if notimpossible, to predict future operating results. We cannot give you anyassurance that we will successfully address these risks.
***We have accumulated losses since our inceptionand our continued inability to generate revenues and profits would adverselyaffect our ability to complete pending project proposals, introduce our productsto the market and raise additional working capital, and could ultimately forceus to suspend our operations and even liquidate our assets and wind-up anddissolve our company***
We are a developmental stage company since wehave not commenced commercial sales of our burner technologies and have norevenues to date. Our failure to generate revenues and ultimately profits would,in the shorter-term, adversely affect our ability to complete our pendingproject proposals and introduce burner products using our technologies onto themarket and to compete, with consequential delays in our ability to generaterevenues and profits; and raise additional 

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 working capital; and in thelonger-term, force us to suspend our operations, and possibly even liquidate ourassets and wind-up and dissolve our company. We do not anticipate that we willgenerate revenues for at least twelve months at the earliest, assuming that oneor more of our pending projects lead to a commercial contract. We have, as aresult of our lack of revenues, incurred operating losses in the amount of $3,254,148 from our inception through December 31, 2002, and we anticipate thatwe will continue to incur substantial operating losses for the foreseeablefuture, despite any revenues we may receive in the short-term from any of ourpending projects, due to the significant costs associated with the developmentand marketing of our burner technologies. We cannot give you any assurance thatwe will generate revenues or profits in the near future or at all.
***If we do not raise additional working capitalfunds to pay our operating and project expenses, we will not be able to sustainour operations, and may even be forced to liquidate our assets and wind-up anddissolve our company***
We currently have insufficient working capital tofund our projected operating and project costs for more than one month. Ourinability to raise sufficient additional working capital in the near futurewould likely force us to suspend our operations, and possibly even liquidate ourassets and wind-up and dissolve our company. Our operating expenses arecurrently being primarily funded for the indefinite future through advances madeby one of our principal shareholders. We cannot give you any assurance that suchshareholder will remain in a position to fund our operations notwithstanding hisdesire to do so. We anticipate that we will need to raise at least $850,000 tofund our projected operating and project costs over the next twelve months, andat least $5,000,000, including the $850,000 noted above, in additional workingcapital to fully implement our longer-term business plan and marketingstrategies. We have no current arrangements for obtaining this additionalcapital other than our current relationship with the noted shareholder, and willseek to raise this amount in one or more increments through contract advances,public or private sales of debt or equity securities, debt financing orshort-term loans, or a combination of the foregoing. We cannot give you anyassurance that we will be able to secure the additional capital we require tocontinue our operation at all, or on terms which will not be objectionable toour company or our shareholders, including substantial dilution or the sale orlicensing of our technologies. Explanatory note 1 to our financial statementsstates that if we do not raise sufficient capital there is a substantial doubtas to our ability to continue as a going concern. Our independent auditorsexpressed a going concern opinion in their report accompanying our financialstatements for the fiscal year ended December 31, 2002.
***We have not entered into any revenue-generatingcontracts to date, and our failure to enter into revenue-generating contractswould force us to suspend our operations, and possibly even liquidate our assetsand wind-up and dissolve our company***
Although we are working on proto-types underseveral pending projects, we have not entered into any revenue-generatingcontracts to date, and our ability to do so will be dependent in primary partupon our ability to satisfactorily complete the proto-types, to raise sufficientcapital to fund these efforts, and to otherwise successfully implement ourvarious market strategies under our business plan. Our failure to enter into anyrevenue-generating contracts would, in the shorter-term, adversely affect ourability to complete other pending project proposals and introduce burnerproducts using our technologies onto the market and to compete, withconsequential delays in our ability to generate revenues and profits; and raiseadditional working capital; and in the longer-term, force us to suspend ouroperations, and possibly even liquidate our assets and wind-up and dissolve ourcompany unless we are otherwise able to raise sufficient working capital to fundour continuing operations until we enter into revenue-generating contracts inthe farther future. Even if we enter into revenue-generating contracts, wecannot give you any assurance that we will attain or sustain operatingprofitability as a result of these contracts.

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*******Our burner products are based upon burnertechnologies that are new and unique, and the failure of these products toachieve or sustain market acceptance would likely force us to suspend ouroperations, liquidate our assets, and wind-up and dissolve our company***
The failure of our burner products to achieve orsustain market acceptance would likely force us to suspend our operations,liquidate our assets, and wind-up and dissolve our company. Products using ourburner technologies must compete with established conventional steady-stateburner technologies and conventional "tubular" pulse combustiontechnologies which have already achieved market acceptance. The design for ourburner technologies is new and unique, and no products based upon ourtechnologies and configurations have been commercially produced or sold to date,either by our company or by any of our competitors. Additionally, although thereis a market for pulse combustion burner products using differently configuredpulse burner technology designs, these products are not widely accepted by themarket, and therefore not particularly useful as a precedent for theintroduction of our pulse combustion burner technology. As is typical in thecase of any new technology, demand and market acceptance for products based uponnew technologies are subject to a high level of uncertainty and risk, including the risk that the marketplace may notaccept, or be receptive to, the potential benefits of these new products. Theextent and pace of market acceptance of new burner products based upon ourburner technologies will ultimately be a function of many variables, includingthe efficacy, performance and attributes of these new products; the ability toobtain necessary regulatory approvals to commercially market these new products;the effectiveness of marketing and sales efforts, including educating potentialcustomers as to the distinctive characteristics and benefits of these newproducts; and the ability to meet manufacturing and delivery schedules; andproduct pricing. The extent and pace of market acceptance of products based uponour burner technologies will also depend upon general economic conditionsaffecting customers' purchasing patterns. Because the market for our burnertechnologies is new and evolving, it is difficult, if not impossible, to predictthe future growth rate, and the size of the potential market. We cannot give youany assurance that a market for our burner technologies will develop or, ifdeveloped, will be sustainable.
***Our inability to develop our sales, marketing anddistribution capabilities either internally or through strategic partners orthird party marketing and distribution companies would adversely affect ourability to introduce our products to the market, generate revenues and profits,and raise additional working capital, and may even force us to suspend ouroperations and possibly even liquidate our assets and wind-up and dissolve ourcompany***
We currently have no internal sales, marketingand distribution capabilities, and will likely be forced to rely extensively onstrategic partners or third party marketing and distribution companies. Ourfailure to generate substantial sales through any strategic partners ordistribution arrangements we procure or to otherwise develop our own internalsales, marketing and distribution capabilities would, in the shorter-term,adversely affect our ability to introduce burner products using our technologiesonto the market and to compete, with consequential delays in our ability togenerate revenues and profits; and raise additional working capital; and in thelonger-term, force us to suspend our operations, and possibly even liquidate ourassets and wind-up and dissolve our company.

As a consequence of our prospective reliance uponstrategic partners or third party marketing and distribution partners, ourability to effectively market and distribute our burner products will bedependent in large part on the strength and financial condition of others, theexpertise and relationships of our strategic partners or distributors andmarketers with customers, and the interest of these parties in selling andmarketing our products. Our prospective strategic partners and marketing anddistribution parties may also market and distribute the products of othercompanies. If our relationships with any strategic partners or third partymarketing and distribution partners were to terminate, we would need to eitherdevelop alternative relationships or develop our own internal sales andmarketing forces to continue to sell our products. Even if we are able todevelop our internal sales, marketing and distribution capabilities, theseefforts would require significant cash and other resources that would bediverted from other uses, if available at all, and could cause delays orinterruptions in our product supply to customers, which could result in the lossof significant sales or customers. We can give you no assurance that we will besuccessful in our efforts to engage strategic partners or third party marketingand distribution companies to meet our sales, marketing and distributionrequirements.

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*******Our strategic partners'*or third partysuppliers*'*failure to satisfy our manufacturing requirements wouldadversely affect our ability to introduce our products to the market, generaterevenues and profits, and raise additional working capital, and may even forceus to suspend our operations and possibly even liquidate our assets and wind-upand dissolve our company*
We currently have no internal manufacturingcapability, and will likely be forced to rely extensively on strategic partnersor third party contract manufacturers or suppliers. A delay or interruption inthe supply of components or finished products would, in the shorter-term,adversely affect our ability to introduce burner products using our technologiesonto the market and to compete, with consequential delays in our ability togenerate revenues and profits; and raise additional working capital; and in thelonger-term, force us to suspend our operations, and possibly even liquidate ourassets and wind-up and dissolve our company. Should we be forced to manufactureour burner products, we cannot give you any assurance that we will be able todevelop or internal manufacturing capability or procure third party suppliers.Moreover, we cannot give you any assurance that any contract manufacturers orsuppliers we procure will be able to supply our product in a timely or costeffective manner or in accordance with applicable regulatory requirements or ourspecifications.

***Our inability to increase the amount of financialresources for our research and development requirements would adversely affectour ability to introduce our products to the market and to generate revenues andprofits***
Due to the early developmental stage of ourbusiness, we have expended only limited amounts on research and development ofour burner products to date, including development of project proto-types, andcurrently have very limited resources to devote to future research anddevelopment. Unless we are able to obtain and devote resources to our researchand development efforts, including project proto-types, we may only be able todevelop limited product offerings in the future and our ability to procurecontracts or otherwise achieve market acceptance for our burner products will belimited. As a result, we may fail to achieve significant growth in revenues orprofitability in the future.
***Our inability to achieve or sustain marketacceptance for our burner products as a consequence of the intense competitionthat is prevalent in the conventional burner industry would likely force us tosuspend our operations, liquidate our assets, and wind-up and dissolve ourcompany***
Products based upon our burner technologies willface intense domestic and foreign competition in all markets in which they areintroduced from conventional products and technologies already being sold inthese markets. The failure of our burner products to achieve or sustain marketacceptance would likely force us to suspend our operations, liquidate ourassets, and wind-up and dissolve our company. Additionally, many of ourprospective competitors have significantly greater financial, technical andmarketing resources and trade name recognition than ours, which may enable themto successfully develop and market products based on technologies or approachessimilar to ours, or develop products based on other technologies or approacheswhich are, or may be, competitive with our burner technologies. The developmentby our competitors new or improved products, processes or technologies may makeour burner technologies less competitive or obsolete. We will be required todevote significant financial and other resources to continue to develop ourburner technologies in view of potential competition. We cannot give you anyassurance that we will be able to initially penetrate or compete successfullywithin the heat transfer industry.
***Our inability to retain our key managerial andresearch and development personnel would adversely affect our ability tointroduce our products to the market, generate revenues and profits, and raiseadditional working capital, and may even force us to suspend our operations andpossibly even liquidate our assets and wind-up and dissolve our company***
Our success depends to a significant extent onthe continued efforts of our research and development and senior managementteam, which currently is composed of a small number of individuals. The loss ofany of these personnel could, in the shorter-term, adversely affect our abilityto complete our pending project proposals and introduce burner products usingour technologies onto the market and to compete, with consequential delays inour ability to generate revenues and profits; 

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****
 and raise additional workingcapital; and in the longer-term, if not satisfactorily replaced, force us tosuspend our operations, and possibly even liquidate our assets and wind-up anddissolve our company. Although some of our research and development and seniormanagement team have signed research and development or management servicesagreements, we cannot give you any assurance that one or more of these employeeswill not leave our company. We also do not carry key person life insurance onany of our key management personnel.
***Our inability to attract the qualified personnelengineering, managerial, sales and marketing and administrative personnelrequired to implement our growth strategies would impede our growth***
Our ability to implement our growth strategieswill be dependent upon our continuing ability to attract and retain highlyqualified engineering, managerial, sales and marketing and administrativepersonnel. Our inability to attract and retain the necessary personnel wouldimpede our growth*.*Competition for the type of personnel we require isintense and we cannot give you any assurance that we will be able to retain ourkey managerial and technical employees, or that we will be able to attract andretain additional highly qualified managerial and technical personnel in thefuture.

***Our inability to effectively manage our growthwould adversely affect our ability to introduce our products to the market,generate revenues and profits, and raise additional working capital***
Our success will depend upon the rapid expansionof our business. Our inability to effectively manage our growth, or the failureof our new personnel to achieve anticipated performance levels, would adverselyaffect our ability to complete our pending project proposals and introduceburner products using our technologies onto the market and to compete, withconsequential delays in our ability to generate revenues and profits; and raiseadditional working capital. Expansion will place a significant strain on ourfinancial, management and other resources, and will require us, among otherthings, to change, expand and improve our operating, managerial and financialsystems and controls; improve he coordination between our various corporatefunctions; and hire additional engineering, sales and marketing, customerservice and managerial personnel. We cannot give you any assurance that ourefforts to hiring or retain these personnel will be successful, or that we willbe able to manage the expansion of our business effectively.
***Our inability to protect our patents andproprietary rights would force us to suspend our operations and possibly evenliquidate our assets and wind-up and dissolve our company***
Our ability to compete effectively will bematerially dependent upon the proprietary nature of our designs, processes,technologies and materials. The invalidation or circumvention of key patents orproprietary rights which we own or license would likely force us to suspend ouroperations, liquidate our assets, and wind-up and dissolve our company.

Although we protect our proprietary property,technologies and processes through a combination of patent law, trade secretsand non-disclosure agreements, we cannot give you any assurance that thesemeasures will prove to be effective. For example, in the case of patents, wecannot give you any assurance that our or our licensors' existing patents willnot be invalidated, that any patents that we or our licensors' currently orprospectively apply for will be granted, or that any of these patents willultimately provide significant commercial benefits. Moreover, it is possiblethat competing companies may circumvent any patents that we or our licensors mayhold by developing products which closely emulate but do not infringe our or ourthese patents, and accordingly market products that compete with our productswithout obtaining a license from us. In addition to patented or potentiallypatentable designs, technologies, processes and materials, we also rely onproprietary designs, technologies, processes and know-how not eligible forpatent protection. We cannot give you any assurance that our competitors willnot independently develop the same or superior designs, technologies, processesand know-how as we possess.

-34-
****
We believe that the international market for ourproducts and technologies is as important as the domestic market, and we willtherefore seek patent protection for our products and technologies or those ofour licensors in selected foreign countries. Because of the differences inforeign patent and other laws concerning proprietary rights, our products andtechnologies may not receive the same degree of protection in a number offoreign countries as they would in the United States.

We cannot give you any assurance that we will beable to successfully defend our patents and proprietary rights. We also cannotgive you any assurance that we will not be required to defend against litigationinvolving the patents or proprietary rights of others, or that we will be ableto obtain licenses for these rights. Legal and accounting costs relating toprosecuting or defending patent infringement litigation may be substantial.
***Our revenues and profits may be adverselyaffected by currency fluctuation, regulatory, political and other risksassociated with international transactions***
We intend to sell our products and technologiesinternationally as well as to the United States and within Canada. This willsubject us to various risks associated with international transactions that mayadversely effect our results of operations, including risks associated withfluctuating exchange rates, the regulation by the governments of the UnitedStates and Canada as well as foreign governments of fund transfers and exportand import duties and tariffs; and political instability. We do not currentlyengage 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. Ifearnings from international operations increase, our exposure to fluctuations inforeign currencies may increase, and we may utilize forward exchange ratecontracts or engage in other efforts to mitigate foreign currency risks. We cangive no you assurance as to the effectiveness of these efforts in limiting anyadverse effects of foreign currency fluctuations on our international operationsand our overall results of operations.
***You may not be able to effect service of processupon or enforce a judgment against Clean Energy and its executive officers ordirectors***
Since Clean Energy's principal executive officesare located in the province of British Columbia, Canada, and our executiveofficers and all but one of our directors are resident of countries outside ofthe United States, it may not be possible for you to effect service of processupon, or enforce a judgment against, Clean Energy or our executive officers ordirectors, with respect to any civil actions predicated on the civil liabilityprovisions of United States federal or state securities legislation that you mayfile in the federal or state courts of the United States or any resultantjudgments you obtain in those courts.
**Risks Relating to OurSecurities
*There is only a limited public market for thecommon shares on the OTC Bulletin Board and that market is extremely volatile***
There is only a limited public market for thecommon shares on the OTC Bulletin Board, and we cannot give you any assurancethat a broader or more active public trading market for the common shares willdevelop or be sustained, or that current trading levels will be sustained.

The market price for the common shares on the OTCBulletin Board has been and we anticipate will continue to be extremely volatileand subject to significant price and volume fluctuations in response to avariety of external and internal factors. This is especially true with respectto emerging companies such as ours. Examples of external factors, which cangenerally be described as factors that are unrelated to the operatingperformance or financial condition of any particular company, include changes ininterest rates and worldwide economic and market conditions and trends, as wellas changes in industry conditions, such as changes in the cost of components andenergy, regulatory and environment rules, announcements of technologyinnovations or new products by other companies, and quarterly 

-35-
****
 fluctuation in ouror in our competitors' operating results. Examples of internal factors, whichcan generally be described as factors that are directly related to our operatingperformance or financial condition, would include release of reports bysecurities analysts and announcements we may make from time-to-time relative toour ability to enter into contracts or other arrangement, our operatingperformance, advances in our technology or other business developments specificto our company.

Because we are a development stage enterprisewith a limited operating history and no revenues or profits to date, the marketprice for the common shares is more volatile than that of a seasoned issuer.Changes in the market price of the common shares, for example, may have noconnection with our operating results, financial condition or prospects. Nopredictions or projections can be made as to what the prevailing market pricefor the common shares will be at any time, or as to what effect, if any, thatthe sale of shares or the availability of common shares for sale at any timewill have on the prevailing market price.

Sales of substantial amounts of the common shareson the public market, or the perception that substantial sales could occur,could adversely affect the prevailing market prices for those shares and also,to the extent the prevailing market price for the common shares is reduced,adversely impact our ability to raise additional capital in the equity markets.In addition, employees, directors and consultants of Clean Energy currently holdvested options entitling them to acquire 370,000 common shares. Should thesepersons exercise these options, it is likely they would sell some or all of theunderlying common shares on the public markets in order to procure liquidity topay taxes as well as other reasons they may deem pertinent.

***You will be subject to the penny stock rules tothe extent our stock price on the OTC Bulletin Board is less than $5***
Since the common shares are not listed on anational stock exchange or quoted on the Nasdaq Market within the United States,trading in the common shares on the OTC Electronic Bulletin Board is subject, tothe extent the market price for the common shares is less than $5 per share, toa number of regulations known as the "penny stock rules". The pennystock rules require a broker-dealer to deliver a standardized risk disclosuredocument prepared by the SEC, to provide the customer with additionalinformation including current bid and offer quotations for the penny stock, thecompensation of the broker-dealer and its salesperson in the transaction,monthly account statements showing the market value of each penny stock held inthe customer's account, and to make a special written determination that thepenny stock is a suitable investment for the purchaser and receive thepurchaser's written agreement to the transaction. To the extent theserequirements may be applicable they will reduce the level of trading activity inthe secondary market for the common shares and may severely and adversely affectthe ability of broker-dealers to sell the common shares.
***You should not expect to receive a liquidationdistribution***
If you hold common shares and were we to wind-upand dissolve our company and liquidate and distribute our assets, you wouldshare ratably with our other common shareholders in our assets only after wesatisfy any amounts we would owe to our creditors and to our preferredshareholders as a liquidation preference. If our liquidation were attributableto our inability to profitably operate our business, then it is likely that wewould have material liabilities at the time of liquidation or dissolution. Wecannot give you any assurance that sufficient assets will remain available afterthe payment of our creditors and preferred shareholders to enable you to receiveany liquidation distribution with respect to any common shares or othersecurities of our company you may hold.
***Our current principal shareholders will continueto control our company, and will accordingly retain the power to substantiallyinfluence corporate actions that conflict with the interests of publicshareholders***
Our present executive officers and directorswill, as a group, hold approximately 51% of our common shares and, asconsequence, hold the power to substantially influence corporate actions thatconflict with the interests of our public shareholders, including our businessexpansion or acquisition policies; whether we should raise additional capitalthrough financing or equity sources, and in what amounts; whether we shouldretain cash reserves for future product development, or distribute them as adividend, and in what amounts; whether we should sell all or a substantialportion of our assets, or should merge or consolidate with another corporation;and transactions which may cause or prevent a change in control or thewinding-up and dissolution of our company.

-36-
****
While our series 'A' preferred shareholdersgenerally do not have the right to vote, we cannot effectuate any of thefollowing transactions or actions without their consent and approval: thedeclaration or payment of any dividend (other than a stock split) to our commonor preferred shareholders; the redemption or purchase of common or preferredshares; the sale of our principal assets or business; a merger or consolidationof our company with any other company; the liquidation or dissolution of ourcompany, the assignment of our assets to our creditors, or a filing forbankruptcy by our company.

An investment in our common shares or othersecurities will entail you entrusting these and similar decisions to our presentmanagement and principal shareholders subject, of course, to their fiduciaryduties and the business judgment rule.
***Our right to issue additional capital stock atany time could have an adverse effect on your proportionate ownership and votingrights***
Our Certificate of Incorporation currentlyauthorizes us to issue 15,000,000 common shares, and 2,000,000 preferred shares,including 248,999 serial or "blank check" preferred shares that willcontain rights, preferences and privileges to be prospectively fixed by ourboard of directors at the time of issuance-without shareholder consent orapproval-based upon any factors our board of directors may deem relevant at thattime. Our board of directors and shareholders have also recently approved anincrease in our authorized capital to 25,000,000 common shares. It is likelythat we will be required to issue a large amount of additional securities toraise capital to further our development and marketing plans, particularly ourcoal project. If you are a common shareholder, your proportionate ownership andvoting rights could be adversely effected by the issuance of additional common,series 'C' convertible or "blank check" preferred shares, depending ontheir rights, preferences and privileges, including a substantial dilution inyour net tangible book value per share. We cannot give you any assurance that wewill not issue shares of capital stock under circumstances we may deemappropriate at the time.

***A third party acquisition of our company would bedifficult due to***"***anti-takeover***"***provisions contained in our charter documents and provided for under Delawarecorporate law***
Some of the provisions contained in our charterdocuments and Delaware corporate law may discourage transactions involving anactual or potential change in control of our company, and may limit the abilityof our shareholders to approve these transactions should they deem them to be intheir best interests. For example, our Certificate of Incorporation and Bylawsreserve the right to fill any vacancies in any Non-Series A Director positionsexclusively to our Board of Directors; stipulate that our Non-Series A Directorscan only be removed for cause; require any action to be taken by our common andseries 'B' preferred shareholders to be effected at a duly called annual orspecial meeting of those shareholders, and prohibit those shareholders fromeffecting any action by written consent unless approved by a two-thirdsaffirmative vote of their shares; reserve the right to call special meetings ofour common and series 'B' preferred shareholders exclusively to our Board ofDirectors and designated executive officers; and require any amendments to thepreceding provisions to be approved by a two-thirds affirmative vote of ourshareholders.

We are also subject to Section 203 of theDelaware General Corporation Law which generally prohibits a Delawarecorporation from engaging in any of a broad range of business combinations withany ''interested shareholder'' for a period of three years following the datethat shareholder became an interested shareholder.

Our Board of Directors also has the authority tofix the rights and preferences of and issue our "blank check"preferred shares without the approval of our common shareholder and, in somecases, our series 'B' and series 'C' preferred shareholders. Any "blankcheck" preferred shares we issue could also be utilized as a method forraising additional capital or discouraging, delaying or preventing a change incontrol of our company. We cannot give you any assurance that we will not issue"blank check" preferred shares under circumstances we may deemappropriate at the time.

-37-
******ConsolidatedFinancial Statements And Supplementary Data**
Our consolidatedfinancial statements and the report of our independent auditors are filed in aseparate section at the end of this annual report.

**ChangesIn And Disagreements With AccountantsOn Accounting And Financial Disclosure**
On March 21, 2003, our board replaced Deloitte& Touche LLP ("*Deloitte & Touche*") as our independentaccountants with Staley, Okada & Partners ("*Staley Okada*").The change in accountants was instituted solely for cost savings considerations.

Deloitte & Touche audited our consolidatedfinancial statements for our two fiscal years ended December 31, 2001, and itsreport accompanying the audit for these fiscal years was not qualified ormodified as to audit scope or accounting principles and did not contain anadverse opinion or disclaimer of opinion. During these two fiscal years and alsoduring the subsequent period through the date of Deloitte & Touche'sreplacement, there were: (1) no disagreements between Clean Energy and Deloitte& Touche on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure; (2) no reportable eventsas such term is defined in Regulation 229.304(a)(1)(v); and (3) no mattersidentified by Deloitte & Touche involving our internal control structure oroperations which was considered to be material weakness.

During our two most recent fiscal years endedDecember 31, 2001, and also during the subsequent interim period through thedate of Deloitte & Touche's resignation, Clean Energy did not consult withStaley Okada regarding the application of accounting principles to a specifiedtransaction, either completed or proposed, or the type of opinion that might berendered regarding our financial statements, nor did we consult with StaleyOkada with respect to any accounting disagreement or any reportable event at anytime prior to the appointment of that firm.
**DirectorsAnd Executive Officers**
Information relating to our directors andexecutive officers required under the rules of the SEC will be contained in ourdefinitive proxy statement to be distributed later this year in advance of ourAnnual Meeting of Shareholders and, pursuant to those rules, that information ishereby incorporated into this annual report by reference.
**ExecutiveCompensation**
Information relating to executive compensationrequired under the rules of the SEC will be contained in our definitive proxystatement to be distributed later this year in advance of our Annual Meeting ofShareholders and, pursuant to those rules, that information is herebyincorporated into this annual report by reference.
**OwnershipOf Our Securities by Beneficial Owners And Management**
Information relating to the ownership of oursecurities by beneficial owners and our management required under the rules ofthe SEC will be contained in our definitive proxy statement to be distributedlater this year in advance of our Annual Meeting of Shareholders and, pursuantto those rules, that information is hereby incorporated into this annual reportby reference.

-38-
******CertainRelationships And Related Transactions**
Information relating to certain relationships andrelated transactions involving our beneficial owners, management and agentsrequired under the rules of the SEC will be contained in our definitive proxystatement to be distributed later this year in advance of our Annual Meeting ofShareholders and, pursuant to those rules, that information is herebyincorporated into this annual report by reference.
**ControlsAnd Procedures**
Within the ninety days prior to the filing dateof this report, our President and Chief Financial Officer, in consultation withour other members of management and advisors as appropriate, carried out anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Rule 13a-14 promulgated under the United States Securities ExchangeAct of 1934. Based upon that evaluation, our President and Chief FinancialOfficer concluded that, as of the date of the evaluation, our disclosurecontrols and procedures are effective in making known to them on a timely basismaterial information relating to our company (including consolidatedsubsidiaries) required to be included in this report. There were no significantchanges in our internal controls or in other factors that could significantlyaffect these controls, known to our President or Chief Financial Officer,subsequent to the date of the evaluation, including any significant deficienciesor 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-1

Independent Auditors Report (Deloitte & Touche LLP)

F-2

Consolidated Balance Sheets at December 31, 2002 and 2001

F-3

Consolidated Statements of Operations for the twelve-month periods        ended December 31, 2002, December 31, 2001 and December 31, 2000

F-4

Consolidated Statements of Capital Deficiency from inception (March        1, 1999) through December 31, 2002

F-5

Consolidated Statements of Cash Flows for the twelve-month periods        ended December 31, 2002, December 31, 2001 and December 31, 2000

F-6

Notes 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 Consent

Schedules 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

-39-**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 (2)

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

Founding Shareholders Agreement dated March 5, 1999 (1)

4.5

1999 Clean Energy Technologies, Inc. Stock Plan adopted on March 5,        1999 (as restated to reflect corporate name change) (1)
4.6
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)

4.7

Series B Preferred Stock Purchase Agreement dated April 6, 1999 (1)

4.8

Investor Relations and Stock Marketing Advisory Services Agreement        dated April 1, 1999, with ABCE Enterprises, Inc. (1)

5

Opinion of legal counsel regarding legality of original issuance of        securities being registered****(2)

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

Founding Shareholders Agreement dated March 5, 1999 (see exhibit 4.4)        (1)

10.4

Employment Agreement dated March 5, 1999, with John D. Chato (1)

10.5

Employment Agreement dated March 5, 1999, with John P. Thuot (1)

10.6

Employment Agreement dated March 5, 1999, with Barry A. Sheahan (1)

10.7

Employment Agreement dated March 5, 1999, with James V. DeFina (1)

10.8

Promissory Note dated August 10, 1999 in the principal amount of        $50,000 between Clean Energy Combustion Systems, Inc., as maker, and R.        Dirk Stinson, as holder (2)

10.9

Letter Agreement dated July 27, 2000 with The Rowe Group (3)

10.10

Letter of Intent dated January 15, 2001 with Jie Li International        Environmental Technologies Group Ltd. (3)

-40-****
10.11

Letter of Intent dated May 31, 2000 with the Brownridge Group(5)

10.12

Letter Agreement dated March 20, 2001 with 818879 Alberta Ltd. (3)

23.1

Consent of Independent Auditors (Staley, Okada & Partners)

23.2

Consent of Independent Auditors (Deloitte & Touche LLP)

24

Power of attorney

99.1

Certification of CEO Pursuant to Section 906 of the        Sarbanes-Oxley Act

99.2

Certification of CFO Pursuant to Section 906 of the        Sarbanes-Oxley Act
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)
-  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  
Previously filed by      our company as an exhibit to our annual report on form 10-K for our fiscal      year ended December 31, 2000 as filed on April 13, 2001
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
- 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
** -41-
*** 

 

 

 

 

 

 

Independent Auditors'*Report and Consolidated Financial Statements of:*
 

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(A Development Stage Enterprise)

 
*December 31, 2002*
 

 

 

 

 

 

 

Independent  Auditors' Report

 
**MSI

Staley, Okada          & Partners          Chartered Accountants

3rd Floor,          10190 152A Street          Surrey, BC Canada          V3R 1J7          Phone: (604) 585-8300          Fax: (604) 585-8377          info@staleyokada.com          www.staleyokada.com

To the Shareholders ofClean Energy Combustion Systems, Inc.:

We have audited the consolidated balancesheet of Clean Energy Combustion Systems, Inc. (a development stage  enterprise) as at 31 December 2002 and the consolidated statements of  operations, capital deficiency and cash flows for the year then ended. The prior figures, including the cumulative amounts from1 January1999, commencement of the development stage, to 31 December 2002, which are presentedfor comparative purposes, were audited by another firm of Chartered Accountants,who issued an unqualified audit opinion dated 14 February 2002. These financial statements are the responsibility of thecompany'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 at31 December 2002 and the results of its operations and it's  cash flows for the year then ended in accordance with  accounting principles generally accepted in the United States of America.
The accompanying financial statements for the  year ended 31 December2002 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.Surrey, British Columbia, Canada12 March 2003
/s/ Staley, Okada & Partners      Chartered Accountants** 

IndependentAuditors' Report

   

Deloitte & Touche LLP          P.O. Box 49279          Four Bentall Centre          2100 - 1055 Dunsmuir Street          Vancouver, British Columbia          V7X 1P4

Tel: (604) 669- 4466          Fax: (604) 685- 0395          www.deloitte.ca

To the Shareholders of

Clean Energy Combustion Systems, Inc.

We have audited the consolidated balance sheetsof Clean Energy Combustion Systems, Inc. (a development stage enterprise) as atDecember 31, 2001 and 2000 and the consolidated statements of operations,capital deficiency and cash flows for the years then ended and for the periodJanuary 1, 1999, commencement of the development stage, to December 31, 2001.These financial statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements basedon our audits.

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

In our opinion, these consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company as at December 31, 2001 and 2000 and the results of its operationsand it's cash flows for the years then ended and for the period January 1, 1999,commencement of the development stage, to December 31, 2001 in accordance withaccounting principles generally accepted in the United States of America.

The accompanying financial statements for theyear ended December 31, 2001 have been prepared assuming that the Company willcontinue 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 raisesubstantial doubt about its ability to continue as a going concern. Management'splans concerning these matters are also described in note 1. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

/s/  Deloitte & Touche LLP

Chartered Accountants  Vancouver, British Columbia, Canada

February 14, 2002 (except note 15 which  is dated March ___, 2003)
** 

CLEANENERGY COMBUSTION SYSTEMS, INC.(a development stage enterprise)(expressed in U.S. dollars)CONSOLIDATED BALANCE SHEETS

 
**As at December 31
**2002
**2001
**ASSETS
  
CURRENT
   
Prepaid expenses
**$                           2,873** **

$     **                           -       **
Total current assets
**2,873 

- 

ADVANCES TO AN      AFFILIATED COMPANY (note 3)
**427,543 

370,716 

PATENTS
**39,327 

35,335 

TOTAL ASSETS
**$                    469,743 

$                     406,051 
**LIABILITIES
  
CURRENT
   
Accounts payable
**$                    316,948 

$                       84,498 
 
Accrued expenses (including      accrued interest of $3,123 as of      December 31, 2002 and $8,084 as of December 31, 2001-note 4)
**48,123 

      8,084 
 
Advances from      related parties (note 4)
**52,697 

190,729 
  
Total current liabilities
**417,768 

283,311 

PROVISIONS AND LIABILITIES      RELATED TO TRANSFER      OF OWNERSHIP OF SUBSIDIARY (note 3)
**468,177 

      659,403 

TOTAL LIABILITIES AND PROVISIONS
**885,945 

942,714 

Going concern (note 1)
  
Commitments and contingencies      (note 11)
  **CAPITAL DEFICIENCY
  
Authorized (note 5):
   
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 (note 5):
   
Series 'A' convertible preferred      stock;        Liquidation preference $1 per      share, or $1,000 total;  1,000      shares issued and outstanding as of December 31, 2002 and December 31,      2001**1 

      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, 2002  and      250,001 shares outstanding as at December 31, 2001**242 

      250 
 
Common stock; 11,407,269 shares      issued and outstanding as of December 31, 2002         and      10,131,694 shares outstanding as of December 31, 2001**1,141 

1,013 

Additional      paid-in capital
**2,836,562 

1,821,748 

Deficiency      accumulated during the development stage
**(3,254,148)

(2,359,675)

TOTAL CAPITAL      DEFICIENCY
**(416,202)

(536,663)

TOTAL LIABILITIES      AND CAPITAL DEFICIENCY
**$                    469,743 

$                     406,051 

The accompanying notesto consolidated financial statementsare 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, 2002          (Cumulative)
 **2002
**2001
**2000

ADMINISTRATION AND MARKETING          EXPENSES
     
Accounting
**$                    10,586** **

$                     34,155 

$                     12,334

$                       79,151
 
Administrative wages,          benefits and contract fees
**110,333** **

148,994 

183,388

600,226
 
Amortization

-

15,297 

20,929

45,027

Communications
**6,648** **

15,547 

7,063

36,959
 
Foreign exchange (gain) loss
**(78)

(17,108)

(18,897)

(27,498)
 
Interest
**46,134** **

17,198 

20,797

89,990
 
Legal and patent maintenance
**201,328** **

45,412 

39,250

355,440
 
Marketing
**55,320** **

73,807 

139,048

347,366
 
Occupancy

-

31,841

36,768

99,829
 
Office and miscellaneous
**7,755** **

21,154 

58,447

102,937
 
Professional fees

-

9,240 

6,732

15,972
 
Transfer agent fees
**1,429** **

19,902 

1,590

35,311
  
Total administration and          marketing
**439,455** **

415,439

507,449

1,780,710

RESEARCH AND DEVELOPMENT          EXPENSES
     
Wages and other direct costs
**364,868

290,596

281,321

1,133,207
 
Overhead
**90,150

106,410

119,056

340,231
  
Total research and          development
**455,018

397,006

400,377

1,473,438**
TOTAL EXPENSES AND NET LOSS          FOR THE PERIOD
****$               (894,473)**
$                (812,445)

$                (907,826)

$               (3,254,148)
****
BASIC AND DILUTED NET LOSS          PER SHARE OF COMMON STOCK (note 2)
****$                      (0.0**9)**

$                      (0.09)

$                      (0.09)
** 
WEIGHTED AVERAGE SHARES OF          COMMON STOCK OUTSTANDING
****10,139,184**
10,131,694

10,131,694
** **
The accompanying notesto consolidated financial statementsare 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          During          The Development Stage
**Shares
**Amount
**Shares
**Amount
**Shares
**Amount
**Period
**Cumulative

Issued on incorporation

1,000

$                     1

-

$                        -

9,643,750

$                   964

$                       535

$                           -

$                   1,500

Private placement

-

-

250,001

250

-

-

499,752

-

500,002**
Vesting of previously issued          but unexercisedwarrants        granted   to        consultant (note 7)
-

-

-

-

-

-

2,000

-

2,000

Net 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           unexercisedwarrants        granted    to        consultant (note 7)
        -

        -

        -

        -

        -

        -

        18,500

        -

        18,500

Issued on conversion of        promissory                  note
-

-

-

-

487,944

49

975,838

-

975,887

Net 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           unexercisedwarrants        granted    to        consultant (note 7)
        -

        -

        -

        -

        -

        -

        30,601

        -

        30,601

Disposition of subsidiary (note        3)

-

-

-

-

-

-

294,522

-

294,522

Net 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           preferredstock        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

-

823,708

Reduction of provision for        liability           related to transfer of subsidiary           (note 3)

-

-

-

-

-

-

191,226
 
-

191,226

Net 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)

The accompanying notesto consolidated financial statements arean 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, 2002**(Cumulative)**
 **2002
**2001
**2000

OPERATING ACTIVITIES
     
Total expenses and net loss
**$ **               (894,473)**

$            (812,445)

$   **      (907,826)**
$      (3,062,922)
 
Adjustments to reconcile total    expenses and net loss to    net cash utilized in operating activities:
      
Amortization

**-**

15,297

20,929

45,027
  
Non-cash consulting expense

**-**

30,601

18,500

51,101
 
Change in operating assets and    liabilities:
      
Accounts receivable and prepaid    expenses
**(2,873)

13,803

(10,861)

(21,192)
  
Accounts payable
**407,400

377,089

168,521

976,307
  
Accrued liabilities
**90,683

136,475

(8,124)

230,492
  
Payroll taxes

**-**

(27,293)

15,673

-

Net cash used in operating    activities
**(399,263)

(266,473)

(703,188)

(1,972,413)

INVESTING ACTIVITIES
     
Proceeds from sale of short-term    investment

**-**

13,338

(3,338)

-

Additions to patents
**(3,992)

(10,160)

(13,748)

(39,327)
 
Purchase of property and equipment

**-**

(805)

(39,756)

(92,791)

Net cash provided by (used in)    investing activities
**(3,992)

322

(56,842)

(132,118)

FINANCING ACTIVITIES
     
Advances from (to) an affiliated    company
**32,136

2,977

1,696

(15,705)
 
Advances from (to) shareholders    (note 4)

**-**

261,052

(228,556)

273,779
 
Advances from (to) related parties
**371,119

-

(13,289)

371,119
 
Net proceeds from disposal of    subsidiary

**-**

(2,051)

-

(2,051)
 
Proceeds from issue of common stock

**-**

-

975,887

976,887
 
Proceeds from issue of series 'A'    convertible preferred stock

**-**

-

-

500
 
Proceeds from issue of series 'B'    convertible preferred stock

**-**

-

-

500,002

Net cash provided by financing    activities
**403,255

264,029

735,738

2,104,531
**NET DECREASE IN CASH AND CASH    EQUIVALENTS

**-**

(2,122)

(24,292)

-
**CASH AND CASH EQUIVALENTS,    BEGINNING OF PERIOD

**-**

2,122

26,414

-
**CASH AND CASH EQUIVALENTS, END OF    PERIOD
**$                        -

$                      -

$                2,122

$                       -

 
**SUPPLEMENTAL                SCHEDULE OF INTEREST AND INCOME TAXES PAID**
Interest            paid for the years ended December 31, 2002, December 31, 2001 and            December 31, 2000 and the cumulative period ended December 31, 2002            was $46,134, $17,198, $20,797 and $89,990, respectively, and income            taxes paid for each of the years ended December 31, 2002, December            31, 2001 and December 31, 2000 and the cumulative period ended            December 31, 2002 was $0.
**NON-CASH                INVESTING AND FINANCING ACTIVITIES**
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.            During the year ended December 31, 2001, 75,000 series 'B' preferred            shares were converted into 75,000 common shares.            During the year ended December 31, 2000, principal and interest in            the amount of $975,887 on a loan payable to a significant            shareholder was converted into 487,944 common shares.

The accompanying notesto consolidated financial statements arean 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**
Clean Energy Combustion Systems, Inc.    ("*we*"*,*"*our company*" or "*Clean    Energy*") was incorporated under the laws of the State of Delaware    and organized and commenced its operations on March 1, 1999. These financial    statements also reflect select pre-organization transactions and commitments    incurred between January 1, 1999 and the date of incorporation on March 1,    1999, that were accepted by our board of directors in connection with its    organization as obligations of our company.

Clean Energy was formed for the specific    purpose of acquiring exclusive world-wide license rights entitling us to    design, engineer, manufacture, market, distribute, license and otherwise    commercially exploit "burner" technologies, including our patented    pulse blade combustion or "PBC" technology for which we hold a    license from one of our founding shareholders, Ravenscraig Properties    Limited ("*Ravenscraig Properties*").

Our objective is to enter into licensing,    royalty, joint venture, or manufacturing agreements with established    national and international heat transfer industry manufacturers.

Since we have not generated operating    revenues to date, we should be considered a development stage enterprise. As    of December 31, 2002, we have incurred losses from inception totalling $3,254,148, have a working capital deficiency of $414,895, and do not    currently have the financial resources to complete our business plan. Our    ability to continue as a going concern will be dependent upon our ability to    attain future profitable operations and to obtain the necessary financing to    meet our obligations and repay our liabilities arising from normal business    operations when they come due. External financing, predominately in the    short-term by loans from affiliated parties and in the longer-term through    the issuance of equity or debt will be sought to finance development of our    products; however, there can be no assurance that sufficient funds will be    raised.   These factors, among others, indicate that we may be unable to continue as a  going concern for a reasonable period of time.

In the event that we are unable to generate    sufficient capital to meet our current operating expenses, Clean Energy will    be required to reevaluate our planned expenditures and allocate our total    resources in such manner as our board of directors and management deem to be    in our best interest. This may result in a substantial reduction of the    scope of our existing and planned operations.

Our consolidated financial  statements do not include any adjustments relating to the recoverability and  classification of recorded asset amounts, or the amount and classifications of  liabilities that might be necessary, should we be unable to continue as a  going concern.

We are authorized under our Certificate of    Incorporation to issue shares of common stock, series 'A' preferred stock,    series 'B' preferred stock and series 'C' preferred stock (sometimes    referred to in our consolidated financial statements and this report as    "*common shares*", "*series*'*A*'*preferred**shares*", "*series*'*B*'*preferred**shares*" and "*series*'*C*'*preferred**shares*", respectively). See note 7.
**2.      Significant Accounting  Policies*****Basis Of  Presentation*

We prepared these consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States.

F-5
**CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
***Consolidation*

We  have consolidated the accounts of our wholly-ownedsubsidiary, Clean Energy USA Inc. ("*Clean Energy USA*") withthose of Clean Energy.  We  have also consolidated the accounts of our  former wholly-ownedsubsidiary,  Clean Energy Technologies (Canada) Inc. ("*CleanEnergy Technologies*"), up  to the date of its disposal on December 31, 2001. All significant intercompany balances and  transactions between  Clean Energy and  Clean Energy USA were  eliminated as a consequence of the consolidation process.  All significant intercompany balances and  transactions between  Clean Energy and  Clean Energy Technologies up to the date of its disposal were  eliminated as a consequence of the consolidation process.  Results of  consolidated operations for the periods ended after December 31, 2001 included  in these consolidated financial statements may not be comparable to results  for the corresponding periods ended December 31, 2001 due to the divestiture  of Clean Energy Technologies.  However, Clean Energy Technologies  continues  to provide research and development services to our company on a contractual  basis since January 1, 2002. See note 3.
***Reclassifications*
Certain items in our prior year's consolidatedfinancial statements have been reclassified to conform to our current year'sconsolidated financial statement presentation.
***Foreign CurrencyTranslation*

Clean Energy is a Delaware corporation andconsiders the United States dollar to be the appropriate functional currency forour operations and these financial statements, notwithstanding that we dobusiness in Canada in transactions denominated in Canadian dollars. It isanticipated that the majority of our business will be conducted in United Statesdollars and our anticipated customer base will be within the United States. Forpurposes of preparing these financial statements, foreign currency monetaryassets and liabilities are translated into U.S. dollars at the exchange rates ineffect at the balance sheet date. Other balance sheet items and revenues andexpenses are translated at the rates prevailing on the respective transactiondates. Translation gains and losses are included in operations.
***Estimates AndAssumptions***
The preparation of these consolidatedfinancial statements in conformity with accounting principles generally acceptedin the United States of America requires our management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of these consolidated financial statements and thereported amount of revenues and expenses during the reporting periods. Actualresults may differ from those estimates.
***Cash And CashEquivalents***
Cash and cash equivalents consist ofcash on hand, funds on deposit and short-term investments with an originalmaturity of ninety days or less. Clean Energy holds no cash or cash equivalentsat the date of these financial statements.

F-6
**CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
***Short-TermInvestments***
Short-term investments consist of termdeposits with a one-year maturity. These investments are cashable and can bedrawn on at any time. Clean Energy holds no short-term investments at the dateof these financial statements.
***Patents***
Costs related to the acquisition of  patents are capitalized in the accounts and,  upon production of revenues,will be amortized on a straight-line  basis, commencing upon the production of revenues from the patent, over the  shorter of the duration of the patent, which is twenty years, or the estimated  life of the technology. As we have not commenced  production of revenues to date, no amortization has been recorded in these  consolidated financial statements.  The costs of servicing our patents are expensed as  incurred. Clean Energy assesses potential impairment of patents by measuring  the expected net recovery based on cash flows from products based on these  rights on an annual basis. These capitalized costs are valued at the lower of  amortized cost and net recoverable amount.***Property And  Equipment***
We have historically stated property  and equipment at cost, and then recorded amortization on these assets on a  straight-line basis over their respective estimated service lives. As a  consequence of the divestiture of Clean Energy Technologies on December 31,  2001, Clean Energy holds no property or equipment at the date of these  financials statements.   All property and equipment used by Clean Energy is leased from Clean Energy  Technologies as part of an overhead charge.  See note 3.
***Research And Development***
Research and development costs are expensed as incurred.
***Marketing Costs***
Marketing costs, including advertising costs, are expensed asincurred.

***Income  Taxes***
Current income tax expense, ifany, is the amount of income taxes expected to be payable for the currentyear.  A deferred tax asset and/or liability is computed for both theexpected future impact of differences between the financial statement and taxbases of assets and liabilities and for the expected future tax benefit to bederived from tax loss and tax credit carryforwards.  Valuation allowancesare established when necessary to reduce deferred tax assets to the amountsexpected to be 'more likely than not' realized in future tax returns.  Taxrate changes are reflected in income in the period such changes are enacted.
***Impairment Of  Long-Lived Assets And Long-Lived Assets To Be Disposed***
We evaluate our long-lived assets for  impairment whenever events or changes in circumstances indicate that the  carrying amount of such assets or intangibles may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of  the carrying amount of an asset to future undiscounted net cash flows expected  to be generated by the assets. If any assets are considered to be impaired, 

F-7
**CLEAN  ENERGY COMBUSTION SYSTEMS, INC.  (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  the impairment to be recognized is measured by the amount by which the  carrying amount of the assets exceeds the net recoverable value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or  fair value less costs to sell.

***Basic  And Diluted Loss Per Share***
Our basic loss per share is computed  in accordance with Statement of Financial Accounting Standards ("*SFAS*")  No. 128, "*Earnings Per Share*"*,* by dividing the net  loss for the period attributable to holders of our common shares by the  weighted average number of common shares outstanding for the period. Our  diluted loss per share is computed, also in accordance with SFAS No. 128, by  including the potential dilution that could occur if holders of our dilutive  securities were to exercise or convert these securities into common shares.  Common share equivalents are excluded from the computation if their effect is  anti-dilutive. Common share equivalents consist of common shares issuable upon  the conversion of the convertible loans, notes and special warrants (using the  if-converted method) and incremental shares issuable upon the exercise of  common share purchase options and warrants (using the treasury stock method).
***Stock-Based  Compensation***
We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards Statement ("*SFAS*")  No. 123, *Accounting  For Stock Based Compensation*,   issued by the Financial  Accounting Standards Board ("*FASB*"), and the subsequent  amendment of SFAS No. 148, *Accounting for Stock Based  Compensation-Transition and Disclosure*, while  following Accounting Principles Board No. 25*,*"*Accounting for  Stock Issued to Employees*"*,* ("*APB* 2*5*"),  and related interpretations, in accounting for the grant of common  share purchase options to our employees and directors.   Under APB  25, companies are not required to  record any compensation expense relating to the grant of options to employees  or directors where the awards are granted upon fixed terms with an exercise  price equal to fair value and the only condition of exercise is continued  employment. See note 6.
***Comprehensive  Income***
Comprehensive income is reported and  displayed in these consolidated financial statements in conformity with  Statement of Financial Accounting Standards Statement ("*SFAS*")  No. 130, *Reporting Comprehensive Income*, issued by the Financial  Accounting Standards Board ("*FASB*"). SFAS No. 130 establishes  standards for the reporting and display of comprehensive income and its  components in a full set of general-purpose financial statements.

***Recent Adopted  Accounting Standards***
In August 2001, the FASB issued SFAS No. 144, *Accounting for the  Impairment or Disposal of Long-Lived Assets*. SFAS No. 144 addresses  financial accounting and reporting for the impairment or disposal of  long-lived assets to be held and used, to be disposed of other than by sale,  and to be disposed of by sale. We adopted SFAS No. 144 in the first quarter of  2002 on a prospective basis. The adoption of SFAS No. 144 did have significant  impact on our consolidated financial position or results of operations.

In June 2001, the FASB introduced  SFAS No. 141, *Business Combinations*, and SFAS No. 142, *Goodwill and  Other Intangible Assets*. SFAS No. 141 addresses the initial recognition  and measurement of goodwill and other intangible assets acquired in a business  combination. SFAS No. 142 addresses the initial recognition of intangible  assets acquired outside of a business combination whether acquired  individually or with 

F-8
**CLEAN  ENERGY COMBUSTION SYSTEMS, INC.  (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 a group of other assets. These standards require all  future business combinations to be accounted for using the purchase method of  accounting. Goodwill will no longer be amortized but instead will be subject  to impairment tests at least annually. We adopted SFAS No. 141 on a  prospective basis as of July 2001, and SFAS No. 142 in January 2002. The  adoption of SFAS No. 141 and SFAS No. 142 did not have an impact on our  consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS  No. 145, *Rescission of FASB Statements Nos. 4, 44, and 64, Amendment of  FASB Statement No. 13, and Technical Corrections*. Among other things, SFAS  No. 145 rescinds both SFAS No. 4, *Reporting Gains and Losses from  Extinguishment of Debt*, and the amendment to SFAS No 4, SFAS No. 64, *Extinguishments  of Debt Made to Satisfy Sinking-Fund Requirements*. Through this  rescission, SFAS No. 145 eliminates the requirement (in both SFAS No. 4 and  SFAS No. 64) that gains and losses from the extinguishment of debt be  aggregated and, if material, classified as an extraordinary item, net of the  related income tax effect. Generally, SFAS No. 145 is effective for  transactions occurring after May 15, 2002. The adoption of SFAS No. 145 did  not have a significant impact on our consolidated financial position or  results of operations.

In October 2002, the FASB issued SFAS  No. 147, *Acquisitions of Certain Financial Institutions*.  SFAS No.  147 requires that acquisitions of financial institutions be accounted in  accordance with SFAS Nos. 141 and 142, and put any intangible asset therefrom  under the guidance of SFAS No. 144.  We adopted SFAS No. 147 in the  fourth quarter of 2002 on a prospective basis.  The adoption of SFAS No.  147 did not have a significant impact on our consolidated financial position  or results of operations.

In December 2002, the FASB issued    SFAS No. 148, *Accounting for Stock Based Compensation - Transition and    Disclosure*.  SFAS No. 148 amends SFAS No. 123, *Accounting for    Stock Based Compensation*, to provide methods of transition for a    voluntary change to the fair value based method of accounting for    stock-based employee compensation, as well as requiring prominent disclosure    about the method and effect of accounting for stock-based    compensation.  We adopted SFAS No. 148 in the fourth quarter of 2002 on    a prospective basis.  The adoption of SFAS No. 148 did not have a    significant impact on our consolidated financial position or results of    operations.

***Recent Issued    Accounting Standards Not Yet Adopted***

In August 2001, the FASB issued    SFAS No. 143, *Accounting for Asset Retirement Obligation*. SFAS No.    143 requires entities to record the fair value of a liability for an asset    retirement obligation in the period in which it is a cost by increasing the    carrying amount of the related long-lived asset. Over time, the liability is    accreted to its present value each period, and the capitalized cost is    depreciated over the useful life of the related obligation for its recorded    amount or incurs a gain or loss upon settlement. SFAS No. 143 will be    effective for exit or disposal activities initiated after December 31, 2002.    We do not anticipate that our adoption of SFAS No. 146 will have a material    impact on our consolidated financial position or results of operations. We    do not anticipate that our adoption of SFAS No. 143, as required on January    1, 2003, will have a material impact on our consolidated financial position    or results of operations.

In June 2002, the FASB issued SFAS    No. 146, *Accounting for Costs Associated with Exit or Disposal Activities*.    SFAS No. 146 requires that the liability for a cost associated with an exit    or disposal activity be recognized at its fair value when the liability is    incurred. Under previous guidance, a liability for certain exit costs was    recognized at the date that management committed to an exit plan, which was    generally before 

F-9
******CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)**(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 the actual liability has been incurred. SFAS No. 146 will    be effective for exit or disposal activities initiated after December 31,    2002. We do not anticipate that our adoption of SFAS No. 146, as required on    January 1, 2003, will have a material impact on our consolidated financial    position or results of operations.
**3.      Disposition Of Subsidiary  Company**
On December 31, 2001, we sold all of the shares    of Clean Energy Technologies to one of our principal shareholders and    directors as of that date, Mr. John D. Chato, for    proceeds of $1. We have recorded increases to additional paid-in capital in    connection with this transaction, calculated as follows:

Proceeds from disposition

$                                    1

Net liabilities of Clean              Energy Technologies on date of disposition

2,095,253

Offset of provisions and              liabilities related to transfer of ownership

(659,403)

Offset against amount due              from Clean Energy Technologies related to research and development              charges

(1,141,328)
****
Net increase in              additional paid-in capital

$                        294,52
****
Effective January 1, 2002      pursuant to a letter of intent,, Clean Energy  Technologies commenced invoicing our remaining subsidiary, Clean Energy USA,  pursuant to a research and development contract which allows Clean Energy  Technologies to invoice pre-approved research and development costs, related  overhead and a 10% mark-up. The      purpose of entering into a research and development arrangement with Clean      Energy Technologies on the noted arms-length basis was 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.  No pro forma disclosure has been provided, as Clean Energy  continued to incur research and development expenditures through our contract  with Clean Energy Technologies, resulting in no significant change to our  operating expenses.

At the date of that transaction, December 31, 2001, we made provisions    and allowances of $659,403 related to amounts advanced to    Clean Energy Technologies and amounts payable by Clean Energy Technologies    which we may have to satisfy. During the current year, the advances    increased by a net amount of $56,827, while the obligations decreased by    $248,053. The net of these amounts, a decrease of $191,226, has been    credited to additional    paid-in capital as a reduction of provision for    liabilities related to the transfer of subsidiary.
Details of provisions and liabilities      related to transfer of ownership of subsidiary are as follows:
****December 30,                2002
**December 31,                2001
****
Valuation allowance related to                advances to an affiliated company

$                           427,543

$                           370,716

Liabilities related to transfer                of ownership

40,634

288,687
********
$                           468,177

$                           659,403
********
F-10
**CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****As at December 31, 2002 and December 31, 2001, we had advanced $427,543 (CDN    $667,872) and $370,716 (CDN $590,476), respectively, to Clean Energy    Technologies. These advances are non-interest bearing, are repayable in    Canadian dollars and have no specific terms of repayment.

As the repayment of these advances is primarily dependant upon Clean    Energy acquiring sufficient funding to honor our research and development    contract with Clean Energy Technologies, a valuation allowance equal to the    full amount of the advances has been set up and the net gain on disposition    of Clean Energy Technologies was reduced accordingly. This    allowance has been increased to reflect the net increase in advances in the    current period.
**   4.      Advances From Related Parties

Summarized below are our advances and borrowing from related parties as    of December 31, 2002 and December 31, 2001:
****December 30,          2002
**December 31,          2001******
Advances from officers, directors and          principal shareholders

$                        -

$                  190,729

Advances from minority shareholders

52,697

-
****
Total

$                52,697

$                   190,72
****
The advances from officers, directorsand principal shareholders reflected in the December 31, 2001 balances includeadvances from the following: Mr. R. Dirk Stinson, a director and the currentPresident of Clean Energy and an indirect principal shareholder of Clean Energythrough Ravenscraig Properties; McSheahan Enterprises Ltd., ("*McSheahanEnterprises*") a principal corporate shareholder of Clean Energy that isowned and controlled by Barry A. Sheahan, an executive officer and a director ofClean Energy; JPT 2 Holdings Ltd. ("*JPT 2 Holdings*"), aprincipal corporate shareholder of Clean Energy that is owned and controlled byJohn P. Thuot, a director of Clean Energy and its past President; and John D.Chato, past Chairman of our board of directors and an indirect principalshareholder of Clean Energy through J9 Enterprises Ltd. These advances wereunsecured, bore interest at the rate of 8.75% per annum, were repayable inCanadian dollars, and had no specific terms of repayment. During the year endedDecember 31, 2002, these advances, together with additional advances from theseparties and amounts payable to other creditors, were converted to common sharesof the company at a conversion rate of $0.65 per share (CDN$1 per share),resulting in a reduction in capital deficiency of $823,708 (see note 11). Theshare certificates related to these share for debt settlement transactions wereissued in March 2003.

The majority of advances from minorityshareholders bear no interest and have no specific terms of repayment. Interestof $3,123 as at December 30, 2002 has been accrued.
**- Share      Capital

*Series 'A'    Preferred Stock*

Our series 'A' preferred shares are  non-voting and may be converted into one common share at the option of the  holder at any time. The affirmative consent of a majority of all outstanding  series 'A' preferred shares is required to liquidate or dissolve our company,  to sell our principal assets, to merge or consolidate our company with  another, to declare a dividend, to make any changes in our authorized capital 

F-11
**CLEAN  ENERGY COMBUSTION SYSTEMS, INC.  (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
  stock, or to issue additional preferential preferred shares. Should our common  shares be accepted for listing on The New York Stock Exchange or The American  Exchange or accepted for quotation on Nasdaq, all outstanding series 'A'  preferred shares will automatically convert into common shares on a one for  one basis once our common shares have been actively traded on that exchange or  market for a two year continuous period. In the event of the voluntary or  involuntary liquidation, dissolution or winding up of our company, our series  'A' preferred shareholders will be entitled to an amount equal to $1 per  share, but after payment has been made to all series 'B' preferred  shareholders with respect to their liquidation preference.

Clean Energy designated and issued  1,000 series 'A' preferred shares upon our incorporation.
***Series 'B'  Preferred Stock***
Our series 'B' preferred shares are  voting and are entitled to participate in dividends with our common shares.

The affirmative consent of a    majority of all outstanding series 'B' preferred shares is required to make    any change in our authorized capital stock or to issue additional    preferential preferred shares. Our series 'B' preferred shares may be    converted at the option of the holder, at any time, into one common share.    Should our common shares be accepted for listing on The New York Stock    Exchange or The American Exchange or accepted for quotation on Nasdaq, all    outstanding series 'B' preferred shares would automatically convert into    common shares on a one for one basis. In the event of the voluntary or    involuntary liquidation, dissolution or winding up of our company, our    series 'B' preferred shareholders will be entitled to an amount equal to $2    per share before any payment will be made or any assets distributed to the    holders of series 'A' preferred shares, common shares, or any other junior    equity security.

During the period ended    December 31, 1999, we designated 250,001 preferred shares as series 'B'    preferred stock, and issued those shares pursuant to a private placement for    gross proceeds of $500,002.

During the year ended December    31, 2002, one of our shareholders converted 8,333 series 'B' preferred    shares to common shares, leaving 241,668 series 'B' preferred shares issued    and outstanding at December 31, 2002.
***Series 'C' PreferredStock***
Our series 'C' preferredshares are voting and are entitled to participate in dividends with our commonshares.

The affirmative consent ofa majority of all outstanding series 'C' preferred shares is required toliquidate or dissolve our company, to sell our principal assets, to merge orconsolidate our company with another, to declare a dividend, to make any changesin our authorized capital stock, to issue additional preferential preferredshares, to declare any dividends or to redeem or purchase any series 'C'preferred shares. Our series 'C' preferred shares may be converted at the optionof the holder, at any time, into one common share. Should our common shares beaccepted for listing on The New York Stock Exchange or The American Exchange oraccepted for quotation on Nasdaq, all outstanding series 'C' preferred shareswould automatically convert into one common share. In the event of our voluntaryor involuntary liquidation, dissolution 

F-12
**CLEAN  ENERGY COMBUSTION SYSTEMS, INC.  (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 or winding up, our series 'C' preferredshareholders will be entitled to an amount equal to the stated value or issuancecost before any payment will be made or any assets distributed to the holders ofour series 'A' preferred shares, series 'B' preferred shares, common shares, orany other junior equity security.

During the period endedDecember 31, 1999, we designated 500,000 preferred shares as series 'C'preferred stock. No series 'C' preferred shares have been issued to date.
***Common Stock***
During 2001, our board of directorsauthorized the creation of an additional 10,000,000 common shares, which willincrease our total authorized common shares to 25,000,000 shares upon our filingof an amendment to our certificate of incorporation. To date, we have not filedthe necessary amendment to institute this action.
**- Employee      And Director Stock Options

*Summary of    Grants Under Plans*

Through December 31, 2002, the only  stock plan pursuant to which Clean Energy has made grants to employees and  directors of our company has been the 1999 Clean Energy Combustion Systems,  Inc. Stock Plan (the "*1999**Plan*"), pursuant to which  1,000,000 common shares are reserved for issuance to directors, employees and  consultants in the form of stock options or outright stock grants. We have 

Summarized below all stock option grants under this plan for  our three fiscal years ended December 31, 2002. There were no grants of any  awards other than stock options under the 1999 Plan during this period.
** **2002
 **2001
 **2000**********Common Share            Purchase Options
**Common            Shares            Under            Options
**Weighted            Average            Exercise            Price
 **Common            Shares            Under            Options
**Weighted            Average            Exercise            Price
 **Common            Shares            Under            Options
**Weighted            Average            Exercise            Price******
Outstanding at beginning of            year

619,305

$              2.16
 
380,000

$              2.00
 
320,000

$              2.00

Granted

80,000

$              2.00
 
239,305

$              2.42
 
60,000

$              2.00

Exercised

-

-
 
-

-
 
-

-

Cancelled or lapsed

(61,305)

$              3.00
 
-

-
 
-

-
****
Outstanding at end of year

638,000

$              2.06
 
619,305

$              2.16
 
380,000

$              2.00
****
Exercisable at end of year

370,000
  
186,000
  
64,000
 ****
Available for grant at end            of year

362,000
  
380,695
  
620,000
**********F-13
**CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We have summarized below all outstanding  options under the 1999 Plan as of December 31, 2002:
****As of            December 31, 2002******Type Of Option**
**Grant            Dates**

 

 

**Exercise            Prices**
****Outstanding
**Vested******
Options granted to            directors

1-20-01 to            3-15-02
 
$ 2.00
 
240,000
 
100,000

Options granted to            executive officers(1)

3-5-99 to 12-1-02 
$ 2.00
 
298,000
 
194,000

Options granted to            employees

3-5-99 to            2-8-01
 
$ 2.00 to $            3.00
 
100,000
 
76,000
****     
638,000
 
370,00
****
The director options outstanding as of    December 31, 2002 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, 2002 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.

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.
***Compensation  Expense Associated With Grant Of Options***
Pursuant to APB 25, we have not recorded any  compensation expense relating to the grant of these common share purchase  options for any period in these consolidated financial statements insofar as  the exercise price for all of these 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 $25,481, $54,690 and $28,974 for the twelve-month periods ended December  31, 2002, December 31, 2001 and December 31 2000 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 81%  (2001 and 2002 - 0%) and a weighted average annualized risk  free interest rate at  4.61% (2001 and 2002 - 5.25%)

F-14
**CLEAN    ENERGY COMBUSTION SYSTEMS, INC.    (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Summarized below is pro forma financial  information for the three twelve-month periods ended December 31, 2002 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
**2002
**2001
**2000******
Net loss for the period as            reported

$                (894,473)
$                (812,445)

$                 (907,826)
****
Compensation expense            computed under SFAS No. 123

(25,481)

(54,690)

(28,974)

Pro forma net loss for the            period

$                (919,954)
$                (867,135)

$                (936,800)
****
Pro forma basic and diluted            loss per common share

$                      (0.09)
$                      (0.09)

$                      (0.09)
****Common Share    Purchase Warrants

During 1999, we issued 36,000 stand-alone    common share purchase warrants as additional consideration pursuant to a    public relations services agreement pursuant to which the holder is given    the right to purchase 36,000 common shares at $2 per share. The right to    exercise these warrants vests in equal monthly instalments over a    twenty-four month period, and each instalments lapses five years after date    of vesting. As at December 31, 2002, all of the 36,000 shares have vested    and none have been exercised.

During 2000, we also issued 200,000    stand-alone share purchase warrants as additional consideration pursuant to    an investors and media relations services agreement pursuant to which the    holder is given the right to purchase 200,000 common shares at prices    between $2 to $5 per share. The right to exercise these warrants vests in    equal quarterly instalments over a twelve-month period commencing July 27,    2000, and each instalment lapses twelve months after date of vesting. As at    December 31, 2002, all 200,000 warrants vested and lapsed, and none of the    warrants were exercised.

During 2002, we issued 36,000 stand-alone    common share purchase warrants as additional consideration pursuant to a    public relations services agreement pursuant to which the holder is given    the right to purchase 36,000 common shares at $2 per share. The right to    exercise these warrants vests in equal monthly instalments over a twelve    month period, and each instalments lapses five years after date of vesting.    As at December 31, 2002, 24,000 of the 36,000 shares have vested and none    have been exercised.

Pursuant to the fair value method of    accounting, we recorded compensation expense of $0 and $30,601and $18,500    for the years ended December 31, 2002,2001 and 2000 respectively, in    connection with the grant and vesting of these warrants. These amounts were    determined using an option pricing model which assumes no dividends are to    be paid, a two-year vesting period, a weighted average annualized volatility    of our share price of 20%, and a weighted average annualized risk free    interest rate at 5.25%.******- Income      Taxes**
As at December 31, 2002, we had net    operating loss carry forwards available to reduce our taxable income in    future years by the amount of approximately $2,300,000. At the statutory    rate of 34%, this net operating loss represents a potential non-current    income tax asset of $782,000. 

F-15
**CLEAN  ENERGY COMBUSTION SYSTEMS, INC.  (a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 We had no other significant temporary or    permanent timing differences. The tax asset relating to operating losses    incurred through December 31, 2002, has been fully offset by a valuation    allowance.  The valuation allowance increased by $122,000 during the    year.

**- 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.
-  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 
   F-16  
CLEAN    ENERGY COMBUSTION SYSTEMS, INC.(a development stage enterprise)(expressed in U.S. dollars)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 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 amounts of indebtedness  settled above, there remain at December 31, 2002, unpaid fees to HMJ  Corporation (a personal service corporation owned by one of our directors, Dr.  William D. Jackson), JPT 2 Holdings Ltd. and McSheahan Enterprises Ltd. in the  amounts of $25,328, $23,279 and $30,091 respectively.
**- Financial      Instruments

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.

**- Other  Commitments      And Contingencies**
Ravenscraig Properties, the licensor of our    pulse combustion technology, has the right to terminate the license if we do    not obtain a listing of our common shares on The New York Stock Exchange,    The American Stock Exchange or Nasdaq by March 5, 2004. Should Ravenscraig    Properties exercise its termination right, we can purchase full title to the    pulse combustion technology by paying CDN $525,000 within ten business days    of the ninety day termination period, plus interest on such amount at the    rate of 13% per annum, accruing as of January 1, 1999. On the purchase,    Clean Energy will also be entitled to receive the return of 593,750 common    shares as well as all outstanding series 'A' preferred shares. If    Ravenscraig Properties is unable to deliver the full number of shares, the    cash payment will be reduced pro-rata.

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 Executive 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    purchase 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 $8,333 per month. Effective    September 1, 2002, the agreement with JPT 2 Holdings was amended to reduce    the payment under that agreement to CDN $3,000 per month, and to terminate    the grant of options effective August 2, 2002.

F-17
****We have entered into a consulting    agreement with the HMJ Corporation, a company owned and controlled by Dr.    William D. Jackson, a director of our company. The agreement obligates HMJ    Corporation to provide the services of Dr. Jackson for a stipulated number    of hours monthly and requires Clean Energy to pay a monthly retainer of    $5,000, and to reimburse Dr. Jackson for out-of-pocket travel costs. This    agreement commenced April 2001 and expired December 31, 2002. A renewal of    the agreement is currently under review with Dr. Jackson.
We have entered into a consulting    agreement with an engineer with respect to our residential hot water heater    project to provide a stipulated number of hours monthly. The agreement    requires Clean Energy to pay a monthly retainer of $2,000, plus    reimbursement for out-of-pocket travel costs.     The agreement is renewable annually unless terminated    and may be cancelled upon sixty days written notice.

We have entered into a public    relations services agreement whereby Clean Energy was obligated to pay a    monthly fee of CDN $6,000 for a period of thirty-six months, commencing    April 1999. Either party can terminate the agreement after one year. In    April 2001, the parties agreed to extend the originalagreement for a further twelve    months, with a reduced monthly fee of CDN $3,000.  

We have entered into an investor    relations and communications services agreement whereby Clean Energy is    obligated to pay a monthly fee of CDN $2,250 for a one-year period,    commencing June 2001. The agreement is renewable annually unless terminated    and may be cancelled upon sixty days written notice.**- Subsequent      Events

On March 14, 2003, Ravenscraig    Properties, the licensor of our pulse combustion technology, waived the    right contained in its license agreement to terminate the license if we do    not obtain a listing of our common shares on The New York Stock Exchange,    The American Stock Exchange or Nasdaq by March 5, 2004.

Effective January 1,  2003, Clean Energy terminated our research and development agreement with  Clean Energy Technologies.  Also effective January 1, 2003, Clean Energy  entered into a research and development agreement with McSheahan Enterprises, a personal service corporation owned and        controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a  director.  Subsequent to that date, Clean Energy Technologies transferred  its property and equipment and assigned its leasehold interests to McSheahan  Enterprises, while McSheahan Enterprises assumed certain liabilities of Clean  Energy Technologies.  Pursuant  to the research and development agreement, McSheahan Enterprises commenced invoicing our remaining subsidiary, Clean Energy USA,  for pre-approved research and development costs incurred on or after January  1, 2003,  together with related  overhead and a 10% mark-up.  The purpose of entering into a research and  development arrangement with McSheahan Enterprises on the noted arms-length  basis was 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.

F-18
**Signatures Of Executive Officers**
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of1934, the registrant has duly caused this annual report on form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized on March 31,2003.

Burnaby, British Columbia, Canada
**CLEAN ENERGY COMBUSTION SYSTEMS, INC.,a Delaware corporation

By*:**/s/ R. Dirk Stinson***                                  R. Dirk Stinson,                                  President                                  (principal executive officer)

By:***/s/ Barry A. Sheahan***                                  Barry A. Sheahan, C.A.                                  Chief Financial Officer                                  (principal accounting and financial officer)
**Signatures Of Board Of Directors**
Pursuant to the requirements of the Securities Exchange Act of 1934, thisannual report on form 10-K has been signed below by the following persons onbehalf of the registrant on March 31, 2003, and in the capacities indicated.

By:***/s/ R. Dirk Stinson****        R. Dirk Stinson

President (principal executive officer) and Director

By:***/s/ Barry A. Sheahan***        Barry A. Sheahan, C.A.

Chief Financial Officer (principal accounting and financial officer)        and Secretary

By**:*/s/ John P. Thuot****        John P. Thuot

Director

By**:*/s/ L. Clive Boulton****        L. Clive Boulton

Director

By**:*/s/ William D. Jackson****        William D. Jackson

Director

By:*/**s/ John L. Howard****        John L. Howard

Director

By:***/s/ R. Dirk Stinson****        R. Dirk Stinson        (Attorney in Fact)
 
-42-
******Certification Of Principal Executive Officer**
I, R. Dirk Stinson, certify that:
-  I have reviewed this annual report on form    10-K of Clean Energy Combustion Systems, Inc.;  
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;
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;
-  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:    -  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;  
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
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;
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):
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
-  any fraud, whether or not material, that      involves management or other employees who have a significant role in the      registrant's internal controls; and 
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: March 31, 2003

By: ***/s/ R. Dirk Stinson***
  
R. Dirk Stinson                                    President(principal executive officer)

-43-
****** 

Certification Of Principal Accounting And Financial Officer**
I, Barry A. Sheahan, C.A., certify that:
-  I have reviewed this annual report on form    10-K of Clean Energy Combustion Systems, Inc.;  
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;
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;
-  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: 
-  designed such disclosure controls and      procedures to ensure that material information relating to the registrant,      including its consolidated   
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
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;
-  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): 
-  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  
any fraud, whether or not material, that      involves management or other employees who have a significant role in the      registrant's internal controls; and
      -  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: March 31, 2003

By: ***/s/ Barry A. Sheahan***
  
Barry A. Sheahan, C.A.                                    Chief Financial Officer                                    (principal accounting and financial officer)

-44-
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