Edgar Filing: CLEAN SYSTEMS TECHNOLOGY GROUP LTD

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended MARCH 31, 2002
--------------

or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGES ACT

For the transition period from to
-------------- -------------------

Commission file number 000-14646

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
(Exact name of Small Business Issuer as Specified in Its Charter)

NEW YORK 06-1113228
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

4 Ashlagan Street, P.O. Box 8624,
Kiryat Gat, Israel 82021
(Address of principal executive offices) (Zip Code)

011 972 8 660 2108 (Issuer's telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ]

The number of shares outstanding of the registrant's Common
Stock, $0.01 Par Value, on May 13, 2002 was 42,766,087 shares.

Transitional Small Business Disclosure Format (check one):
Yes No X
------------ -----------

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Page
Number
------

Item 1. Financial Statements..........................................4-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation.......................11-14

PART II - OTHER INFORMATION

Item 1. Legal Proceedings..............................................15
Item 6. Exhibits and Reports on Form 8-K...............................15
Signature Page.................................................16

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-QSB contains
forward-looking statements as defined by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performance and
underlying assumptions and other statements, which are other than statements of
historical facts. These statements are subject to uncertainties and risks
including, but not limited to, product and service demand and acceptance,
changes in technology, economic conditions, the impact of competition and
pricing, government regulation, and other risks defined in this document and in
statements filed from time to time with the Securities and Exchange Commission.
These cautionary statements and any other cautionary statements that may
accompany the forward-looking statements expressly qualify all such
forward-looking statements. In addition, Clean Systems Technology Group, Ltd.
disclaims any obligation to update any forward-looking statements to reflect
events or circumstances after the date hereof.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of March 31, 2002 (Unaudited).....4
Consolidated Statements of Operations for the three months
ended March 31, 2002 (Unaudited) and 2001 (Unaudited)......5
Consolidated Statement of Shareholders' Equity for the three
months ended March 31, 2002 (Unaudited)....................6
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 (Unaudited) and 2001 (Unaudited).....7-8
Notes to the Consolidated Financial Statements (Unaudited)......9-10

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2002.
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS:
CURRENT ASSETS:

Cash and cash equivalents $ 23
Accounts receivable - net 1,797
Accounts receivable - related party 26
Inventory 2,264
Costs incurred in excess of billings on contracts in progress 1,329
Refundable value added tax 82
Employee advances 23
Other current assets 78
Deferred taxes 26
---------

TOTAL CURRENT ASSETS 5,648

PROPERTY AND EQUIPMENT - NET 1,909

OTHER ASSETS 234
---------

TOTAL ASSETS $ 7,791
=========

LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Short-term bank credit $ 6
Bank line of credit 2,124
Accounts payable 1,535
Accrued compensation 378
Short-term loans 238
Accrued expenses 302
Other liabilities 92
---------

TOTAL CURRENT LIABILITIES 4,675
---------

CONVERTIBLE NOTES 913
---------

ACCRUED SEVERANCE PAY - NET 35
---------

COMMITMENTS AND CONTINGENCIES --
---------

SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 110,000,000 shares authorized,
42,766,087, issued and outstanding 428
Additional paid-in capital 428
Retained earnings 1,312
---------

TOTAL SHAREHOLDERS' EQUITY 2,168
---------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,791
=========

See Notes to the Consolidated Financial Statements.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

THREE MONTHS ENDED
MARCH 31,
2 0 0 2 2 0 0 1
------- -------

REVENUES $ 3,099 $ 3,270

COST OF REVENUE 1,757 2,423
------------------ -----------------

GROSS PROFIT 1,342 847

OPERATING EXPENSES:
Selling, general and administrative 515 420
------------------ -----------------

INCOME FROM OPERATIONS 827 427

INTEREST EXPENSE 36 43

OTHER (EXPENSE) INCOME (275) 90
------------------ -----------------

INCOME BEFORE PROVISION FOR INCOME TAXES 516 474

PROVISION FOR INCOME TAXES 10 --
------------------ -----------------

NET INCOME $ 506 $ 474
================== =================

NET INCOME PER SHARE - BASIC $ .01 $ .01
================== =================

NET INCOME PER SHARE - DILUTED $ .01 $ .01
================== =================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES - BASIC 42,766,087 42,766,087
================== =================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES - DILUTED 43,809,087 43,809,087
================== =================

See Notes to the Consolidated Financial Statements.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS, EXCEPT NUMBER OF SHARE DATA)

COMMON STOCK ADDITIONAL TOTAL
NUMBER PAID-IN RETAINED SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- ------ ------- -------- ------

BALANCE DECEMBER 31, 2001 42,766,087 $ 428 $ 428 $ 806 $ 1,662

Net Income -- -- -- 506 506
----------------- --------------- --------------- -------------- ---------------

BALANCE MARCH 31, 2002 42,766,087 $ 428 $ 428 $ 1,312 $ 2,168
================= =============== =============== ============== ===============

See Notes to the Consolidated Financial Statements.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
2 0 0 2 2 0 0 1
------- -------
OPERATING ACTIVITIES:

Net income $ 506 $ 474
Adjustments to reconcile net income to net cash
(used for) operating activities:
Amortization and depreciation 72 39
Gain from the sale of property and equipment -- 1
Change in accrued severance pay - net 6 (8)

Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable - net (306) 737
Accounts receivable - related party 103 --
Inventory 33 (1,065)
Costs incurred in excess of billings on contracts in progress (992) (553)
Refundable value added tax (10) 30
Employee advances 7 (108)
Other current assets (55) (93)
Deferred taxes (2) --

Increase (decrease) in:
Accounts payable (106) 369
Accrued compensation (29) 35
Accrued expenses (76) (65)
Other liabilities 36 (77)
------------ -------------
NET CASH - (USED FOR) OPERATING ACTIVITIES (813) (284)
------------ -------------

INVESTING ACTIVITIES:
Acquisition of property and equipment (331) (133)
Proceeds from sale of property and equipment -- 5
Other assets (2) 3
Investment in unconsolidated subsidiary (94) --
------------ -------------

NET CASH - INVESTING ACTIVITIES (427) (125)
------------ -------------

FINANCING ACTIVITIES:
Proceeds from loans -- (28)
Proceeds from convertible notes 673 --
Repayment of shareholder loans -- (74)
Changes in short-term bank credit - net 623 (256)
Repayment of short-term loans - net (68) --
Deferred loan costs (72) --
------------ -------------

NET CASH - FINANCING ACTIVITIES 1,156 (358)
------------ -------------

NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ (84) $ (767)

See Notes to the Combined Financial Statements.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

THREE MONTHS ENDED
MARCH 31,
2 0 0 2 2 0 0 1
------- -------

NET [DECREASE] IN CASH AND CASH EQUIVALENTS - FORWARD $ (84) $ (767)

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIODS 107 1,238
------------------ -----------------

CASH AND CASH EQUIVALENTS - END OF PERIODS $ 23 $ 471
================== =================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for:
Interest $ 33 $ 34
Income taxes $ -- $ --

See Notes to the Consolidated Financial Statements.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)

[1] BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Clean Systems
Technology Group, Ltd. have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly, they do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments [consisting of normal recurring accruals] considered
necessary in order to make the interim financial statements not misleading have
been included. Results for the three months ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. These interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and footnotes
thereto of the Company and management's discussion and analysis of financial
condition and results of operations included in the Company's annual report on
Form 10-KSB for the year ended December 31, 2001.

On October 17, 2001, Entertainment International Ltd. ("ENTI"), through its
wholly-owned subsidiary ENTI Acquisition I Corp., closed a transaction (the
"Transaction") providing for the acquisition of CSTI Hi-Tec, Ltd. an Israeli
corporation. All of the issued and outstanding shares of CSTI Hi-Tec, Ltd. were
exchanged for shares of ENTI's unregistered restricted common stock.
Simultaneously with the closing, the Board of Directors authorized a one for
twenty reverse stock split of all ENTI's issued and outstanding common stock.
All references in the accompanying consolidated financial statements to the
number of shares have been restated to reflect the reverse stock split.

For accounting purposes, the Transaction has been treated as a recapitalization
of CSTI Hi-Tec, Ltd., with CSTI Hi-Tec, Ltd. as the acquirer. The shares issued
in the Transaction are treated as being issued for cash and are shown as
outstanding for all periods presented in the same manner as for a stock split.
The consolidated financial statements reflect the results of operations of CSTI
Hi-Tec, Ltd. and its subsidiaries and ENTI as of and for the three months ended
March 31, 2002. The consolidated financial statements for the three months ended
March 31, 2001, reflect the results of operations and financial position of CSTI
Hi-Tec, Ltd. and its subsidiaries. Pro forma information on the Transaction is
not presented as, at the date of the Transaction, ENTI was considered a public
shell and accordingly, the Transaction was not considered a business
combination. On December 27, 2001, ENTI amended its certificate of incorporation
to change its name from Entertainment International, Ltd. to Clean Systems
Technology Group, Ltd. (the "Company" or "CSTI").

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting policies followed by the Company are set forth in Note 1 to the
Company's consolidated financial statements included in the Company's Form
10-KSB for the year ended December 31, 2001.

-9-

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)

USE OF ESTIMATES -- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires 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 the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

REVENUE RECOGNITION -- The Company follows the percentage-of-completion method
of accounting for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred bears to
estimated total costs. Where contracts in progress are subject to negotiation
and it is probable that the additional costs will be recovered, none of the
costs are recognized in the income statement until pricing has been approved.
Similarly, the revenue is not recognized until realization is assured beyond a
reasonable doubt. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of cost
incurred on contracts in progress in excess of related billings is shown as a
current asset, and the aggregate of billings on contracts in progress in excess
of related costs incurred as shown as a current liability.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
("SFAS No. 141"). SFAS No. 141 changes the accounting for business combinations
initiated after June 30, 2001, requiring that all business combinations be
accounted for using the purchase method and that intangible assets be recognized
as assets apart from goodwill if they arise from contractual or other legal
rights, or if they are separable or capable of being separated from the acquired
entity and sold, transferred, licensed, rented or exchanged. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001. The
adoption of SFAS No. 141 did not have a material impact on the Company's
financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles"
(SFAS No. 142") SFAS No. 142 specifies the financial accounting and reporting
for acquired goodwill and other intangible assets. Goodwill and intangible
assets with indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 requires that the useful
lives of intangible assets acquired on or before June 30, 2001 be reassessed and
the remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives shall be tested for
impairment. Goodwill recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is initially applied in its
entirety. As of March 31, 2002, the Company had no recorded goodwill or
indefinite lived intangibles. Therefore, the Company believes that the adoption
of SFAS No. 142 will not have a significant impact on its results of operations
or financial position.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" )"SFAS No. 143"), which is effective October 1, 2003. SFAS No. 143
requires, among other things, the accounting and reporting of legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, or normal operation of a long-lived
asset. The Company is currently assessing, but has not yet determined, the
effect of SFAS No. 143 on its financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. SFAS No. 144 addresses
accounting and reporting of all long-lived assets, except goodwill, that are
either held and used or disposed of through sale or other means. The Company is
currently assessing the impact of SFAS No. 144, but believes that its adoption
will not have a material impact on its operating results or financial position.

[3] INVENTORY

Inventory, which consists of raw materials, is valued at the lower of cost or
market. Cost is determined by the weighted average method.

-10-

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA OR AS OTHERWISE NOTED)

[4] NET INCOME PER SHARE

Earnings per share are calculated in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 requires the reporting of both basic earnings per share, which is the
weighted-average number of common shares outstanding, and diluted earnings per
share, which includes the weighted-average number of common shares outstanding
and all dilutive potential common shares outstanding, utilizing the treasury
stock method. For the three months ended March 31, 2002 and 2001, the shares
issued in the Transaction are treated as outstanding for all periods presented.
For the three months ended March 31, 2002 and 2001, dilutive potential common
shares outstanding reflect shares issuable under convertible notes [See Note 5].
Share and per share amounts reflect the effect of the one for twenty reverse
stock split in October 2001.

[5] CONVERTIBLE NOTES

During the three months ended March 31, 2002, the Company issued $673 in
convertible notes. Principal amounts of the notes may be converted by the
holders into shares of Company common stock, at a conversion price of $0.875 per
share, at any time from issuance until May 15, 2003. At May 15, 2003, the notes
automatically convert into shares of Company common stock at a price equal to
$0.875, subject to adjustment. The adjustment entitles the noteholders to
receive consideration at least equal to the original principal amount of the
note plus accrued interest at eight percent from the date of issuance. The
consideration may be paid in cash or common stock at the sole discretion of the
Company.

[6] OTHER (EXPENSE) INCOME

Aggregate amounts in other (expense) income are primarily the result of foreign
currency translation adjustments. Substantially all of the Company's sales are
made in U.S. dollars. In addition, a substantial portion of the Company's costs
are incurred in U.S. dollars. Since the U.S. dollar is the primary currency in
the economic environment in which the Company operates, the U.S. dollar is its
functional currency.

During the three months ended March 31, 2002 certain assets and liabilities were
denominated in NIS while the payments to suppliers were linked to the U.S.
dollar which caused a substantial translation adjustment due to the relative
strength of the U.S. dollar to the New Israeli shekel in 2002.

[7] GEOGRAPHIC REPORTING

Revenues by geographic classifications are as follows:

[In U.S. $ thousands]
---------------------
Israel Italy India Other Total
------ ----- ----- ----- -----

For the period ended
March 31, 2002 $ 3,007 $ 74 $ 18 $ -- $ 3,099
For the period ended
March 31, 2001 $ 20 $ 2,376 $ 685 $ 189 $ 3,270

[8] INVESTMENT IN UNCONSOLIDATED SUBSIDIARY -- AT COST

In January 2002 the Company paid $94 for a nineteen percent (19%) interest in
Altan Systems Ltd., an entity whose processes and technology may enhance CSTI's
product line. The investment will be carried at cost.

[9] SUBSEQUENT EVENTS

Subsequent to March 31, 2002, the Company issued an aggregate of $200 in
convertible notes with terms substantially similar to those described in Note 5.

. . . . . . . . . .

-11-

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

When used in this Form 10-QSB and in future filings by CSTI with the
Securities and Exchange commission, the words or phrases "will likely result"
and "the company expects, "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
"forward-looking statements." CSTI wishes to caution readers not to place undue
reliance on any such forward-looking statements, each of which speak only as of
the date made. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. CSTI has no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.

OVERVIEW

CSTI designs, engineers, manufactures, installs and services ultra high purity
systems for transportation of clean gases and liquids from the source, where the
gases and liquids are stored, to the point of use for the following processing
industries:

o Micro-electronics (semi conductors);
o Optical fibers;
o Pharmaceuticals and Bio-technology; and
o Metal Blades.

CSTI product lines provide a total solution for the four major gas and chemical
systems from source to the point of use referenced above. Since the gases and
the chemicals are pure and extremely dangerous, the systems that CSTI
manufactures must have the highest levels of safety and quality.

CSTI products are divided into three main categories:

o Systems for ultra high purity gases from source to point of use;
o Pre-manufactured products sub-systems; and
o System upgrades.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This discussion and analysis of the Company's financial condition and results of
operations are based on its consolidated financial statements that have been
prepared under accounting principles generally accepted in the United States of
America. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. All significant
accounting policies are disclosed in note 1 to the consolidated financial
statements included in this Form 10-KSB. The consolidated financial statements
and the related notes thereto should be read in conjunction with the following
discussion of the Company's critical accounting policies. Critical accounting
policies and estimates are:

o Revenue Recognition
o Use of Estimates

-12-

REVENUE RECOGNITION -- The Company follows the percentage-of-completion method
of accounting for contracts that extend for periods in excess of one year.
Accordingly, income is recognized in the ratio that costs incurred bears to
estimated total costs. Adjustments to cost estimates are made periodically, and
losses expected to be incurred on contracts in progress are charged to
operations in the period such losses are determined. The aggregate of cost
incurred and income recognized on uncompleted contracts in excess of related
billings is shown as a current asset, and the aggregate of billings on
uncomplete contracts in excess of related costs incurred and income recognized
is shown as a current liability.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In July 2001, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS') No. 141, "Business Combinations" ("SFAS No. 141"). SFAS No.
141 changes the accounting for business combinations initiated after June 30,
2001, requiring that all business combinations be accounted for using the
purchase method and that intangible assets be recognized as assets apart from
goodwill if they arise from contractual or other legal rights, or if they are
separable or capable of being separated from the acquired entity and sold,
transferred, licensed, rented or exchanged. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001. The adoption of SFAS No.
141 did not have a material impact on the Company's financial statements.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles"
(SFAS No. 142") SFAS No. 142 specifies the financial accounting and reporting
for acquired goodwill and other intangible assets. Goodwill and intangible
assets with indefinite useful lives will not be amortized but rather will be
tested at least annually for impairment. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001. SFAS No. 142 requires that the useful
lives of intangible assets acquired on or before June 30, 2001 be reassessed and
the remaining amortization periods adjusted accordingly. Previously recognized
intangible assets deemed to have indefinite lives shall be tested for
impairment. Goodwill recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment as of the
beginning of the fiscal year in which SFAS No. 142 is initially applied in its
entirety. As of December 31, 2001, the Company had no recorded goodwill or
indefinite lived intangibles. Therefore, the Company believes that the adoption
of SFAS No. 142 will not have a significant impact on its results of operations
or financial position.

-13-

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of total revenue, certain
consolidated statements of operations data for the periods indicated. These
operating results are not necessarily indicative of the results for any future
period.

THREE MONTHS ENDED MARCH 31,
----------------------------
2 0 0 2 2 0 0 1
------- -------

Revenues 100 % 100 %
-------- -----
Cost of Revenues 57 % 74 %

Gross Profit 43 % 26 %
Selling General and Administrative 16 % 13 %

Income from Operations 27 % 13 %

Interest Expense 1 % 1 %
Other Income (Expense) (9) % 3 %

Income Before Taxes on Income 17 % 15 %
Income Taxes - % - %
Net Income 17 % 15 %

THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 2001
(AMOUNTS IN THOUSANDS UNLESS OTHERWISE INDICATED)

REVENUES

Revenues in 2002 of $ 3,099 decreased $0.17 million (or 5.2%) from $3,270 in
2001. Management's strategic decision is to continue to be a premier industry
leader in Israel as well as to continue to gain market share in the European and
Central Asian markets, especially Italy and India. During the three months ended
March 31, 2002 and 2001, revenues to customers in Israel amounted to $3,007 and
$20, respectively. Revenues to Italian, Indian, and other non-domestic customers
amounted to $92 and $3,250 for the three months ended March 31, 2002 and 2001,
respectively. In general, the Company is not dependent upon any single customer
or group of customers. The nature of the Company's business is such that it
works on several large contracts at any one time. Therefore, several customers
may comprise a significant portion of CSTI's revenues during any fiscal period.
Once the Company installs a system for its customer, the customer is generally
dependent on the Company for future upgrades of that system.

COST OF REVENUES

The following table sets forth a comparison of the costs of revenues for the
periods indicated:

THREE MONTHS ENDED
MARCH 31,
2 0 0 2 2 0 0 1
------- -------

Cost of materials and inventory $ 128 $ 1,202
Salaries and related expenses 654 387
Subcontractors 42 65
Cost of service abroad 39 210
Rent and taxes 22 24
Vehicles and transportation 74 75
Equipment maintenance and insurance 9 27
Depreciation 44 25
Miscellaneous 11 32
Changes in work in process 734 376
------------ ------------

Cost of Revenues $ 1,757 $ 2,423
============ ============

-14-

Cost of revenues has decreased by $0.67 million (or 27.5%) to $1.76 million in
2002 from $2.42 million in 2001. The decrease is due to a moderate decrease in
revenues and the projects' design. Materials and inventory costs decreased by
$716 to $862 in 2002 from $1,578 in 2001. The decrease is primarily attributable
to higher use of project labor costs as opposed to inventory and materials in
projects worked on in 2002 versus 2001. The purchase cost of materials did not
significantly increase in 2002 over 2001. Materials and inventory costs as a
percentage of revenues was 28% in 2002 as compared to 48% in 2001. The average
number of employees during 2002 was 145 as compared to 83 for 2001. Other costs
such as rent and taxes, transportation, equipment maintenance and insurance and
depreciation decreased in relative proportion to the decrease in revenues.

GROSS PROFIT

Gross Profit has increased by $0.50 million (or 59%) to $1.34 million in 2002
from $0.85 million in 2001. The increase in gross profit percentage to 43.3% in
2002 from 25.9% in 2001 is due to the higher margins attained on revenues in
Israel due to its leading industry position. During the three months ended March
31, 2002, a substantial portion of revenues were earned in Israel while revenues
earned in the comparative three month period were earned substantially outside
of Israel. Further, the projects worked on in the first quarter of 2002 were
more labor intensive than the materials intensive projects of the first quarter
of 2001. The Company believes that lower materials usage and its ability to
exert greater control over relatively less expensive domestic labor costs
contributed to the higher margins experienced in 2002.

SELLING, GENERAL AND ADMINISTRATIVE

The following table sets forth details regarding selling, general and
administrative expenses for the periods indicated:

THREE MONTHS ENDED
MARCH 31,
2 0 0 2 2 0 0 1
------- -------

Salaries and related expenses $ 243 $ 155
Professional fees 94 51
Telephone and office maintenance 51 45
Travel vehicles and transportation 46 31
Depreciation 21 9
Sales and marketing 60 129
--------- ----------

$ 515 $ 420
========= ==========

Selling, General and Administrative Expenses ("SG&A") have increased $0.09
million (or 22.6%) to $0.5 million in 2002 from $0.4 million in 2001. The
increase is primarily attributable to the addition of three senior employees in
2002. Management's initiative to increase domestic sales efforts resulted in
increased professional fees.

INTEREST EXPENSE

Interest expense decreased by $7 to $36 in 2002 from $43 in 2001. The decrease
is attributable to lower interest rates in 2002 as compared to 2001.

OTHER INCOME (EXPENSE)

The increase in other (expense) of $(365) to $(275) in 2002 as compared to an
income $90 in other expenses in 2001 is primarily the result of foreign currency
translation adjustments. Substantially all of the Company's sales are made in
U.S. dollars. In addition, a substantial portion of the Company's costs are
incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the
economic environment in which the Company operates, the U.S. dollar is its
functional currency.

During the three months ended March 31,2002 certain assets and liabilities were
denominated in NIS while the payments to suppliers were linked to the U.S.
dollar which caused a substantial translation adjustment due to the relative
strength of the U.S. dollar to the New Israeli shekel in 2002 .

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, the Company had cash and cash equivalents of $23 as compared
to $471 at March 31, 2001.

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Net cash used in operating activities was $813 for the three months ended March
31, 2002 as compared to net cash used by operating activities of $284 for the
three months ended March 31, 2001. The increase in net cash used in operating
activities is primarily attributable to increases in net accounts receivables
and costs incurred in excess of billings. These cash outflows were offset by the
increase in net income.

Net cash used in investing activities was $427 and $125 for the three months
ended March 31, 2002 and 2001, respectively. The increase is primarily due to
the direct purchase of real estate property ($200) and an equity investment in
an unconsolidated subsidiary ($100).

Net cash provided by financing activities was $1,156 and $(358) for the three
months ended March 31, 2002 and 2001, respectively. The increase was primarily
due to the increased use of the bank-line of credit facility and the proceeds
received from the issuance of convertible notes.

The following summarizes certain financing outstanding as of March 31, 2002:

[a] Convertible Notes - In January and February 2002, the Company issued $673 in
convertible notes. Principal amounts of the notes may be converted by the holder
into shares of Company common stock, at a conversion price of $0.875 per shares,
at any time from issuance until May 15, 2003. At May 15, 2003, the notes
automatically convert into shares of Company common stock at a price equal to
$0.875, subject to adjustment. The adjustment entitles the noteholders to
receive consideration at least equal to the original principal amount of the
note plus accrued interest at eight percent from the date of issuance. The
consideration may be paid in cash or common stock at the sole discretion of the
Company.

[b] Bank Guarantees - Certain customers require the Company to obtain bank
guarantees of a portion of the contract undertaken. The Company has an agreement
with the bank under which such guarantees are available. In the event the
Company is unable to perform all aspects of the contracts, the bank will make
contractual payments to customers and then seek reimbursement from the Company.
As of March 31, 2002, the bank had extended approximately $508 in guarantees to
five customers.

Subsequent to March 31, 2002, the Company issued an aggregate of $200
convertible notes with terms substantially the same as described in [a] above.

Assuming there is no significant change in the business, the Company believes
that additional funding such as described above and cash flow from operations
and will be sufficient to fund its needs for at least the next twelve months.

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PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Other than as previously disclosed in the Company's Form 10-KSB, the Company is
not party to any other material legal proceedings.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

None.

(b) Reports on Form 8-K.

None.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.

CLEAN SYSTEMS TECHNOLOGY GROUP, LTD.

Dated: May 20, 2002 By:
------------------------------------
Jacob Lustgarten
Chief Executive Officer and
Chairman of the Board

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