10-Q

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

Form 10-Q

(Mark One)
þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2010
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number: 001-33710

CLEAN DIESEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	06-1393453 (I.R.S. Employer Identification No.)
10 Middle Street, Suite 1100, Bridgeport, CT (Address of principal executive offices)	06604 (Zip Code)

(203) 416-5290

(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 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 þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

As of May 10, 2010, there were 8,213,988 outstanding shares of the registrant’s common stock, par value $0.01 per share.

CLEAN DIESEL TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
for the Quarter Ended March 31, 2010

INDEX

			Page
	PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements		3
		Condensed Consolidated Balance Sheets as of March 31, 2010 (Unaudited) and December 31, 2009		3
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 (Unaudited)		4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 (Unaudited)		5
		Notes to Condensed Consolidated Financial Statements (Unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		23
	Item 4.	Controls and Procedures		23
	PART II.	OTHER INFORMATION
	Item 6.	Exhibits		23
SIGNATURES				24
EX-10.A
EX-10.B
EX-31.A
EX-31.B
EX-32

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PART I. FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Balance Sheets

	March 31,			December 31,
	2010			2009
	(Unaudited)
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	2,257		$	2,772
Investments		10,475			11,725
Accounts receivable, net of allowance of $218 and $232, respectively		522			148
Inventories, net		887			1,059
Other current assets		128			294
Total current assets		14,269			15,998
Patents, net		908			898
Fixed assets, net of accumulated depreciation of $396 and $505, respectively		270			294
Other assets		55			57
Total assets	$	15,502		$	17,247
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	405		$	301
Accrued expenses		618			675
Short-term debt		6,900			7,693
Total current liabilities		7,923			8,669
Commitments and contingencies (Note 7)
Stockholders’ equity:
Preferred stock, par value $0.01 per share: authorized 100,000; no shares issued and outstanding		—			—
Common stock, par value $0.01 per share: authorized 12,000,000; issued and outstanding 8,213,988 and 8,213,988 shares, respectively		82			82
Additional paid-in capital		74,724			74,694
Accumulated other comprehensive loss		(435	)		(381	)
Accumulated deficit		(66,792	)		(65,817	)
Total stockholders’ equity		7,579			8,578
Total liabilities and stockholders’ equity	$	15,502		$	17,247

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Statements of Operations

	Three Months Ended
	March 31,
	2010			2009
	(In thousands, except per share amounts)
	(Unaudited)
Revenue:
Product sales	$	612		$	312
Technology licensing fees and royalties		33			34
Consulting and other		38			—
Total revenue		683			346
Costs and expenses:
Cost of product sales		465			234
Cost of licensing fees and royalties		—			—
Cost of consulting and other revenues		—			—
Selling, general and administrative		1,221			1,952
Severance charge		(103	)		510
Research and development		53			59
Patent amortization and other expense		49			69
Operating costs and expenses		1,685			2,824
Loss from operations		(1,002	)		(2,478	)
Other income (expense):
Interest income		60			92
Other income (expense), net		(33	)		(121	)
Net loss	$	(975	)	$	(2,507	)
Basic and diluted loss per common share	$	(0.12	)	$	(0.31	)
Basic and diluted weighted-average number of common shares outstanding		8,181			8,138

The accompanying notes are an integral part of the condensed consolidated financial statements

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CLEAN DIESEL TECHNOLOGIES, INC.

Condensed Consolidated Statements of Cash Flows

	Three Months Ended
	March 31,
	2010			2009
	(In thousands)
	(Unaudited)
Operating activities
Net loss	$	(975	)	$	(2,507	)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		47			47
Compensation expense for options, warrants and stock awards		30			206
Unrealized loss on investments, net		—			72
Loss on abandonment of patents		3			34
Changes in operating assets and liabilities:
Accounts receivable		(374	)		235
Inventories, net		172			11
Other current assets and other assets		168			12
Accounts payable, accrued expenses and other liabilities		47			123
Net cash used for operating activities		(882	)		(1,767	)
Investing activities
Sale of investments		1,250			—
Patent costs		(29	)		(24	)
Purchase of fixed assets		(9	)		(116	)
Net cash provided by (used for) investing activities		1,212			(140	)
Financing activities
Proceeds from short-term debt		498			3,471
Repayment of short-term debt		(1,291	)		(25	)
Net cash (used for) provided by financing activities		(793	)		3,446
Effect of exchange rate changes on cash		(52	)		(9	)
Net (decrease) increase in cash and cash equivalents	$	(515	)	$	1,530
Cash and cash equivalents at beginning of the period		2,772			3,976
Cash and cash equivalents at end of the period	$	2,257		$	5,506
Supplemental non-cash activities:
Accumulated amortization of abandoned assets	$	2		$	3
Supplemental disclosures:
Cash paid for interest	$	24		$	20

The accompanying notes are an integral part of the condensed consolidated financial statements.

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CLEAN DIESEL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.   Significant Accounting Policies

Basis of Presentation:

In this Quarterly Report on Form 10-Q, the terms “CDT,” “Clean Diesel,” “Company,” “we,” “us,” or “our” mean Clean Diesel Technologies, Inc. and its wholly-owned subsidiary, Clean Diesel International, LLC.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed. These interim condensed consolidated financial statements should be read in conjunction with Clean Diesel’s consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2009.

The unaudited condensed consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. The results for interim periods are not necessarily indicative of results which may be expected for any other interim period or for the full year.

Revision of Prior Period Amounts:

In preparing its financial statements for the three months ended March 31, 2010, Clean Diesel discovered certain errors related to accounting for patents. These errors resulted in the overstatement of Patents, net and the understatement of patent costs for 2009. In accordance with SEC Staff accounting Bulletin Nos. 99 and 108 (“SAB 99 and SAB 108”), Clean Diesel evaluated these errors and determined that they were immaterial to the each reporting period affected and, therefore, amendment of previously filed reports was not required. However, if the adjustments to correct the cumulative errors had been recorded in the first quarter 2010, Clean Diesel believes the impact would have been significant to the first quarter and would impact comparisons to prior periods. As permitted by SAB 108, Clean Diesel revised in the current filing and plans to revise in the next filings of its quarterly and annual consolidated financial statements previously reported annual and quarterly results for 2009 for these immaterial amounts.

The Consolidated Balance Sheet at December 31, 2009 was revised to reflect the cumulative effect of these errors which resulted in an increase in Accumulated deficit of $185,000. Also, in accordance with SAB 108, the Consolidated Statement of Operations and Consolidated Statement of Cash Flows have been revised as follows:

Condensed Consolidated Balance Sheet — December 31, 2009

	As previously
	reported			Adjustment			Revised
	(In thousands)
Patents, net	$	1,083		$	(185	)	$	898
Total assets		17,432			(185	)		17,247
Accumulated deficit		(65,632	)		(185	)		(65,817	)
Total stockholder’s equity		8,763			(185	)		8,578
Total liabilities and stockholders’ equity		17,432			(185	)		17,247

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Condensed Consolidated Statement of Operations — Three Months Ended March 31, 2009

	As previously
	reported			Adjustment			Revised
	(In thousands)
Patent amortization and other expense	$	35		$	34		$	69
Operating costs and expenses		2,790			34			2,824
Loss from operations		(2,444	)		(34	)		(2,478	)
Net loss		(2,473	)		(34	)		(2,507	)
Basic and diluted loss per common share		(0.30	)		—			(0.31	)

Condensed Consolidated Statement of Cash Flows — Three Months Ended March 31, 2009

	As previously
	reported			Adjustment			Revised
	(In thousands)
Net loss	$	(2,473	)	$	(34	)	$	(2,507	)
Loss on abandonment of patents		—			34			34
Accumulated amortization of abandoned assets		—			3			3

Revenue Recognition:

The Company generates revenue from sales of emission reduction products including Purifier system hardware; ARIS^® advanced reagent injection system injectors and dosing systems; fuel-borne catalysts, including the Platinum Plus^® fuel-borne catalyst products and concentrate; and license and royalty fees from the ARIS system and other technologies.

Revenue is recognized when earned. For technology licensing fees paid by licensees that are fixed and determinable, accepted by the customer and nonrefundable, revenue is recognized upon execution of the license agreement, unless it is subject to completion of any performance criteria specified within the agreement, in which case it is deferred until such performance criteria are met. Royalties are frequently required pursuant to license agreements or may be the subject of separately executed royalty agreements. Revenue from royalties is recognized ratably over the royalty period based upon periodic reports submitted by the royalty obligor or based on minimum royalty requirements. Revenue from product sales is recognized when title has passed and our products are shipped to our customer, unless the purchase order or contract specifically requires us to provide installation for hardware purchases. For hardware projects in which we are responsible for installation (either directly or indirectly by third-party contractors), revenue is recognized when the hardware is installed and/or accepted, if the project requires inspection and/or acceptance. Other revenue primarily consists of grant income, engineering and development consulting services. Revenue from technical consulting services is generally recognized and billed as the services are performed. Revenue from grant income is recognized when grant income is earned.

Generally, our license agreements are non-exclusive and specify the geographic territories and classes of diesel engines covered, such as on-road vehicles, off-road vehicles, construction, stationary engines, marine and railroad engines. At the time of the execution of our license agreement, we assign the right to the licensee to use our patented technologies. The up-front fees are not subject to refund or adjustment. We recognize the license fee as revenue at the inception of the license agreement when we have reasonable assurance that the technologies transferred have been accepted by the licensee and collectability of the license fee is reasonably assured. The nonrefundable up-front fee is in exchange for the culmination of the earnings process as the Company has accomplished what it must do to be entitled to the benefits represented by the revenue. Under our license agreements, there is no significant obligation for future performance required of the Company. Each licensee must determine if the rights to our patented technologies are usable for their business purposes and must determine the means of use without further involvement by the Company. In most cases, licensees must make additional investments to enable the capabilities of our patents, including significant engineering, sourcing of and assembly of multiple components. Our obligation to defend valid patents does not represent an

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additional deliverable to which a portion of an arrangement fee should be allocated. Defending the patents is generally consistent with our representation in the license agreement that such patents are legal and valid.

Valuation of Accounts Receivable:

Management reviews the creditworthiness of a customer prior to accepting an initial order. Upon review of the customer’s credit application and confirmation of the customer’s credit and bank references, management establishes the customer’s terms and credit limits. Credit terms for payment of products are extended to customers in the normal course of business and no collateral is required. We receive order acknowledgements from customers confirming their orders prior to our fulfillment of orders. To determine the allowance for doubtful accounts receivable which adjusts gross trade accounts receivable downward to estimated net realizable value, management considers the ongoing financial stability of the Company’s customers, the aging of accounts receivable balances, historical losses and recoveries, and general business trends and existing economic conditions that impact our industry and customers. In cases where the Company is aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance against amounts due from that customer, and thereby reduce the net recognized receivable to the amount the Company reasonably believes will be collected. An account is written off only after management has determined that all available means of collection, including legal remedies, are exhausted.

Cost of Revenue:

Our cost of product sales includes the costs we incur to formulate our finished products into saleable form for our customers, including material costs, labor and processing costs charged to us by our outsourced blenders, installers and other vendors, packaging costs incurred by our outsourced suppliers, freight costs to customers and inbound freight charges from our suppliers. Our inventory is primarily maintained off-site by our outsourced suppliers. To date, our purchasing, receiving, inspection and internal transfer costs have been insignificant and have been included in cost of product sales. Cost of licensing fees and royalties is zero as there are no incremental costs associated with the revenue. Cost of consulting and other revenue includes incremental out of pocket costs to provide consulting services.

Patent Expense:

Patents, which include all direct incremental costs associated with initial patent filings and costs to acquire rights to patents under licenses, are stated at cost and amortized using the straight-line method over the remaining useful lives, ranging from one to twenty years. During the three months ended March 31, 2010, we capitalized $29,000 of patent costs and recognized a $3,000 loss on the abandonment of certain patents and patent applications. Indirect and other patent-related costs are expensed as incurred. Patent amortization expense for the three months ended March 31, 2010 and March 31, 2009 was $16,000 and $11,000, respectively. At March 31, 2010 and December 31, 2009, the Company’s patents, net of accumulated amortization, were $908,000 and $898,000, respectively.

Basic and Diluted Loss per Common Share:

Basic loss per share is computed by dividing net loss by the weighted-average shares outstanding during the reporting period. Diluted loss per share is computed in a manner similar to basic earnings per share except that the weighted-average shares outstanding are increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive, using the treasury stock method. The Company’s computation of diluted net loss per share for the three months ended March 31, 2010 and 2009 does not include common share equivalents associated with 818,744 and 972,078 options, respectively, and 407,493 and 424,992 warrants, respectively, as the result would be anti-dilutive. Further, per share effects of the 26,667 and 40,000 unvested restricted shares under a stock award have not been included in the diluted net loss per share for the three months ended March 31, 2010 and 2009, respectively, as the result would be anti-dilutive.

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Income Taxes:

At March 31, 2010, there were no unrecognized tax benefits. It is the Company’s policy to classify in the financial statements accrued interest and penalties attributable to a tax position as income taxes.

Utilization of CDT’s U.S. federal tax loss carryforwards for the period prior to December 12, 1995 is limited as a result of the ownership change in excess of 50% attributable to the 1995 Fuel-Tech N.V. rights offering to a maximum annual allowance of $734,500. Utilization of CDT’s U.S. federal tax loss carryforwards for the period after December 12, 1995 and before December 30, 2006 is limited as a result of the ownership change in excess of 50% attributable to the private placement which was effective December 29, 2006 to a maximum annual allowance of $2,518,985. Utilization of CDT’s tax losses subsequent to 2006 may be limited due to cumulative ownership changes in any future three-year period.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. Our tax years after 2006 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired.

Selling, General and Administrative Expense:

Selling, general and administrative expense is summarized as the following:

	Three Months Ended
	March 31,
	2010		2009
	(In thousands)
Compensation and benefits	$	620	$	1,016
Non-cash stock-based compensation		30		202
Total compensation and benefits		650		1,218
Professional services		326		247
Travel		51		111
Occupancy		122		235
Sales and marketing expenses		7		52
Depreciation and all other		65		89
Total selling, general and administrative expenses	$	1,221	$	1,952

Aggregate non-cash stock-based compensation charges incurred by the Company in the three months ended March 31, 2010 and 2009 were $30,000 and $206,000, respectively, (including zero and $4,000, respectively, in research and development expenses).

Fair Value of Financial Instruments:

The Company’s assets carried at fair value on a recurring basis are its investments (see Note 2). The investments have been classified within level 3 in the valuation hierarchy as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. The valuation may be revised in future periods as market conditions evolve.

Certain financial instruments are carried at cost on our condensed consolidated balance sheets, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, customer deposits, accrued expenses and short-term debt.

Recently Adopted and Recently Issued Accounting Pronouncements:

In January 2010, the Financial Accounting Standards Board (“FASB”) published Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06 clarifies improved disclosure requirements related to fair

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value measurements and disclosures in Overall Subtopic 820-10 of the FASB Codification. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard will not have a material impact on the Company’s financial position and results of operations.

Note 2.   Investments

The Company’s investments consist of auction rate securities (“ARS”) and an auction rate securities right (“ARSR”). The Company accounts for its ARS investments based upon accounting standards that provide for determination of the appropriate classification of investments. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses, net of tax, reported as a separate component of stockholders’ equity. Trading securities are carried at fair value, with unrealized holding gains and losses included in other income (expense) on our condensed consolidated statements of operations.

The Company’s ARSR investment is accounted for based upon a standard that provides a fair value option election that allows entities to irrevocably elect fair value as the initial and subsequent measurement attribute for certain assets and liabilities. Changes in fair value are recognized in earnings as they occur for those assets or liabilities for which the election is made. The election is made on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

The Company’s investments are reported at fair value in accordance with accounting standards that accomplish the following key objectives:

•  Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;

•  Establishes a three-level hierarchy (“valuation hierarchy”) for fair value measurements;

•  Requires consideration of the Company’s creditworthiness when valuing liabilities; and

•  Expands disclosures about instruments measured at fair value.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:

•  Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•  Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

•  Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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The Company’s investments as of March 31, 2010 and December 31, 2009 have been classified within level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. The fair value of the investments may be revised in future periods as market conditions evolve. Investments are comprised of the following:

	March 31,		December 31,
	2010		2009
	(In thousands)
Auction rate securities	$	9,461	$	10,577
Auction rate securities right		1,014		1,148
Total investments	$	10,475	$	11,725
Classified as current assets		10,475		11,725
Classified as non-current assets	$	—	$	—

Our ARS are variable-rate debt securities, most of which are AAA/Aaa rated, that are collateralized by student loans substantially guaranteed by the U.S. Department of Education. While the underlying securities have a long-term nominal maturity, the interest rate is reset through dutch auctions that are typically held every 28 days. The contractual maturities of our ARS range from 2027 to 2047. Auctions for our ARS have failed since February 2008 resulting in illiquid investments for the Company. Our ARS were purchased and held through UBS. In October 2008, the Company received an offer (the “Offer”) from UBS AG for a put right permitting us to sell to UBS at par value all ARS previously purchased from UBS at a future date (any time during a two-year period beginning June 30, 2010). The Offer also included a commitment to loan us 75% of the UBS-determined value of the ARS at any time until the put is exercised. We accepted the Offer on November 6, 2008. Our right under the Offer is in substance a put option (with the strike price equal to the par value of the ARS) which we recorded as an asset, measured at its fair value, with the resultant gain recognized in our statement of operations.

For the period through the date the Company accepted the Offer, the Company classified the ARS as available-for-sale; thereafter, the Company transferred the ARS to the trading category.

In March 2010, UBS purchased one of our ARS instruments at par value. UBS applied the sale proceeds of $1,250,000 to reduce the outstanding borrowing under our UBS credit facility (see Note 4.). This action is pursuant to the terms of the UBS Offer that grants UBS the right to purchase ARS from our account at par value plus accrued interest and apply all proceeds to the outstanding debt. As such, UBS has modified the amount we are eligible to borrow based upon 75% of the UBS-determined value of the ARS.

The fair value of the ARS was approximately $9.5 million (par value of $10.5 million) at March 31, 2010 and $10.6 million at December 31, 2009. The fair value of the ARS was determined utilizing a discounted cash flow approach and market evidence with respect to the ARS’s collateral, ratings and insurance to assess default risk, credit spread risk and downgrade risk. The Company also recorded the ARSR at an initial fair value of $1.3 million. The fair value of the ARSR was based on an approach in which the present value of all expected future cash flows were subtracted from the current fair market value of the securities and the resultant value was calculated as a future value at an interest rate reflective of counterparty risk. In the three months ended March 31, 2010, we recorded a gain of $134,000 on the ARS and a loss of $134,000 on the ARSR, resulting in no impact on our results of operation. In the three months ended March 31, 2009, we recorded a gain of $34,000 on the ARS and a loss of $106,000 on the ARSR, resulting in a $72,000 net loss included in other income (expense) on our condensed consolidated statements of operations.

Classification of investments as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. At March 31, 2010 and December 31, 2009, the Company classified all investments as current based on management’s intention and ability to liquidate the investments by June 30, 2010.

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The Company will be exposed to credit risk should UBS be unable to fulfill its commitment under the Offer. In the event that UBS is unable to perform upon our exercise of the ARS put right on or after June 30, 2010, we would have to sell the underlying securities at a discount which would negatively impact our future cash flows.

Interest income for the three months ended March 31, 2010 and March 31, 2009 was approximately $60,000 and $92,000, respectively. Accrued interest receivable at March 31, 2010 and December 31, 2009 was approximately $12,000 and $7,000, respectively.

The table below includes a rollforward of the Company’s investments in ARS and ARSR for the three months ended March 31, 2010:

	2010
	Significant
	Unobservable
	Inputs
	(Level 3)
	(In thousands)
Fair value at beginning of period	$	11,725
Purchases		—
Sales		(1,250	)
Transfers (out) in		—
Unrealized gain (loss) included in statement of operations		—
Fair value at end of period	$	10,475
Change in unrealized gain (loss)	$	—

Note 3.   Inventories

Inventories are stated at the lower of cost or market with cost determined using the average cost method. Inventories consist of the following:

	March 31,			December 31,
	2010			2009
	(In thousands)
Finished Platinum Plus fuel-borne catalyst	$	185		$	85
Platinum concentrate/metal		262			449
Hardware		443			587
Other		67			11
	$	957		$	1,132
Less: inventory reserves		(70	)		(73	)
Inventories, net	$	887		$	1,059

Note 4.   Short-term Debt

On July 25, 2008, the Company borrowed $3.0 million from the demand loan facility with UBS collateralized by our ARS, a facility we had arranged in May 2008. Management determined to draw down the entire facility as a matter of financial prudence to secure available cash. The loan facility was available for our working capital purposes and required that we continue to meet certain collateral maintenance requirements, such that our outstanding borrowings could not exceed 50% of the value of our ARS as determined by the lender. No facility fee was required. Borrowings bore interest at a floating interest rate per annum equal to the sum of the prevailing daily 30-day Libor plus 25 basis points.

In November 2008, the Company accepted the Offer from UBS AG (see Note 2). UBS committed to loan us 75% of the value of the ARS as determined by UBS at any time until the ARSR is exercised. We applied

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for the loan which UBS committed would be on a no net cost basis to the Company. UBS approved our credit application on January 14, 2009 and approved a $6.5 million credit facility pursuant to its Offer. On September 4, 2009, we arranged an increase of the credit line to $7.7 million.

In March 2010, UBS purchased one of our ARS instruments at par value. UBS applied the sale proceeds of $1,250,000 to reduce the outstanding debt. This action was pursuant to the terms of the UBS Offer that grants UBS the right to purchase ARS from our account at par value plus accrued interest and apply all proceeds to the outstanding debt. As such, UBS modified the amount we are eligible to borrow based upon 75% of the UBS-determined value of the ARS to approximately $6.9 million.

The outstanding balance of the short-term debt at March 31, 2010 and December 31, 2009 was $6.9 million and $7.7 million, respectively.

Our ARS serve as collateral for the loan which is payable upon demand. If UBS should demand repayment prior to the commencement of the exercise period for our ARSR (June 30, 2010), UBS will arrange alternative financing with substantially the same terms and conditions. If alternative financing cannot be established, UBS will purchase our pledged ARS at par value. Interest is calculated at the weighted average rate of interest we earn on the ARS. Interest is payable monthly. Interest expense for the three months ended March 31, 2010 and 2009 was approximately $27,000 and $20,000, respectively. Accrued interest payable at March 31, 2010 was approximately $3,000.

Note 5.   Stockholders’ Equity

In March 2009, we issued 40,000 restricted shares of our common stock under our Incentive Plan (see Note 6).

In the first three months of 2010, there was no activity in the Company’s warrants. At March 31, 2010, the Company had 407,493 warrants outstanding, exercisable at a weighted-average exercise price of $11.51 with a weighted-average remaining life of 2.2 years.

Note 6.   Stock-Based Compensation

The Company maintains a stock award plan approved by its stockholders, the Incentive Plan (the “Plan”). Under the Plan, awards may be granted to participants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance awards, bonuses or other forms of share-based awards or cash, or combinations of these as determined by the board of directors. Awards are granted at fair market value on the date of grant and typically expire ten years after date of grant. Participants in the Plan may include the Company’s directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as the board of directors may determine. The maximum number of awards allowed under the Plan is 17.5% of the Company’s outstanding common stock less the then outstanding awards, subject to sufficient authorized shares.

Share-based compensation cost recognized under ASC 718 was approximately $30,000 and $206,000 for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, there was approximately $0.1 million of unrecognized compensation cost related to stock options and restricted shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 0.7 years.

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The following table summarizes information concerning stock options outstanding including the related transactions under the Plan for the three months ended March 31, 2010:

						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
	Number of			Exercise		Contractual		Intrinsic
	Shares*			Price		Term in Years		Value
Options Outstanding as of December 31, 2009		876,410		$	10.40
Granted		—		$	—
Exercised		—		$	—
Forfeited		—		$	—
Expired		(57,666	)	$	12.30
Options outstanding as of March 31, 2010		818,744		$	10.27		4.2	$	—
Options exercisable as of March 31, 2010		781,744		$	10.58		3.9	$	—

* Table does not include 40,000 shares issued in 2009 as a restricted stock award under the Plan.

The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on March 31, 2010, which would have been received by the holders had all holders of awards and options in the money exercised their options as of that date.

No stock options were exercised in the three months ended March 31, 2010 and 2009.

In 2009, the board of directors awarded 40,000 shares to the newly-elected Chief Executive Officer at an average market price of $1.625 per share, representing the high and low market price on the date of award, March 30, 2009. These shares vest as to one-third of the total on each of February 10, 2010, 2011 and 2012. The total fair value of the award was $65,000 which is being charged to expense over the vesting period.

The Company estimates the fair value of stock options using a Black-Scholes option pricing model. Key input assumptions used to estimate the fair value of stock options include the expected term, expected volatility of the Company’s stock, the risk free interest rate, option forfeiture rates, and dividends, if any. The expected term of the options is based upon the historical term until exercise or expiration of all granted options. The expected volatility is derived from the historical volatility of the Company’s stock on the U.S. NASDAQ Capital Market (the Over-the-Counter market prior to October 3, 2007) for a period that matches the expected term of the option. The risk-free interest rate is the constant maturity rate published by the U.S. Federal Reserve Board that corresponds to the expected term of the option. ASC 718 requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The estimate is based on the Company’s historical rates of forfeitures. ASC 718 also requires estimated forfeitures to be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The dividend yield is assumed as 0% because the Company has not paid dividends and does not expect to pay dividends in the future.

Note 7.   Commitments and Contingencies

Legal Proceedings

From time to time, the Company is involved in legal proceedings in the ordinary course of its business. The litigation process is inherently uncertain, and the Company cannot guarantee that the outcome of existing proceedings will be favorable for the Company or that they will not be material to the Company’s business, results of operations or financial position. However, the Company does not currently believe these matters will have a material adverse effect on its business, results or financial position.

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Note 8.   Related Party Transactions

Mr. Park, our Chairman, is also a principal and chairman of Innovator Capital Limited, a financial services company based in London, England, which firm has provided services to the Company. On November 20, 2009, the Company entered into an engagement letter with Innovator to provide financing and merger and acquisition services (“Engagement Letter”). The Engagement Letter had an initial three month term during which Innovator would (i) act for the Company in arranging a private placement financing of $3.0 million to $4.0 million from the sale of the Company’s common stock and warrants and (ii) assist the Company in merger and acquisition activities. Effective February 20, 2010, the Company extended the term of the Engagement Letter to June 30, 2010 and revised the minimum and maximum range of private placement financing to $1.0 million to $1.5 million.

For its financing services, Innovator will receive (i) a placing commission of five percent (5%) of all monies received by the Company and (ii) financing warrants to acquire shares of common stock of the Company equal in value to fifteen percent (15%) of the total gross proceeds received by the Company in the financing, such financing warrants to be exercisable at a price equal to a ten percent (10%) premium to the price per share of common stock in the financing. Issuance of the financing warrants is contingent on the stockholders of the Company authorizing additional common stock.

For its merger and acquisition services, Innovator will receive monthly retainer fees of $10,000 and success fees as a percentage of transaction value of five percent (5%) on the first $10.0 million, four percent (4%) on the next $3.0 million, three percent (3%) on the next $2.0 million, and two percent (2%) on amounts above $15.0 million in connection with possible merger and acquisition transactions. Success fees are payable in cash or shares or a combination of cash or shares as determined by the Board of the Company.

The Engagement Letter further provides that retainer fees may be deducted from success fees, that Innovator shall be reimbursed for its ordinary and necessary out of pocket expenses, that the Engagement Letter is subject to Delaware law, and that disputes between the parties are subject to arbitration.

Selling, general and administrative expenses for the three months ended March 31, 2010 include $30,000 related to services rendered by Innovator Capital under the terms of the Engagement Letter.

Effective January 27, 2010, we engaged David F. Merrion, a director of the Company, to perform consulting services for us as an expert witness in an administrative proceeding related to a patent application with respect to diesel engine technology. Mr. Merrion will be paid for his services, as requested from time to time by the Company, at the rate of $300 per hour or a daily maximum of $3,000 per day. In the three months ended March 31, 2010, the Company incurred costs of approximately $20,000 under this agreement.

Note 9.   Significant Customers

For the three months ended March 31, 2010 and 2009, revenue derived from certain customers comprised 10% or more of our consolidated revenue as set forth in the table below:

	Three Months Ended
	March 31,
	2010			2009
Customer A		53.9	%		*
Customer B		*			38.3	%

* Represents less than 10% revenue for that customer in the applicable period. There were no other customers that represented 10% or more of revenue for the periods indicated.

At March 31, 2010, Clean Diesel had two customers (one customer is not included in the table above) that represented approximately 59.3% of its gross accounts receivable balance.

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Note 10.   Comprehensive Loss

Components of comprehensive loss:

	Three Months Ended
	March 31,
	2010			2009
	(In thousands)
Net loss	$	(975	)	$	(2,507	)
Other comprehensive income (loss):
Foreign currency translation adjustment		(54	)		(9	)
Comprehensive loss	$	(1,029	)	$	(2,516	)

Note 11.   Geographic Information

CDT sells its products and licenses its technologies throughout the world. A geographic distribution of revenue consists of the following:

	Three Months Ended
	March 31,
	2010		2009
	(In thousands)
U.S.	$	138	$	221
U.K./Europe		518		97
Asia		27		28
Total revenue	$	683	$	346

The Company has patent coverage in North and South America, Europe, Asia, Africa and Australia. As of March 31, 2010 and December 31, 2009, the Company’s assets comprise the following:

	March 31,		December 31,
	2010		2009
	(In thousands)
U.S.	$	13,771	$	15,551
Foreign		1,731		1,696
Total assets	$	15,502	$	17,247

Note 12.   Severance Charges

On February 10, 2009, the Company’s Board of Directors elected Michael L. Asmussen as President and Chief Executive Officer replacing Dr. Bernhard Steiner. As a consequence of his termination of employment, Dr. Steiner is entitled to salary of approximately $315,445 (EUR 241,500) per annum until September 13, 2010, the remainder of his contract term, along with specified expenses not to exceed an aggregate of approximately $4,300, to be paid in monthly installments. During the three months ended March 31, 2009, the Company recognized a severance charge of $510,000 for this obligation.

On August 4, 2009, the Board of Directors adopted a plan to implement a company-wide reduction in force effective August 7, 2009. In accordance with ASC 420, Exit or Disposal Cost Obligations, the Company recognized approximately $448,000 in severance charges in the third quarter of 2009. During the three months ended March 31, 2010, the Company reversed $103,000 of its severance accrual to recognize a reduction in the Company’s obligations under these severance arrangements.

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A summary of the activity in the severance accrual is as follows:

	(In thousands)
Balance at December 31, 2009	$	389
Provisions (Reversals)		(103	)
Payments		(146	)
Balance at March 31, 2010	$	140

Note 13.   Subsequent Events

Effective April 19, 2010, our Board of Directors terminated the employment of Ann B. Ruple and her appointment as Vice President, Treasurer and Chief Financial Officer. Also on the same date, our Board of Directors appointed John B. Wynne, 48, as Vice President, Treasurer and Interim Chief Financial Officer to be effective on April 23, 2010. Mr. Wynne has been a partner of Tatum, LLC since 2005. Tatum is an executive services firm and is furnishing to Clean Diesel the services of Mr. Wynne as Interim Chief Financial Officer.

In May 2010, UBS purchased one of our ARS instruments at par value in the amount of $3.5 million and applied the proceeds to reduce the outstanding borrowing under our UBS credit facility (See Note 4). This action is pursuant to the terms of the UBS Offer that grants UBS the right to purchase ARS from our account at par value plus accrued interest and apply all proceeds to the outstanding debt. As such, UBS has modified the amount we are eligible to borrow based upon 75% of the UBS-determined value of the ARS. On May 6, 2010, UBS advised us that we have approximately $1.2 million available under our UBS credit facility.

Effective May 10, 2010, Mr. John A. de Havilland resigned as a director of the Company.

On May 13, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Catalytic Solutions, Inc. (“CSI”) (AIM: CTS and CTSU), a global manufacturer and distributor of emissions control systems and products based in Ventura, CA. The proposed merger is a transaction that will result in the combination of the businesses of Clean Diesel and CSI, whereby CSI will become a wholly-owned subsidiary of Clean Diesel (the “Merger”). Under the terms of the Merger Agreement:

•  In exchange for their shares of CSI common stock, the shareholders of CSI will receive shares, and warrants to purchase shares, of Clean Diesel common stock. CSI shareholders will receive such numbers of Clean Diesel common stock so that after the Merger, CSI will own approximately 60% of the outstanding shares of Clean Diesel common stock, subject to adjustment for the cash position, as defined in the Merger Agreement, of CSI and Clean Diesel, at the earlier of closing or June 30, 2010. In addition, CSI shareholders will receive warrants to purchase up to 3 million shares of Clean Diesel common stock.

•  The Merger is conditional among other matters on obtaining Clean Diesel stockholder approval and CSI shareholder approval and also a number of further closing requirements including that Clean Diesel has $4.5 million and CSI has $2.0 million in cash or equivalent at the time of the Merger.

In connection with the proposed merger, the Company in a Regulation S offering, has received commitment letters from existing stockholders to raise approximately $1.0 million for the issuance of additional shares of common stock and warrants.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical facts, so-called “forward-looking statements,” are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company’s filings with the Securities and Exchange Commission. See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Three Months ended March 31, 2010 Compared to Three Months ended March 31, 2009

Total revenue in the three months ended March 31, 2010 was $683,000 compared to $346,000 in the three months ended March 31, 2009, an increase of $337,000, or 97.4%, reflecting increased traction in the Company’s attempt to establish itself in the retrofit space. Operating revenue for the three months ended March 31, 2010 consisted of approximately 89.6% in product sales, 4.8% in technology licensing fees and royalties, and 5.6% in grant revenue. Of our operating revenue for the three months ended March 31, 2009, approximately 90.2% was from product sales and 9.8% was from technology licensing fees and royalties. The mix of our revenue sources during any reporting period may have a material impact on our operating results. In particular, our execution of technology licensing agreements, and the timing of the revenue recognized from these agreements, has not been predictable.

Product sales were $612,000 in the first quarter of 2010 compared to $312,000 in the same quarter of 2009, an increase of $300,000. This increase in product sales was attributable primarily to higher demand for our Platinum Plus Purifier Systems, a product comprised of a diesel particulate filter along with our Platinum Plus fuel-borne catalyst. We received approval in October 2007 from Transport for London to supply our Purifier Systems as an emission reduction solution that meets the standards established for the London Low Emission Zone. The deadlines for compliance with the London Low Emission Zone will be phased in over time for different classifications of vehicles. February 2008 was the compliance deadline for vehicles greater than 12 metric tons and July 2008 was the compliance deadline for motor coaches and vehicles greater than 3.5 metric tons. The next compliance deadlines for the London Low Emission Zone are in 2010 and 2012, although the Mayor of London has proposed suspension of the 2010 deadline. The sales of our Purifier Systems for compliance with the requirements of the London Low Emission Zone provide us with recurring revenue from use of our Platinum Plus fuel-borne catalyst that enables the regeneration of the diesel particulate filter. We believe we will have the opportunity to expand this business opportunity as we build the infrastructure required to address additional low emission zones throughout Europe and elsewhere.

Our technology licensing fees and royalties were essentially flat year over year with $33,000 in the three months ended March 31, 2010 compared to $34,000 in the same quarter of 2009. These revenues are primarily attributable to royalties related to our ARIS^® technologies. While we have not executed new technology license agreements in 2010, we continue our efforts to consummate technology license agreements with manufacturers and component suppliers for the use of our ARIS technologies for control of oxides of nitrogen (NOx) using our selective catalytic reduction (SCR) emission control, the combination of exhaust gas recirculation (EGR) with SCR technologies, and hydrocarbon injection for lean NOx traps, NOx catalysts and diesel particulate filter regeneration.

Our total cost of revenue was $465,000 in the three month period ended March 31, 2010 compared to $234,000 in the three month period ended March 31, 2009. The increase in our cost of sales is due to higher product sales volume. Our gross profit as a percentage of revenue was 31.9% and 32.4% for the three month periods ended March 31, 2010 and 2009, respectively.

Our cost of revenue — product sales includes the costs we incur to formulate our finished products into saleable form for our customers, including material costs, labor and processing costs charged to us by our outsourced blenders, installers and other vendors, packaging costs incurred by our outsourced suppliers, freight

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costs to customers and inbound freight charges from our suppliers. Our inventory is primarily maintained off-site by our outsourced suppliers. To date, our purchasing, receiving, inspection and internal transfer costs have been insignificant and have been included in cost of revenue — product sales. In addition, in 2009 the costs of our warehouse of approximately $21,000 per year were included in selling, general and administrative expenses. Our gross margins may not be comparable to those of other entities, because some entities include all of the costs related to their distribution network in cost of revenue and others like us exclude a portion of such costs from gross margin, including such costs instead within operating expenses. Cost of revenue — licensing fees and royalties is zero as there are no incremental costs associated with the revenue. Cost of consulting and other revenue includes incremental out of pocket costs to provide consulting services.

Selling, general and administrative expenses were $1,221,000 in the three months ended March 31, 2010 compared to $1,952,000 in the comparable 2009 period, a decrease of $731,000, or 37.4%. The decrease in selling, general and administrative costs is primarily attributable to lower compensation and benefits, travel, rent and related occupancy expenses. Our cost control initiatives to strictly control spending are ongoing and improvements are apparent in our current operating costs. Selling, general and administrative expenses are summarized as follows:

	Three Months Ended
	March 31,
	2010		2009
	(In thousands)
Compensation and benefits	$	620	$	1,016
Non-cash stock-based compensation		30		202
Total compensation and benefits		650		1,218
Professional services		326		247
Travel		51		111
Occupancy		122		235
Sales and marketing expenses		7		52
Depreciation and all other		65		89
Total selling, general and administrative expenses	$	1,221	$	1,952

Excluding the non-cash stock-based charges, compensation and benefit expenses were $620,000 for the three months ended March 31, 2010 compared to $1,016,000 in the comparable prior year period. This decrease of $396,000, or 39.0%, is due primarily to the reduction in force implemented effective August 7, 2009. The reduction in non-cash stock-based compensation reflects a reduction in the Company’s workforce and related issuance of stock-based awards.

Research and development expenses were $53,000 in the three months ended March 31, 2010 compared to $59,000 in the three months ended March 31, 2009, a decrease of $6,000, or 10.2%. Presently, we are working to overcome gaps in our technology and product portfolios brought about by volatile markets and past development setbacks. In addition to development of new products, our 2010 projects include field testing of fuel economy and emission control technologies. Total research and development expenses for the three months ended March 31, 2009 included $4,000 of non-cash charges for stock-based compensation.

The U.S. Environmental Protection Agency (EPA) verifications were withdrawn on two of our products in January 2009 because available test results were not accepted by EPA as meeting new emissions testing requirements for NO2 measurement. Presently, we do not intend to seek verification of these products. We have no assurance of the extent of additional testing that may be required by EPA or whether it will be adequate to remove any remaining concern the EPA may have regarding use of our fuel-borne catalyst.

We believe that it is an essential requirement of the U.S. retrofit market that emissions control products and systems are verified under the U.S. EPA and/or the California Air Resources Board (CARB) protocols in order to qualify for funding from EPA and/or CARB programs. Funding for these emissions control products and systems is generally limited to those products and technologies that have already been verified.

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Verification is also useful for commercial acceptability. We believe that the lack of CARB verification will result in a shift of U.S. retrofit revenue into future periods. We expect to have CARB verification in the fourth quarter of 2010. We may have the opportunity to obtain a conditional CARB verification before all of our testing has been concluded.

Without full CARB verification, our U.S. retrofit opportunities are limited although certain jurisdictions have been satisfied with other of our certifications. We received the EPA registration in December 1999 for the Platinum Plus fuel-borne catalyst for use in bulk fuel by refiners, distributors and truck fleets. In 2000, we completed the certification protocol for particulate filters and additives for use with particulate filters with VERT, the main recognized authority in Europe that tests and verifies diesel particulate filters for emissions and health effects. In 2001, the Swiss environmental agency BUWAL approved the Platinum Plus fuel-borne catalyst for use with particulate filters. In 2002, the U.S. Mining, Safety and Health Administration accepted Platinum Plus fuel-borne catalyst for use in all underground mines. In 2007, we received accreditation for our Purifier System, our Platinum Plus fuel-borne catalyst used with a diesel particulate filter, to be sold for compliance with the emission reduction requirements established for the London LEZ. In 2009, the German Federal Environment Agency, the Umweltbundesamt (“UBA”), issued a non disapproval for sale of Platinum Plus fuel-borne catalyst for use in conjunction with up to 2,000 diesel particulate filters in Germany; further work will be required to lift fully the 2,000 unit restriction.

In addition to emphasis on the global retrofit market, we continued to focus on fuel economy opportunities in the U.S. in non-road sectors, including rail, marine, mining and construction, and expect continued focus on these sectors by our distributors rather than through our direct selling efforts. Our Platinum Plus fuel-borne catalyst is effective with regular sulfur diesel, ultra-low sulfur diesel, arctic diesel (kerosene) and biodiesel. When used with blends of biodiesel and ultra-low sulfur diesel, our Platinum Plus fuel-borne catalyst prevents the normal increase in nitrogen oxides associated with biodiesel, as well as offering emission reduction in particulates and reduced fuel consumption. Platinum Plus is used to improve combustion which acts to reduce emissions and improve the performance and reliability of emission control equipment. Platinum Plus fuel-borne catalyst takes catalytic action into engine cylinders where it improves combustion, thereby reducing particulates, unburned hydrocarbons and carbon monoxide emissions, which also results in improved fuel economy. Platinum Plus fuel-borne catalyst lends itself to a wide range of enabling solutions including fuel economy, diesel particulate filtration, low emission biodiesel, carbon reduction and exhaust emission reduction. The improvement attributable to Platinum Plus fuel-borne catalyst may vary as a result of engine age, application in which the engine is used, load, duty cycle, speed, fuel quality, tire pressure and ambient air temperature. Generally, after use of Platinum Plus fuel-borne catalyst during a conditioning period, our customers derive economic benefits from the use of our Platinum Plus fuel-borne catalyst whenever the price of diesel fuel is in excess of $1.75 per U.S. gallon.

Patent amortization and other patent related expense was $49,000 in the three months ended March 31, 2010 compared to $69,000 in the same prior year period, a decrease of $20,000. The 2009 expense includes the write-off of $34,000 in capitalized costs related to the abandonment of certain patents and patent applications not material to our business, the continued maintenance of which was judged by management to be uneconomic.

At each reporting period, the Company evaluates the events or changes in circumstances that may indicate that patents are not recoverable. The types of events and changes in circumstances that would indicate the carrying value of our patents is not recoverable and therefore, impairment testing would be triggered include the following: permanent elimination of mandated compliance with emission reduction standards; reduction in overall market prevalence of diesel engines; obsolescence of our technologies due to new discoveries and inventions; and an adverse action or assessment against our technologies.

Our technology is comprised of patents, patent applications, trade or service marks, data and know-how. We consider the life of our technologies to be commensurate with the remaining term of our U.S. and corresponding foreign patents. Our patents have expiration dates ranging from 2010 through 2026, with the majority of the material patents upon which we rely expiring in 2018 and beyond. We believe that we have sufficient patent coverage surrounding our core patents that effectively serves to provide us longer proprietary

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protection. Our patents comprise technologies that have been asserted as the technologies of choice by various automotive original equipment manufacturers (OEMs) to meet mandates to comply with upcoming regulatory requirements that go into effect starting in 2010 (EPA 2010). We monitor evolving technologies in the automotive and other applicable industries to evaluate obsolescence of any of our patents.

Although we have seen certain suspensions and delays in mandated emissions requirements, we expect sufficient revenue over the remaining life of the underlying patents to recover the carrying value of our patents. We believe the emission reduction mandates will be phased in over time so that despite volatility in our revenue streams, we should realize the expected revenue from our patents. Our intellectual property strategy has been to build upon our base of core technology with newer advanced technology patents developed or purchased by us. In many instances, we have incorporated the technology embodied in our core patents into patents covering specific product applications, including product design and packaging. We believe this building-block approach provides greater protection to us and our licensees than relying solely on our core patents.

Interest income was $60,000 in the three months ended March 31, 2010 compared to $92,000 in the three months ended March 31, 2009, a decrease of $32,000, or 34.8%, principally due to lower invested balances.

Other (expense) was ($33,000) in the three months ended March 31, 2010 compared to ($121,000) in the comparable 2009 period, a decrease of $88,000, which was primarily attributable to unrealized losses recognized on the fair value of our investments in the first quarter of 2009. The 2010 other income (expense) includes foreign currency transaction losses, net of gains of ($6,000), and interest expense of ($27,000).

Liquidity and Capital Resources

We require capital resources and liquidity to fund our global development and for working capital. Our working capital requirements vary from period to period depending upon manufacturing volumes, the timing of deliveries and payment cycles of our customers. At March 31, 2010 and December 31, 2009, we had cash and cash equivalents of $2.3 million and $2.8 million, respectively, to use for our operations. In addition, we have short-term investments net of outstanding borrowings with UBS of $3.6 million, which we expect to exercise our put right with UBS on June 30, 2010. Our working capital was $6.3 million at March 31, 2010 compared to $7.3 million at December 31, 2009 reflecting a decrease of $1.0 million primarily attributable to our operating losses during the period.

Net cash used for operating activities was $0.9 million in the three months ended March 31, 2010 and was used primarily to fund the net loss of $1.0 million, adjusted for non-cash items. Included in the non-cash items was stock-based compensation expense of $30,000 and depreciation and amortization of $47,000.

Accounts receivable, net increased to $0.5 million at March 31, 2010 from $0.1 million at December 31, 2009 due primarily to increased sales activity. Inventories, net decreased $172,000, reflecting increased product sales in the retrofit-market. Other current assets and other assets decreased $168,000 at March 31, 2010 from the December 31, 2009 levels, principally reflecting collections of other receivables. Our accounts payable, accrued expenses and other liabilities decreased at March 31, 2010 compared to December 31, 2009 reflecting increases in accounts payable that were more than offset by decreases in accrued expenses and other liabilities. The decrease in accrued expenses is principally due to the payment and adjustment of severance liabilities.

Net cash provided by investing activities was $1.2 million in the three months ended March 31, 2010, principally reflecting the sale of $1.25 million of our ARS investments. We also used cash for investments in our patents, including patent applications in foreign jurisdictions. We expect to continue to invest in our intellectual property portfolio.

Cash used in financing activities was approximately $0.8 million in the three months ended March 31, 2010 and was attributable to net repayment of borrowings under our demand loan facility with UBS.

In October 2008, the Company received an offer (the “Offer”) from UBS for a put right permitting us to sell to UBS at par value all ARS previously purchased from UBS at a future date (any time during a two-year period beginning June 30, 2010). The Offer also included a commitment to loan us 75% of the UBS-

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determined value of the ARS at any time until the put is exercised. The Offer was non-transferable and expired on November 14, 2008. On November 6, 2008, the Company accepted the Offer. The Company’s right under the Offer is in substance a put option (with the strike price equal to the par value of the ARS) which it recorded as an asset, measured at its fair value. The Company uses an independent third party valuation firm to assist it with its determination of fair values of the ARS and ARSR.

At March 31, 2010 our investments are recorded at fair value and comprise ARS and an ARSR and together totaled $10.5 million. At March 31, 2010 and December 31, 2009, we held approximately $9.5 million and $10.6 million ($11.7 million par value), respectively, in investments in ARS collateralized by student loans, primarily AAA/Aaa-rated, which are substantially guaranteed by the U.S. Department of Education and approximately $1.0 million and $1.1 million, respectively, in investment in ARSR. Starting on February 15, 2008 and continuing to date, the Company has experienced difficulty in effecting sales of its ARS because of the failure of the auction mechanism as a result of sell orders exceeding buy orders. Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals. These failed auctions represent liquidity risk exposure and are not defaults or credit events. Holders of the securities continue to receive interest on the investments, and the securities continue to be auctioned at the pre-determined intervals (typically every 28 days) until the auction succeeds, the issuer calls the securities, or they mature.

Classification of investments as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions. At March 31, 2010 and December 31, 2009, the Company classified all investments as current based on management’s intention and ability to liquidate the investments within the next twelve months through exercise of its put right with UBS.

The Company will be exposed to credit risk should UBS be unable to fulfill its commitment under the Offer. In the event that UBS is unable to perform upon our exercise of the ARS put right on or after June 30, 2010, we would have to sell the underlying securities at a discount which would negatively impact our future cash flows.

Our management believes that based upon the Company’s cash and cash equivalents and investments at March 31, 2010, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow, financial flexibility or our ability to fund our operations for at least the next twelve months.

We have evaluated our cash burn and determined that we have sufficient resources to fund operations for the next twelve months. We continue to pay our obligations in the ordinary course as obligations become due. We continue the efforts begun in 2009 to contain our costs and eliminate those costs that are redundant or considered unnecessary with strict controls over all discretionary spending and travel costs. We have significantly reduced our ongoing cash requirements by curtailment of expenses and a 44% reduction in our work force, effective August 7, 2009. We have also restructured the Company so that each employee will manage resources based upon data-driven revenue expectations, and we have established processes to ensure organizational and individual discipline and accountability.

We have incurred losses since inception aggregating $66.8 million, which amount includes $4.8 million of non-cash preferred stock dividends. We expect to incur losses through 2010. Although we have generated revenue from sales of our Platinum Plus fuel-borne catalyst, Purifier Systems, ARIS advanced reagent injector and dosing systems for selective catalytic reduction, catalyzed wire mesh filters and from technology licensing fees and royalties, revenue to date has been insufficient to cover our operating expenses, and we continue to be dependent upon sources other than operations to finance our working capital requirements. Historically, we have been primarily dependent upon funding from new and existing stockholders. The Company can provide no assurance that it will be successful in any future financing effort to obtain the necessary working capital to support operations or if such financing is available, that it will be on acceptable terms.

In the event that our business does not generate sufficient cash and external financing is not available or timely, we would be required to substantially reduce our level of operations and capital expenditures in order

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to conserve cash and possibly seek joint ventures or other transactions, including the sale of assets. These reductions could have an adverse effect on our relationships with our customers and suppliers. Our long-term continuation is dependent upon the achievement of profitable operations and the ability to generate sufficient cash from operations, equity financings and other funding sources to meet our obligations.

No dividends have been paid on our common stock and we do not anticipate paying cash dividends in the foreseeable future.

Capital Expenditures

As of March 31, 2010, we had no commitments for capital expenditures and no material commitments are anticipated in the near future.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that Clean Diesel had effective disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Controls

In connection with the evaluation by the Company’s Chief Executive Officer and Chief Financial Officer of internal control over financial reporting that occurred during the Company’s last fiscal quarter, no change in the Company’s internal control over financial reporting was identified that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6.   Exhibits

(a) Exhibits

Exhibit
Number	Description
10(a)	Amendment of Engagement Letter between Clean Diesel Technologies, Inc. and Innovator Capital Limited as of April 21, 2010.
10(b)	Interim Services Agreement between Clean Diesel Technologies, Inc. and SFN Professional Services LLC d/b/a Tatum as of April 23, 2010.
31(a)	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange Act.
31(b)	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange Act.
32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

-23-

SIGNATURES

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

CLEAN DIESEL TECHNOLOGIES, INC.

(Registrant)

By:  /s/  Michael L. Asmussen

Michael L. Asmussen

Director, President and

Chief Executive Officer

Date: May 13, 2010

By:  /s/  John B. Wynne

John B. Wynne

Interim Chief Financial Officer,

Vice President and Treasurer

Date: May 13, 2010

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EX-10.A

Exhibit 10(a)

21/04/2010

Clean Diesel Technologies Inc.
10 Middle Street, Suite 1100
Bridgeport, CT 06604

Attn: Michael L. Asmussen

AMENDMENT OF ENGAGEMENT LETTER

Dear Sirs,

We refer to the Engagement Letter between us of 18 November 2009 (the “Engagement Letter”). This letter agreement of the above date is intended to be effective as of 20 February 2010 and to extend and to amend the Engagement Letter.

We hereby agree:

1. To amend the Engagement Letter to revise the minimum and maximum funds sought to be raised as expressed in the Engagement Letter to $1,000,000 minimum and $1,500,000 maximum rather than $3,000,000 minimum and $4,000,000 maximum: and

2. To extend the Engagement Letter, with only the foregoing amendment and otherwise by its terms, until the close of business 30 June 2010.

If you are in accord with the foregoing, kindly sign below where indicated.

Yours faithfully,

For: Innovator Capital Limited
By	/s/ Mungo Park
	Mungo Park, Chairman

We hereby agree to the above mentioned, dated this 21^st day of April 2010.

For: Clean Diesel Technologies Inc.
By	/s/ Michael L. Asmussen
	Michael L. Asmussen, CEO
By	/s/ C.W. Grinnell
	Charles W. Grinnell, VP

4^TH FLOOR
20 DERING STREET
LONDON, W1S 1AJ
T +44 20 7297 6840

UK COMPANY NO. 04995719
VAT REGISTRATION NO. 839 6796 55
REGULATED BY THE FINANCIAL SERVICES AUTHORITY — REGISTRATION NO. 401746

EX-10.B

Exhibit 10(b)

Interim Services Agreement

April 23, 2010

Mr. Michael L. Asmussen
President & CEO
Clean Diesel Technologies
10 Middle Street
Suite 1100
Bridgeport, CT 06604

Dear Michael:

SFN Professional Services LLC d/b/a Tatum (“Tatum,” “we,” “us” or “our”) is pleased that Clean Diesel Technologies (“Company,” “you” or “your”) has selected us to provide you with outsourced interim services. The services (the “Services”) and fees will be more particularly described on the Schedule attached hereto and will be provided by the individual resource (the “Tatum Resource”) identified on such Schedule. Schedules for additional Tatum Resources may be added from time to time upon the mutual written agreement of the parties. In addition, upon the request of the Company and the execution of an additional Schedule to this agreement, Tatum will provide search Services to the Company, all as more particularly described on such Schedule.

Engagement. The Tatum Resource will be one of Tatum’s professionals, and we will be solely responsible for determining the conditions, terms and payment of compensation and benefits for the Tatum Resource. You will be solely responsible for providing the Tatum Resource day-to-day guidance, supervision, direction, assistance and other information necessary for the successful and timely completion of the Services. Tatum will have no oversight, control, or authority over the Tatum Resource with respect to the Services. The Company acknowledges that it is solely responsible for the sufficiency of the Services for its purposes. The Company will designate a management-level individual to be responsible for overseeing the Services, and the Tatum Resource will report directly to such individual with respect to the provision of the Services. Unless the Tatum Resource is acting as an executive officer of the Company and is authorized by the Company to make such decision, the Company will not permit or require the Tatum Resource to be the ultimate decision making authority for any material decision relating to your business, including, without limitation, any proposed merger, acquisition, recapitalization, financial strategy or restructuring.

Fees and Expenses. You will pay us the fees set forth on the applicable Schedule. In addition to our standard professional service fees, we will charge an administrative of $500.00 to cover otherwise unbilled items difficult to estimate such as telephone charges, computer use, in-house copying, facsimiles, and other internal services. In addition, you will reimburse Tatum directly for all ordinary and necessary travel and out-of-pocket expenses incurred by Tatum or the Tatum Resource in connection with this agreement (including any Schedules); provided, however, that any such expenditure involving travel in excess of $1,000 per trip shall be pre-approved by the Company to the extent not authorized in a Schedule to this agreement

Payment Terms. Payments to Tatum should be made within 10 days of receipt of invoice by electronic transfer in accordance with the instructions set forth below or such alternative instructions as provided by us from time to time. Any amounts not paid when due may be subject to a periodic service charge

equal to the lesser of 1.5% per month and the maximum amount allowed under applicable law, until such amounts are paid in full, including assessed service charges. In lieu of terminating this agreement, we may suspend the provision of any Services if amounts owed are not paid in accordance with the terms of this agreement.

Bank Name and Address: Silicon Valley Bank, 3003 Tasman Drive, Santa Clara, CA 95054
Beneficiary: Tatum
Beneficiary Account Number:
ABA Transit/Routing Number:

Please reference Company name in the body of the payment.

Effective Date and Termination. This agreement will be effective as of the earlier of (i) the date Tatum begins providing Services to the Company, and (ii) the date of the last signature to this agreement as indicated on the signature page. In the event that a party commits a breach of this agreement (including any Schedule) and fails to cure the same within 10 days following delivery by the non-breaching party of written notice specifying the nature of the breach, the non-breaching party may terminate this agreement or the applicable Schedule effective upon written notice of such termination. The termination rights set forth in this Section are in addition to and not in lieu of the termination rights set forth in each of the Schedules.

Hiring the Tatum Resource Outside of a Tatum Agreement. If, at any time during the time frame in which a Tatum Resource is providing Services to the Company and for a period of 12-months thereafter, other than in connection with this agreement or another Tatum agreement, the Company or any of its subsidiaries or affiliates employs such Tatum Resource, or engages such Tatum Resource as an independent contractor, the Company will pay Tatum a placement fee in an amount equal to 35% of the Annualized Compensation (as defined below). “Annualized Compensation” is defined as salary, incentive, signing and other bonuses, equity compensation, and any other compensation that may be earned by the Tatum Resource during the first 12 months of service with the Company (or its subsidiary or affiliate) regardless of when or if such compensation is actually paid. The placement fee shall be due upon the commencement of the Tatum Resource’s employment or engagement with the Company (or its subsidiary or affiliate).

Warranties and Disclaimers. We disclaim all representations and warranties, whether express, implied or statutory, including, but not limited to any warranties of quality, performance, merchantability, or fitness of use or purpose. Without limiting the foregoing, we make no representation or warranty with respect to the Tatum Resource or the Services provided hereunder, and we will not be responsible for any action taken by you in following or declining to follow any of the Tatum Resource’s advice or recommendations. The Services provided by Tatum and the Tatum Resource hereunder are for the sole benefit of the Company and not any unnamed third parties. The Services will not constitute an audit, review, opinion, or compilation, or any other type of financial statement reporting or attestation engagement that is subject to the rules of the AICPA or other similar state or national professional bodies or laws and will not result in an opinion or any form of assurance on internal controls.

Limitation of Liability; Indemnity.

     (a) Tatum’s liability in any and all categories and for any and all causes arising under this agreement, whether based in contract, tort, negligence, strict liability or otherwise, will, in the aggregate, not exceed the actual fees paid by you to us over the previous two months’ of the agreement with respect to the Tatum Resource from whom the liability arises. In no event will we be liable for incidental, consequential, punitive, indirect or special damages, including, without limitation, interruption or loss of business, profit or goodwill. As a condition for recovery of any liability, you must assert any claim against us within three months after discovery or 60 days after the termination or expiration of the applicable Schedule under which the liability arises, whichever is earlier.

     (b) You agree to indemnify us and the Tatum Resource to the full extent permitted by law for any losses, costs, damages, and expenses (including reasonable attorneys’ fees), as they are incurred, in connection with any cause of action, suit, or other proceeding arising in connection with the Tatum Resource’s services to you, other than losses, costs, damages and expenses arising out of our or the Tatum Resource’s gross negligence or willful misconduct.

     (c) We agree to indemnify you to the full extent permitted by law for any losses, costs, damages, and expenses (including reasonable attorneys’ fees), as they are incurred, in connection with any cause of action, suit, or other proceeding by the Tatum Resource against the Company for monies or property in the nature of compensation or with respect to any Company benefit plan or with respect to any issue relating to employment tax withholding, but only to the extent such cause of action, suit or other proceeding is for the time frame the Tatum Resource was providing services to the Company under this agreement.

Insurance.

     If the Tatum Resource is serving as an officer or executive of the Company, the Company will provide Tatum or the Tatum Resource with written evidence that the Company maintains directors’ and officers’ insurance covering the Tatum Resource in an amount reasonably acceptable to the Tatum at no additional cost to the Tatum Resource, and the Company will maintain such insurance at all times while this agreement remains in effect. Furthermore, the Company will maintain such insurance coverage with respect to occurrences arising during the term of this agreement for at least five years following the termination or expiration of the applicable Schedule or will purchase a directors’ and officers’ extended reporting period or “tail” policy to cover the Tatum Resource for such five year time period.

Governing Law, Arbitration and Witness Fees.

     (a) This agreement will be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of laws provisions.

     (b) If the parties are unable to resolve any dispute arising out of or in connection with this agreement, the parties agree and stipulate that any such disputes will be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (“AAA”). The arbitration will be conducted in the New York, New York office of the AAA by a single arbitrator selected by the parties according to the rules of the AAA, and the decision of the arbitrator will be final and binding on both parties. In the event that the parties fail to agree on the selection of the arbitrator within 30 days after either party’s request for arbitration under this Section, the arbitrator will be chosen by the AAA. The arbitrator may in his or her discretion order documentary discovery but will not allow depositions without a showing of compelling need. The arbitrator will render his or her decision within 90 days after the call for arbitration. Judgment on the award of the arbitrator may be entered in and enforced by any court of competent jurisdiction. The arbitrator will have no authority to award damages in excess or in contravention of this agreement and may not amend or disregard any provision of this agreement, including this section. Notwithstanding the foregoing, either party may seek appropriate injunctive relief from any court of competent jurisdiction, and Tatum may pursue payment of any unpaid amounts due under this agreement through any court of competent jurisdiction.

     (c) In the event any professional of Tatum (including, without limitation, any Tatum Resource) is requested or authorized by you or is required by government regulation, subpoena, or other legal process to produce documents or appear as witnesses in connection with any action, suit or other proceeding initiated by a third party against you or by you against a third party, you will, so long as Tatum is not a party to the proceeding in which the information is sought, reimburse Tatum for its professional’s time (based

on customary rates) and expenses, as well as the reasonable fees and expenses of its counsel, incurred in responding to such requests. This provision is in addition to and not in lieu of any indemnification obligations the Company may have under this agreement.

Miscellaneous.

     (a) This agreement together with all Schedules constitutes the entire agreement between the parties with regard to the subject matter hereof and supersedes any and all agreements, whether oral or written, between the parties with respect to its subject matter. No amendment or modification to this agreement will be valid unless in writing and signed by both parties.

     (b) If any portion of this agreement is found to be invalid or unenforceable, such provision will be deemed severable from the remainder of this agreement and will not cause the invalidity or unenforceability of the remainder of this agreement, except to the extent that the severed provision deprives either party of a substantial portion of its bargain.

     (c) Neither party will be deemed to have waived any rights or remedies accruing under this agreement unless such waiver is in writing and signed by the party electing to waive the right or remedy. The waiver by any party of a breach or violation of any provision of this agreement will not operate or be construed as a waiver of any subsequent breach of such provision or any other provision of this agreement.

     (d) Neither party will be liable for any delay or failure to perform under this agreement (other than with respect to payment obligations) to the extent such delay or failure is a result of an act of God, war, earthquake, civil disobedience, court order, labor dispute, or other cause beyond such party’s reasonable control.

     (e) You may not assign your rights or obligations under this agreement without the express written consent of Tatum, which consent shall not unreasonably be withheld, delayed or conditioned. Nothing in this agreement will confer any rights upon any person or entity other than the parties hereto and their respective successors and permitted assigns and the Tatum Resources.

     (f) The expiration or termination of this agreement or any Schedule will not destroy or diminish the binding force and effect of any of the provisions of this agreement or any Schedule that expressly, or by reasonable implication, come into or continue in effect on or after such expiration or termination, including, without limitation, provisions relating to payment of fees and expenses (including witness fees and expenses and liquidated damage fees), governing law, arbitration, limitation of liability and indemnity.

     (g) You agree to reimburse Tatum for all costs and expenses (including, without limitation, reasonable attorneys’ fees, court costs and arbitration fees) incurred by Tatum in enforcing collection of any monies due under this agreement.

     (h) You agree to allow us to use the Company’s logo and name on Tatum’s website and other marketing materials for the sole purpose of identifying the Company as a client of Tatum. Tatum will not use the Company’s logo or name in any press release or general circulation advertisement without the Company’s prior written consent, which may be granted or withheld in the Company’s sole discretion.

We appreciate the opportunity to serve you and believe this agreement accurately reflects our mutual understanding of the terms upon which the Services will be provided. We would be pleased to discuss this agreement with you at your convenience. If the foregoing is in accordance with your understanding, please sign a copy of this agreement and return it to my attention.

Sincerely,
SFN Professional Services LLC d/b/a Tatum
/s/ Robert B. Harman
Robert B. Harman
Managing Partner
Accepted and agreed:
Clean Diesel Technologies
By:	/s/ C.W. Grinnell		By:	/s/ Michael L. Asmussen
	Name:	Charles W. Grinnell		By:	Michael L. Asmussen
	Title:	Vice President		Title:	President & CEO
	Date:	4/23/10		Date:	4/23/10

Schedule 1 to Interim Services Agreement

     This Schedule is entered into in connection with that certain Interim Services Agreement, dated April 22, 2010 (the “Agreement”), by and between SFN Professional Services LLC d/b/a Tatum (“Tatum,” “we,” “us” or “our”) and Clean Diesel Technologies (“Company,” “you” or “your”) and will be governed by the terms and conditions of the Agreement.

Tatum Resource Name: John (Jack) Wynne

Service Description or Position: Vice President, Treasurer and Interim CFO of the Company and shall act for the Company as its Principal Financial and Accounting Officer and in that capacity will execute all certifications required by the Sarbarnes Oxley Act of 2002.”

Company Supervisor: CEO

Start Date: o/a April 26, 2010

Minimum Term: Three months

Termination:

     (a) During the minimum term set forth above, either party may terminate this Schedule by providing the other party a minimum of 30 days’ advance written notice and such termination will be effective as of the date specified in such notice, provided that such date is no earlier than 30 days after the date of delivery of the notice. Tatum will continue to provide, and the Company will continue to pay for, the Services until the termination effective date.

     (b) After the minimum term set forth above, either party may terminate this Schedule by providing the other party a minimum of 15 days’ advance written notice and such termination will be effective as of the date specified in such notice, provided that such date is no earlier than 15 days after the date of delivery of the notice. Tatum will continue to provide, and the Company will continue to pay for, the Services until the termination effective date.

     (c) Tatum may terminate this Schedule immediately upon written notice to the Company if: (i) the Company is engaged in or asks Tatum or any Tatum Resource to engage in or ignore any illegal or unethical activity; (ii) the Tatum Resource ceases to be a professional of Tatum for any reason; (iii) the Tatum Resource becomes disabled; or (iv) the Company fails to pay any amounts due to us under the Agreement when due. For purposes of this Agreement, disability will be defined by the applicable policy of disability insurance or, in the absence of such insurance, by Tatum’s management acting in good faith. Notwithstanding the foregoing, in lieu of terminating this Schedule under (ii) and (iii) above, upon the mutual agreement of the parties, the Tatum Resource may be replaced by another Tatum professional.

     (d) Notwithstanding anything contained in the Agreement or this Schedule to the contrary, the Company may at anytime by action of its Board of Directors immediately and without notice terminate the appointment of the Tatum Resource and the Agreement and this Schedule for Cause as defined in that certain Personal Services Agreement, dated on or about the date hereof, between the Company and the Tatum Resource.

     (e) The termination rights set forth in this section are in addition to and not in lieu of the termination rights set forth in the Agreement.

Fees: You will pay to Tatum a fee of $35,000 a month for the Tatum Resource. The fees will be prorated for the first and final fee period based on the number of days in such period. The monthly fee includes allowance for holidays, personal and sick days, and vacation for the Tatum Resource consistent with the Company’s policy as it applies to similarly situated employees of the Company. In the event you terminate this Schedule prior to the expiration of the Minimum Term other than for the Tatum Resource’s material failure to perform the obligations of his or her position with the Company, provided the Tatum Resource fails to cure such breach within 10 days after receipt of written notice of such breach, you agree to pay to Tatum upon the termination of this Schedule a lump sum amount equal to the difference between the fees actually paid and the fees that should have been paid.

In addition, you will pay Tatum a fee of $300.00 an hour for time incurred in connection with this Schedule by a member of Tatum’s leadership team for resource coordination, attending meetings with Company personnel, assisting the Tatum Resource with Company issues, and other matters requiring the assistance of Tatum leadership, when required, in the reasonable judgment of the Chief Executive Officer of the Company.

Billings: Tatum will bill for Services in advance of the provision of such Services as follows:

Upon Execution of this Schedule: $35,500 which is inclusive of the administrative fee. On the 1st and 15^th day of each month: $17,750 which is inclusive of the administrative fee. If necessary, Tatum will true up advance billings with the next subsequent billing. Out-of-pocket expenses will be billed at actual cost.

In the event of a conflict between the terms and conditions of this Schedule and the Agreement, the terms and conditions of the Agreement will control.

SFN Professional Services LLC d/b/a Tatum			Clean Diesel Technologies
By:	/s/ Robert B. Harman		By:	/s/ C. W. Grinnell
	Name:	Robert B. Harman		Name:	Charles W. Grinnell
	Title:	Managing Partner		Title:	Vice President
	Date:	4/23/10		Date:	4/23/10
			By:	/s/ Michael L. Asmussen
				Name:	Michael L. Asmussen
				Title:	President & CEO
				Date:	4/23/10

SCHEDULE 2 -PERSONAL SERVICES AGREEMENT

Clean Diesel Technologies, Inc. — John Wynne

     AGREEMENT made as of the date set forth below by and between John B. Wynne, of 79 Under Cliff Road, Trumbull CT 06611 (“Executive”) and Clean Diesel Technologies, Inc., a Delaware corporation (the “Company”), having a place of business at Suite 1100, 10 Middle Street, Bridgeport, CT 06604.

     WHEREAS, the Company is entering into an Interim Services Agreement with SFN Professional Services LLC d/b/a Tatum (“Tatum”) for the provision to the Company of the services of Wynne described below;

     NOW THEREFORE, Wynne and the Company agree, as follows:

1. Interim Services Agreement: This Agreement is in all respects subject to that Interim Services Agreement dated as of April 19, 2010, including the Schedules attached thereto which is incorporated by reference herein (“Interim Agreement”). Defined terms in the Interim Agreement shall have the same meaning herein, except as otherwise provided. This Agreement shall terminate upon the termination of the Interim Agreement, except for the continuing obligations set out below.

2. Scope of Work; Title: Effective April 23, 2010, Executive shall act as Vice President, Treasurer and Interim Chief Financial Officer of the Company, having been elected such by the Board of Directors of the Company (“Board”) on April 19, 2010, subject to the execution and delivery of the Interim Agreement by Tatum and the Company. In such capacity, Executive shall on a full-time basis act as the Company’s principal financial and accounting officer and direct all of Executive’s efforts toward the duties assigned Executive by the Board and the Chief Executive Officer of the Company. “Full time” shall mean no outside business activities without the Company’s prior consent. Executive’s place of work shall be the Company’s corporate headquarters at the above address.

3. Compensation and Expenses: Executive’s compensation and reimbursable expenses are entirely provided for by Tatum which has furnished Executive’s services to the Company. The Company shall pay the fees and other amounts to Tatum as are provided in the Interim Agreement and no other amounts. Executive is not entitled to compensation or expense reimbursement directly from the Company and waives any claim to such compensation or reimbursement. Executive is not entitled to participate in and waives participation in any of the benefit and welfare plans of the Company. Executive shall make provision or shall cause Tatum to make provision for his own income and employment taxes as may be applicable and Company shall have no liability for withholding any such taxes

4. Termination of Appointment For Cause. Notwithstanding anything provided for in the Interim Agreement, the Company may at any time terminate this Agreement and the Interim Agreement and all Schedules thereto and the appointment of Executive as Vice President, Treasurer and CFO for Cause. “Cause” shall mean, as determined by the Board in its sole discretion, conviction of Executive under, or a plea of guilty by the Executive to, any charge which would constitute a felony under the laws of Connecticut, regardless of jurisdiction; any instance of fraud, embezzlement, self-dealing, insider trading or similar malfeasance with respect to the Company regardless of the amount involved; any instance of material disloyalty, insubordination, or disparagement of the Company to an outside party; or any instance of substance abuse of a controlled substance or, otherwise, a pattern of substance abuse which limits Executive’s performance of Executive’s duties.

5. Discoveries and Inventions: All patentable and unpatentable inventions, discoveries and ideas which are made or conceived or reduced to practice by

Executive during the term of Executive’s employment, and which are based upon or arise out of Executive’s services hereunder (“Developments”) are or shall become the Company’s property. Executive agrees to disclose promptly to the Company each such Development and, upon the Company’s request and at its expense, Executive will assist the Company, or its designee, in making application for Letters Patent, Trade or Service Marks or Copyrights in any country in the world. Executive further agrees, at no expense to Executive, to execute all papers and do all things which may be necessary or advisable to prosecute such applications, and to transfer to and vest in the Company, or its designee, all the right, title and interest in and to such Developments, and all applications for patents and Letters Patent, Trademarks and Service Marks and Copyrights issued thereon. If for any reason Executive is unable to effectuate a full assignment of any such Development, Executive agrees to transfer to the Company, or its designee, Executive’s transferable rights, whether they be exclusive or non-exclusive, or as a joint inventor or partial owner of the Development. No action or inaction by the Company shall in any event be construed as a waiver or abandonment of its rights to any such Development except an instrument in writing assigned by an authorized official of the Company by which it specifically states it intends to be bound in such respect.

6. Proprietary Information: Executive will not at any time, either during the term of this Agreement or thereafter, disclose to others, or use for Executive’s own benefit or the benefit of others, any of the Developments or any confidential, proprietary or secret information owned, possessed or used by the Company or any of its subsidiaries or affiliates (collectively, “Proprietary Information”), which, by way of illustration, but not limitation, includes devices, structures, machines, data, know-how, business opportunities, marketing plans, forecasts, unpublished financial statements, budgets, licenses and information concerning prices, costs, Executives, customers and suppliers. Executive’s undertakings and obligations under this Paragraph 7 will not apply to any Proprietary Information which: (a) is or becomes generally known to the public through no action on the part of the Executive or (b) is generally disclosed to third parties by the Company or any of its subsidiaries or affiliates without restriction on such third parties. Upon termination of this Agreement or at any other time upon request, Executive will promptly deliver to the Company all keys, notes, memoranda, notebooks, computers, computer disks or drives, drawings, designs, three dimensional figures, photographs, layouts, diagrams, records, reports, files and other documents (and all copies or reproductions of such materials) in Executive’s possession or under Executive’s control, whether prepared by him or others, which contain Proprietary Information. Executive acknowledges that this material is the sole property of the Company or a subsidiary or an affiliate of the Company.

7. Continuing Obligations: The Executive’s covenants set forth above in Sections 5 and 6 shall continue according to their terms following the termination of this Agreement. Termination of Executive’s employment for any reason shall constitute termination of this Agreement.

8. Governing Law; Waiver of Trial by Jury; Equitable Remedies. This Agreement, the interpretation hereof and the resolution of any and all disputes directly between the Company and Executive shall be governed by and interpreted under Connecticut law and shall be determined in arbitration as provided by the Interim Agreement but in Bridgeport Connecticut. In the event of any judicial proceeding in any jurisdiction the parties waive trial by jury. The parties further agree that any violations of Executive’s covenants set forth in Sections 5 and 6 above may cause irreparable harm to the Company which harm is not capable of accurate determination and for which the remedy of damages may be insufficient. Accordingly, in any proceeding to enforce the Company’s rights under such Sections 5 and 6 the Company may seek, in addition to

damages, equitable remedies such as injunctions, temporary injunctions and restraining orders and the parties hereby waive any requirement of bond in any such proceeding or in any appeal therefrom.

     13. Notices. All notices hereunder shall be in writing and shall be deemed effective upon receipt, if hand delivered, or if sent by facsimile and acknowledged electronically, or by courier and receipted on delivery. Notices by mail shall be deemed received on receipt, if sent first class or priority mail postage prepaid return receipt requested and the sender shall have the signed receipt. Otherwise notices shall be deemed effective five (5) days after transmission. In each case notices shall be transmitted to the address first given above or such other address as may be given by notice as provided herein.

          IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

EXECUTIVE	CLEAN DIESEL TECHNOLOGIES, INC.
	/s/ Michael L. Asmussen
Name: John Wynne	Name:	Michael L. Asmussen
		President & CEO
Date: April 23, 2010	Date:	April 26, 2010
	/s/ C.W. Grinnell
	Name:	Charles W. Grinnell
		Vice President and Secretary
	Date:	April 26, 2010

EX-31.A

Exhibit 31(a)

CERTIFICATIONS

I, Michael L. Asmussen, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (the “report”) of Clean Diesel Technologies, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2010	By:	/s/ Michael L. Asmussen
		Michael L. Asmussen
		Director, President and Chief Executive Officer

EX-31.B

Exhibit 31(b)

CERTIFICATIONS

I, John B. Wynne, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q (the “report”) of Clean Diesel Technologies, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15 (f) and 15d-15 (f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 13, 2010	By:	/s/ John B. Wynne
		John B. Wynne
		Interim Chief Financial Officer, Vice President and Treasurer

EX-32

Exhibit 32

CERTIFICATIONS

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to18 U.S.C. Section 1350

The undersigned, Michael L. Asmussen and John B. Wynne, in their capacities as Chief Executive Officer and Interim Chief Financial Officer, respectively, of Clean Diesel Technologies, Inc. (the “Registrant”) do each hereby certify with respect to the Quarterly Report on Form 10-Q of the Registrant for the period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that, to the best of his or her knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant as of, and for, the periods presented in this Report.

Date: May 13, 2010	/s/ Michael L. Asmussen
	Michael L. Asmussen
	President, Chief Executive Officer and Director
Date: May 13, 2010	/s/ John B. Wynne
	John B. Wynne
	Interim Chief Financial Officer, Vice President and Treasurer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the “Act”), this certification accompanies the Report and shall not, except to the extent required by the Act, be deemed filed by Registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Clean Diesel Technologies, Inc. and will be retained by Clean Diesel Technologies, Inc. and will be furnished to the Securities and Exchange Commission or its staff upon request.