Commission file number:  333-88207

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, par value $0.0001 per share.

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

Yes    [ X ]     No   [__]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 28, 2001 was indeterminable, given that no public market for the registrant's common stock existed before or as of that date .

The number of shares outstanding of the registrant's common stock as of March 28, 2001:  10,131,694 shares

Information required by Part III (Items 10, 11, 12 and 13) is incorporated into this annual report by reference to the registrant's definitive proxy statement to be disseminated in advance of its annual meeting of stockholders to be held later in fiscal 2001.

With the exception of information relating to our corporate name change, the information set forth in Item 1 of this annual report, captioned "Business," is current as of March 28, 2001, unless an earlier or later date is indicated in that section. The information set forth in the sections of this annual report other than Item 1 is current as of December 31, 2000, unless an earlier or later date is indicated in those sections.

All references to "dollars" in this annual report refer to United States or U.S. dollars, unless specific reference is made to Canadian or Cdn. dollars. For information relative to rates of exchange and currency conversion, see note 2(g) to our consolidated financial statements.

Clean Energy ("we," "our company" or "Clean Energy") is a recently-organized development stage enterprise formed and organized on March 1, 1999 to market "burner units" based upon two patented and innovative burner designs we acquired under license-our "pulse combustion technology" and our "diesel fuel combustion technology." These designs were originally invented by one of our founders, Mr. John D. Chato, and are now in a position to be introduced to the market having completed their primary development stage. Each design has a large number of potential industrial, commercial and residential applications. We have one wholly-owned subsidiary, Clean Energy Technologies (Canada) Inc., which focuses on pulse combustion research and development activities. Our principal executive offices and research and development facilities are located at 7087 MacPherson Avenue, Burnaby, British Columbia, Canada, V5J 4N4, and our telephone number is (604) 435-9339.

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

The first of our designs, which we refer to as our "pulse combustion technology," is an elongated or "linear" configured pulse burner technology which can operate on a variety of fuels, including natural gas, propane, powdered coal, and hydrogen. This design can be used to manufacture highly-compact burner units that are more energy-efficient, and emit significantly lower levels of pollutants, than conventional steady-state and "tubular" configured pulse combustion designs. For a description and illustration of our "linear" design as compared to conventional "tubular" configured pulse combustion designs, see that section of this annual report captioned "Business-How Conventional Pulse Combustion Technology Works" and "Business-How Our Pulse Combustion Technology Works." Due to the compactness, simplicity of design and lack of moving parts inherent in our technology, our design also allows burner units to be more inexpensively, easily and quickly manufactured, installed and serviced than conventional steady-state and tubular pulse combustion designs.

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We are currently working on production proto-types under pending proposals for the following applications of this technology:

• A 13 million BTU/hour powdered-coal burning pulse combustion unit that will be used for the retrofit of 1,000 boilers used to produce steam for the heating of public buildings.

• A number of natural gas-fueled burner units, ranging from 30,000 BTU//hour to 69 million BTU/hour, to be used to create a low oxygen content exhaust flue reducing gas required for the effective operation of catalytic absorption pollution control systems. An exhaust flue is the pipe or duct which carries the products of combustion out of the combustor. A catalytic absorption pollution control system is a system that cleans combustion exhaust by reacting harmful exhaust components with a catalyst to render them harmless. This project will most likely be extended to diesel fuel applications.

• An 8,000 BTU/hour natural gas-fueled burner unit used to create a low oxygen content hydrocarbon reducing gas required for the operation of fuel cells. A fuel cell is an electrochemical device which combines hydrogen fuel with oxygen to produce electric power, heat and water.

• A natural gas-fueled burner unit used to burn residual flare gases emitted from producing oil wells, and to convert the heat energy created into electricity through a turbo-generator. Flare gases are generally residual or "waste" gases containing contaminants like sulfur that render them difficult to utilize. Because these gases are surplus they are flared off instead of being collected and processed-i.e., they are combined with air and burned in the atmosphere at the end of a tall stack. A turbo-generator is a small, self contained gas turbine generator designed to provide a source of electricity for remote sites like oil wells or to provide commercial or industrial users a additional or supplementary source of electricity to the power they receive from the utility grid.

• A 50,000 to 200,000 BTU/hour diesel-based burner to be used for space heaters in heavy-duty special-purpose vehicles.

• A natural gas-fueled burner unit to be used for industrial paper and pulp dryers.

• A natural gas fueled 400,000 to 500,000 BTU/hour instantaneous water heater.

We believe the demand for cleaning burning fuels will continue as clean air legislation and public environmental pressures increase. Even though our current focus is on natural gas and coal burning applications, our pulse combustion technology can also use other carbon-based fuels as its energy source. We have, for example, successfully burned gasoline, propane, and a powdered coal and hydrogen mix, and also believe our technology will be equally successful in burning diesel and oil.

The second of our designs, which we refer to as our "diesel fuel combustion technology," is a burner technology which enables some conventional steady-state burner units to burn diesel fuel instead of natural gas or propane. This design not only allows a user to use diesel as his fuel of choice where warranted by price or supply considerations, but also results in lower levels of pollutants than that emitted through the burning of natural gas or propane in these types of burner units. We are currently working on production proto-types under pending proposals for the adaptation of two natural gas fueled burner units to burn diesel fuel.

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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 best 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 and commercial emissions in the four counties comprising the Los Angeles metropolitan area.

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 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.

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 units based upon our technology into various selected market segments.

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 revenue producing contracts over the next four to six months.

Our company was formed and organized on March 1, 1999 under the name Clean Energy Technologies, Inc., by two groups of founders, whom we refer to as the "BO Group" and the "Alberta Group." We changed our corporate name to Clean Energy Combustion Systems, Inc. on May 20, 1999.

The "BO Group" is comprised of BO Tech Burner Systems Ltd. and several of their principals, including Messrs. John D. Chato, John P. Thuot, Barry A. Sheahan, and James V. DeFina. BO Tech Burner Systems Ltd., in turn, is part of a group of three affiliated British Columbia corporations, whom we refer to as the "BO Companies," who expended over Cdn. $4 million in primary development for our pulse combustion technology over the ten year period ended December 31, 1998. The other two members of the BO Companies are BO Gas Limited, a majority-owned subsidiary of BO Tech Burner Systems Ltd., and BO Development Enterprises Ltd., the majority-owned parent of BO Tech Burner Systems Ltd.

Mr. John D. Chato is the inventor of both our pulse combustion and diesel fuel combustion technologies, as well as the owner and licensor of our diesel fuel combustion technology. Messrs. Chato, Thuot, and Sheahan are also officers and directors of each of the BO Companies, as well as direct or indirect stockholders of each of these companies through BO Development Enterprises Ltd. Mr. DeFina is a key employee of the BO Companies, as well as a direct or indirect stockholder of each of these companies.

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Messrs. Chato, Thuot and Sheahan were appointed as executive officers and directors, and Mr. DeFina as one of our executive officers, as part of our formation. In connection with our formation, we issued 6,525,713 shares of our common stock to BO Tech Burner Systems Ltd., and a total of 1,074,287 shares of our common stock to Messrs. Chato, Thuot, Sheahan, DeFina and Robert Alexander, who served at that time as an unpaid advisor. BO Tech Burner Systems Ltd. subsequently distributed 2,599,084 of our common shares held by it to BO Development Enterprises Ltd., while at the same time transferring an additional 753,724 shares to BO Gas.

On February 16, 1999, our founders caused our wholly-owned research and development Canadian subsidiary, Clean Energy Technologies (Canada) Inc., a British Columbia corporation which we refer to as "Clean Energy Canada, " to be incorporated and organized, and we acquired all of the common stock of Clean Energy Canada on March 1, 1999.

Conventional pulse combustion burner technology is a burner unit design comprised of two geometrically-configured adjoining channels and chambers-a combustion chamber and an exhaust channel or "tailpipe." As shown in the illustration below, most conventional pulse combustion burner units use a "tubular" configuration, similar to a bottle with an elongated neck. In operation, fuel and air are first injected from an intake channel into the combustion chamber (at the base of the bottle) where they are ignited with an ignition rod and commence burning (in the bottom portion of the bottle). The heat created by the combustion process then generates a pressure wave which travels from the combustion chamber through the tailpipe (the elongated neck of the bottle), carrying with it various gases or "effluents" resulting from the combustion process. As the effluent gases exit the tailpipe and the exterior of the combustion chamber cools, a partial vacuum is created within the combustion chamber which, in turn, pulls a new supply of air and fuel into the combustion chamber from the intake channel. This new fuel-air mixture is then compressed by effluent returning or "pulsing back" from the tailpipe, and ignites on its own without the need of the ignition rod as a result of this pressure increase and the remaining heat within the combustion chamber, causing the entire process to repeat. Most conventional pulse combustion technology, for example, operates at anywhere from 60 to 70 cycles per second depending upon the configuration and application. It is this oscillating or "pulsating" condition-hence, "pulse" combustion-which differentiates pulse combustion from conventional steady-state combustion, where combustion is provided through the steady or continuous burning of a flame, such as in the case of a kettle of water being heated on a gas stove.

The principal drawbacks of conventional pulse combustion technology has been noise and vibration and an inability to efficiently generate large quantities of BTUs through the combustion process. As discussed in greater detail below, the noise and vibration result from the operation of the conventional pulse combustion burner at relatively low frequencies of 60 to 70 cycles per second. The conventional pulse combustion burner's inability to efficiently generate large quantities of BTUs can be attributed to its geometries. Specifically, as the dimensions of the "bottle" are expanded or elongated in order to increase BTU production capacity, the heat output and heat transfer efficiency of the unit decreases, while emissions and noise and vibration levels increase. As illustrated below, our company's solution to these problems was to maintain the most efficient shape of the "bottle" in terms of its "cross-section," while extending the "depth" of the bottle in a linear or straight-line direction:

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[ILLUSTRATION OF CONVENTIONAL COMPARED TO LINEAR PULSE COMBUSTORS]

Our design eliminates the noise and vibration levels associated with conventional pulse combustion since the design of our unit allows it to operate at anywhere from 350 to 650 cycles per second depending upon the configuration and application. Moreover, the depth implicit in our design allows us to significantly increase the unit's overall heat output, without loss of efficiencies and increase of emissions.

We use two different pulse combustion designs depending upon the application required-our initial "linear" configuration and a more recently developed "cylindrical" variant. Set forth below is a diagram of a water or space heating system containing three combustion chambers based upon our linear configuration:

[ILLUSTRATION OF LINEAR PULSE COMBUSTOR]

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

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

• extending or "scaling-up" either:

• 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

• 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.

The principal advantage of our linear configuration over our cylindrical configuration is that it lends itself more readily to the joining together on a side-by-side basis of separate operating "modules," each module containing one or more combustion units. We can then regulate or adjust heat output by turning one or more of these adjoining modules on or off. This on-off capacity, which we refer to as "turn-down capability," allows our linear unit to operate at a number of differing pre-selected higher or lower output levels while maintaining optimum heat output and heat transfer efficiencies. Conventional systems have very low efficiencies and high emissions while operating in a lengthy startup modes or partial capacity during low demand periods of operation.

We developed our cylindrical configuration for use in applications where turn-down capability is not a consideration. There are several benefits to the cylindrical shape for these applications, including lower manufacturing costs, innate structural integrity, and elimination of gases collecting in corners.

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

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

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

Even though the higher efficiencies afforded by pulse combustion over conventional steady-state combustion is a well known fact in the residential and commercial heating industry, pulse combustion products still have not been widely introduced, and have had limited penetration in the markets they have 

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been introduced into. We believe the principal reasons for this limited market penetration are higher manufacturing and installation costs, which translate into higher sales prices, as well as noise considerations. Indeed, to our knowledge the only significant manufacturers and marketers of pulse combustion burner units within the United States today are:

• Hydrotherm Corporation, which markets three natural gas-fueled pulse water boiler systems rated at from 100,000 BTUs/hr to 300,000 BTUs/hr for residential and commercial "hydronic" 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 markets 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 BTUs/hr input, and a line of high pressure models rated at between 500,000 to 700,000 BTUs/hr input; and

• two lines of pulse boilers used for hydronic heating purposes, rated at between 300,000 to 1,400,000 BTUs/hr input.

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

All of Lennox's, Fulton's and Hydrotherm's pulse combustion products utilize a long "tubular" design. For example, in the case of the Lennox unit, the tube is approximately eight feet long and is looped or coiled vertically for space efficiency. The principal operational feature of the conventional tubular design is the low number of repetitive combustion pulses or cycles at which it operates, typically 60 to 70 cycles per second.

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

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

• Our pulse combustion technology enables burner units to operate with:

• significantly higher energy conversion efficiencies than conventional steady-state combustion technology, leading to significantly higher fuel savings than these technologies, and

• slightly higher heat output and heat transfer conversion efficiencies than conventional tubular pulse combustion technologies, leading to slightly higher fuel savings than these technologies.

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• Our pulse combustion technology enables burner units to emit:

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

• significantly lower emissions of oxides of nitrogen, commonly known as "NOx," than conventional tubular pulse combustion technologies, and comparable or slightly lower emission levels than these technologies with respect to emissions other than Nox.

• Our pulse combustion technology allows unlimited size or output variations with our pulse blade design, as opposed to conventional "tub" pulse burners which have no scalability and thus are very limited in operating efficiently outside their comparatively narrow application range;

• 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 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 linear design, 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 exisiting boiler unit thereby saving considerable capital cost. You should note that a burner unit retrofit is a fraction of the cost of a complete 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 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.

• 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.

• Background:   Among the principal considerations is evaluating a burner unit are its relative "energy conversion efficiencies," which 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 is more energy conversion efficient 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 efficiency of a burner unit can be broken down into the following constituent elements:

• Heat Output Efficiency:   As previously discussed in this annual report, 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 1,000 BTUs of heat energy assuming its entire chemical energy was converted

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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 NOx, carbon monoxide and sulfur dioxide-resulting in unextracted or "wasted" of heat energy potential.

• Heat Transfer Efficiency:   As previously discussed in this annual report, the 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 generated by the combustion process to warm the water or air, instead of allowing any of this heat 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. Generally speaking, the bigger the combustion unit in terms of BTU output capacity, the longer the warm-up period. The warm-up time for a conventional steady-state 10 million BTU/hour boiler, for instance, is approximately two hours.

• 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 "buffer 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 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 buffer layer affect does not occur in pulse combustion, however, since the more turbulent combustion environment and internal combustion pressures resulting from the repetitive pulse 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. 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. The warm-up time for a 10 million BTU/hour pulse combustion boiler, for instance, would be approximately two minutes, as compared to the two hour warm-up time noted above for a comparable conventional steady-state boiler.

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• 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 60 to 70 cycles per second. Our pulse combustion technology, on the other hand, operates at anywhere from 350 to 650 cycles per second depending upon the configuration and application, or 6 to 9 times the rate of conventional tubular pulse combustion, leading to better heat output, heat transfer and start-up efficiencies.

Test evaluations conducted in 1993 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 carbon monoxide and for oxides of nitrogen, meaning that over 99% of the heat energy of the fuel was consumed in the combustion process. For these reasons we believe the heat output efficiency of our pulse combustion technology exceeds 99%.

• Background:   There has been increased worldwide awareness and concern over the past 25 years over the effect of atmospheric pollutants 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, carbon monoxide, sulfur dioxide and other residual gases, while maintaining the energy conversion efficiencies necessary 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 in this annual report, heat output efficiencies are a function of the completeness of the burning process. The more compete the process, the greater amount of the chemical components of the fuel will be converted into heat energy, and the less amount of unconverted fuel, in the form of various post-burn chemical gases, will be emitted as part of the exhaust stream.

• The amount of pollutants is also a function of the level of "excess air" used in the combustion process, as measured as a percentage of oxygen contained in the exhaust stream. Simply put, the combustion process requires, at a minimum, two quantities of oxygen-the first quantity of oxygen representing that amount necessary to bond and chemically react with the fuel as part of the combustion process in order to convert its chemical energy into heat energy, and the second quantity of oxygen representing an additional amount necessary to maintain a "stable" combustion environment. If there are insufficient quantities of this latter amount of additional oxygen in the combustion environment, referred to as "excess air," then the combustion process will sputter or be "unstable," resulting in reduced energy conversion efficiencies. By way of example, natural gas-fueled water heaters typically operate with excess air rates of 30% to 40% of the exhaust stream, which constitutes approximately 30% to 40% of the amount of additional oxygen required to burn the natural gas and convert it into heat energy.

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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 in this annual report, pulse combustion results in a more complete combustion process than conventional steady-state combustion due to the more turbulent combustion environment and internal combustion pressures resulting from the repetitive pulse combustion cycles inherent in pulse combustion process, resulting in the emission of less post-burn chemical gases as part of the exhaust stream. Pulse combustion can, however, 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, offers significantly reduced NOx emissions than conventional tubular pulse combustion designs, and comparable or slightly lower levels of other emissions, such as sulfur dioxide and carbon monoxide, as a result of greater number of burning cycles inherent in our design. Simply put, the greater number of burning cycles, the more complete the burning process, and the lower the level of emissions. As previously noted, pulse burner units using the conventional tubular pulse combustion configuration typically operate at 60 to 70 cycles per second. Our pulse combustion technology, on the other hand, operates at anywhere from 350 to 650 cycles per second depending upon the configuration and application, which translates into significantly lower emissions.

The ability of our pulse combustion technology to reduce emissions is illustrated by the following independent test results:

• In February, 1994, the Center for Emissions Research, and Certification, Inc., an independent testing agency under the auspices of the Southern California Air Quality Management District located conducted a series of tests at their facilities in the City of Industry, California, of a 30,000 to 94,000 BTU/hour natural gas-fueled residential water heater demonstration unit using our cylindrical pulse combustion design. These tests followed a test protocol developed by the Southern California Air Quality Management District. The average NOx emissions of these tests, based upon three test runs conducted and monitored by the Center using their testing equipment, was 9.5 Ng/Joule.

• In May, 1994, the American Gas Association Laboratories, an independent testing laboratory, conducted a series of tests at their facilities in Cleveland, Ohio, on an 8,000 BTU/hour natural gas-fueled water heater demonstration unit using our linear pulse combustion design. These tests followed the same test protocol developed by the Southern California Air Quality Management District and used by the Center for Emissions Research, and Certification, Inc. in conducting its tests. The average NOx emissions of these tests, based upon a series of test runs conducted and monitored by the American Gas Association Laboratories using their testing equipment, was 5.5 Ng/Joule.

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• In February, 1997, the Canada Centre for Mineral and Energy Technology, or "CANMET," conducted a series of tests at our research and development facilities of (1) a 15,200 BTU/hour natural gas-fueled industrial drying furnace unit using linear pulse combustion configuration, and (2) a 10,700 BTU/hour combination natural gas and coal powder-fueled industrial drying furnace unit. All tests were conducted and monitored by CANMET using its own test protocols and testing equipment. CANMET reported zero parts per million NOx and sulfur dioxide emissions for all of these tests, with the exception of one anomalous NO reading on one test arising from the addition of air through a coal feeding orifice.

No further independent testing has been carried out or required since the tests described above.

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. In these cases our burner units would re-burn the 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. Co-generation is the process of supplying both electric and steam energy from the same power source-that is, combustion heat generated from a single process is used to create both electric or mechanical and steam energy. A scrubber is a chemical or electrostatic process used to remove pollutants from an exhaust stream after combustion.

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; and

• 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 size advantage is extremely important where limited floor or room space considerations apply. For instance, a 100,000 BTU/hr low pressure boiler system utilizing our linear 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 tubular combustion unit contains a combustion chamber which is approximately two feet in diameter and three feet in height, and weighs in excess of 200 pounds. The size of conventional steady-state combustion units, in turn, equal or exceed that of conventional tubular combustion units of comparable output.

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As previously discussed in this annual report, 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:

• Turn-down Capability:   All conventional and pulse burners operate at an optimum energy conversion efficiency and emission levels based upon their design, measured in terms of BTU output. A 100,000 BTUs/hour conventional steady-state furnace, for example, is designed to operate most efficiently at a level of fuel-mixture, referred to as the "turn-down ratio," 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 decline and emission levels increase.

As previously discussed in this annual report, one of the principal advantages of our pulse combustion design 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 output and heat transfer efficiencies and lower emissions levels, which we refer to as "turn-down capability," by simply turning one or more modules contained in a combustion unit on or off. Moreover, should an operator desire to increase the combustion units' overall output ability, he need only attach 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 design allows 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.

• No 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 while maintaining full energy output from the remaining modules. This feature is particularly important in commercial and industrial applications requiring continuous operation.

Many conventional tubular pulse systems employ flapper valves on their intake channels. Our pulse combustion technology, on the other hand, is a simple design which requires no valves or other moving parts to operate, leading to increased operating reliability and reduced maintenance and repair costs.

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, propane, and a powdered coal and hydrogen mix, and believe our burner technology will also successfully burn diesel and oil.

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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. As previously discussed in this annual report, conventional tubular pulse combustion units operate at approximately 60 to 70 cycles per second due to their configuration. The oscillating pressure waves from these cycles create a corresponding low frequency standing sound wave of approximately 60 to 70 Hz, 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 600 cycles per second depending upon the configuration, and is "tuned" to create a standing sound wave of approximately 440 Hz. Although this continuous soundwave 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.

The cost to manufacture and install a conventional steady-state 100 million BTU/hr boiler can exceed $10 million, and could take three years to design, manufacture and install from the date the order is placed. A conventional tubular pulse combustion boiler with comparable output would likely be equally expensive.

Due to the simplicity and compact size of our design, including lack of moving parts, 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. For example, we estimate that the 100 million BTU/hr pulse combustion boiler system mentioned would cost approximately one-half of that of a conventional tubular pulse combustion boiler with comparable output, and would have approximately one-third the weight and take up approximately one-third of the floor space of the comparable tubular pulse combustion boiler.

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

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

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• 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 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 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 proposals, 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 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 proposals, we are currently working on this type of project for heavy-duty special-purpose vehicles.

• 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 proposals, we are currently working on this type of project 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.

• Specialty Application Markets:   In this application a burner unit is used for various specialty applications. A good example of a specialty application is the need for "inert" process gases for industrial operations, such as catalytic absorption pollution control systems, fuel cells and horizontal down-hole drilling. Inert process gases are exhaust gases which contain low or zero levels of oxygen. As discussed in greater detail below in that section of this annual report relating to our pending proposals, we are currently working on these types of projects for both catalytic absorption pollution control systems and fuel cells.

• 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.

Both our pulse combustion technology and our diesel fuel combustion technology have completed their respective research and development stages, and the next step in exploiting these technologies is to introduce these technologies to the various markets in order to build market penetration and share and product knowledge and acceptance. Given the broad range of potential applications and markets for our burner technologies, we anticipate that we will introduce our technologies to these potential markets through a number of different strategies and approaches, including the following types of arrangements:

• Royalty 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.

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• 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.

• 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.

Our burner designs have recently completed their primary development stage and are now in a position to be introduced to the market. We are currently working on a variety of production proto-types under various proposal requests which would lead to the initial introduction of the following burner units using our technologies. These pending proposal requests are summarized below.

• Pulse Combustion Burners for China Public Building Steam Boiler Retrofits:   On August 30, 2000, we entered into a letter of intent with Jie Li International Environmental Group, Inc., to provide them a license for the marketing in China of coal-fired burner units using our pulse combustion technology. The Chinese market represents an attractive opportunity for our pulse combustion technology since coal accounts for approximately 75% of China's annual energy consumption and will most likely remain the dominant energy source in China for the foreseeable future. Of equal importance, China suffers significant air pollution-particularly sulfur dioxide or acid rain-as a consequence of its use of coal as its primary source of energy. The opportunity is particularly timely for us since the Chinese government has initiated a major program to reduce air pollution by pursuing "clean coal" technologies, while indicating its desire to continue to use coal as its primary energy source rather than switching to cleaner burning, but more expensive, fuels. Moreover, our pulse combustion technology lends itself to retrofitting, and is significantly more efficient than China's current coal burning technology.

Our agreement to enter into the letter of intent was predicated on the relationships and business strategy formulated by Jie Li to enter the Chinese market. Specifically, members of Jie Li have long-standing business relations with Tian Long Holdings Group Ltd., which operates the Shandong province hub branch of the China National Rail Ministry. Shandong province (also known as Qi Lu) is located at the estuary of the Yellow River in the Bohai Bay. Shandong is China's second most populous province (90 million) after Henan (100 million). Tian Long controls 48 subsidiary companies, and employs 1850 administrative, managerial and support personnel. Tian Long's interests include high-tech products, shipping, hotel and restaurants, trading companies, social services, heavy industry, advertising and printing, and heating and cooling.

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Tian Long is enjoying rapid growth and increased profits year after year. Among its main business activities is the supply of heating and cooling to commercial and residential clients. Tian Long has solid plans to develop this business, as heat supply is a lucrative and successful part of its operations. Today, Tian Long is among the top five heat suppliers in the capital city of Shandong province (Jinan) alone. Tian Long's heating supply arm also has a maintenance and repair service centre, a boiler water softener plant as well as a parts distribution centre. Tian Long is able to offer total and complete heating service.

Tian Long also has the full support of its parent, the Chinese Railways Ministry (one of China's top four Ministries), which also owns a bank and various financial corporations. We believe that Tian Long is an excellent partner for its economic and political relationships and its ability to offer one of China's largest distribution networks as well.

As a consequence of Jie Lie's business relationship with Tian Long, Jie Lie procured an order from Tian Long for 500 coal burning pulse combustion-based boiler retrofits, each involving at least two of our burners, to be used to produce steam for the heating of public buildings under Tian Longs' control. These buildings are currently heated by steam boilers that are extremely energy inefficient and polluting as their antiquated design does not allow for complete combustion of the coal. Clean Energy has been asked to provide clean burning coal burners to retrofit the existing boiler systems thereby replacing only the burner while leaving the boiler system intact. This is an enormous opportunity for our company in that it not only represents the first of many anticipated follow-up orders from Tian Long, but also acts as a commercial beta site for other potential customers and licensees. There are currently 9,500 such boilers under the control of Tian Long alone, and an estimated 136,000 nationwide under the Railway Ministry's control.

As part of the negotiations with Tian Long, Clean Energy sent an engineering team to Jinan in April, 2000 to review the feasibility of the project, followed up with a marketing and financial team visit in August, 2000 to finalize the letter of intent and purchase commitment with Jie Li. Based on those written commitments, Jie Li has, in turn, provided us with a commitment letter for the first 500 retrofits (or 1,000 burner units in total) at a price of $20,000 per burner unit, subject to the pilot installation achieving efficiency and emission reduction targets.

The design, development and production of the first retrofit unit involves two stages, as follows:

• First, our ability to successfully design, construct and operate a proto-type model, including controls and coal feeder, that can burn China's relatively poor-quality coal in a powdered form. (Previously, the only coal we had burned with our pulse combustion technology was a natural gas-powdered coal mixture). We accomplished this step in December 2000, when we successfully tested a 330,000 BTU proto-type burner. 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. At this point we are continuing to modify the design in an attempt to further reduce emission levels, and well as improving the design of the coal feeding system.

• The second step will be to scale-up the proto-type burner into a full 13 million BTU production model, and then install it in Shandong province. In order for Clean Energy to accomplish this next step, we must acquire a significantly larger research & development and testing facility, and we are currently in the process of seeking funding necessary to accomplish this objective. We anticipate that it will take us at least six to twelve months to design, test and manufacture this proto-type burner once we acquire and equip a larger research & development and testing facility. Since our burner design can be easily scaled-up, the principal remaining issue in designing and manufacturing a production model will be improvements to the coal feeding system.

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In the longer term we intend, pursuant to our letter of intent and subsequent discussions with Jie Li, to form a joint venture in China with Tian Long for the manufacture and sale of burner units once cost savings and volume production considerations make on-site manufacturing in China a viable alternative. In this case Clean Energy would be paid an ongoing royalty based on units manufactured by the joint venture, which would approximate our profit margin in manufacturing burner units. It is contemplated that the venture will be owned 25% each by Clean Energy and Jie Li, with the balance held by Tian Long, who will be providing equity to the joint venture in the form of capital assets. It has also been proposed that we invest $500,000 into Jie Lie in return for a 25% equity interest in order to provide Jie Li sufficient marketing funds to continue to expand the potential customer base for these boiler retrofits. This equity interest in Jie Li would also entitle Clean Energy to a pro-rata share of Jie Li's interest in the manufacturing joint venture. Discussions between Clean Energy and Jie Li regarding the ultimate form of association are ongoing, and will be subject to a number of other factors under consideration, including the protection of our intellectual property rights.

• Pulse Combustion Burner to Create A Low Excess Air Reducing Gas For Industrial Catalytic Absorption Pollution Control Systems:   Goal Line Environmental Technologies, LLC, a Tennessee-based designer and manufacturer of industrial catalytic absorption pollution control systems, has requested that we give quotes for eight different natural gas-fueled pulse combustion burner unit proto-types, ranging from 30,000 BTU/hr to 69 million BTU/hr, to be used as a component for their proprietary industrial "SCONOx" catalytic absorption pollution control systems. Goal Line, which is a joint venture of Sunlaw Energy Corporation and Advanced Catalyst Systems, Inc., was initially formed to combine Sunlaw's experience in power plant development and operation with Advanced Catalyst Systems' extensive catalytic research and development expertise.

Goal Line's first project was to develop a catalytic absorption pollution control system which would eliminate carbon monoxide and NOx emissions for two 28 MW natural gas turbine powered industrial co-generation plants operated by Sunlaw in the Los Angeles metropolitan area. This system, which was successfully developed and installed by Goal Line at Sunlaw's co-generation plants and now forms the basis of Goal Line's technology, involves the following two processes:

• an oxidation/absorption process where emissions are passed through an absorption chamber that (1) captures NOx in a potassium carbonate absorber coating, and (2) converts carbon monoxide into harmless carbon dioxide, which is then released through a smokestack; and

• a nitrogen regeneration process where dilute hydrogen reducing gas is passed across the surface of the catalyst and converts the previously captured NOx into harmless nitrogen, which is then released through a smokestack.

The Goal Line catalytic absorption pollution control system has been found by the United States Environmental Protection Agency to result in the "Lowest Achievable Emission Rate" for NOx emissions to date for gas turbine power plants, and therefore, by law, to be the "Best Available Control Technology" standard for new gas turbines. Regardless of these findings, the primary competitive drawback of Goal Line's system has been its inability to identify a technology which would allow it to introduce an oxygen-free dilute hydrogen reducing gas into the catalytic chamber for the nitrogen regeneration process. This is currently done by redirecting steam from the power generation process, which reduces the heat output efficiency of the overall system by approximately 10%. Goal Line looked without success for several years for a technology which would facilitate this requirement since this loss of heat output efficiency is a significant cost item. We demonstrated to Goal Line in a series of tests conducted in January and September 1999 that our pulse combustion burner unit has the capability, due to its ability to maintain "stable" combustion at lower excess air levels, to deliver a 100% oxygen-free hydrogen reducing gas to the catalytic chamber, consequentially allowing Goal Line to recapture the lost heat output efficiency.

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As a result of the noted demonstrations, we have been authorized by Goal Line to commence designing eight different proto-types for use with Goal Line's catalytic absorption pollution control systems. We completed the first proto-type in November 2000, a 365,000 BTU burner unit for use with the catalytic absorption pollution control system installed at Sunlaw's Los Angeles gas turbine co-generation plant. This unit will also serve as a demonstration proto-type for the sale of the catalytic absorption pollution control system to other industrial plants. The other proto-types will be used with catalytic absorption pollution control system used for other types of power system applications, including diesel compressor sets and oil pipeline pumping stations.

While we have completed the first proto-type for Goal Line, Goal Line has not yet had the opportunity to test the proto-type with its catalytic absorption pollution control system due to its pending relocation to larger facilities. In addition, Goal Line has also recently received a major cash infusion from Cummins, Inc., a world leader in engine manufacturing, and is currently reviewing the applications of our technology with respect to additional product requirements under this new relationship. We believe that the proposed applications for Goal Line will most likely be extended to diesel-fueled applications given this event. In our most recent communications, it was agreed that the engineers of each company will meet to review capital and running costs, and that Goal Line's executives would visit us to commence contract negotiations.

• Natural Gas-Fueled Pulse Combustion Burner to Create A Low Excess Air Reducing Gas For Fuel Cell Applications:   We are currently working on a proposal for an Alberta-based company to design a burner which facilitates the conversion of natural gas into an oxygen-free dilute hydrogen reducing gas (in a similar manner as our proto-type for Goal Line) for use with a recently developed line of fuel cells that will be marketed for a variety of stationary electricity generation purposes. A fuel cell is an electrochemical device which combines hydrogen fuel with oxygen to produce electric power, heat and water. One of the biggest problems with fuel cell technologies is the delivery of hydrogen, an extremely volatile and combustible gas. The developer of these fuel cells, which have completed development and reached the stage where they can be marketed commercially, has addressed this problem using natural gas as its fuel source. Specifically, the hydrogen required for the operation of the fuel cell is acquired through the conversion of natural gas into hydrogen and carbon monoxide using conventional combustion. However, the effluent of this conventional combustion process contains oxygen or excess air as a consequence of the combustion process, which the developer would like to eliminate since the residue of oxygen in the effluent results in a lower amount of electricity generated. Our pulse combustion technology should therefore, as a consequence of its ability to convert the natural gas into an oxygen-free dilute hydrogen reducing gas, allow more electricity to be generated through the chemical reactive process, and accordingly add additional commercial viability to the fuel cell product.

We have recently designed and manufactured an extremely small, 8,000 BTU/hour proto-type burner unit which operates at a 1,600 HZ frequency level due to its extremely small size, which meets the developer's initial requirements as set forth in its proposal, and delivered it to the developer for testing. Assuming the proto-type unit is satisfactory to the developer with respect to both performance and cost, we anticipate that we will enter into discussions with the developer over the next several months over the adoption of our pulse combustion technology for its natural gas conversion requirements.

• Pulse Combustion Burner For Industrial Pulp and Paper Drying Applications:   We are currently working on a proposal for a Montreal-based manufacturer of pulp and paper industrial dryers which has asked Clean Energy to submit a proposal to provide burner units for their products. We believe this represents a beta-site opportunity (similar to the Jie Li project) for Clean Energy to demonstrate the additional advantages of our pulse combustion technology to the drying industry.

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• Diesel-Fueled Pulse Combustion Burner For Vehicle Heating:   We are currently working on a proposal for a Canadian-based manufacturer of heaters for heavy-duty special-purpose vehicles for a diesel-based burner to be used for their heaters. In this regard we have designed and are currently testing and perfecting an extremely small, 50,000 to 200,000 BTU/hour proto-type burner unit which should meet the manufacturer's operating requirements. We anticipate that we should complete this proto-type within three months, at which time we will deliver it to the manufacturer for testing. We intend to use this project to demonstrate the ability of our pulse combustion technology to burn diesel fuel.

• Adaptation Of Two Natural Gas Fueled Burner Units To Burn Diesel Fuel Using Diesel Combustion Technology:   Acotech Corporation of Marietta, Georgia, has requested that we design two production proto-types of our diesel fuel combustion technology which would allow two of Acotech's natural gas-fueled burner design to burn diesel fuel. Acotech is a 50/50 joint venture of The Bekaert Group, the largest independent steel wire manufacturer in Europe, and The Royal Dutch Shell Group. We have put the commencement of this project on hold pending the focus of our limited manpower and resources on our China, Goal Line and other Canadian projects discussed above. We are also awaiting discussions with Acotech relative to costing, royalty and other economic issues before work on this proposal proceeds.

• Flare Gas-Fueled Pulse Combustion Burner to Operate Turbo-Generator:   We have also worked on a proposal for Allied Signal Power Systems, Inc., to assess the application of our pulse combustion technology to be used in conjunction with Allied Signal Power Systems' flare-gas operated turbo-generator. Allied Signal Powers Systems is a division of AlliedSignal, which recently merged with Honeywell, Inc. to form Honeywell. Similar to Acotech, we have also put this project on hold pending the focus of our limited manpower and resources on our China, Goal Line and other Canadian projects discussed above. We are also awaiting further input from Allied Signal Powers Systems relative to the direction of this project pending restructuring issues relating to their recent acquisition by Honeywell.

Flare gas is residual natural gas emitted as a byproduct of producing oil wells. Flare gas is ordinarily burned at the source, and the resultant emissions released into the environment, since the amount of residual natural gas is relatively small and the cost to collect and market the gas is not commercially justified. Allied Signal Power Systems uses the heat energy resulting from the combustion of flare gas to power its turbo-generator, and create electricity than can then be funneled into the electricity grid. The attractiveness of our burner unit to Allied Signal Power Systems is its ability to provide both higher energy efficiencies and lower-NOx exhaust gases than the burner unit Allied Signal Powers Systems currently uses to fuel its turbo-generator.

We have successfully competed the first stage of this project, which was to conduct flow tests establishing our ability to meet Allied Signal Power Systems' unusual flow capacity requirements. The cost of this first phase, approximately $15,000, has been borne by our company as a development expense. We will need to complete a second step, involving the design and scale up of the prototype to meet Allied's output requirements, and a third and final step, to fabricate and successfully test a demonstration proto-type. The cost of the second phase, which has not yet been determined, will be shared equally by our company and Allied. The cost of phase 3 also has not yet been determined, and cost sharing arrangements will be negotiated upon conclusion of the second phase.

In previous reports Clean Energy disclosed that we had worked on a proposal to finalize development of a natural gas-fueled 400,000 to 500,000 BTU/hr instantaneous water heater for State Industries, Inc., and a proposal to develop a natural gas-fueled burner unit for STM Corporation to provide an oxygen-free reducing gas as a heat source for the operation of their external combustion engine for industrial. The water heater proposal has since expired as a

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 consequence of State Industries' financial situation and the elimination of its research and development department, and the STM Corporation proposal has expired as a consequence of technical issues relating to their technology. Clean Energy has since hired the head of State Industries research and development team to further our instantaneous water heater technology, and is actively pursuing grants with CE-CERT and ICAT to further develop and commercialize this technology for the California market.

Please note that completion of proto-types under the foregoing proposals are still pending, and no orders will be placed or enforceable contracts entered into until the proto-types are completed and approved in the case of all of the proposals, and mutually acceptable contract terms have been negotiated in the case of all of the proposals other than China. 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 after we complete the noted prototypes.

Additional applications of our pulse combustion technology which we intend to pursue in the future include the following:

• Commercial Dryer for Industrial Waste, Wood Products and Wood Waste, and the Agri-food Drying Industry:   This is an application identified by The Canadian Center For Mineral And Energy Technology, or CANMET, following their testing and evaluation of our pulse combustion technology that is of particular suitability to its design. The acoustic wave associated with pulse combustion, when applied to drying applications, provides a 22% mechanical advantage over conventional drying technologies because of the acoustic signal's physical manipulation of the drying environment. 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. We believe that this will translate into substantial fuel savings in large industrial drying applications.

We have received a proposal from CANMET, a quasi-governmental "think tank" which specializes in researching and marketing innovative mineral and energies technologies, to work in consultation to our company to design and manufacture a working proto-type industrial dryer and to approach potential users in the industrial dry cleaning market. Under this proposal, CANMET would lend the assistance of its scientific and technical staff and industry contacts to assist us at their cost of manpower. No potential users have been contacted to date from CANMET, however, we have recently been contacted by, and have submitted a proposal to, a Montreal-based manufacturer for a pulp and paper industrial dryer.

• 40 to 80 Million BTU/hr Flow-Through Water Heater:   This unit is intended for large industrial applications such as pulp mills. A design feasibility study to apply our pulse combustion technology to the requirements of a specific mill was requested by a large pulp and paper manufacturer.

• Electric Car Heater and Recharging System:   It is currently proposed that the batteries of the all-electric car mandated for California be reserved for one purpose only, the movement of the car. This means that all other energy requirements, such as heating, cooling, headlights, radio and perhaps most importantly, a trickle charge back into the battery, be loaded onto a different energy system. Pulse combustion burner unit emissions are sufficiently low to qualify for the so-called "zero emissions" standards being applied to electric vehicles in California. We believe that this advantage, as well as the compact size of our pulse combustion technology, perfectly suit it to be the heat source for this application.

• Transit Bus Heater:   We plan to design a 50,000 BTU/hr natural-gas-fired heater for natural gas transit buses. This is a rapidly expanding market area. Natural gas has been acclaimed "the fuel of choice" for transit buses by most leading authorities in the United States, including the American Gas Association.

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• 10 Million BTU/hr. Burner Head for Large Scale Power Plant Retrofit such as Burrard Thermal in Vancouver:   The Burrard Thermal Plant, which is located in the greater Vancouver, British Columbia, area, is a major local source of NOx emissions and the current remedy of installing after-combustion-scrubbers is an expensive stop gap measure. We believe that once its scale-up progress continues to ten million BTU, we would be in a position to assess whether our technology can be engineered to retrofit one of the large units, consisting of approximately one billion BTU output, at the Burrard Thermal Plant. If so, we would have the unique opportunity of providing a practical and inexpensive solution for high output, high pollution industrial sites such as the Burrard Thermal Plant.

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

Our principal activities since our formation in March 1999 have been research and development activities in adapting our proto-types into production models. Our research and development team is currently comprised of six employees, including Messrs. Chato and DeFina. Our gross research and development expenses amounted to $400,107 and $221,037 for our 2000 and 1999 fiscal years, respectively. Our research and development budget for fiscal 2001 is $825,000.

One of our objectives in meeting our operating expenses is to fund a significant portion of our research and development expenditures through grants. We are in the process, for example, of applying for approximately $400,000 in matching grants from CE-CERT and ICAT with respect to the development of our natural gas-fueled water heaters. Previously, the BO companies have procured Cdn. $1,785,000 in grants for developmental purposes. Our contract and grant procuring efforts are being headed by Dr. William Jackson, who is one of our directors. Dr. Jackson received his Ph.D. from Glasgow in Scotland, and received a Fulbright Scholarship as a Post-Doctoral Fellow at the Massachusetts Institute of Technology. He subsequently joined the faculty at MIT and established himself as an internationally recognized authority on advanced energy technologies and systems. This led him to the U.S. Department of Energy where he held senior management and technical positions during the energy crises of the 1970's. He is presently a Professor of Engineering at George Washington University in Washington DC and has also taught at several prestigious universities around the world, including Manchester (UK), Technical University of Berlin, Germany; University of Illinois; and the University of Tennessee Space Institute. In 1983 he established and has continuously headed the HMJ Corporation, a Washington DC based engineering analysis and consulting organization specializing in advanced energy systems. Dr. Jackson gained much of his industrial research exposure at the AVCO - EVERETT Reseach Laboraties where he was the Principal Research Scientist. Dr. Jackson is also coordinating our contacts with the U.S. Department of Energy and the South Coast Air Quality Management District, to name a few, in our efforts to further promote the development of our technologies and to have them designated as best available technologies.

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On March 5, 1999, we entered into a pulse combustion technology license with 818879 Alberta, Ltd. under which it granted us, in consideration of $10, an exclusive license to design, engineer, manufacture, market, distribute, lease and sell burner products using the pulse combustion technology within any country in the world other than Finland or Sweden, and to sublicense and otherwise commercially exploit the pulse combustion technology within the permitted countries. Under the terms of the pulse combustion technology license, we have no obligation to pay any royalty or license fees to 818879 Alberta, Ltd. The term of the pulse combustion technology license expires upon the earlier of March 5, 2019 or the lapse of the newest underlying patents for the pulse combustion technology, including any patented improvements. The oldest pulse combustion technology patent expires in July 2006, and the newest current pulse combustion technology patent expires in July 2012. For further information concerning the underlying patents for the pulse combustion technology, see the section of this annual report captioned "Business-Patents and Proprietary Rights."

We are generally prohibited under the pulse combustion technology license from sublicensing our rights to the pulse combustion technology, or otherwise assigning our rights as licensee under the pulse combustion technology license, to any third party without 818879 Alberta, Ltd.'s prior consent. 818879 Alberta, Ltd., in turn, is also generally prohibited from selling its rights to the pulse combustion technology, or otherwise assigning its rights as licensor under the pulse combustion technology license, to any third party without our prior consent.

We are obligated under the pulse combustion technology license to pay or to reimburse 818879 Alberta, Ltd. for all costs its incurs to file and prosecute new or additional patents for the pulse combustion technology in any country. We are also obligated to pay or to reimburse 818879 Alberta, Ltd. for prosecuting and defending patent infringement claims relating to the pulse combustion technology, and to pay any damages arising from these claims.

We have the right under the pulse combustion technology license to acquire full ownership of the pulse combustion technology from 818879 Alberta, Ltd. on or after March 5, 2004, based upon the occurrence of conditions revolving around our success or failure in procuring a listing of our common stock on a "national market," which is defined under the pulse combustion technology license to constitute The New York Stock Exchange, The American Stock Exchange or The Nasdaq Stock Market, including both the SmallCap and National Markets.We refer to this purchase right as the "Pulse Combustion Technology Option." Specifically:

• We have the right, commencing March 5, 2004, to elect to acquire full ownership of the pulse combustion technology from 818879 Alberta, Ltd. for the payment of Cdn. $1, so long as our common stock has been accepted for listing or quotation on a national market by the date we notify 818879 Alberta, Ltd. that we are exercising this option and we tender payment. We have made no application to date to obtain any listing or quotation, and we can give no you assurance that we will make any application.

• 818879 Alberta, Ltd., in turn, has the right to terminate the pulse combustion technology license anytime after March 5, 2004, if our common stock is not actively trading on a national market by the date it exercises its termination right. In order to exercise this right, 818879 Alberta, Ltd. must give us 90-days notice accompanied by the payment of Cdn. $1. Should 818879 Alberta, Ltd. exercise this termination right, we will lose all rights to market burner products using the pulse combustion technology unless we subsequently procure the listing or quotation of our common stock on a national market by the end of our 90-day cure period, or are able to exercise other protective rights described below which we retain to acquire the pulse combustion technology.

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• Should 818879 Alberta, Ltd. exercise its termination right, and should we fail to procure the listing or quotation of our common stock on a national market by the lapse of our 90-day cure period, we can nevertheless acquire full title to the pulse combustion technology by paying 818879 Alberta, Ltd. the sum of Cdn. $525,000 within ten business days of the end of our 90-day cure period, subject to downward adjustment, plus interest on the amount which has accrued since January 1, 1999 at the rate of 13% per annum. In order to be entitled to receive the full Cdn. $525,000, 818879 Alberta, Ltd. must remit to us concurrent with our payment all shares of our series "A" preferred stock which are then outstanding as well as 593,750 shares of our common stock. If 818879 Alberta, Ltd. is unable to tender all 593,750 shares of our common stock, the Cdn. $525,000 cash consideration we must pay to 818879 Alberta, Ltd. will be reduced on a pro rata basis based upon the number of shares of our common stock which 818879 Alberta, Ltd. actually remits to us.

• If our common stock is not actively trading on a national market by March 5, 2004, and should 818879 Alberta, Ltd. not exercise its termination right by that date, then we may pay 818879 Alberta, Ltd. the sum of Cdn. $1 and demand that 818879 Alberta, Ltd. exercise its termination right within 90 days of our demand, in which case we may, in turn, elect to acquire full ownership of the pulse combustion technology on the terms described above. If 818879 Alberta, Ltd. fails to make its election by the end of our 90 day demand period, full title to the pulse combustion technology will automatically revert to us.

• Should we acquire full title to our pulse combustion technology by reason of any of the above purchase rights, 818879 Alberta, Ltd. will nevertheless retain the right to reacquire our pulse combustion technology should we later become bankrupt or insolvent, or be threatened with bankruptcy or insolvency, or make an assignment in favor of our creditors.

For further information concerning risks associated with the termination of the pulse combustion technology license, see that section of this annual report captioned "Risk Factors-Risks Relating To Clean Energy And Its Business-We Could Lose Our Technology Licenses If We Fail To List Our Common Stock on a National Market."

On March 5, 1999, in consideration of the sum of $10 paid to Mr. John D. Chato, we entered into a diesel fuel combustion technology license with Mr. Chato under which he granted us an exclusive worldwide license to design, engineer, manufacture, market, distribute, lease and sell burner products using the diesel fuel combustion technology, and to sublicense and otherwise commercially exploit the diesel fuel combustion technology. We are obligated under the diesel fuel combustion technology license to pay Mr. Chato or his assignees a 10% royalty based upon our net profits, after reasonable allowance for bad debts and the allocation of administrative and other overhead items, from the sale of products incorporating the diesel fuel combustion technology. The term of the diesel fuel combustion technology license expires upon the earlier of March 5, 2019, or the lapse of the newest underlying patents for the diesel fuel combustion technology, including any patented improvements. An application for a patent for the diesel fuel combustion technology was filed in August 1998 and, if issued, will expire 17 years after the issue date. For further information concerning the underlying patents for the diesel fuel combustion technology, see that section of this annual report captioned "Business-Patents and Proprietary Rights."

We are generally prohibited under the diesel fuel combustion technology license from sublicensing our rights to the diesel fuel combustion technology, or otherwise assigning our rights as licensee under the diesel fuel combustion technology license, to any third party without Mr. Chato's prior consent. Mr. Chato, in turn, is also generally prohibited from selling his rights to the diesel fuel combustion technology, or otherwise assigning his rights as licensor under the diesel fuel combustion technology license, to any third party without our prior consent.

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We are obligated under the diesel fuel combustion technology license to pay or to reimburse Mr. Chato for all costs he incurs to file and prosecute new or additional patents for the diesel fuel combustion technology in any country. We are also obligated to pay or to reimburse Mr. Chato for prosecuting and defending patent infringement claims relating to the diesel fuel combustion technology, and to pay any damages arising from these claims.

The diesel fuel combustion technology agreement provides that we will automatically obtain full ownership of the diesel fuel combustion technology, without the payment of any additional consideration, as of the same date as we acquire title to the pulse combustion technology. We refer to this acquisition right as the "Diesel Fuel Combustion Technology Option." Should we acquire full ownership of the diesel fuel combustion technology, we will nevertheless continue to be obligated to pay the 10% royalty to Mr. Chato or his assigns.

Should the pulse combustion technology license be terminated without our acquiring full ownership of the pulse combustion technology, then the diesel fuel combustion technology license will expire concurrently, and we will lose all rights to market burner products using the diesel fuel combustion technology.

For further information concerning risks associated with the termination of the diesel fuel combustion technology license, see the section of this annual report captioned "Risk Factors-Risks Relating To Clean Energy And Its Business-We Could Lose Our Technology Licenses If We Fail To List Our Common Stock on a National Market."

Our basic pulse combustion technology and a number of design improvements to this technology are protected by a number of United States patents in the name of Mr. Chato, as inventor, the oldest of which expires in July, 2006, and the newest of which expires in July 2012. The diesel fuel combustion technology is also protected by a United States patent filed in 1998 which expires in August 2012. We anticipate that we will make international patent applications in selected foreign countries for our pulse combustion technology and our diesel fuel combustion technology in the upcoming months.

We acquired our rights to our pulse combustion technology under a pulse combustion technology license we entered into with 818879 Alberta, Ltd. on March 5, 1999. 818879 Alberta, Ltd. acquired its rights to the pulse combustion technology in December 1998 from a creditor of the BO Group and its related companies. Excluded from this transfer were the rights to early pulse combustion patents relating to Finland and Sweden which the creditor had purchased separately from the BO Group. As part of 818879 Alberta, Ltd.'s acquisition of its rights to the pulse combustion technology, Mr. Chato agreed to release all of his rights to the initial pulse blade combustion patents and any improvements. Mr. Chato owns the diesel fuel combustion technology, which he licensed to us on March 5, 1999. For more complete information concerning these transactions, see the sections of this annual report captioned "Business-Corporate Structure" and "Business-License Agreements."

We intend to diligently defend any infringement of our pulse combustion technology and diesel fuel combustion technology patents. We are not aware of any potential challenges to these patents. We have not established a fund for defense of these patents, but may do so if significant sales of its products are achieved. We intend to have all employees and consultants execute trade secret and confidentiality agreements.

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

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depending generally on the economic importance of the country or countries to which these patents or proprietary rights relate, an adverse effect on our company and our business prospects. Legal costs relating to prosecuting or defending patent infringement litigation may be substantial. Costs of litigation related to successful prosecution of patent litigation are capitalized and amortized over the estimated useful life of the relevant patent. We cannot give you any assurance that we will be able to successfully defend our patents and proprietary rights, or fund the costs of that litigation. For further information concerning these risks, see "Risk Factors-Risks Relating To Clean Energy And Its Business-Our Ability To Compete Is Dependent Upon Our Patents and Proprietary Rights."

We currently have eight full-time employees and one part-time employee, including two in executive management and six in research and development. We expect to add two or three additional full-time employees over the next 12 months. None of our employees are represented by a union. We believe that our relations with our employees are good.

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

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

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

• limits nitrogen oxides emission levels for water heaters, boilers or process heaters to be sold in the region after January 1, 2000 to 30ppm for all units with an output between 400,000 to 2 million BTUs/hr, and 55ppm for all units with an output between 75,000 and 400,000 BTUs/hr;

• prohibits the operation in the region after July 1, 2002 of any water heaters, boilers or process heaters manufactured before 1992 that have nitrogen oxides emissions in excess of 30ppm; and

• prohibits the operation in the region after January 1, 2006 of any water heaters, boilers or process heaters manufactured before 2000 that have nitrogen oxides emissions in excess of 30ppm.

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

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

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

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 for a two-year term, with a two-year option to renew, through our subsidiary Clean Energy Canada, at an approximate rental rate of Cdn. $3,400 per month.

Our increased levels of activity and pending business opportunities-particularly our ability to manufacture a full-size production burner for our China proposal-require expanded premises and staffing levels. After determining our needs and viewing many properties, our management has identified a facility consisting of approximately 27,000 sq. feet located in the south Burnaby industrial area. Our ability to acquire and move into these or similar new premises, however, will be governed by our ability to raise additional capital.

A larger facility will allow our company to grow our business in many ways. We will have more office space, a demonstration area to showcase products and working prototypes as well as complete testing facilities and production space, when needed. We will also build and operate individual test cells to accommodate the development of the many applications that we, or potential licensees, have identified.

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

• 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.

No matters were submitted to a vote of our security holders during our fourth quarter ended December 31, 2000.

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On March 29, 2001, the shareholders' list provided by our transfer agent showed:

• seventeen registered holders of our common stock and 10,131,694 shares of our common stock outstanding.

• one registered holder of our series "A" convertible preferred stock and 1,000 shares of our series "A" convertible preferred stock outstanding. Each of these shares is convertible into one share of our common stock.

• one registered holders of our series "B" convertible preferred stock and 250,001 shares of our series "B" convertible preferred stock outstanding. Each of these shares is convertible into one share of our common stock.

There are also outstanding as of March 29, 2001, options and warrants entitling the holders to purchase 817,305 shares of our common stock at prices between $2 and $5, respectively.

There currently is no public market for our common stock or other securities, and we cannot give you any assurance that any active or liquid public market for our common stock or other securities will develop or be sustained at any time in the future. In June 2000, a United States-based broker-dealer filed an application with the NASD to sponsor the trading of our common stock on the NASD OTC Bulletin Board pending the completion of the distributions of CECSI common stock contemplated by our registration statement on form SB-2 which was declared effective on May 10, 2000. The distributions to be made by the various BO companies under the form SB-2 have been delayed, however, pending their approval by the British Columbia and Ontario Securities Commissions. Although these Canadian securities regulators approved the distributions in principle in December 2000, their staff and the BO companies are currently finalizing the terms of the order which will formally govern the distributions. While the only remaining issue Clean Energy has to date with the NASD is the completion of these distributions, no assurance can be given that the NASD will ultimately give its approval, or if it does, that this market will actually commence or develop. 

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

The following table presents selected historical consolidated financial data derived from our consolidated financial statements. The selected statement of loss data set forth below for our fiscal periods ended December 31, 2000 and December 31, 1999 and the selected balance sheet data set forth below as of

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December 31, 2000 and December 31, 1999 have been audited by Deloitte & Touche LLP, independent auditors, as indicated in their report contained in the consolidated financial statements included in Item 14 of this annual report. The following selected financial data should be read in conjunction with:

• our consolidated financial statements and the notes to our consolidated financial statements included in Item 14 of this annual report; and

• Item 7 of this annual report captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations."