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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Research and development expenditures are expensed as incurred.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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(1)   Reflects pre-consolidation sales prices.

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

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

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

• On March 5, 2004, we issued 7,076,300 common shares to ecoTech Waste Management Systems (1991) Inc., in connection with our purchase of a gasification technology from that company. As part of that transaction, we also issued 500,000 to Mr. C. Victor Hall, the President and principal shareholder of ecoTech Waste Management Systems, for the purshase of his cryogenic technology. We valued the common shares paid at US $0.14 per share, or an aggregate of $990,682 for the gasification technology and $70,000 for the cryogenic technology.

• On March 8, 2003, we agreed to issue 2,080,660 common shares at an average conversion price of $0.23 per share to a group of thirteen directors, shareholders, employees and other creditors in settlement of a total of $471,053 in short-term advances, wages, fees and other payables due to those persons. Included in that transaction were (1) 614,391 common shares issued to Ravenscraig Properties, Ltd., a corporation owned and controlled by Mr. R. Dirk Stinson, our President and a director, in satisfaction of $153,598 in loans and liabilities assumed; (2) 263,988 common shares issued to McSheahan Enterprises, Ltd., a personal service corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, with respect to loans and unpaid management fees in the amount of $65,997, (3) 289,268 common shares issued to Clean Energy Research, Inc., a research and development corporation owned and controlled by Mr. Barry A. Sheahan, our Chief Financial Officer and a director, with respect to unpaid fees in the amount of $72,317 under our research and development contract with that company; (4) 316,292 common shares issued to Mr. James V. DeFina, our projects director, in satisfaction of $79,073 in unpaid wages; (5) 53,258 common shares issued to JPT 2 Holdings, Ltd., a personal service corporation owned and controlled by Mr. John P. Thuot, a director, in satisfaction of $13,314 in unpaid management fees relating to when Mr. Thuot was an officer of our company; and (6) 120,000 common shares issued to Mr. Denver Collins, our Vice President of Engineering and Product Development and a director, in satisfaction of $30,000 in unpaid wages.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

F-1

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

 

			Twelve Months Ended December 31,		Jan. 1, 1999 to Dec. 31, 2003
			2003	2002	(Cumulative)
ADMINISTRATION AND MARKETING EXPENSES
	Accounting		$ 20,221	$ 10,586	$ 99,372
	Administrative wages, benefits and contract fees		94,304	110,333	694,530
	Amortization		-	-	45,027
	Communications, including telephone and website maintenance		9,176	6,648	46,135
	Foreign exchange (gain) loss		3,713	(78)	(23,785)
	Interest		2,068	46,134	92,058
	Legal and patent maintenance		104,044	201,328	459,484
	Marketing		52,074	55,320	399,440
	Occupancy		10,160	-	109,989
	Office and miscellaneous		5,453	7,755	108,390
	Write-down of patents		9,199	-	9,199
	Professional fees		-	-	15,972
	Transfer agent fees		3,395	1,429	38,706
		Total administration and marketing	313,807	439,455	2,094,517
RESEARCH AND DEVELOPMENT EXPENSES
	Wages and other direct costs		236,595	364,868	1,369,802
	Overhead		52,301	90,150	392,532
		Total research and development	288,896	455,018	1,762,334
TOTAL EXPENSES AND NET LOSS FOR THE PERIOD			$ (602,703)	$ (894,473)	$ (3,856,851)
BASIC AND DILUTED NET LOSS PER SHARE OF COMMON STOCK (note 2)			$ (0.05)	$ (0.09)
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING			12,989,610	10,139,184