As filed with the Securities and Exchange Commission on May 15, 2001

Securities And Exchange Commission

Washington, D.C. 20549

_________________

FORM 10-Q

_________________

(Mark One)

[ X ]	Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For The Three-Month Period Ended March 31, 2001; Or
	Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For The Transition Period From ________ To _______

Commission File No. 333-88207

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of
incorporation or organization)

98-0211550

(I.R.S. Employer
Identification No.)

7087 MacPherson Avenue, British Columbia, Canada V5J 4N4

(Address of principal executive offices) (Zip Code)

(604) 435-9339

(Registrant's telephone number, including area code)

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 registration was required to file such Reports), and (2) has been subject to such filing requirements for the past 90 days: Yes No

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

10,131,694 shares of common stock, par value $0.0001 per share, as of May 11, 2001

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Page

PART I	B USINESS		1
item 1	FINANCIAL STATEMENTS		1
Item 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		13
		General	13
		Overview	13
		Results Of Operations	14
		Liquidity And Capital Resources	14
		Other Matters	16
		Uncertainties And Other Risk Factors That May Affect OurFuture Results And Financial Condition	17
Item 3	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		29
		Oil And Gas Price Fluctuations	29
		Currency Fluctuations	30
		Interest Rate Fluctuations	30
PART II	OTHER INFORMATION		30
Item 1	LEGAL PROCEEDINGS		30
Item 2	CHANGES IN SECURITIES AND USE OF PROCEEDS		30
Item 3	DEFAULTS UPON SENIOR SECURITIES		30
Item 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		30
Item 5	OTHER INFORMATION		30
Item 6	EXHIBITS		30
		Exhibits	30
		Reports on form 8-K	30

-ii-

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Consolidated Balance Sheet
(unaudited)
expressed in U.S. dollars)

			March 31, 2001	December 31, 2000
ASSETS
CURRENT
	Cash and cash equivalents		$ 560	$ 2,122
	Short-term investments		-	13,338
	Accounts receivable and prepaid expenses		17,993	32,122
	Advances to an affiliated company (note 3)		48,342	50,818
			---------------------	-----------------------
		Total current assets	66,895	98,400
PATENTS			25,175	25,175
PROPERTY AND EQUIPMENT (note 4)			57,260	62,256
			---------------------	-----------------------
TOTAL ASSETS			$ 149,330	$ 185,831
			==============	===============
LIABILITIES
CURRENT
	Accounts payable		$ 298,845	$ 191,818
	Accrued liabilities		12,561	3,334
	Current payroll taxes		46,662	27,293
	Advances from related parties (note 5)		59,591	12,727
			---------------------	-----------------------
		Total current liabilities	417,659	235,172
Going concern (note 1)
SHAREHOLDERS' EQUITY
Authorized (note 6):
	Preferred stock; par value $0.0001 per share, 1,000,000 shares
	Common stock; par value $0.0001 per share, 15,000,000 shares
Issued (note 6):
	Series "A" convertible preferred stock; Liquidation preference $1 per share, or $1,000 total 1,000 shares issued and outstanding as of March 31, 2001 and December 31, 2000		1	1
	Series "B" convertible preferred stock; Liquidation preference $2 per share, or $500,002 total 250,001 shares issued and outstanding as of March 31, 2001 and December 31, 2000		250	250
	Common stock; 10,131,694 shares issued and outstanding as of March 31, 2001 and December 31, 2000		1,013	1,013
Additional paid-in capital			1,513,125	1,496,625
Deficit accumulated during the development stage			(1,782,718)	(1,547,230)
			---------------------	-----------------------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT)			(268,329)	(49,341)
			---------------------	-----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			$ 149,330	$ 185,831
			==============	===============

The accompanying notes to consolidated financial statements
are an integral part of this consolidated balance sheet

-1-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Consolidated Statement Of Operations
(unaudited)
(expressed in U.S. dollars)

Three Months Ended March 31, and Cumulative From Commencement of Operations on January 1, 1999 to March 31, 2001			March 31, 2001	March 31, 2000	Cumulative to March 31, 2001
ADMINISTRATION AND MARKETING EXPENSES
	Accounting		$ 9,229	$ -		$ 43,639
	Wages and benefits		52,586	46,135		393,485
	Amortization		4,996	4,580		34,726
	Communications		1,870	2,103		16,634
	Foreign exchange (gain) loss		(10,770)	8,282		(21,082)
	Interest		3,943	7,272		30,601
	Legal		22,161	12,973		130,861
	Professional fees		-	-		6,732
	Marketing		30,447	21,434		248,686
	Occupancy		9,436	9,073		77,424
	Office and miscellaneous		4,720	5,162		78,748
	Transfer agent fees		2,460	3,027		16,440
			--------------------	-------------------		-------------------
		Total administration and marketing	131,078	120,041		1,056,894
RESEARCH AND DEVELOPMENT EXPENSES
	Wages and benefits		73,331	53,184		551,074
	Development		31,079	13,134		174,750
			--------------------	-------------------		-------------------
		Total research and development	104,410	66,318		725,824

TOTAL EXPENSES AND NET LOSS			$ (235,488)	$ (186,359)		$ (1,782,718)
			=============	=============		=============
BASIC AND DILUTED LOSS PER SHARE (note 2(j))			$ (0.02)	$ (0.02)
			=============	=============		=============
WEIGHTED AVERAGE SHARES OUTSTANDING			10,131,694	9,643,750
			=============	=============		=============

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

-2-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Consolidated Statement Of Shareholders' Equity (Deficit)
(unaudited)
(expressed in U.S. dollars)

	Series "A" Preferred Stock		Series "B" Preferred Stock		Common Stock		Additional Paid-in Capital	Accumulated During The Development Stage
	Shares	Amount	Shares	Amount	Shares	Amount	Additional Paid-in Capital	Period	Cumulative

Issued on incorporation	1,000	$ 1	-	$ -	9,643,750	$ 964	$ 535	$ -	$ 1,500
Private placement	-	-	250,001	250	-	-	499,752	-	500,002
Vesting of previously issued but unexercised warrants granted to consultant (note 6(f))	-	-	-	-	-	-	2,000	-	2,000
Net loss	-	-	-	-	-	-	-	(639,404)	(639,404)
	---------	---------	---------	---------	------------	---------	------------	-------------	------------
Balance, December 31, 1999	1,000	1	250,001	250	9,643,750	964	502,287	(639,404)	(135,902)

Vesting of previously issued but unexercised warrants granted to consultant (note 6(f))	-	-	-	-	-	-	18,500	-	18,500
Issued on conversion of promissory note	-	-	-	-	487,944	49	975,838	-	975,887
Net loss	-	-	-	-	-	-	-	(907,826)	(907,826)
	---------	---------	---------	---------	------------	---------	------------	-------------	------------
Balance, December 31, 2000	1,000	1	250,001	250	10,131,694	1,013	1,496,625	(1,547,230)	(49,341)

Vesting of previously issued but unexercised warrants granted to consultant (note 6(f))	-	-	-	-	-	-	16,500	-	16,500
Net loss	-	-	-	-	-	-	-	(235,488)	(235,488)
	---------	---------	---------	---------	------------	---------	------------	-------------	------------
Balance, March 31, 2001	1,000	$ 1	250,001	$ 250	10,131,694	$ 1,013	$ 1,513,125	$ (1,782,718)	$ (268,329)
	========	========	=======	=======	==========	=======	==========	===========	==========

The accompanying notes to consolidated financial statements are
an integral part of this consolidated statement of shareholders' equity (deficit)

-3-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Consolidated Statement Of Cash Flows
(unaudited)
(expressed in U.S. dollars)

Three Months Ended March 31, and Cumulative From Commencement of Operations on January 1, 1999 to March 31, 2001			March 31, 2001	March 31, 2000	Cumulative to March 31, 2001

OPERATING ACTIVITIES
	Total operating expenses and net loss		$ (235,488)	$ (186,359)		$ (1,782,718)
	Adjustments to reconcile total operating expenses
		to net cash utilized in operating activities:
		Amortization	4,996	4,580		34,726
		Non-cash consulting expense	16,500	500		37,000
	Change in operating assets and liabilities:
		Accounts receivable and prepaid expenses	14,129	7,363		(17,993)
		Accounts payable	107,027	10,000		298,845
		Accrued liabilities	9,227	3,269		12,561
		Payroll taxes	19,369	3,945		46,662
			-----------------	-------------------		-------------------
Net cash used in operating activities			(64,240)	(156,702)		(1,370,917)

INVESTING ACTIVITIES
	Purchase of short-term investment		13,338	10,000		-
	Purchase of a patent		-	(7,696)		(25,175)
	Purchase of property and equipment		-	(19,602)		(91,986)
			-----------------	-------------------		-------------------
Net cash used in investing activities			13,338	(17,298)		(117,161)

FINANCING ACTIVITIES
	Advances to an affiliated company		2,477	1,056		(48,342)
	Proceeds from long-term obligations (note 5)		46,864	150,874		-
	Advances from related parties		-	162		59,591
	Proceeds from issue of common stock		-	-		976,889
	Proceeds from issue of Series "A" convertible preferred stock		-	-		500
	Proceeds from issue of Series "B" convertible preferred stock		-	-		500,002
			-----------------	-------------------		-------------------
Net cash provided by financing activities			49,341	152,092		1,488,640

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(1,561)	(21,908)		560
CASH (BANK OVERDRAFT) AND CASH EQUIVALENTS, BEGINNING OF PERIOD			2,122	26,414		-
			-----------------	-------------------		-------------------
CASH (BANK OVERDRAFT) AND CASH EQUIVALENTS, END OF PERIOD			$ 561	$ 4,506		$ 560
			===========	=============		=============

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

-4-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Organization And Operations; Going Concern

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

Clean Energy was formed for the specific purpose of acquiring exclusive world-wide license rights entitling us to design, engineer, manufacture, market, distribute, license and otherwise commercially exploit two innovative, patented "burner" technologies, our pulse blade combustion or "PBC" technology and our diesel fuel combustion technology. Clean Energy acquired these technologies through the purchase of two licenses in the amount of $10 each from founding shareholders of our company.

Since we have not generated operating revenues to date, we should be considered a development stage enterprise. Clean Energy has incurred losses from inception totalling $1,782,718 and has a working capital deficiency of $350,764 and does not currently have the financial resources to complete its business plan. Our ability to continue as a going concern will be dependent upon our ability to attain future profitable operations and to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. External financing, predominately in the short-term by loans from affiliated parties and in the longer-term through the issuance of common stock will be sought to finance development of our products; however, there can be no assurance that sufficient funds will be raised.

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

Significant Accounting Policies

Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. While these financial statements reflect all normal recurring adjustments which, in the opinion of our management, are necessary for fair presentation of the results of the interim period, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. For additional information, refer to our financial statements included in our annual report amendment no. 1) on form 10-K for our fiscal year ended December 31, 2000.

-5-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Consolidation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. While these financial statements reflect all normal recurring adjustments which, in the opinion of our management, are necessary for fair presentation of the results of the interim period,

We have consolidated the accounts of our wholly owned subsidiary with those of Clean Energy in the course of preparing these consolidated financial statements. All significant intercompany balances and transactions amongst Clean Energy and its subsidiary have been eliminated as a consequence of the consolidation process, and are therefore not reflected in these consolidated financial statements.

Foreign Currency Translation

Clean Energy is a Delaware corporation and considers the United States dollar to be the appropriate functional currency for our operations and these financial statements, notwithstanding that we do business in Canada in transactions denominated in Canadian dollars. It is anticipated that the majority of our business will be conducted in United States dollars and our anticipated customer base will be within the United States. For purposes of preparing these financial statements, foreign currency monetary assets and liabilities are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Other balance sheet items and revenues and expenses are translated at the rates prevailing on the respective transaction dates. Translation gains and losses are included in income.

Estimates and Assumptions

The preparation of these consolidated financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results may differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, funds on deposit and short-term investments with an original maturity of ninety days or less.

Short-Term Investments

Short-term investments consist of term deposits with a one year maturity. These investments are cashable and can be drawn on at any time.

Patents

Costs related to the acquisition of patents are capitalized in the accounts and are amortized on a straight-line basis, commencing upon the production of revenues from the patent, over the shorter of the duration of the patent, which is twenty years, or the estimated life of the technology. The costs of servicing our patents are expensed as incurred. Clean Energy assesses potential impairment of patents by measuring the expected net recovery based on cash flows from products based on these rights on an annual basis. These capitalized costs are valued at the lower of amortized cost and net recoverable amount.

-6-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Property and Equipment

We state property and equipment at cost, and then record amortization on these assets on a straight-line basis over their respective estimated service lives as follows:

Communications equipment

30%

Computer hardware

30%

Computer software

50%

Display and promotional equipment

20%

Furnishings

20%

Lab equipment

20%

Leasehold improvements

20%

Office equipment

20%

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the assets. If any assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Basic and Diluted Loss Per Share

Our basic loss per share is computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," ("SFAS No. 128"), by dividing the net loss for the period attributable to holders of our common stock by the weighted average number of shares of our common stock outstanding for the period. Our diluted loss per share is computed, also in accordance with SFAS No. 128, by including the potential dilution that could occur if holders of our dilutive securities were to exercise or convert these securities into our common stock. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive. Common stock equivalent shares consist of the common shares issuable upon the conversion of the convertible loan notes and special warrants (using the if-converted method) and incremental shares issuable upon the exercise of stock options and share purchase warrants (using the treasury stock method).

Stock-Based Compensation

In accounting for the grant of our employee and director stock options, we have elected to follow Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), and related interpretations. Under APB 25, companies are not required to record any compensation expense relating to the grant of options to employees or directors where the awards are granted upon fixed terms with an exercise price equal to fair value and the only condition of exercise is continued employment. See note 6(f).

-7-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Comprehensive Income

The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards Statement No. 130, Reporting Comprehensive Income ("SFAS 130"), which is required to be adopted for fiscal years beginning on or after December 15, 1997. SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. There is no impact of SFAS 130 on our financial statements.

Recent Pronouncements

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments and hedging activities. This statement requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement is effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. The adoption of this pronouncement will not have a material effect on our consolidated financial position or results of operations.

In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB 25 ("FIN No. 44"). FIN No. 44 clarifies (1) the definition of employee for purposes of applying APB Opinion No. 5, (2) the criteria for determining whether a plan qualifies as a noncompensatory plan, (3) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (4) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 is effective July 1, 2000 but certain conclusions in this interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. The adoption of certain of the conclusions of FIN No. 44 covering events occurring during the period after December 15, 1998 or January 12, 2000 did not have a material effect on our financial position and results of operations. The adoption of the remaining conclusions did not have a material effect on our financial position or results of operations.

Advances to Affiliated Company

As at March 31, 2001 and December 31, 2000, we had advanced $48,342 (Cdn. $76,202) and $50,818 (Cdn. $76,202), respectively, to a company controlled by shareholders of our company in common. These advances are non-interest bearing, are repayable in Canadian dollars and have no specific terms of repayment.

-8-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Property and Equipment

Summarized below are our capitalized costs for property and equipment as of March 31, 2001 and December 31, 2000:

March 31,

2001

December 31,

2000

Cost

Accumulated

Depreciation

Net Book

Value

Communications Equipment

6,681

3,050

3,631

3,925

Computer Hardware

22,949

9,410

13,539

14,610

Computer Software

4,550

2,491

2,059

2,353

Display/promotional Equipment

4,832

1,006

3,826

4,027

Furnishings

2,242

795

1,447

1,526

Lab equipment

38,339

10,688

27,651

29,112

Leasehold Improvements

12,429

7,741

4,688

6,262

Office equipment

527

108

419

441

------------- ------------- ------------ -------------

92,549

35,289

57,260

62,256

========= ========= ======== ========

Advances from Related Parties

Summarized below are our advances and borrowing from related parties as of March 31, 2001 and December 31, 2000:

March 31,

2001

December 31,

2000

Advances from related company

$ 5,953

$ 6,058

Advances from shareholders

47,294

0

Advances from consultant

6,344

6,669
---------------- -------------------

$ 59,591

$ 12,727
========== ============

The advances of $5,953 (Cdn. $9,383) and $6,058 (Cdn. $9,083) to Clean Energy as of March 31, 2001 and December 31, 2000, respectively, were from a company controlled by shareholders in common. These advances bear interest at the rate of 8.75% per annum, are repayable in Canadian dollars, and have no specific terms of repayment.

The advances of $53,638 (Cdn. $84,550) as at March 31, 2001 include amounts from shareholders and other related parties. The loans and advances bear varying rates of interest. These amounts include a loan of $6,344 (Cdn. $10,000) to Clean Energy as at March 31, 2001 which was also outstanding at December 31, 2000 in the amount of $6,669 (Cdn. $10,000). This amount, advanced by a consultant, bears a 10% bonus on repayment, in lieu of interest and has a specified agreement as to repayment.

-9-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.

(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Share Capital and Stock Options

During the current period, our board of directors authorized the creation of an additional 500,000 shares of preferred stock, bringing the total to 1,500,000.

Series "A" Preferred Stock

Our series "A" preferred stock is non-voting and is convertible into one share of common stock at the option of the holder at any time. The affirmative consent of a majority of all outstanding series "A" preferred shares is required to liquidate or dissolve our company, to sale our principle assets, to merger or consolidate our company with another, to declare a dividend, to make any changes in our authorized capital stock, or to issue additional preferential preferred shares. Should our common stock be accepted for listing on The New York Stock Exchange or The American Exchange or accepted for quotation on Nasdaq, all outstanding series "A" preferred shares will automatically convert into common stock on a one for one basis once our common stock has been actively traded on that exchange or market for a two year continuous period. In the event of the voluntary or involuntary liquidation, dissolution or winding up of our company, our series "A" preferred shareholders will be entitled to an amount equal to $1 per share, but after payment has been made to all series "B" preferred shareholders.

Clean Energy designated and issued 1,000 shares of series "A" preferred stock upon its incorporation.

Series "B" Preferred Stock

Our series "B" preferred stock is voting and is entitled to participate in dividends with our common stock.

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

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

Series "C" Preferred Stock

Our series "C" preferred stock is voting and is entitled to participate in dividends with shares of common stock.

The affirmative consent of a majority of all outstanding series "C" preferred shares is required to liquidate or dissolve our company, to sale our principle assets, to merger or consolidate our company with another, to declare a dividend, to make any changes in our authorized capital stock, issue additional preferential preferred shares, declare any dividends or redeem or purchase any series "C" preferred shares. Our series

-10-

"C" preferred stock is convertible at the option of the holder, at any time, into one share of common stock. Should our common stock be accepted for listing on The New York Stock Exchange or The American Exchange or accepted for quotation on Nasdaq, all outstanding series "C" preferred shares will automatically convert into common stock on a one for one basis. In the event of our voluntary or involuntary liquidation, dissolution or winding up, our series "C" preferred shareholders will be entitled to an amount equal to the stated value or issuance cost before any payment will be made or any assets distributed to the holders of our series "A" preferred stock, series "B" preferred stock, common stock, or any other junior equity security.

During the period ended December 31, 1999, Clean Energy designated 500,000 preferred shares as series "C" preferred stock. As at March 31, 2001, there were no series "C" preferred stock outstanding.

Common Stock

During the current period, our board of directors authorized the creation of an additional 10 million shares of common stock, increasing our total authorized common shares to 25 million. We did not issue any additional common shares in the current reporting period.

Common Stock
Purchase Options

In 1999, we granted non-qualified stock options to executive officers and key employees entitling them to purchase an aggregate of 320,000 shares of our common stock at an exercise price of $2 per share. These options vest equally annually over a five year period, and each annual vesting portion expires five years subsequent to the vesting date.

Also in 1999, we granted non-qualified stock options to a Director of the company entitling him to purchase an aggregate of 60,000 shares of our common stock at an exercise price of $2 per share. These options vest equally annually over a three year period, and each annual vesting portion expires five years subsequent to the vesting date.

In the current period, we granted additional non-qualified stock options to directors and key employees as follows:

Employee options entitling them to purchase an aggregate of 101,305 shares of our common stock at an exercise price of $3 per share. These options vest one year after being granted and expire five years subsequent to the vesting date.

Director options entitling them to purchase an aggregate of 100,000 shares of our common stock at an exercise price of $5 per share. These options vest equally annually over a two year period, and each annual vesting portion expires five years subsequent to the vesting date.

At March 31, 2001, 168,000 stock options were vested. No stock options have been exercised as at March 31, 2001.

Pursuant to APB 25, we have not recorded any compensation expense relating to the grant of these options for any period in these consolidated financial statements insofar as the exercise price for all of these options equaled or exceeded the fair value of the underlying common shares on the effective date of grant. See note 2(k).

-11-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Common Stock Purchase
Warrants

During 1999, we issued 36,000 share purchase warrants as additional consideration pursuant to a public relations services agreement pursuant to which the holder is given the right to purchase 36,000 common shares at $2 per share. The right to exercise these warrants vests in equal monthly instalments over a twenty-four month period, and each instalment lapses five years after date of vesting. As at March 31, 2001, 33,000 shares have vested and none have been exercised.

During 2000, we also issued 200,000 share purchase warrants as additional consideration pursuant to an investors and media relations services agreement pursuant to which the holder is given the right to purchase 200,000 common shares at prices between $2 to $5 per share. The right to exercise these warrants vests in equal quarterly instalments over a twelve-month period commencing July 27, 2000, and each instalment lapses twelve months after date of vesting. As at March 31, 2001, 150,000 shares have vested at an exercise price of $2 per share and none have been exercised.

Pursuant to the fair value method of accounting, we recorded compensation expense of $16,500 and $500 for the three-month periods ended March 31, 2001 and March 31, 2000, respectively, in connection with the grant and vesting of these warrants. These amounts were determined using an option pricing model which assumes no dividends are to be paid, a two-year vesting period, a weighted average annualized volatility of our share price of 20%, and a weighted average annualized risk free interest rate at 5.25%.

-12-

CLEAN ENERGY COMBUSTION SYSTEMS, INC.
(a development stage enterprise)
Notes To Consolidated Statements
(unaudited)
(expressed in U.S. dollars)
March 31, 2001 and 2000

Related Party Transactions

Related party transactions and balances not disclosed elsewhere in these financial statements are as follows:

We advanced $9,408 (Cdn. $14,829) and $9,688 (Cdn. $14,527) to our shareholders as at March 31, 2001 and December 31, 2000, respectively. These advances are non-interest bearing, are repayable in Canadian dollars and have no specific repayment terms.
We acquired exclusive world-wide license rights entitling our company to design, engineer, manufacture, market, distribute, license and otherwise commercially exploit two patented "burner" technologies, our pulse blade combustion or "PBC" technology and our diesel fuel combustion technology. The former license was granted by one of our founding shareholders who indirectly holds greater than 10% of our outstanding and issued share capital and is also one of our directors, while the latter license was granted by one of our founding shareholders who both indirectly holds greater than 10% of our outstanding and issued share capital and who is also the inventor of both technologies and one of our directors.

-13-

Commitments

The licensor of our pulse combustion technology have the right to terminate the license if we do not obtain a listing on The New York Stock Exchange, The American Stock Exchange or Nasdaq by March 5, 2004. That licensor also has the right to reacquire the pulse combustion technology if Clean Energy is declared insolvent or bankrupt. Should the licensor exercise its termination right, we can purchase full title to the pulse combustion technology by paying Cdn. $525,000 within ten business days of the ninety day termination period, plus interest on such amount at the rate of 13% per annum, accruing as of January 1, 1999. On the purchase, Clean Energy will also be entitled to receive the return of 593,750 common shares as well as all outstanding shares of series "A" preferred stock. If the licensor is unable to deliver the full number of shares, the cash payment will be reduced pro-rata. Should the pulse combustion technology license terminate without our acquisition of full ownership of that technology, then our diesel fuel combustion technology license shall expire concurrently.

We have entered into employment agreements with four of our senior employees providing for total annual payment of $315,000 (Cdn. $496,125). Each agreement provides for a one year initial term, renewed automatically for successive one year terms.

We have entered into a public relations services agreements whereby Clean Energy is obligated to pay a monthly fee of Cdn. $6,000 for a period of thirty-six months, commencing April 1999. The agreement can be terminated by either party after one year.

Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations

General

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to our consolidated financial statements included in Part I, Item 1, of this quarterly report. The information set forth below in this quarterly report is current as of the date of this quarterly report, May 11, 2001, unless an earlier or later date is indicated.

All references to "dollars" in this quarterly report refer to United States or U.S. dollars unless specific reference is made to Canadian or Cdn. dollars. For information relative to currency conversion, see note 2(c) to our consolidated financial statements. The rate of exchange of Canadian dollars to United States dollars as of March 31, 2001, was Cdn. $1.5763 to U.S. $1.

Overview

Clean Energy was formed on March 1, 1999, for the specific purpose of acquiring exclusive world-wide license rights entitling us to design, engineer, manufacture, market, distribute, license and otherwise commercially exploit two innovative patented "burner" technologies, our pulse blade combustion technology and our diesel fuel combustion technology. Both of these technologies have completed the primary development stage and are in a position to be commercially exploited. 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. Since we have not generated operating revenues to date, we should be considered a development stage enterprise.

For additional and more detailed background information relating to our company and our business, see our annual report (amendment no. 1) on form 10-K for our fiscal year ended December 31, 2000.

-13-

Results Of Operations

Operating Revenues

We had no revenues for our three-month interim fiscal periods ended March 31, 2001 and March 31, 2000.

Operating Loss

We incurred an operating loss of $235,488 for our three-month interim period ended March 31, 2001, as compared to $186,359 for the corresponding interim period in fiscal 2000, representing a $49,129 or 26.4% overall increase.

The 26.4% increase in our operating loss for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to the following changes in costs and expenses:

a $11,057, or 9.19%, increase in administration expense from $120,041 to $131,078; and
a $38,092, or 57.44%, increase in research and development expense from $66,318 to $104,410.

The increase in administration expense of $11,057 for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was primarily attributable to across-the-board net increases in costs to support our increased level of business activities, the most significant of which were wages and benefits, legal fees and marketing costs, partially offset by a foreign exchange gain as compared to a foreign exchange loss for the corresponding interim period in fiscal 2000.

Research and development expense generally relates to the cost-including allocable salaries-to develop, improve and test our burner systems and related components. The $38,092 increase in research and development expense for our three-month interim period ended March 31, 2001 over the corresponding interim period in fiscal 2000 was principally attributable to a $20,147 increase in wages and benefits, as well as a $17,945 increase in the cost of materials and equipment associated with additional research and development efforts, compared to the corresponding interim period in fiscal 2000.

Liquidity And Capital Resources

Sources of Cash

Our cash flow requirements from our inception through March 31, 2001 were principally funded by:

$975,838 in short-term advances from one of our directors, Mr. R. Dirk Stinson, which advances were subsequently converted in fiscal 2000 into 487,944 shares of our common stock at a conversion price of $2 per share pursuant to the terms of our financing agreement with Mr. Stinson;
$500,002 in gross proceeds from a private placement of our series "B" preferred stock which closed on April 6, 1999, and
$417,659 in accounts payable and short-term advances by shareholders.

-14-

The short-term advances by Mr. Stinson described above were extended pursuant to an unsecured revolving promissory note in the original amount of $50,000 dated August 8, 1999. This note required Clean Energy to repay the $50,000, plus any additional amounts Mr. Stinson agrees to advance to Clean Energy, plus interest accrued on these amounts at the rate of prime plus 2% per annum, by August 10, 2000, or any earlier time we raise Cdn. $750,000 in equity, debt or joint-venture financing or product revenues. On or about August 10, 2000, Mr. Stinson agreed to amend the terms of the note to provide for the repayment of any outstanding balances to thirty days of demand. Mr. Stinson is afforded the right under the note to convert any portion of the outstanding indebtedness under the note into our common stock at any time at the conversion rate of one share of common stock per $2 of indebtedness. On August 15, 2000, Mr. Stinson converted the current balance of the loan into common shares.

Current Cash Position and Historical Changes In Cash Position

Our cash and cash equivalents position as of March 31, 2001 was $560, as compared to $2,122 as of December 31, 2000. Our cash and cash equivalents position as of March 31, 2000 was $4,506, as compared to $26,414 as of December 31, 1999.

The $1,561 decrease in our cash position for our three-month interim period ended March 31, 2001 as compared to December 31, 2000 was attributable to $64,240 in cash used in operating activities, partially offset by $13,338 realized from investing activities and $49,341 realized from financing activities. The $21,908 decrease in our cash position for our three-month interim period ended March 31, 2000 as compared to December 31, 1999 was attributable to $156,702 used in operating activities and $17,298 used in investing activities, partially offset by $152,092 realized from financing activities.

Our operating activities required cash in the amount of $64,240 for our three-month interim period ended March 31, 2001, as compared to cash requirements of $156,702 for the corresponding interim period in fiscal 2000. The $64,240 of cash used in operating activities for our three-month interim period ended March 31, 2001 reflected our net loss of $235,488 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances. The $156,702 of cash used in operating activities for our three-month interim period ended March 31, 2000 reflected our net loss of $186,359 for that period, as decreased for non-cash deductions and a net increase in non-cash working capital balances.

We realized cash in the amount of $13,338 from investing activities for our three-month interim period ended March 31, 2001, as compared to $17,298 of cash used for investing activities for the corresponding interim period in fiscal 2000. There were no purchases of property or equipment, or investment in patents for our three-month interim period ended March 31, 2001, compared to investment in patents of $7,696 and acquisitions of property and equipment of $19,602 for the corresponding interim period in fiscal 2000.

We raised $49,341 in cash from financing activities for our three-month interim period ended March 31, 2001, as compared to $152,092 in cash raised from financing activities for the corresponding interim period in fiscal 2000. The $49,341 in cash raised through financing activities for our three-month interim period ended March 31, 2001 was principally comprised of $46,864 in funds advanced by shareholders, related parties and consultants. The $152,092 in cash raised through financing activities for our three-month interim period ended March 31, 2000 was principally comprised of $150,874 in funds advanced by a shareholder and subsequently converted to share capital.

Plan Of Operation And Prospective Capital Requirements

Our ability to continue as a going concern will be dependent upon our entering into revenue producing contracts and raising additional working capital to fund these contracts and fully implement our longer-term business plan and marketing strategies. We anticipate that we will need to raise at least $700,000 to fund our projected operating and project costs over the next twelve months, and at least $2.5 million, including the $700,000 noted above, in additional working capital to fully implement our longer-term business plan and marketing strategies. These estimates will be subject to significant change based upon any contracts we may enter into and/or additional capital we may raise.

-15-

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. Our principals previously raised approximately Cdn. $1,785,000 in grants for developmental purposes through our predecessor (the BO companies).

Our operating expenses are currently being funded through advances made by Mr. Stinson under the terms of the promissory note previously described. Mr. Stinson has indicated that he would be willing to continue to make advances on these terms for the indefinite future, should his personal financial situation permit it. We cannot give you any assurance that Mr. Stinson will remain in a position to fund our operations notwithstanding his desire to do so. We have made no binding arrangements or received binding commitments to obtain additional working capital as of the date of this quarterly report other than the advances described above which Mr. Stinson may make. Our intent is to raise additional working capital in one or more increments through contract advances, public or private sales of debt or equity securities, debt financing or short-term loans, or a combination of the foregoing. In view of our limited operating history and lack of revenues and profits to date, we cannot give you any assurance that we will be able to secure the additional capital we require at all, or on terms which will not be objectionable to our company or our shareholders, including substantial dilution or the sale or licensing of our technologies. Our failure or inability under these circumstances to obtain additional capital on acceptable terms or at all would have a material adverse effect on our company and our business, which would result in our being forced to materially scale back or even suspend our operations, or even force us to seek a merger with or to sell our business to a third party. In view of these considerations, note no. 1 of our financial statements states that if we do not raise sufficient capital there is a substantial doubt as to our ability to continue as a going concern.

Other Matters

Foreign Exchange Fluctuations

We recorded a $10,770 foreign currency translation gain for our three-month interim period ended March 31, 2001 as an administration expense recovery item on our statements of operations and deficiency in assets in consolidating our books for financial reporting purposes as a result of the fluctuation in United States-Canadian currency exchange rates during that period. We anticipate that our exposure to significant foreign currency gains or losses on our accounting records will increase as we invest a greater portion of our United States-dollar denominated cash reserves into our Canadian operations and properties through intercompany advancements. We cannot give you any assurance that our future operating results will not be similarly adversely affected by currency exchange rate fluctuations. See Part I, Item 3, of this quarterly report captioned "Quantitative and Qualitative Disclosure About Market Risk," for a description of other aspects of our company that may be potentially affected by foreign exchange fluctuations.

Effect Of Inflation

We do not believe that our operating results were adversely affected during the first three months of fiscal 2001 or fiscal 2000 by inflation or changing prices.

-16-

Uncertainties And Other Risk Factors That May Affect Our Future Results And Financial Condition

Our future results of operations or financial condition may be affected by the uncertainties and other risk factors enumerated below as well as those presented elsewhere in this quarterly report and in other reports we periodically file with the Securities and Exchange Commission, including our annual report (amendment no. 1) on form 10-K for the fiscal year ended December 31, 2000, and should be considered in context with the various disclosures concerning our company presented elsewhere herein and therein.

Uncertainties And Risk Factors Generally Relating To Our Company And Our Business

As a recently formed company with a limited operating history, we are subject to all the risks and issues inherent in the establishment and expansion of a new business enterprise, and our failure to address these risks and issues will adversely affect our ability to complete pending project proposals, introduce our products to the market, generate revenues and profits, and raise additional working capital

We were only recently organized, on March 1, 1999, and have a limited operating history. We are, as a consequence, subject to all the risks and issues inherent in the establishment and expansion of a new business enterprise. Our failure to successfully address these risks would adversely affect our ability to:

complete our pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital.

Our activities through the date of this quarterly report have been limited to:

complete our pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
developing our business plan;
obtaining license rights to our burner technologies;
establishing administrative offices and laboratory facilities; engaging administrative and research and development personnel; and
commencing work on various burner proto-types under pending proposals intended to lead to commercial contracts.

Risks and issues inherent in the establishment and expansion of a new business enterprise which we face include, among others, problems of entering new markets, marketing new technologies, hiring and training personnel, acquiring reliable facilities and equipment, and implementing operational controls. In general, startup businesses are subject to risks and or levels of risk that are often greater than those encountered by companies with established operations and relationships. Startups often require significant capital from sources other than operations. The management and employees of startup business shoulder the burdens of the business operations and a workload associated with company growth and capitalization that is disproportionately greater than that for an established business. Our limited operating history makes it difficult, if not impossible, to predict future operating results. We cannot give you any assurance that we will successfully address these risks.

-17-

We have accumulated losses since our inception, and our continued inability to generate revenues and profits would adversely affect our ability to complete pending project proposals, introduce our products to the market and raise additional working capital, and could ultimately force us to suspend our operations and even liquidate our assets and wind-up and dissolve our company

We are a developmental stage company since we have not commenced commercial sales of our burner technologies and have no revenues to date. Our failure to generate revenues and ultimately profits would:

in the shorter-term, adversely affect our ability to:

complete our pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital; and

in the longer-term, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

We do not anticipate that we will generate revenues for at least four to six months at the earliest, assuming that one or more of our pending projects lead to a commercial contract. We have, as a result of our lack of revenues, incurred operating losses in the amount of $1,782,718 from our inception through March 31, 2001, and we anticipate that we will continue to incur substantial operating losses for the foreseeable future, despite any revenues we may receive in the short-term from any of our pending projects, due to the significant costs associated with the development and marketing of our burner technologies. We cannot give you any assurance that we will generate revenues or profits in the near future or at all.

If we do not raise additional working capital funds to pay our operating and project expenses, we will not be able to sustain our operations, and may even be forced to liquidate our assets and wind-up and dissolve our company

We currently have insufficient working capital to fund our projected operating and project costs for more than one month. Our inability to raise sufficient additional working capital in the near future would likely force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Our operating expenses are currently being funded for the indefinite future through advances made by one of our directors and principal shareholders, Mr. R. Dirk Stinson. We cannot give you any assurance that Mr. Stinson will remain in a position to fund our operations notwithstanding his desire to do so.

We anticipate that we will need to raise at least $700,000 to fund our projected operating and project costs over the next twelve months, and at least $2.5 million, including the $700,000 noted above, in additional working capital to fully implement our longer-term business plan and marketing strategies. We have no current arrangements for obtaining this additional capital other than our current relationship with Mr. Stinson, and will seek to raise this amount in one or more increments through contract advances, public or private sales of debt or equity securities, debt financing or short-term loans, or a combination of the foregoing. We cannot give you any assurance that we will be able to secure the additional capital we require to continue our operation at all, or on terms which will not be objectionable to our company or our shareholders, including substantial dilution or the sale or licensing of our technologies.

-18-

Note no. 1 to our financial statements states that if we do not raise sufficient capital there is a substantial doubt as to our ability to continue as a going concern. Our independent auditors stated in their report accompanying our financial statements for our fiscal year ended December 31, 2000 that they would be required to express a going concern opinion were our financial statements prepared in accordance with United States reporting standards for auditors.

We have not entered into any revenue-generating contracts to date, and our failure to enter into revenue-generating contracts would force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company

Although we are working on proto-types under several pending proposals, we have not entered into any revenue-generating contracts to date, and our ability to do so will be dependent in primary part upon our ability to satisfactorily complete the proto-types, to raise sufficient capital to fund these efforts, and to otherwise successfully implement our various market strategies under our business plan. Our failure to enter into any revenue-generating contracts would:

in the shorter-term, adversely affect our ability to:

complete other pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital; and

in the longer-term, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company unless we are otherwise able to raise sufficient working capital to fund our continuing operations until we enter into revenue-generating contracts in the farther future.

Even if we enter into revenue-generating contracts, we cannot give you any assurance that we will attain or sustain operating profitability as a result of these contracts.

Our burner products are based upon burner technologies that are new and unique, and the failure of these products to achieve or sustain market acceptance would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company

The failure of our burner products to achieve or sustain market acceptance would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company. Products using our burner technologies must compete with established conventional steady-state burner technologies and conventional "tubular" pulse combustion technologies which have already achieved market acceptance. The design for our burner technologies is new and unique, and no products based upon our technologies and configurations have been commercially produced or sold to date, either by our company or by any of our competitors. Additionally, although there is a market for pulse combustion burner products using differently configured pulse burner technology designs, these products are not widely accepted by the market, and therefore not particularly useful as a precedent for the introduction of our pulse combustion burner technology. As is typical in the case of any new technology, demand and market acceptance for products based upon new technologies are subject to a high level of uncertainty and risk,

-19-

including the risk that the marketplace may not accept, or be receptive to, the potential benefits of these new products. The extent and pace of market acceptance of new burner products based upon our burner technologies will ultimately be a function of many variables, including the following:

the efficacy, performance and attributes of these new products;
the ability to obtain necessary regulatory approvals to commercially market these new products;
the effectiveness of marketing and sales efforts, including educating potential customers as to the distinctive characteristics and benefits of these new products; and
the ability to meet manufacturing and delivery schedules; and product pricing.

The extent and pace of market acceptance of products based upon our burner technologies will also depend upon general economic conditions affecting customers' purchasing patterns. Because the market for our burner technologies is new and evolving, it is difficult, if not impossible, to predict the future growth rate, and the size of the potential market. We cannot give you any assurance that a market for our burner technologies will develop or, if developed, will be sustainable.

Our inability to develop our sales, marketing and distribution capabilities either internally or through strategic partners or third party marketing and distribution companies would adversely affect our ability to introduce our products to the market, generate revenues and profits, and raise additional working capital, and may even force us to suspend our operations and possibly even liquidate our assets and wind-up and dissolve our company

We currently have no internal sales, marketing and distribution capabilities, and will likely be forced to rely extensively on strategic partners or third party marketing and distribution companies. Our failure to generate substantial sales through any strategic partners or distribution arrangements we procure or to otherwise develop our own internal sales, marketing and distribution capabilities would:

in the shorter-term, adversely affect our ability to:

introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital; and

in the longer-term, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

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

-20-

Our st
rategic partners' or third party suppliers' failure to satisfy our manufacturing requirements would adversely affect our ability to introduce our products to the market, generate revenues and profits, and raise additional working capital, and may even force us to suspend our operations and possibly even liquidate our assets and wind-up and dissolve our company

We currently have no internal manufacturing capability, and will likely be forced to rely extensively on strategic partners or third party contract manufacturers or suppliers. A delay or interruption in the supply of components or finished products would:

in the shorter-term, adversely affect our ability to:

introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital; and

in the longer-term, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Should we be forced to manufacture our burner products, we cannot give you any assurance that we will be able to develop or internal manufacturing capability or procure third party suppliers. Moreover, we cannot give you any assurance that any contract manufacturers or suppliers we procure will be able to supply our product in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.

Our inability to increase the amount of financial resources for our research and development requirements would adversely affect our ability to introduce our products to the market and to generate revenues and profits

Due to the early developmental stage of our business, we have expended only limited amounts on research and development of our burner products to date, including development of project proto-types, and currently have very limited resources to devote to future research and development. Unless we are able to obtain and devote resources to our research and development efforts, including project proto-types, we may only be able to develop limited product offerings in the future and our ability to procure contracts or otherwise achieve market acceptance for our burner products will be limited. As a result, we may fail to achieve significant growth in revenues or profitability in the future.

Our inability to achieve or sustain market acceptance for our burner products as a consequence of the intense competition that is prevalent in the conventional burner industry would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company

Products based upon our burner technologies will face intense domestic and foreign competition in all markets in which they are introduced from conventional products and technologies already being sold in these markets. The failure of our burner products to achieve or sustain market acceptance would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company. Additionally, many of our prospective competitors have significantly greater financial, technical and marketing resources and trade name recognition than ours, which may enable them to successfully develop and market products based on technologies or approaches similar to ours, or develop products based on other technologies or approaches which are, or may be, competitive with our burner technologies. The development by our competitors new or improved products, processes or technologies may make our burner technologies less competitive or obsolete. We will be required to devote significant financial and other resources to continue to develop our burner technologies in view of potential competition. We cannot give you any assurance that we will be able to initially penetrate or compete successfully within the heat transfer industry.

-21-

The loss of our technology licenses as a consequence of our failure to list our common stock on a national market would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company

The licensors of our pulse combustion and diesel fuel combustion technologies reserved several termination rights as a condition for their licensing these technologies to our company. The loss of either of our technology licenses would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company. Specifically:

818879 Alberta, Ltd., the licensor of our pulse combustion technology, reserves the right to terminate the pulse combustion technology license if our common stock does not actively trade on a "national market," which we define under the license agreement as The New York Stock Exchange, The American Stock Exchange or The Nasdaq Stock Market, on or after March 5, 2004. Should 818879 Alberta, Ltd., exercise this termination right, we reserve the right to over-ride 818879 Alberta, Ltd.'s exercise by purchasing the pulse combustion technology outright for a formula-based cash payment.
Mr. John D. Chato, the licensor of our diesel fuel combustion technology, reserves the right to terminate the diesel fuel combustion technology license if the 818879 Alberta, Ltd. terminates the pulse combustion technology license for the reasons stated above.
If we acquire title to our pulse combustion technology from 818879 Alberta, Ltd. by reason of our success in developing an active trading market on a national market, then 818879 Alberta, Ltd. will retain the right to repurchase the pulse combustion technology from us should we declare bankruptcy or become insolvent.

We can give you no assurance in the event of the potential termination of either of our technology licenses that we will be able to preserve the license through the exercise of any cures or other protective rights available to us under the applicable technology license.

Our inability to retain our key managerial and research and development personnel would adversely affect our ability to introduce our products to the market, generate revenues and profits, and raise additional working capital, and may even force us to suspend our operations and possibly even liquidate our assets and wind-up and dissolve our company

Our success depends to a significant extent on the continued efforts of our research and development and senior management team, which currently is composed of a small number of individuals, including Mr. John D. Chato, our head of research and development and the inventor of our licensed technologies, Mr. John P. Thuot, our President, Mr. Barry A. Sheahan, our Chief Financial Officer, and Mr. James V. DeFina, our Projects Director. The loss of any of these management personnel would:

in the shorter-term, adversely affect our ability to:

complete our pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital; and

in the longer-term, if not satisfactorily replaced, force us to suspend our operations, and possibly even liquidate our assets and wind-up and dissolve our company.

Although Messrs. Chato, Thuot, Sheahan and DeFina have signed employment agreements, we cannot give you any assurance that one or more of these employees will not leave our company. We also do not carry key person life insurance on any of our key management personnel.

-22-

Our inability to attract the qualified personnel engineering, managerial, sales and marketing and administrative personnel required to implement our growth strategies would impede our growth

Our ability to implement our growth strategies will be dependent upon our continuing ability to attract and retain highly qualified engineering, managerial, sales and marketing and administrative personnel. Our inability to attract and retain the necessary personnel would impede our growth. Competition for the type of personnel we require is intense and we cannot give you any assurance that we will be able to retain our key managerial and technical employees, or that we will be able to attract and retain additional highly qualified managerial and technical personnel in the future

Our inability to effectively manage our growth would adversely affect our ability to introduce our products to the market, generate revenues and profits, and raise additional working capital

Our success will depend upon the rapid expansion of our business. Our inability to effectively manage our growth, or the failure of our new personnel to achieve anticipated performance levels, would adversely affect our ability to:

complete our pending project proposals and introduce burner products using our technologies onto the market and to compete, with consequential delays in our ability to generate revenues and profits; and
raise additional working capital.

Expansion will place a significant strain on our financial, management and other resources, and will require us, among other things, to:

change, expand and improve our operating, managerial and financial systems and controls;
improve he coordination between our various corporate functions; and
hire additional engineering, sales and marketing, customer service and managerial personnel.

We cannot give you any assurance that our efforts to hiring or retain these personnel will be successful, or that we will be able to manage the expansion of our business effectively.

-23-

Our inability to protect our patents and proprietary rights would force us to suspend our operations and possibly even liquidate our assets and wind-up and dissolve our company

Our ability to compete effectively will be materially dependent upon the proprietary nature of our designs, processes, technologies and materials. The invalidation or circumvention of key patents or proprietary rights which we own or license would likely force us to suspend our operations, liquidate our assets, and wind-up and dissolve our company.

Although we protect our proprietary property, technologies and processes through a combination of patent law, trade secrets and non-disclosure agreements, we cannot give you any assurance that these measures will prove to be effective. For example, in the case of patents, we cannot give you any assurance that our or our licensors' existing patents will not be invalidated, that any patents that we or our licensors' currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits. Moreover, it is possible that competing companies may circumvent any patents that we or our licensors may hold by developing products which closely emulate but do not infringe our or our these patents, and accordingly market products that compete with our products without obtaining a license from us. In addition to patented or potentially patentable designs, technologies, processes and materials, we also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection. We cannot give you any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how as we possess.

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

We cannot give you any assurance that we will be able to successfully defend our patents and proprietary rights. We also cannot give you any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights. Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.

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

We intend to sell our products and technologies internationally as well as to the United States and within Canada. This will subject us to various risks associated with international transactions that may adversely effect our results of operations, including risks associated with:

fluctuating exchange rates,
the regulation by the governments of the United States and Canada as well as foreign governments of fund transfers and export and import duties and tariffs; and
political instability.

We do not currently engage in activities to mitigate the effects of foreign currency fluctuations, and we anticipate we will be paid in U.S. dollars with respect to any international transactions we may enter into. If earnings from international operations increase, our exposure to fluctuations in foreign currencies may increase, and we may utilize forward exchange rate contracts or engage in other efforts to mitigate foreign currency risks. We can give no you assurance as to the effectiveness of these efforts in limiting any adverse effects of foreign currency fluctuations on our international operations and our overall results of operations.

-24-

Matters Relating To Our Common Stock

There is no public trading market for our common stock, and no public trading market may ever develop

There 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. While a United States-based broker-dealer has filed an application with the NASD to sponsor the trading of our common stock on the NASD OTC Bulletin Board pending the approval by Canadian securities regulator of some of the distributions of our common stock contemplated by our registration statement on form SB-2 declared effective on May 10, 2000, no assurance can be given that those approvals will be given or that the broker-dealer's application with the NASD to trade our common stock on the NASD OTC Bulletin Board will ultimately be given, or that our common sock will ever qualify for quotation or listing on any other over-the-counter market or on any exchange.

In the absence of a public market for our common stock, your ability to sell our common stock will limited to privately negotiated transactions, and you will face difficulties in finding purchasers for your shares

In the absence of a public market for our common stock, you will not be able to sell any shares of common stock you hold through normal brokerage channels, and your ability to sell these shares will be limited to privately negotiated transactions. You will likely face difficulties in finding a purchaser for your shares, particularly in view of our limited operating history, our absence of revenues, profits and dividends, our need for additional capital, your position as a minority shareholder, and the other risk factors discussed in this quarterly report relating to an investment in our common stock. Lenders will also not readily accept your shares as collateral for these same reasons. Also, our company and our officers, directors, shareholders and agents are under no obligation to purchase these shares from you. As a consequence of these factors, you may not be able to sell or liquidate these shares should you need to do so due to a financial emergency or other exigent circumstances, including your death or disability. Moreover, if you do find a purchaser for your shares, the price you receive may be less than the price you believe to be warranted. Consequently, you should consider any shares of common stock you may hold only as an illiquid long-term investment.

Even if a public market for our common stock were to develop, your ability to sell shares on that market will be circumscribed by a number of regulatory and contractual restrictions

Even if a public market for our common stock is eventually developed, your ability to sell our common stock on that public market will be circumscribed by the following regulatory and contractual considerations:

the disclosure and investor suitability rules promulgated under the Penny Stock Reform Act of 1990 and limitations mandated by Rule 15c-2-6 promulgated by the Securities and Exchange Commission;
the necessity of complying with any state "Blue Sky" or Canadian provincial securities laws which may be applicable;

-25-

contractual volume restrictions on sale imposed on some of the holders of blocks of more than 3,000 shares of our common stock upon whom we have imposed lock-up restrictions as a condition to our cooperation in establishing a public market for our common stock on the OTC Electronic Bulletin Board; and
the amount of shares which you may freely trade under Rule 144 if applicable.

Should a public market for our common stock develop, no prediction can be made as to the effect, if any, that the sale of shares or the availability of shares for sale will have on the market price prevailing from time to time. Moreover, sales of substantial amounts of our common stock on the public market, or the perception that substantial sales could occur, could adversely affect the prevailing market prices for our common stock and also, to the extent the prevailing market price for our common stock is reduced, adversely impact our ability to raise additional capital in the equity markets.

Even if a public market for our common stock were to develop, our stock price would likely be volatile due to market considerations beyond our control

The securities markets have from time to time experienced significant price and volume fluctuations that can be unrelated to the operating performance or financial condition of any particular company. This is especially true with respect to emerging companies such as ours. Examples of external factors, which can generally be described as factors that are unrelated to the operating performance or financial condition of any particular company, include changes in interest rates and worldwide economic and market conditions, as well as changes in industry conditions, such as changes in the cost of components and energy, regulatory and environment rules, announcements of technology innovations or new products by other companies, and quarterly fluctuation in our or in our competitors' operating results. Examples of internal factors, which can generally be described as factors that are directly related to our operating performance or financial condition, would include release of reports by securities analysts and announcements we may make from time-to-time relative to our ability to enter into contracts or other arrangement, our operating performance, advances in our technology or other business developments specific to our company. Any of these external or internal factors could have a significant impact on our stock price were a public market develop for our common stock. Moreover, because we are a development stage enterprise with a limited operating history and no revenues or profits, the market price for our common stock would be more volatile than that of a seasoned issuer, and may changes in the market price may have no connection with our operating results or prospects. No predictions or projections can be made as to what the prevailing market price for our common stock will be at any time.

If a public market for our common stock were to develop, you could be subject to the penny stock rules if our stock price were less than $5

If a public market for our common stock were to develop, it would become subject, unless it was listed on a national stock exchange or quoted on the Nasdaq Market, to a number of regulations known as the "penny stock rules." When the market price for shares is less than $5 per share, the broker-dealer facilitating the sale is required under the penny stock rules to deliver a standardized risk disclosure document prepared by the Securities and Exchange Commission, to provide the customer with additional information including current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, monthly account statements showing the market value of each penny stock held in the customer's account, and to make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. To the extent these requirements may be applicable they will reduce the level of trading activity in the secondary market for our common stock and may severely and adversely affect the ability of broker-dealers to sell our common stock.

-26-

You should not expect to receive a liquidation distribution

If our liquidation were attributable to our inability to profitably operate our business, then it is likely that we would have material liabilities at the time of liquidation or dissolution. We cannot give you any assurance that sufficient assets will remain available after the payment of our creditors and preferred shareholders to enable you to receive any liquidation distribution with respect to the shares sold or distributed to you under this quarterly report.

Our current principal shareholders will continue to control our company, and will accordingly retain the power to substantially influence corporate actions that conflict with the interests of public shareholders

Our present executive officers and directors hold, as a group, approximately 57.6% of our common stock as of the date of this quarterly report, and will, and as consequence, retain the power to substantially influence corporate actions that conflict with the interests of public shareholders, including:

our business expansion or acquisition policies;
whether we should raise additional capital through financing or equity sources, and in what amounts;
whether we should retain cash reserves for future product development, or distribute them as a dividend, and in what amounts;
whether we should sell all or a substantial portion of our assets, or should merge or consolidate with another corporation; and
transactions which may cause or prevent a change in control or the winding-up and dissolution of our company.

An investment in our common stock will entail you entrusting these and similar decisions to our present management subject, of course, to their fiduciary duties and the business judgment rule.

Our right to issue additional capital stock at any time could have an adverse effect on your proportionate ownership and voting rights

Our Certificate of Incorporation currently authorizes us to issue 15,000,000 shares of common stock, and 1,000,000 shares of preferred stock, including 248,999 shares of serial or "blank check" preferred stock that will contain rights, preferences and privileges to be prospectively fixed by our board of directors at the time of issuance-without shareholder consent or approval-based upon any factors our board of directors may deem relevant at that time. Our board of directors and shareholders have also recently approved an increase in our authorized capital to 25,000,000 common shares and 1,500,000 preferred shares. Your proportionate ownership and voting rights as a common shareholder could be adversely effected by the issuance of additional common, series "C" convertible or "blank check" preferred shares, depending on their rights, preferences and privileges, including a substantial dilution in your net tangible book value per share. We cannot give you any assurance that we will not issue shares of capital stock under circumstances we may deem appropriate at the time.

-27-

"A third party acquisition of our company would be difficult due to "anti-takeover" provisions contained in our charter documents and provided for under Delaware corporate law

Some of the provisions contained in our charter documents and Delaware corporate law may discourage transactions involving an actual or potential change in control of our company, and may limit the ability of our shareholders to approve these transactions should they deem them to be in their best interests. For example, our Certificate of Incorporation and Bylaws:

reserve the right to fill any vacancies in any Non-Series A Director positions exclusively to our board of directors;
stipulate that our Non-Series A Directors can only be removed for cause;
require any action to be taken by our common and series "B" preferred shareholders to be effected at a duly called annual or special meeting of these shareholders, and prohibit these shareholders from effecting any action by written consent unless approved by a two-thirds affirmative vote of these shareholders;
reserve the right to call special meetings of our common and series "B" preferred shareholders exclusively to our board of directors and designated executive officers; and
require any amendments to the preceding provisions to be approved by a two-thirds affirmative vote of our shareholders.

We are also subject to Section 203 of the Delaware General Corporation Law which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any ''interested shareholder'' for a period of three years following the date that shareholder became an interested shareholder.

Our board of directors also has the authority to fix the rights and preferences of and issue shares of our "blank check" preferred stock without the approval of our common shareholder and, in some cases, our series "B" and series "C" preferred shareholders. Any "blank check" preferred stock we issue could also be utilized as a method for raising additional capital or discouraging, delaying or preventing a change in control of our company. We cannot give you any assurance that we will not issue "blank check" preferred stock under circumstances we may deem appropriate at the time.

Special Note Regarding Forward Looking Statements

Contained in this uncertainties and risk factors section as well as in other sections of this quarterly report are so-called "forward-looking statements" which generally relate to our expectations or speculations as to potential future events and our observations as to trends and factors that may impact our future operating results. These forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. You can generally identify forward-looking statements through words such as "believe," "anticipate," "expect," "project," "estimate," "budget," "will be," "will continue," "will likely result," or words or phrases with similar meanings. Forward-looking statements that may be contained in this quarterly report would, for example, include statements relating to the likelihood that we will enter into contracts or other arrangements with respect to our technology.

-28-

Whenever you read any forward looking statement contained in this quarterly report, you should be aware of and take into consideration that:

the forward-looking statement merely reflects the current expectations and speculation of our management as to anticipated events or observations relating to future trends based, in part, upon currently available information and our current business plan,
actual results from these future events may differ materially from the results expected or speculated or trends observed as expressed in, or implied by, the forward-looking statement, as a result of changes in circumstances and events and other uncertainties and risks, including:
- changes in our business plan and corporate strategies;
- our ability to satisfactorily complete pending proposals and enter into binding contracts based upon those proposals;
- the occurrence of the various types of uncertainties and risk factors described above in this section as well as those described in Item 3 of this quarterly report captioned "Quantitative And Qualitative Disclosure About Market Risk;"
the forward-looking statement must, in any event, be considered in context with the various disclosures made by our company in this quarterly report about our business; and
the uncertainties and risks presented in this section and elsewhere in this quarterly report are not exhaustive, and new uncertainties and risk factors may emerge from time to time. It is not possible for management to predict all such uncertainties and risk factors, nor can it assess the impact of all such uncertainties and risk factors on Clean Energy's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from, those contained in any forward-looking statements.

Given these risks and uncertainties, holders of our securities should not place undue reliance on forward-looking statements as a prediction of actual results.

We are not obligated to update or revise any forward looking statement contained in this quarterly report to reflect new events or circumstances. You are also cautioned that we intend for all forward-looking statements contained in this quarterly report to be construed as "forward-looking statements" within the meaning Section 21E of the United States Securities Exchange Act of 1934 and, to the extent it may be applicable by way of the incorporation of statements contained in this quarterly report by reference or otherwise, Section 27A of the United States Securities Act of 1933, each of which establishes a safe-harbor from private actions for forward-looking statements as defined in those statutes.

Item 3. Quantitative And Qualitative Disclosures About Market Risk

Currency Fluctuations

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

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

-29-

Interest Rate Fluctuations

We currently maintain the bulk of our available cash in money-market accounts maintained in U.S. dollars. Our interest income from these short-term investments could be adversely affected by any material changes in interest rates within the United States.

Part II OTHER INFORMATION

Item 1. Legal Proceedings

As of the date of this quarterly 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.

Item 2. Changes In Securities And Use Of Proceeds

Not Applicable

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Submission Of Matters To A Vote Of Security Holders

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

Exhibits

None

Reports on Form 8-K

None

-30-

Signatures

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this quarterly report on form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated at Burnaby, British Columbia, this 11th day of May, 2001.

	Clean Energy Combustion Systems, Inc.

	By: /s/ John P. Thuot
		John P. Thuot President (principal executive officer)

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

-31-

CLEAN ENERGY COMBUSTION SYSTEMS INC 10-Q