CLEAN DIESEL TECHNOLOGIES INC
GENERAL       Clean  Diesel  Technologies,  Inc., a Delaware corporation with a principal place of business at 300 Atlantic Street, Stamford, CT 06901, was formed in 1994 as  a  wholly owned subsidiary of Fuel-Tech N.V., incorporated under the laws of the  Netherlands  Antilles  (Fuel  Tech),  to  develop  technologies that reduce harmful  emissions  from  diesel  engines  while  reducing  fuel consumption and improving  fuel  economy.  CDT was spun-off by Fuel Tech in a rights offering in December  1995.  Over  the past ten years, CDT has developed its technologies in the  areas  of  platinum  fuel  catalysts  (PFCs) for emissions control and fuel economy  improvement  in  diesel  engines,  and  nitrogen  oxide (NOx) reduction systems  for  control  of  NOx  emissions  from  diesel  engines.       CDT  is now commercializing the Platinum Plus(R) fuel-borne catalyst (FBC), a  diesel  fuel  PFC  additive,  the  ARIS(R)  NOx reduction system, an advanced reagent  injection  system  used  in catalytic NOx reduction systems , and Clean Diesel's  diesel  particulate  filter  technology  based  on catalyzed wire mesh filter elements.  CDT has 26 U.S. patents issued and 17 U.S. patent applications pending,  as  well  as  106  foreign  patents  issued  and  65  foreign  patent applications pending.  Increasingly, combustion engine development is influenced by  concern  over  global  warming caused by carbon dioxide (CO2) emissions from fossil  fuels  and toxic exhaust emissions.  Because carbon dioxide results from the  combustion of fossil fuels, reducing fuel consumption is often cited as the primary  way  to reduce carbon dioxide emissions.  Diesel engines are as much as 40%  more  fuel-efficient  than gasoline engines.  Thus, increased use of diesel engines  relative  to  gasoline  engines  is  one  way  to  reduce  overall fuel consumption  and  thereby significantly reduce carbon dioxide emissions.  Diesel engines,  however,  emit  higher  levels  of  two toxic pollutants than gasoline engines  fitted with catalytic converters, specifically, particulate matter (PM) and  nitrogen  oxides.  Both  of  these  pollutants affect human health and also damage  the  environment.  TECHNOLOGIES AND PRODUCTS       CDT  has  succeeded  in  developing  technologies  and  products that, when combined  with  other  after-treatment devices, can reduce particulate emissions and  nitrogen  oxides  from  diesel  engines  to or below the emission levels of natural  gas  engines,  while also reducing fuel consumption.  This results in a reduction  in fuel costs and greenhouse gas emissions, primarily carbon dioxide, as  well  as  a  reduction in emissions of particulates, nitrogen oxides, carbon monoxide  and  un-burnt  hydrocarbons.  PLATINUM PLUS FBC       CDT has successfully developed and patented the Platinum Plus additive as a diesel  fuel  soluble,  fuel-borne  catalyst,  which  contains minute amounts of platinum  and  cerium  catalysts  and  is  used  to  improve  combustion, reduce emissions  and  improve  the  performance  and  reliability  of emission control equipment.  Platinum  Plus  FBC takes the catalytic action into engine cylinders where  it  improves  combustion  thereby  reducing  particulates,  un-burnt hydrocarbons  and  carbon  monoxide  emissions  and improves fuel economy. Fleet tests using Platinum Plus FBC have shown improvements in fuel economy of between 3%  and 12%. Platinum Plus FBC can be used alone or with either regular or ultra low-sulfur  diesel fuel to reduce particulate emissions by 10% to 25% within the engine  while  also  improving the performance of diesel oxidation catalysts and particulate filters (which trap up to 95% of particulates but in doing so become clogged  with  soot) by burning off the soot particles at lower temperatures and further  reducing  toxic emissions of carbon monoxide and un-burnt hydrocarbons.       From 1996 to 1999, CDT defined and managed several research and development programs  on  platinum  fuel  catalysts  which were conducted by Delft Technical University  (Netherlands),  Ricardo  Consulting Engineers (U.K.), Cummins Engine Company  (USA)  and  Southwest  Research Institute (USA).  Through a strategy of using  independent  test houses, CDT's small technical team has been able to run several  programs  on  a  cost effective basis while bringing in a wide range of expertise.  Most  importantly,  the  results  have  been  independently derived.                                           4       CDT  completed  the  first stage of development of the Platinum Plus FBC in 1999.  In  December of that year, CDT received EPA registration for the Platinum Plus  FBC  for  use in bulk fuel by refiners, distributors and truck fleets.  In 2000,  CDT  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 Authority BUWAL approved the Platinum  Plus  fuel-borne  catalyst for use with particulate filters.  In 2002, the  U.S.  Mining, Safety and Health Administration (MSHA) accepted the Platinum Plus  fuel-borne  catalyst  for use in mines, with or without diesel particulate filter  after-treatment.       In  2003,  CDT  received  EPA  verification for the Platinum Plus FBC and a diesel-oxidation catalyst (the Purifier System).  In June 2004, CDT received EPA verification  for  the  Catalyzed  Wire  Mesh  Filter System, which combines the Platinum  Plus  fuel  borne  catalysts with a catalyzed wire mesh filter (CWMF). CDT  has  also  applied  to  the  California  Air  Resources  Board  (CARB)  for verification  of  these  combination  systems.  In  2005,  CDT  applied for CARB verification  of  Platinum  Plus  FBC in combination with high efficiency diesel particulate  filter.  Verification  is given for specific engine groups, and the initial  verification  and  applications  are  for  older  engines  (pre-1994 manufactured),  which  are  higher  emitters of particulates and nitrogen oxides than  newer  engines.  CDT  also  received verification extension for fuel-borne catalysts  and  diesel-oxidizing catalysts to cover engines manufactured between 1994 and 2003.  Verification is needed for the end user of the Platinum Plus FBC to  get  emissions reduction credit from the EPA's voluntary retrofit program or CARB's  mandatory  retrofit  program.  In the U.S., truck fleets, municipalities and off-road equipment operators are generally moving toward using only verified technologies  when  installing  retrofit  emissions  reduction  systems.       Over  the  past  several  years,  CDT  has  carried out 11 large fleet fuel economy demonstration trials in the U.S. in a range of industries, including the waste hauling, beverage, grocery and fuel delivery industries.  The improvements in fuel economy from using Platinum Plus FBC in these demonstrations ranged from 3%  to  12%,  with  an  average 8% improvement.  The best results were generally attributable  to  short-haul  "stop-and-go" driving, as is generally the pattern for local delivery vehicles, buses and garbage trucks.  Lab engine test beds run at  both Cummins Engine Company and the Southwest Research Institute showed a 2% to  8%  improvement  in fuel economy, respectively, which have been confirmed by field  testing  programs.  Platinum  Plus  FBC  is  effective with normal sulfur diesel,  ultra  low sulfur diesel, arctic diesel (kerosene) and biodiesel.  When used with biodiesel and kerosene, Platinum Plus FBC prevents the normal increase in  nitrogen  oxides  associated  with  biodiesel.  ARIS SCR       The  ARIS  (Advanced  Reagent  Injection  System) is the patented injection system  for  the reduction of nitrogen oxide emissions from diesel engines.  The system  comprises  of  a single fluid computer-controlled injector that provides precise  injection  of  nontoxic  urea-based  reagents  into  the  exhaust  of a stationary  or  mobile  engine,  where  the system then converts nitrogen oxides across  a  catalyst to nitrogen and water vapor.  The system has shown reduction of nitrogen oxides of up to 90% and, on occasion, higher percentages on a steady state  operation  and of up to 85% in transient operations.  This process, known as  selective catalytic reduction (SCR), has been in use for many years in power stations, and it is well proven in mobile and stationary applications.  The ARIS system  is  a  compact  version  of  the selective catalytic reduction injection system.  The  principal advantage of the patented ARIS system is that compressed air  is  not  required to operate the system and that a single fluid is used for both NOx reduction and injector cooling.  The system is designed for high-volume production  and  is very compact, with very few components, making it inherently cheaper  to  manufacture,  install  and operate than the compressed air systems, which were first developed for heavy-duty vehicles.  The ARIS system may be used in both stationary diesel engines for power generation and mobile diesel engines used  in  trucks,  buses,  trains  and  boats.  CATALYZED  WIRE  MESH  DIESEL  PARTICULATE  FILTER       Clean  Diesel had partnered with Mitsui and PUREarth in the development and testing  of  catalyzed  wire mesh filter (CWMF) technology.  The CWMF technology was initially developed by Mitsui/PUREarth for use in conjunction with CDT's FBC as  a  lower  cost and reliable alternative to the traditional heavily catalyzed filter  systems.  The  system  has  been  verified  by  CDT  under  the  EPA's Environmental Technology Verification protocol as reducing toxic particulates by up to 75 percent, carbon monoxide by 60 percent, hydrocarbons by 80 percent, and NOx  by  9  percent.  It  also  provides  lower NO2 emissions levels relative to traditional,  heavily catalyzed filter systems.  In 2005 the CWMF technology was transferred  to  CDT  under  a  technology  transfer  agreement  with Mitsui and PUREarth.  Under  the  agreement CDT acquired the worldwide title to the patents and  other  intellectual  properties,  excluding  Japan.  The CWMF technology is designed  for  use in a wide range of diesel engine particulate emission control applications.       The  CWMF technology is a durable, low-cost filter design to bridge the gap between  low  efficiency  diesel-oxidation  catalysts  and  expensive,  heavily catalyzed  particulate  filters. The wire-mesh filter system is designed to work synergistically  with  a  FBC  for reliable performance.  This combined FBC/CWMF technology  is  especially  suited  to  solving  the  challenging                                           5  problem  of delivering a reliable pollution control solution which can be easily retrofitted  for  the  older,  higher-emission  diesel engines expected to be in service  for  years  to  come.       In  addition  to reducing the cost to achieve these emissions improvements, the  patented  combination with a FBC permits the CWMF to operate effectively at the  lower  exhaust  temperatures found in stop-and-go service applications. The FBC  reduces the engine-out emissions and allows soot captured in the CWMF to be reliably  combusted  at  lower  exhaust  temperatures.  Commercial  systems  of Platinum  Plus  FBC  with  this  durable  CWMF  have demonstrated performance in beverage  delivery  vehicles,  refuse  trucks  and  buses.  THE MARKET AND THE REGULATORY ENVIRONMENT       CDT  estimates  that worldwide annual consumption of diesel fuel amounts to approximately  200 billion USG, including approximately 50 billion in the United States,  60  billion  in  Europe  and  50  billion  in  Asia.  NEW DIESEL ENGINES       While  engine  manufacturers  have,  to  date,  generally  met  emissions regulations  by engine design changes (which tend to increase fuel consumption), CDT  believes  that further reduction in emissions can be achieved best by using combinations  of  cleaner-burning  fuels  and  after-treatment  systems  such as diesel-particulate  filters  and catalytic systems for reducing nitrogen oxides.       In  the  last  several  years,  emissions regulations for new mobile diesel engines in the major markets of North America, Asia and Europe have continued to tighten  and  are  now  40%  to  90%  lower  than  the  mid-1980s  regulations. Regulations  proposed  through 2010 in the U.S., Europe and Asia are expected to reduce  the  emissions  level  for new mobile diesel engines to 85 to 99% of the levels  mandated  in the mid-1980s.  The market for mobile NOx reduction systems is  expected  by  management  to develop between 2006 and 2010.  European engine manufacturers  have  decided  to  use  urea  SCR in 2006, at least on heavy duty vehicles  and very likely on medium and light trucks in later years.  There is a clear  preference  to  use a single fluid system for the medium and light trucks which  have  no  compressed  air  system.  It  also seems probable that European manufacturers  will adopt particulate filters to meet 2010 regulations which are being  formulated.       In  May  2004  the  U.S.  Environmental  Protection  Agency (EPA) announced proposals  to  regulate  'nonroad'  engines.  The  regulations are planned to be phased  in  from  2008  to 2014.  Proposals include a wide range of construction equipment,  agricultural equipment, as well as railroad and marine applications.       CDT  believes  the U.S. market for diesel engines is poised for significant growth  because  of  the  favorable  fuel  economy performance of diesel engines coupled  with  the  increased  ability  to  control effectively, particulate and emissions  of  nitrogen  oxides  from such engines.  Europe and Asia already use significantly  more  mobile  diesel  engines,  particularly  for  passenger  and light-duty  vehicles.  Most  U.S.  engine manufacturers have indicated that they intend to use particulate filters, to meet new diesel vehicle regulations in the 2007 to 2010 time period.  European engine manufacturers have committed to adopt urea-selective  catalytic reduction by the 2007 to 2010 period.  CDT believes it is  probable that both particulate filters and some emissions of nitrogen oxides control  technology  will be required in Europe and the U.S. by the 2010 to 2015 period.  EXISTING DIESEL ENGINES AND THE RETROFIT MARKET       While  much  of  the  regulatory  pressure  and  the  response  from engine manufacturers  has  focused  on  reducing  emissions  from new engines, there is increasing  concern over pollution from existing diesel engines that have 20- to 30-year  life cycles.  CDT believes this trend underlies the growing interest in the  potential  market  that  may  exist  for  retrofitting  diesel engines with emissions  reduction systems.  Stationary diesel engines, construction equipment and  public  transportation  vehicles such as buses and commercial and municipal truck  fleets  will  all  be  included  in such a retrofit diesel engine market.       In  1998,  the  California  Air  Resources  Board  (CARB)  declared  diesel particulates  to  be  toxic  and  in  2000 it proposed reductions in particulate emissions  from  over one million existing engines in California as well as more stringent  controls  for  new  engines.  The  EPA  stated  its  objective  for retrofitting  vehicles  with particulate controls and developed the Clean School Bus U.S.A program to reduce emissions on school buses and the Smartway Transport Program  to  reduce  both diesel emissions and fuel consumption on over-the-road trucks.                                           6  COMPETITION       There is significant competition among companies that provide solutions for pollutant emissions from diesel engines.  Several companies market products that compete  directly  with  CDT's  products and other companies offer products that potential  customers  may  consider to be acceptable alternatives.  In addition, newly  developed  products could be more effective and cost-efficient than CDT's current  products  or  those  developed  in  the  future.       CDT  faces  direct  competition  from companies with far greater financial, technological,  manufacturing  and  personnel  resources,  including  Engelhard, Donaldson, Fleetguard, Octel, Rhodia and Johnson Matthey.  Moreover, many of the current  and  potential  future competitors have substantially more engineering, sales  and  marketing capabilities and broader product lines than CDT does.  CDT also  faces  indirect  competition  in  the form of alternative fuel consumption vehicles  such  as  those  using  methanol,  hydrogen,  ethanol and electricity.       CDT believes that its technologies and products occupy a strong competitive position relative to others in the diesel emissions reduction technology market. Competition  in  verified  particulate  reduction  systems  for retrofit is from catalyst  systems suppliers like Johnson Matthey and Engelhard.  These companies employ  systems  that  rely on much greater quantities of platinum and that have the  undesirable  effect  of  increasing  emissions  of NO2, a component of NOx. Competition  in  the diesel fuel additive market is from additive suppliers such as  Associated  Octel,  who markets an iron product and Rhodia and Oxonica , who market  cerium  products.  The  Platinum  Plus  FBC  competes  on performance in regenerating  filters and lower metal usage which results in less ash buildup on filters.  Platinum  Plus  FBC  also offers better performance in terms of carbon monoxide reduction and hydrocarbon reduction.  In addition, Platinum Plus FBC is the only fuel additive to provide fuel economy improvement.  Finally, in the NOx control  market,  competition  is  from  other  suppliers  of  reagent-based post-combustion  NOx  control  systems such as KleenAir Systems for retrofit and Robert  Bosch  for  OEMs.  Bosch  has  stated  that it will offer a single fluid system  after  2007.  CDT,  however,  already  has  proprietary technology for a single  fluid  system,  which  requires  no  compressed  air  and involves fewer components.  MARKET OPPORTUNITY       The  two principal market drivers for CDT's products are emission reduction and  fuel  economy  improvement.  Platinum  Plus FBC is an "enabling technology" that enables emission reductions from the engine itself and enhances performance of  the  exhaust  treatment  system while improving fuel economy.  The continued tightening  of  clean air standards, emissions control regulations, pressure for fuel  efficiency  and  growing  international awareness of the greenhouse effect should  provide  CDT  with substantial opportunities in local markets throughout North  America,  Asia  and  Europe.       Without  compromising  the  fuel  economy benefits of diesel, a significant reduction  of  particulate  and  NOx  emissions  can  only  be achieved by using combinations  of  improved  engine  design,  cleaner  burning  fuels  and after-treatment  systems  such  as  diesel  particulate  filters  and  catalytic systems.  The  Platinum  Plus  FBC  (which improves combustion catalytically and enables  higher  performance  of  exhaust  treatment  devices) and the ARIS 2000 technology  can  form  key  components of both of these after-treatment systems.       The  convergence of requirements for emissions compliance and the high cost of  fuel  make  the use of the products economical.  With diesel fuel selling at approximately  $2.50 per USG, or more, in the United States as of December 2005, a  fuel savings of at least 2% corresponds to $0.05 per USG and effectively pays the  cost  of  dosing with Platinum Plus FBC by truck fleet operators.  Platinum Plus  FBC  in  controlled  fleet  tests  showed  an  average  of 7% fuel economy improvement.  In Europe, where diesel fuel retails in some countries for as much as  $7.50  per  USG  because  of  the  high tax on fuels, potential fuel economy benefits  are  even  more  pronounced.  MARKETING STRATEGY AND COMMERCIALIZATION       The  market  for  after-treatment systems for emissions control from diesel engines  is  currently  moving from the demonstration and development phase to a commercialization  phase.  The  only  exception  to this general trend is in the market  for  passenger  cars in France, where PSA Peugeot has taken the lead and has  already begun offering particulate filter systems with fuel-borne catalysts on  several  of  its  models.  EPA  and  CARB programs are only now beginning to result  in  the  creation  of  active  markets  for  diesel  emissions reduction technologies  and  products.  Thus,  the  market  for diesel emissions reduction technologies  and  products  is  relatively  new.  CDT expects opportunities and demand  for  verified  diesel emissions reduction technologies and products from both  larger  companies  with  established  distribution  channels to the diesel engine market and owners of existing public and private fleets of diesel-powered vehicles.  At  the  same  time,  engine  manufacturers  are looking to subsystem suppliers  to  provide complete exhaust subsystems including particulate filters and/or  NOx  abatement  systems  and  eventually  both.                                           7       It  is  an essential requirement of the U.S. retrofit market that emissions control  products  and  systems  are verified under the EPA or CARB protocols to qualify  for  credits  within  the  EPA  and  CARB  programs.  Funding for these emissions  control  products and systems is mostly limited to those products and technologies  that  have  already been verified.  CDT has  received verification from  the  US  EPA  for two systems based upon the use of the Platinum Plus FBC. The  Platinum  Plus  Purifier  System  uses  the  FBC  and a DOC for up to a 50% particulate  reduction.  A second system is verified for up to 75% reduction and uses  a  CWMF  and  the Platinum Plus FBC.   CDT may seek to verify its Platinum Plus  FBC  in combination with additional emissions control devices manufactured by  other  vendors.  CDT may receive royalties from sales of such devices in the event sales of such devices include the Platinum Plus FBC product as part of the devices'  verification.       CDT  currently  manufactures and ships the Platinum Plus FBC product from a toll  blender  in Pittsburg, Pennsylvania and from a small warehouse in Milford, Connecticut.  However,  as  demand  for  the  product  increases, CDT intends to expand  the  manufacturing and shipping points by supplying platinum concentrate to  large  chemical  and additive manufacturing companies.  These companies will then  blend and market the finished Platinum Plus FBC products to fuel suppliers and  end  users.       CDT  has  licensed  the ARIS 2000 NOx reduction technology in both the U.S. and  Japan.  CDT  plans  to widen distribution to Europe and Asia by selling key components  with  the  technology  licenses.   CDT  believes  this  strategy  of licensing  the  products  and  technologies represents the most efficient way to gain  widespread distribution quickly and to exploit demand for the technologies in  North  America,  Asia  and  Europe.  In  2005  CDT  acquired  the rights to several worldwide patents from the Mitsui Company  of  Japan relating to catalized wire mesh filter technology.  CDT is in the  process  of commercializing the technology in combination with its Platinum Plus  FBC.  HEALTH EFFECTS AND REGISTRATION OF ADDITIVES       Metallic  additives  have come under scrutiny for their possible effects on health.  CDT  registered  its platinum additive in 1997 in both the U.S. and the U.K.  The  platinum-cerium  bimetallic additive required further registration in the  U.S.  and  that  process  involved  a  1,000-hour engine test and extensive emission  measurements and analysis.  The registration was completed in 1999 and issued  in  December  1999.       Germany,  Austria  and  Switzerland  have  set  up  a  protocol  (VERT) for approving  diesel  particulate filters and additive systems used with them.  CDT completed  the  required  tests  under  the VERT protocol in 2000 and in January 2001, the Swiss authority BUWAL approved the Platinum Plus FBC fuel additive for use  with  a  filter.       Engine  tests  in  the  U.S.  and  Switzerland  show that 95% to 99% of the catalyst  metal  introduced to the fuel by the FBC is retained within the engine and  exhaust after a filter and that the amount of platinum emitted from the use of Platinum Plus FBC is roughly equivalent to platinum attrition from automotive catalytic  converters.       In  December  1996,  the  United  Kingdom Ministry of Health's Committee on Toxicity  reviewed the product and all the data submitted by CDT and stated "The Committee  is satisfied that the platinum emission from vehicles would not be in an  allergenic  form  and  that the concentrations are well below those known to cause  human  toxicity."  In  1997,  Radian  Associates, an independent research consulting firm, reviewed our data and the literature on platinum health effects and concluded, "the use of Clean Diesel Technologies' Platinum containing diesel fuel additive is not expected to have an adverse health effect on the population under the condition reviewed."  Radian also concluded that emissions of platinum from  the  additive had a margin of safety ranging from 2,000 to 2,000,000 times below  workplace  standards.       In  2002,  the U.S. Mining Safety and Health Administration (MSHA) accepted the  use  of Platinum Plus FBC with particulate filters and also allowed its use in  all  fuel  used  in  underground  mining,  even  without  filters.       In  October  2003,  the EPA verified the Platinum Plus FBC Purifier System, which  is  the  first  time the EPA has verified a metal catalyst additive-based system.       In January 2005 CDT announced it had initiated independent tests to address recent  questions from the EPA on the use of its fuel borne catalyst as a result of  growing  commercial  interest  in its diesel emission control products.  The results  from testing of the Platinum Plus FBC over eight months at EPA approved laboratories  confirmed  that any potentially allergenic platinum emissions from the  use  of the Platinum Plus FBC were hundreds to thousands of times below the lowest published safe level and were consistent with reported platinum emissions from  catalyzed  control  devices.                                           8  SOURCES OF SUPPLY       Platinum  and cerium are the principal raw materials used in the production of  the Platinum Plus fuel borne catalyst.  These metals are generally available from  multiple  sources in the market place.  CDT does not anticipate a shortage in  the  supply  of  the  raw materials used in the production of the FBC in the foreseeable  future.  While  CDT has outsourcing arrangements with two companies in  the  precious  metal refining industry to procure this precious metal, there are no fixed commitments with these parties to provide supplies and CDT may make procurement  arrangements with others to fulfill the raw materials requirements. In  the  past,  CDT  manufactured  the  product  internally  but  now  considers outsourcing of the manufacturing process to a precious metal refinery to be more cost  effective.  RESEARCH AND DEVELOPMENT       During  2005,  CDT  employed several individuals in engineering and product development.  During  the  years  ended  December  31, 2005, 2004, and 2003, the research  and  development  expenses,  exclusive  of  patent  costs,  totaled approximately    $439,000,  $506,000,  $855,000 respectively.  The 2005 decrease resulted from lower personnel allocation and consultant use, partially offset by higher  EPA testing expense.  In addition, 2004 expense was lower as a result of the  completion  of  verification  testing  expense  in  2003.  CDT expenses all research  and  development  costs  as  incurred.  PROTECTION OF PROPRIETARY INFORMATION       CDT  holds  the  rights  to  a  number  of  patents and patent applications pending.  There  can  be  no  assurance that pending patent applications will be approved  or  that  the  issued  patents  or  pending  applications  will not be challenged  or  circumvented  by  competitors.  Certain  critical  technology incorporated in the products is protected by trademark and trade secret laws and confidentiality  and  licensing agreements.  There can be no assurance that such protection  will  prove  adequate  or  that  CDT will have adequate remedies for disclosure  of  the  trade  secrets  or  violations of the intellectual property rights.  INSURANCE       CDT  maintains coverage for the customary risks inherent in its operations. Although  CDT  believes  the insurance policies to be adequate in the amount and coverage  for  the  current  operations,  no  assurance  can  be given that this coverage  will,  in fact, be or continue to be available in adequate amounts, or at a reasonable cost or that such insurance will be adequate to cover any future claims.  EMPLOYEES       CDT has 13 full-time employees.  In addition, one executive officer of Fuel Tech  provides  management  and  legal  services  to CDT on an "as needed" basis pursuant  to  a  Management and Services Agreement with Fuel Tech Inc.  CDT also retains  several outside technical consultants and marketing agents for specific projects  related  to  platinum,  engines  and  NOx  reduction and fuel additive selling.       CDT  enjoys  good  relations  with  its employees and is not a party to any labor  management  agreements.  RISK  FACTORS  OF  THE  BUSINESS       Investors  in  Clean Diesel Technologies should be mindful of the following risk  factors  relative  to  Clean  Diesel  Technologies'  business:  CDT HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO INCUR LOSSES IN THE FUTURE.       Prior  to  2000, Clean Diesel Technologies was a development stage business and  has  incurred  losses  since  inception totaling $34,841,000 (excluding the effect  of  non-cash  preferred  stock  dividends).  At the date of this report, Clean  Diesel Technologies has cash resources estimated to be sufficient for its needs  into  the  first  quarter  of  2007.       CDT  has  had  minimal  revenues  through  December 31, 2005 and expects to continue  to  incur  operating  losses  at  least through 2006.  There can be no assurance that CDT will achieve or sustain significant revenues or profitability in  the future.  See the text below under the captions "Liquidity and Sources of Capital" in Item 7, "Management's Discussion and Analysis of Financial Condition and  Results  of  Operations,"  elsewhere  herein.                                           9  CDT FACES CONSTANT CHANGES IN GOVERNMENTAL STANDARDS BY WHICH ITS PRODUCTS ARE EVALUATED.       CDT  believes  that, due to the constant focus on the environment and clean air standards throughout the world, a requirement in the future to adhere to new and  more  stringent  regulations  both  domestically  and abroad is possible as governmental  agencies  seek  to improve standards required for certification of products  intended  to  promote  clean air.  In the event CDT's products fail to meet  these  ever-changing  standards,  some  or  all of the products may become obsolete.  FUTURE  GROWTH  OF  CDT'S  BUSINESS  DEPENDS  IN PART ON ENFORCEMENT OF EXISTING EMISSIONS-RELATED  ENVIRONMENTAL  REGULATIONS AND FURTHER TIGHTENING OF EMISSION STANDARDS  WORLDWIDE.       CDT expects that the future business growth will be driven, in part, by the enforcement of existing emissions-related environmental regulations and tightening of emissions standards worldwide.  If such standards do not continue to become stricter or are loosened or are not enforced by governmental authorities, it could have a material adverse effect on business, operating results, financial condition and long-term prospects.  THE POSSIBILITY OF NEW METAL STANDARDS, ,LOWER ENVIRONMENTAL LIMITS OR  STRICTER REGULATION  FOR  HEALTH  REASONS  OF  PLATINUM  OR  CERIUM  EXISTS.       New  standards  or  environmental  limits  on  the use of platinum and / or cerium  metal by a governmental agency could adversely affect the ability of CDT to  use  its  Platinum  Plus  FBC  in  some applications.  In addition CARB will require  "multimedia"  analysis  of the FBC.  The EPA could require a "Tier III" test of the Platinum Plus FBC at any time to determine additional health effects of  platinum or cerium which tests would likely involve costs beyond the current resources  of  Clean  Diesel.  CDT FACES COMPETITION AND TECHNOLOGICAL ADVANCES BY COMPETITORS.       There is significant competition among companies that provide solutions for pollutant emissions from diesel engines.  Several companies market products that compete  directly  with  CDT's  products.  Other  companies  offer products that potential customers may consider to be acceptable alternatives to CDT's products and  services.  CDT  faces  direct  competition  from companies with far greater financial,  technological,  manufacturing  and  personnel  resources,  including Engelhard,  Donaldson,  Fleetguard,  Octel,  Rhodia,  Bosch and Johnson Matthey. Newly  developed  products could be more effective and cost efficient than CDT's current  or  future  products.  Many  of  the  current  and  potential  future competitors  have  substantially  more  engineering,  sales  and  marketing capabilities  and  broader product lines than CDT does.  CDT also faces indirect competition  in  the form of alternative fuel consumption vehicles such as those using  methanol,  hydrogen,  ethanol  and  electricity.  CDT DEPENDS ON INTELLECTUAL PROPERTY AND THE FAILURE TO PROTECT THE INTELLECTUAL PROPERTY  COULD  ADVERSELY  AFFECT  FUTURE  GROWTH  AND  SUCCESS.       CDT relies on patent, trademark and copyright law, trade secret protection, and confidentiality and other agreements with employees, customers, partners and others  to protect its intellectual property.  However, some of the intellectual property  is  not  covered  by  any  patent  or patent application, and, despite precautions,  it  may  be  possible  for  third  parties  to  obtain and use the intellectual  property  without  authorization.       CDT  does  not  know whether any patents will be issued from the pending or future  patent  applications  or  whether  the  scope  of  the issued patents is sufficiently  broad  to protect the technologies or processes.  Moreover, patent applications  and  issued  patents  may be challenged or invalidated.  CDT could incur  substantial  costs in prosecuting or defending patent infringement suits. Furthermore,  the  laws  of  some foreign countries may not protect intellectual property  rights  to  the  same  extent  as  do  the  laws of the United States.       Some  of  the  key  patents,  including  the  fundamental platinum additive patent,  will  expire  during  the period 2006-2008.  However, CDT believes that other  longer  lived  patents,  including  those  for  platinum  additives  in combination  with  after-treatment  devices, will provide adequate protection of the  proprietary  technology,  but  there  can  be  no  assurances  CDT  will be successful  in  protecting  the  proprietary  technology.       As  part  of the confidentiality procedures, CDT generally has entered into nondisclosure  agreements with employees, consultants and corporate partners and has  attempted  to  control  access  to  and  distribution  of the technologies, documentation  and  other  proprietary information.  CDT plans to continue these procedures.  Despite  these  procedures,  third  parties could copy or otherwise obtain  and  make  unauthorized use of the technologies or independently develop similar  technologies.  The steps that have been taken and that may occur in the future  might  not  prevent  misappropriation  of the solutions or technologies, particularly  in  foreign  countries where laws or law enforcement practices may not  protect  the  proprietary  rights  as  fully  as  in  the  United  States.                                          10       There  can  be  no  assurance that CDT will be successful in protecting its proprietary  rights.  Any  infringement  on any of the intellectual rights could have  an  adverse  effect  on  the  ability  to  develop  and  sell successfully commercially  competitive  systems  and  components.  IF  THIRD  PARTIES  CLAIM  THAT  THE  PRODUCTS  INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, CDT MAY BE FORCED TO EXPEND SIGNIFICANT FINANCIAL RESOURCES AND MANAGEMENT  TIME  LITIGATING SUCH CLAIMS AND THE OPERATING RESULTS COULD SUFFER.       Third  parties  may  claim  that  the  products  and  systems infringe upon third-party  patents  and  other  intellectual  property  rights.  Identifying third-party patent rights can be particularly difficult, especially since patent applications  are  not published until up to 18 months after their filing dates. In  the  event  a  competitor  were to challenge the patents, or assert that the products or processes infringe its patent or other intellectual property rights, CDT  could  incur  substantial  litigation  costs,  be  forced to make expensive product  modifications, pay substantial damages, or even be forced to cease some operations.  Third-party infringement claims, regardless of their outcome, would not  only  drain  financial  resources  but  also  divert the time and effort of management  and  could  result  in customers or potential customers deferring or limiting  their  purchase  or  use  of  the  affected products or services until resolution  of  the  litigation.  AN EXTENDED INTERRUPTION OF THE SUPPLY OR A SUBSTANTIAL INCREASE IN THE PRICE OF PLATINUM COULD HAVE AN ADVERSE EFFECT ON BUSINESS.       The  cost of platinum or the processing cost associated with converting the metal  may  have  a direct impact on the future pricing and profitability of the Platinum  Plus  FBC.  Although  in the future, CDT intends to minimize this risk through  various  purchasing  and  hedging strategies, there can be no assurance that  this  will  be  successful.  A  shortage  in  the  supply of platinum or a significant  prolonged  increase  in  the price of platinum, in each case, could have  a material adverse effect on the business, operating results and financial condition.  FAILURE TO ATTRACT AND RETAIN KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON FUTURE SUCCESS.       CDT's  success will depend, in large part, on the ability to retain current key  personnel,  attract and retain additional qualified management, scientific, and  manufacturing  personnel,  and  develop  and  maintain  relationships  with research  institutions and other outside consultants.  The loss of key personnel or  the  inability  to  hire  or  retain  qualified personnel, or the failure to assimilate  effectively  such  personnel could have a material adverse effect on the  business,  operating  results  and  financial  condition.  CDT'S RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND COMPETITIVE FACTORS FROM WHICH CDT HAS LITTLE OR NO CONTROL OVER.       The  factors  listed below, some of which CDT cannot control, may cause the revenues  and  results  of  operations  to  fluctuate  significantly:      -    Actions  taken  by  regulatory  bodies relating to the verification or           registration  of  the  products.       -    The  extent to which the Platinum Plus FBC and ARIS 2000 NOx reduction           products  obtain  market  acceptance.       -    The  timing  and  size  of  customer  purchases.       -    Customer  concerns  about  the  stability  of the business which could           cause  them  to  seek  alternatives  to  CDT's  product.  CDT IS CURRENTLY DEPENDENT ON A FEW MAJOR CUSTOMERS FOR A SIGNIFICANT PORTION OF REVENUES  AND THE REVENUES COULD DECLINE IF CDT IS UNABLE TO MAINTAIN OR DEVELOP RELATIONSHIPS  WITH  CURRENT  OR  POTENTIAL  CUSTOMERS.       A  few  customers  currently account for a significant portion of revenues. For the three-year period ended December 31, 2005, three customers accounted for approximately  43% of revenues. The majority of the revenues received from these three  customers  consisted  of  license  fees  and ARIS hardware purchases. CDT intends  to  establish  long-term  relationships  with  existing  customers  and continue  to expand its customer base. While CDT diligently seeks to become less dependent  on  any  single  customer,  it  is  likely  that  certain contractual relationships  may result in one or more customers contributing to a significant portion of the revenue in any given year for the foreseeable future. The loss of one  or  more  of  these  significant customers may result in a material adverse effect  on revenues, the ability to become profitable or the ability to continue the  business  operations.                                          11  CDT  DEPENDS ON THE MARKETABILITY OF THREE PRIMARY PRODUCTS - PLATINUM PLUS FBC, ARIS  SYSTEMS  AND  CATALYZED  WIRE  MESH  FILTERS.       The  Platinum  Plus  fuel  borne  catalyst, ARIS advanced reagent injection system  for selective catalytic reduction and the catalyzed wire mesh filter are the  three  primary products of Clean Diesel.  Failure of any of the products to achieve  market  acceptance  may  limit  the  company's growth potential.  Clean Diesel  may  have  to  cease  operations  if all of the primary products fail to achieve  market  acceptance  and/or  fail  to  generate  significant  revenues. Additionally,  the  marketability  of  the  products is dependent upon obtaining verifications  from agencies such as the EPA, CARB, or similar European agencies as  well  as  the  effectiveness  of  the  products  in  relation  to  various environmental  regulations  in  the  many  jurisdictions  in  which Clean Diesel markets  and  sells  its  products.  CDT  MAY  NOT BE ABLE TO SUCCESSFULLY MARKET NEW PRODUCTS THAT ARE DEVELOPED AND OR  OBTAIN  DIRECT  OR  INDIRECT  VERIFICATION OR APPROVALS OF THE NEW PRODUCTS.       CDT  plans  to market other emissions reduction devices used in combination with  the  Platinum  Plus  fuel  borne  catalyst  and  ARIS injector.  There are numerous  development and verification issues that may preclude the introduction of  these  products  into  commercial sale.  If CDT is unable to demonstrate the feasibility  of  these  products  or  obtain  verification  or  approval for the products  from  agencies such as the EPA, CARB or similar European agencies, CDT may have to abandon the products or alter the business plan.  Such modifications to  the  business  plan  will  likely delay achievement of milestones related to revenue  increases  and  achievement  of  profitability.  NO  ASSURANCES  OF  ADDITIONAL  FUNDING       Clean  Diesel  Technologies  may  seek  additional funding in the form of a private  or  public offering of additional shares of equity securities. Any such funding  will  depend on prior stockholder approval of an amendment to the Clean Diesel  certificate of incorporation authorizing additional equity. Any offering of  such securities would result in dilution to the stockholders of Clean Diesel Technologies.  The  ability  of  CDT  to consummate financing will depend on the status  of  CDT's  marketing programs and commercialization progress, as well as conditions  then  prevailing  in  the  relevant capital markets. There can be no assurance that such funding will be available if needed, or on acceptable terms. In  the event that CDT needs additional funds and is unable to raise such funds, CDT  may be required to delay, scale back, or severely curtail its operations or otherwise  impede  its  ongoing  commercialization,  which could have a material adverse  effect  on  the  business,  operating  results, financial condition and long-term  prospects.  See  the  text  below  under  the captions "Liquidity and Sources  of  Capital"  in  Item  7,  "Management's  Discussion  and  Analysis of Financial  Condition  and  Results  of  Operations,"  elsewhere  herein.  CURRENCY  FLUCTUATIONS  COULD  IMPACT  FINANCIAL  PERFORMANCE.       The  majority  of recent activities have been in the U.S.  However, CDT has increased  its  activities  in  Europe and Asia, and thus potential for currency exposure  exists.  CDT  intends  to manage the risk to such exposure, if any, by entering  into  foreign currency futures and options contracts.  There can be no assurance  that  currency  fluctuation will not have a significant effect on the operations  in  the  future.  CDT  HAS  NOT  AND  DOES NOT INTEND TO PAY DIVIDENDS ON THE COMMON STOCK SHARES.       CDT  has  not  paid dividends on its common stock since inception, and does not  intend  to  pay  any  dividends  to  the  holders  of  common  stock in the foreseeable  future.  CDT  intends  to  reinvest  earnings,  if  any,  in  the development  and  expansion  of  the  business.  THE  PRICE OF THE COMMON STOCK SHARES MAY BE ADVERSELY AFFECTED BY THE SALE OF A SIGNIFICANT  NUMBER  OF  NEW  SHARES.       The sale, or availability for sale, of substantial amounts of common stock, including shares issued upon exercise of outstanding options and warrants, or in the  event  that CDT elects to sell shares of common stock in the future to fund continuing  operations,  in  the  public  market  or a private placement, or the perception  by  the  market that these sales could occur, could adversely affect the  market  price  of  the  common  stock and could impair the ability to raise additional capital through the sale of equity securities or debt financing.  The perceived risk of dilution may cause the existing stockholders and other holders to sell their shares of stock, which would contribute to a decrease in the stock price.  In  that  regard,  significant downward pressure on the trading price of CDT's  common  stock  may  also  cause investors to engage in short sales, which would  further  contribute to significant downward pressure on the trading price of  the  stock.                                          12  CDT'S  COMMON  STOCK  IS  CURRENTLY  TRADED  ON THE OVER-THE COUNTER MARKET, THE ALTERNATIVE  INVESTMENT  MARKET  OF  THE LONDON EXCHANGE AND THE FRANKFURT STOCK EXCHANGE  AND AN INVESTOR'S ABILITY TO TRADE THE STOCK MAY BE LIMITED BY TRADING VOLUME  AND  PRICE  VOLATILITY.       The  trading  volume  in CDT's common stock has been relatively limited.  A consistently  active trading market for its common stock may not continue on the OTC market or on the Alternative Investment Market of the London Stock Exchange. The  average  daily trading volume in the common stock on the OTC market for the month  ended  January,  2006  was approximately 4,140 shares.  The average daily trading  volume  in  the  common  stock  on Alternative Investment Market of the London  Stock  Exchange  for the month ended January, 2006 was approximately 494 shares.  In  February  2006,  clean  Diesel began trading on the Frankfurt stock exchange  in  Germany.       There  has  been  significant  volatility  in the market prices of publicly traded  shares  of emerging growth technology companies, including CDT.  Factors such as announcements of technical developments, verifications, establishment of distribution  agreements,  significant  sales  orders,  changes  in governmental regulation  and  developments  in  patent  or  proprietary  rights  may  have  a significant  effect  on  the  market  price of CDT's common stock.  In addition, there  has  been a low average daily trading volume of the common stock.  To the extent  this  trading  pattern  continues,  the  price  of  the common stock may fluctuate  significantly  as  a result of relatively minor changes in demand for such  shares  and  sales  of  stock  by  holders.
FACILITIES       Clean  Diesel  Technologies  has  a 5 year lease expiring in March 2009 for 3,925  square  feet  of  administrative  office  space  at  300 Atlantic Street, Stamford,  Connecticut.  The  annual cost of the lease including rent, utilities and  parking  is  approximately $125,000. CDT has a lease for 400 feet of office space  outside  London,  UK  through  September  2007  at  an  annual  cost  of approximately  $33,000.  Clean Diesel Technologies also leases 2,750 square feet of  warehouse  space  in  Milford,  Connecticut.  The  annual  cost of the lease excluding  utilities  is  estimated  at  $20,000  and  runs  through  July 2008.  PATENTS  AND  TECHNOLOGY  ASSIGNMENTS       CDT's  technology  is  comprised  of patents, patent applications, trade or service  marks,  data,  and know-how. This technology was acquired by assignment from  Fuel  Tech  or developed internally. The assignment agreement provides for annual royalties of 2.5% of gross revenues derived from the sale of the Platinum Plus  FBC, commencing in 1998 and terminating in 2008. Clean Diesel Technologies may  at  any  time  terminate this royalty obligation by payment to Fuel Tech of amounts  in  2006  of  $3.3  million, in 2007 of $2.2 million or $1.1 million in 2008.  CDT,  as  owner,  maintains  the  technology  at  its  expense.       During  2005,  Clean  Diesel  Technologies  filed  10  additional US patent applications  and  2  foreign  patent  applications.  In  addition  Clean Diesel acquired  11  foreign granted patents and 2 US and 8 foreign patent applications from  Mitsui.    Clean  Diesel  Technologies  now  has  a total of 26 US patents granted and 106 foreign patents. There are currently 17 US and 65 foreign patent applications  pending.  The patents expire in various years through 2025.  These patents  and  patent  applications  cover  the  means  of  controlling  the four principal  emissions  from  diesel  engines  (NOx,  particulates,  CO,  and HC).
Clean  Diesel  Technologies  is not involved in any legal proceedings.
There  were  no submissions of matter to a vote of security holders in      the  fourth  quarter  of  2005.  PART II
COMMON  STOCK       Clean  Diesel  Technologies'  Common  Stock  is  traded  in  the  US on the over-the-counter  (OTC)  market,  on  the  London  Stock  Exchange  through  the Alternative  Investment  Market  (AIM)  and  in  Germany  on the Frankfurt stock exchange.  Reports  of  transactions  of  Clean  Diesel Technologies' shares are available on the OTC Electronic Bulletin Board (Symbol CDTI), on the AIM (Symbol CDT  and CDTS) and on the Frankfurt exchange (Symbol CDI).  At December 29, 2005 there  were  369  registered holders and approximately 750 beneficial holders of Common  Stock.                                          13       No  dividends  have  been  paid  on  CDT's  Common  Stock  and Clean Diesel Technologies does not intend to pay dividends on these shares in the foreseeable future.  Prices  indicated  below  with  respect to the Clean Diesel share price include  inter-dealer  prices  , without retail mark up, mark down or commission and  may  not  necessarily  represent  actual  transactions.                                          OTC              LONDON STOCK EXCHANGE                                  BULLETIN BOARD                 AIM                                    (IN US$)                   (IN GBP)      STOCK PRICE DATE:          HIGH      LOW            HIGH         LOW      -----------------        -------  --------       -----------  ---------           1st Quarter  2004. . .      3.38      2.80              1.90       1.35      2nd Quarter  2004. . .      2.90      2.00              1.45       1.18      3rd Quarter  2004. . .      3.19      2.00              1.30       0.86      4th Quarter  2004. . .      3.60      1.50              1.40       0.90       1st Quarter  2005. . .      1.90      1.15              0.90       0.48      2nd Quarter  2005. . .      2.30      1.01              0.97       0.33      3rd Quarter  2005. . .      1.95      1.20              0.92       0.50      4th Quarter  2005. . .      1.80      1.00              0.55       0.41   SALES  AND  USES  OF  UNREGISTERED  SECURITIES  DURING  THE  PERIOD       Pursuant to a Regulation S exemption for offshore placements and Regulation D  exemption  for  private placements to U.S. accredited investors, Clean Diesel Technologies  sold, effective November 4, 2005, 8.2 million of its Common Stock. The  price  of the Common Stock was 0.40 sterling (GBP) per share (approximately $.70  per  share).   The proceeds of the Common Stock issuance, $5.5 million net of  $232,000  in  expenses,  will  be used for the general corporate purposes of Clean  Diesel  Technologies.       Pursuant to a Regulation S exemption with respect to an offshore placement, Clean Diesel Technologies sold, effective October 8, 2004, 426,500 shares of its Common  Stock.  The price of the Common Stock was 1.025 sterling (GBP) per share (approximately  $1.83  per  share).   The proceeds of the Common Stock issuance, $754,000,  net  of  $25,000  in  expenses  and  including  $135,400 of exchanged deferred salary for the retired CEO, was used for the general corporate purposes of  Clean  Diesel  Technologies.       Pursuant to a Regulation S exemption with respect to an offshore placement, Clean  Diesel  Technologies sold, effective September 28, 2004, 1,000,000 shares of  its Common Stock. The price of the Common Stock was 1.025 sterling (GBP) per share  (approximately  $1.83  per  share).   The  proceeds  of  the Common Stock issuance,  $1.789  million, net of $65,000 in expenses, was used for the general corporate  purposes  of  Clean  Diesel  Technologies.
Clean Diesel Technologies was incorporated on January 19, 1994, as a wholly owned subsidiary of Fuel Tech.  Effective December 12, 1995, Fuel Tech completed a  Rights  Offering  of  CDT's  common  stock,  with Fuel Tech retaining a 27.6% ownership  interest in Clean Diesel Technologies. In 2005 and 2004, CDT obtained $5.5  million  and  $2.5  million  of  proceeds,  respectively,  through private placement  sales  of  its  common stock.  In addition in 2005 the Company had an additional  $0.5  of  subscription  receivable  relating  to  the  2005  private placement  which  was  received  by  the  company  in  2006.  As a result of the additional  stock  transactions,  Fuel  Tech's  1,825,119 shares of CDT's common stock  represent  approximately  a 7.0% interest in Clean Diesel Technologies at December  31,  2005.       As discussed elsewhere herein, prior to 2000, Clean Diesel Technologies was a  development-stage business.  The following selected data are derived from the financial  statements of CDT.    The data should be read in conjunction with the financial  statements,  related  notes  and  other financial information herein.                                          14                                                                   FOR THE YEARS ENDED DECEMBER 31,                                                 -----------------------------------------------                                                  2005      2004      2003      2002      2001                                                --------  --------  --------  --------  --------      STATEMENTS OF OPERATIONS DATA                   (in thousands, except per share data)            Additive  revenue                         $   411   $   299   $   212   $    40   $   114      Hardware revenue                              349       369       161       102        62      License and royalty revenue                    52        54       194       299     1,424                                                ------------------  --------  --------  --------      Total revenues                                812       722       567       441     1,600      COSTS AND EXPENSES:      Cost of revenue                               471       455       219        86       117      General and administrative                  4,963     3,962     2,695     2,291     1,858      Research and development                      439       506       855       693       365      Patent amortization and other expense         170        90        58        43       196                                                ------------------  --------  --------  --------       Loss from operations                       (5,231)   (4,291)   (3,260)   (2,672)     (936)      Foreign currency exchange gain(loss)         (221)      101        --        --        --      Interest income/(expense), net                 26        47        15        30      (170)                                                ------------------  --------  --------  --------      Loss before preferred stock dividend       (5,426)   (4,143)   (3,245)   (2,642)   (1,106)       Preferred stock dividend (non-cash)            --        --        --        --      (621)      Preferred stock conversion premium             --        --        --        --    (1,276)                                                ------------------  --------  --------  --------       Net loss                                  $(5,426)  $(4,143)  $(3,245)  $(2,642)  $(3,003)                                                ----------========  ========  ========  ========       Basic and diluted loss per common share   $ (0.30)  $ (0.26)  $ (0.26)  $ (0.23)  $ (1.08)       Weighted-average shares outstanding        18,389    16,071    12,721    11,419     2,777                                                   -----------------------------------------------                                                  2005      2004      2003      2002      2001                                                ------------------  --------  --------  --------      BALANCE SHEET DATA                                          (in thousands)      Current assets                            $ 5,505   $ 4,868   $ 7,023   $ 2,757   $ 4,612      Total assets                                6,274     5,513     7,441     2,979     4,658      Current liabilities                           496       391       868       223       808      Long-term liabilities                           0         0         0       418       368      Working capital                             5,009     4,477     6,155     2,534     3,804      Stockholders' equity                        5,778     5,122     6,573     2,338     3,482    ITEM  7.   MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  FINANCIAL  CONDITION AND RESULTS  OF  OPERATIONS       Prior to 2000, Clean Diesel Technologies was a development-stage enterprise and  its  efforts  were devoted to the research and development of platinum fuel catalysts  and  nitrogen  oxide  reduction technologies to reduce emissions from diesel  engines. During December 1999, CDT received its EPA registration for its platinum-cerium  product and in early 2000 completed its first commercial sales; accordingly,  in  the  opinion  of  management, Clean Diesel Technologies was no longer  a development-stage enterprise.  Although the Company has been unable to generate  positive  cash  flows,  it  has  made  significant  progress  in commercializing  its  technologies.  RESULTS  OF  OPERATIONS 2005  VERSUS  2004  Revenues  and  cost of revenue were $812,000 and $471,000, respectively, in 2005 versus  $722,000  and  $455,000, respectively, in 2004.  The revenues consist of the  following:                                          15         (in thousands)         2005    2004    2003                            ------  ------  ------          REVENUE:      Additive              $  411  $  299  $  212      Hardware                 349     369     161      License and royalty       52      54     194                            ----------------------       Total revenue         $  812  $  722  $  567        In  the  foregoing table "Additive" includes the Platinum Plus FBC products and  concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS injectors  and  dosing  systems.  CDT  received EPA verification of its Purifier System  (FBC  and  DOC)  in  October  2003,  and  a  second verification for its catalyzed wire mesh filter system (FBC and CWMF) in June 2004. The Platinum Plus FBC  is  registered  with  the  EPA.       Additive  revenue  has  increased  as  a result of successful demonstration programs  and  sales  of  the verified Purifier System which requires the use of Platinum Plus FBC. Both further penetration of the European market and increased sales  to  key beverage delivery and waste hauling customers relating to a grant from  the  State  of  Pennsylvania,  increased  Clean Diesel's additive revenue. Hardware  and  license  and  royalty  revenues  remained  relatively  constant.  CDT's  business  strategy  is to sell Platinum Plus FBC concentrate and finished product to distributors, resellers and end users. The Company's ARIS strategy is to license the ARIS 2000 NOx reduction system to other companies for an up-front fee  for the technology and information transfer and a separate on-going royalty per  unit  payment.  Clean  Diesel  is  also  selling  finished  ARIS systems to potential ARIS licensees.   CDT currently has an exclusive license agreement for both  stationary  and  mobile  ARIS  applications  with  DENOX  Inc.  of  Japan (transferred  in 2005 from Mitsui Ltd.). CDT has a nonexclusive license for both stationary  and  mobile  ARIS  applications in the United States with Combustion Components  Associates  of Monroe, Connecticut.  CDT believes that the ARIS 2000 system  can  most  effectively  be  commercialized  through  licensing  several companies  with  a related business in these markets.  Clean Diesel Technologies is  actively  seeking  additional  ARIS licensees for both mobile and stationary applications  in  the  US, Europe and Asia.  Clean Diesel acquired the rights to proprietary technology for catalyzed wire mesh filters from Mitsui Ltd. in 2005. Clean  Diesel  plans to license the rights to the catalyzed wire mesh technology as  well  as  sell  finished  filters  for  use  with  the  Platinum  Plus  FBC.   General  and  administrative  expenses  increased  to  $4,963,000  in  2005 from $3,962,000  in  2004  as  summarized  in  the  following  table:    (in thousands)                               2005     2004     2003                                            -------  -------  -------     Compensation and benefits                  $ 3,319  $ 2,535  $ 1,650 Occupancy                                      485      420      320 Professional                                   831      740      425 Other                                          328      267      300                                            -------  -------  ------- Total general and administrative expense   $ 4,963  $ 3,962  $ 2,695        Compensation  and  benefit  expense  increased  as a result of increases in management salaries and related expenses.   CDT hired a Chief Technology Officer in  August  2005.  An  additional  director  was  added  to  the  Board in 2005. Occupancy  increased in 2005 as a result of additional rent and related expenses in both the US and Europe.   Professional fees including financial advisory fees increased  in  2005  along  with  marketing  activities  in  Europe  and  Asia.       Research  and  development  expenses  decreased  to  $439,000  in 2005 from $506,000  in  2004.  The  decrease  in  research  and development related to the transition  to  commercial  selling  efforts  in  2004  was  partially offset by additional  costs  incurred  for  testing  required  by  the  EPA and additional hardware  systems  testing.       Patent  amortization  and  other costs increased to $170,000 in 2005 versus $90,000 in 2004.  The 2005 increase is related to writing off of some patents in 2005,offset  by  additional  patent  applications  including  the acquisition of additional  patents from the Mitsui Company of Japan  relating to catalyzed wire mesh  filter  technology  and  the  higher  amortization related to prior years' capitalized  costs.       Interest  income  decreased  to $26,000 in 2005 from $47,000 in 2004 due to the  lower  amount  of  invested  funds  prior  to the private placement funding received  at  the  end  of  2005.                                          16  RESULTS  OF  OPERATIONS 2004  VERSUS  2003  Revenues  and  cost of revenue were $722,000 and $455,000, respectively, in 2004 versus  $567,000  and  $219,000, respectively, in 2003.  The revenues consist of the  following:         (in thousands)         2004    2003    2002                            ------  ------  ------          REVENUE:      Additive              $  299  $  212  $   40      Hardware                 369     161     102      License & royalty         54     194     299                            ----------------------       Total revenue         $  722  $  567  $  441        In the foregoing table "Additive" includes the Platinum Plus FBC products and concentrate; and "Hardware" includes the EPA verified Purifier System, ARIS injectors and dosing systems.       CDT  received  EPA  verification  of  its  Purifier System (FBC and DOC) in October  2003,  and  a  second  verification  for its catalyzed wire mesh filter system  (FBC  and CWMF) in June 2004.  Clean Diesel Technologies has applied for verification for emission reduction by CARB for the CWMF/FBC system as well. The Platinum  Plus  FBC  is  registered  with  the  EPA.       Additive  revenue  has  increased  as  a result of successful demonstration programs and sales of the verified Purifier System which requires the use of the Platinum  Plus  FBC.  The  increase in hardware sales is primarily the result of the EPA- sponsored State of Maine school bus retrofit program and increased ARIS injector  sales  to  Mitsui.       Clean  Diesel  Technologies  identified  a  market  opportunity  for  urea selective  catalytic  reduction  (SCR)  systems  for  use with stationary diesel engines  primarily  for power generation.  The ARIS  is a single-fluid injection and  metering  system  complete  with  an  electronic  control  unit that can be integrated  with  engine  electronic  and  diagnostic  systems.  CDT's  business strategy  is  to license the ARIS NOx reduction system to other companies for an up-front  fee for the technology and information transfer and a separate ongoing royalty  per unit payment.  CDT currently has an exclusive license agreement for both stationary and mobile ARIS applications with Mitsui Ltd. for Japan. CDT has a  nonexclusive  license for both stationary and mobile ARIS applications in the United  States with Combustion Components Associates of Monroe, Connecticut. CDT previously  had  an ARIS stationary license agreement for North America with the RJM  Corporation  of  Norwalk, Connecticut, but as of August 2004 RJM was out of business  and the ARIS license reverted back to CDT.  CDT believes that the ARIS 2000  system  can  most  effectively be commercialized through licensing several companies  with  a related business in these markets.  Clean Diesel Technologies is  actively  seeking  additional  ARIS licensees for both mobile and stationary applications  in  the  US,  Europe  and  Asia.       General  and  administrative  expenses increased to $3,962,000 in 2004 from $2,695,000  in  2003  as  summarized  in  the  following  table:    (in thousands)                                2004     2003     2002                                             -------  -------  -------     Compensation and benefits                   $ 2,535  $ 1,650  $ 1,335 Occupancy                                       420      320      265 Professional                                    740      425      325 Other                                           267      300      366                                             -------  -------  ------- Total general and administrative expenses   $ 3,962  $ 2,695  $ 2,291        Compensation  and  benefit  expense  increased  as of the result of several staff  additions  in  the US and Europe related to increased sales and marketing efforts  and  a new CEO. Occupancy increased in 2004 as a result of the European activity.  Professional  fees  also increased primarily due to the SEC secondary registration process and fund-raising, which was terminated in the fall of 2004.       Research  and  development  expenses  decreased  to  $506,000  in 2004 from $855,000 in 2003. The decrease in research and development in 2004 is due to the 2003 verification testing relating to CARB and EPA testing and the transition to commercial  selling  efforts  in  2004.       Patent  amortization  and  other  costs increased to $90,000 in 2004 versus $58,000  in  2003.  The  2004 increase is related to writing off some patents in 2004  and  the  higher  amortization  related to prior years' capitalized costs.                                          17       Interest  income  increased  to $47,000 in 2004 from $15,000 in 2003 due to the  higher  amount of invested funds related to the November 2003 fund-raising.  LIQUIDITY AND SOURCES OF CAPITAL       Prior  to 2000, Clean Diesel Technologies was primarily engaged in research and  development and has incurred losses since inception aggregating $34,841,000 (excluding  the  effect of the preferred stock dividends).  CDT expects to incur losses  through  the  foreseeable  future  as  it  further  pursues  its commercialization efforts.  Although CDT has begun selling limited quantities of Platinum  Plus  additive  and Purifier Systems and generating ARIS licensing and royalties,  revenue  to  date has been insufficient to cover operating expenses, and  Clean Diesel Technologies continues to be dependent upon sources other than operations  to  finance  its  working  capital  requirements.       For  the  years  ended  2005, 2004 and 2003, Clean Diesel Technologies used cash  of  $4,956,000,  $4,312,000,  and  $2,744,000,  respectively, in operating activities.       At  December 31, 2005, and December 31, 2004, Clean Diesel Technologies had cash  and  cash  equivalents  of  $4,513,000  and  $4,265,000, respectively. The increase in cash and cash equivalents in 2005 from 2004 was due to the timing of Clean  Diesel's fundraising. Working capital increased to $4,521,000 at December 31,  2005,  from  $4,477,000  at  December  31,  2004. CDT anticipates incurring additional  losses  through  at  least  2006  as  it  further  pursues  its commercialization efforts. At the date of this report, Clean Diesel Technologies has  cash  resources  estimated  to  be  sufficient for its needs into the first quarter  of  2007.       In  November  2005, Clean Diesel Technologies received $5.5 million (net of $232,000 in expenses) through a private placement of 8.174 million shares of its common  stock  on  AIM.       In  October  2004,  Clean  Diesel  Technologies  received  $754,000 (net of $25,000 in expenses) through a private placement of 426,500 shares of its common stock  on  AIM.  As  part  of  the  transaction, retired CEO Jeremy Peter-Hoblyn exchanged his deferred salary of $135,400 for 73,587 shares of CDT common stock.       In  September  2004, Clean Diesel Technologies received $1.789 million (net of  $65,000  in expenses) through a private placement of 1,000,000 shares of its common  stock  on  AIM.       In December 2003, Clean Diesel Technologies received $3.583 million (net of $170,000  in  expenses)  through  a private placement of 1,282,600 shares of its common  stock  on  AIM.       In  September  2003, Clean Diesel Technologies received $3.866 million (net of  $39,000  in expenses) through a private placement of 2,395,597 shares of its common  stock  on  AIM.       In  October 2002, Clean Diesel Technologies received $1.356 million (net of $69,000 in expenses) through a private placement of 704,349 shares of its common stock  on  AIM.       In December 2001, Clean Diesel Technologies received $3.721 million (net of expenses)  through  a private placement of 2,580,664 shares of its common stock. In  conjunction  with  the  private placement, CDT converted all of its Series A preferred  stock  to  common  stock.  All  of  CDT's  common  stock  shares were registered  to  trade  on  the  AIM  of  the  London  Stock  Exchange.         In April 2003, Clean Diesel Technologies completed a nonexclusive license agreement  with  Combustion  Component  Associates  Inc.  (CCA)  of  Monroe, Connecticut,  for  the  mobile  ARIS  technology  in the US.  Under terms of the agreement  CCA  agreed  to  pay  CDT  a  nonrefundable  $150,000 license fee and committed  to  spend  an  additional  $100,000  in  developing,  testing  and demonstrating  ARIS  mobile  prototypes.  CDT  recognized  the  $150,000 license revenue in the second quarter of 2003, as there are no ongoing services required to  be  performed  by  CDT.       In  September  2004,  CCA  was  granted  an  additional  limited  two-year nonexclusive  ARIS stationary license for the US market.  The license fee is due at  the  end  of  a  two-year  trial  period.  Similar to the other ARIS license agreements  for  stationary  applications,  a  per unit royalty of approximately $1,500  (based  on  percentage of sales price) is due for each system.   CDT did not  receive  any  revenue  from  this  license  in  2004  or  2005.       In  December  2002,  Clean  Diesel  Technologies  completed  an  additional exclusive  license  agreement  with  Mitsui  for  the mobile ARIS technology for Japan.  Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license fee                                          18  and  Mitsui committed to spend an additional $200,000 in developing, testing and demonstrating  ARIS  mobile  prototypes.  CDT recognized the $250,000 of license revenue  in  the  fourth  quarter  of  2002.       In  August  2001,  Clean  Diesel Technologies completed a license agreement with  Mitsui  for  CDT's  ARIS 2000 NOx control system for all stationary diesel power  generators  in  Japan.  Under  the  agreement, CDT received nonrefundable up-front  license  payments  of  $495,000  and  will  receive  ongoing  standard royalties of $1,500 to $2,500 on each system sold by Mitsui.  Mitsui also had an option  to  license  the ARIS technology for mobile applications in Japan for an additional  license  fee.                       FUTURE  CONTRACTUAL  OBLIGATIONS                            Less than    1 to 3   4 to 5   Over 5 (in thousands)     Total     1 year     years    years    years                    ------  ----------  -------  -------  -------        Operating Leases   $  525  $      179  $   346  $    --  $    --                    ------  ----------  -------  -------  -------  Total              $  525  $      179  $   346  $    --  $    --        The  operating lease consists of a five-year lease for administrative space in  Stamford,  Connecticut,  a  four-year  lease for warehouse space in Milford, Connecticut,  and  a  27-month  office  lease  in  Whyteleafe,  England.  CRITICAL ACCOUNTING POLICIES       The  preparation  of  financial  statements  in  conformity  with generally accepted  accounting  principles  requires  management  to  make  estimates  and assumptions  that  affect  the  amounts reported in the financial statements and accompanying  notes.  Actual  results  can  differ  from  those  estimates.  The Company  believes that of its significant accounting policies (see Note 1 to the Financial Statements), the following may involve a higher degree of judgment and complexity.  REVENUE RECOGNITION       Clean  Diesel  Technologies  generates  revenue  from  the sale of additive including  the  Platinum Plus FBC products and concentrate; "hardware" including the EPA verified Purifier System, ARIS injectors and dosing systems; and license and  royalty  fees  from  the  ARIS  2000  system.       Clean  Diesel  Technologies'  shipping terms are FOB shipping point and CDT recognizes  revenue  when its products are received unless the purchase order or contract  specifically requires the Company to provide installation for hardware purchases.  For  hardware  projects  where  CDT  is responsible for installation either  directly  or  indirectly (third-party contractor), revenue is recognized when  the  hardware  is  installed  and/or  accepted  if  the  project  requires inspection/acceptance.       The  Company  sells  to  end-user  fleets,  municipalities and construction companies  as  well  as  fuel  resellers,  additive  distribution  companies and emission  reduction  companies.       License  revenue  is recognized when the license agreement is entered into, the  license  period  commences, the technology rights, information and know-how have  been  transferred  to  the  licensee  and  CDT  does  not have any ongoing responsibilities  or  performance  requirements  and  collection  is  reasonably assured.  Royalty  income  is  recognized  when  earned.  RESEARCH AND DEVELOPMENT COSTS       Costs  relating  to  the  research, development and testing of products are charged  to  operations as they are incurred. These costs include test programs, salary  and benefits, consultancy fees, materials and certain testing equipment.  PATENT  EXPENSE       CDT capitalizes all direct incremental costs associated with initial patent filing  costs  and  amortizes the cost over the estimated remaining life of such patent.  Patents are reviewed regularly and the remaining carrying amount of any patents  deemed  not  commercial  or  cost  effective  are  written  off.
In  the  opinion  of  management,  with  the  exception  of  exposure  to fluctuations  in  the cost of platinum and the United Kingdom exchange rate, CDT is not subject to any significant market risk exposure. See "Risk Factors of the Business-  Platinum  Price"  in  Item  1,  "Business."                                          19       Clean  Diesel  Technologies generally receives most income in United States dollars.  CDT  typically  makes  several  monthly  payments  in  various foreign currencies  for salary expense, patent expenses, product tests and registration, local  marketing  and  promotion, and consultants.  Clean Diesel also received a portion  of  its  fundraising  proceeds in British Sterling, which is subject to foreign  currency  fluctuations.  NEW ACCOUNTING PRONOUNCEMENTS       FAS Statement 154, "Accounting Changes and Error Corrections" was issued in May  2005  and  is effective for fiscal years beginning after December 15, 2005. Unless  impracticable,  the  statement requires the retrospective application of changes  in  accounting  principle to prior periods' financial statements versus recognizing  the effect in net income of the period of change.  The Company does not  expect the statement to have a material impact on its financial statements.                                          20
REPORT  OF  INDEPENDENT  REGISTERED  PUBLIC  ACCOUNTING  FIRM  Board  of  Directors  and  Stockholders Clean  Diesel  Technologies,  Inc.  We  have  audited  the accompanying balance sheets of Clean Diesel Technologies, Inc.  as of December 31, 2005 and 2004 and the related statements of operations, changes  in  stockholders'  equity and cash flows for each of the three years in the  period  ended  December  31,  2005.  These  financial  statements  are  the responsibility of the Company's management.  Our responsibility is to express an opinion  on  these  financial  statements  based  on  our  audits.  We  conducted  our audits in accordance with the standards of the Public Company Accounting  Oversight  Board  (United  States).  Those standards require that we plan  and  perform  the  audit  to obtain reasonable assurance about whether the financial  statements  are  free  of  material  misstatement.  An audit includes examining,  on  a test basis, evidence supporting the amounts and disclosures in the  financial  statements.  An  audit  also  includes  assessing the accounting principles  used  and  significant  estimates  made  by  management,  as well as evaluating  the  overall  financial statement presentation.  We believe that our audits  provide  a  reasonable  basis  for  our  opinion.  In  our  opinion,  the financial statements referred to above present fairly, in all material respects, the financial position of Clean Diesel Technologies, Inc. as  of December 31, 2005 and 2004 and the results of its operations and its cash flows  for  each  of  the  three  years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.   Eisner  LLP  New  York,  New  York February 15, 2006, except for Note 4 as to which the date is March 3, 2006                                          21    CLEAN DIESEL TECHNOLOGIES, INC. BALANCE SHEETS                                                        (IN THOUSANDS, EXCEPT SHARE DATA)                                                                           ---------            ---------                                                                            2005                 2004                                                                          ---------            ---------    ASSETS CURRENT ASSETS: Cash and cash equivalents                                                $  4,513             $  4,265 Accounts receivable, net of allowance of $11 and $12 in 2005 and   2004,  respectively                                                         125                  145 Inventories                                                                   285                  387 Other current assets                                                           94                   71 Subscription receivable, net                                                  488                   --                                                                          ---------            --------- TOTAL CURRENT ASSETS                                                        5,505                4,868 Patents, net                                                                  567                  418 Fixed assets, net of accumulated depreciation of $259 in 2005 and     $188 in 2004, respectively                                                175                  200 Other assets                                                                   27                   27                                                                          ---------            --------- TOTAL ASSETS                                                             $  6,274             $  5,513                                                                          =========            =========  LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Deferred revenue                                                         $      9             $     -- Accounts payable and accrued expenses                                         487                  391                                                                          ---------            ---------     TOTAL CURRENT LIABILITIES                                                 496                  391  Commitments (Note 6)  STOCKHOLDERS' EQUITY: Preferred stock, par value $0.05 per share,   authorized 100,000, no shares issued and outstanding                                              -- Common stock, par value $0.05 per share, authorized   30,000,000 shares, issued and outstanding 25,369,358   and 17,165,868 shares, respectively                                       1,268                  858 Common stock, par value $0.05 per share, subscribed and to be issued; 705,113 shares in 2005                                                 35 Additional paid-in capital                                                 44,068               38,431 Accumulated deficit                                                       (39,593)             (34,167)                                                                          ---------            --------- TOTAL STOCKHOLDERS' EQUITY                                                  5,778                5,122                                                                          ---------            --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $  6,274             $  5,513                                                                          =========           ==========  See accompanying notes.                                           22    CLEAN DIESEL TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS                           (IN THOUSANDS, EXCEPT PER SHARE DATA)                                                      FOR THE YEAR ENDED DECEMBER 31,                                             -------------------------------------------- Revenue:                                       2005             2004             2003                                             ----------       ----------       ----------         Additive revenue                        $     411        $     299        $     212     Hardware revenue                              349              369              161     License and royalty revenue                    52               54              194                                             ----------       ----------       ---------- Total revenue                                     812              722              567  Costs and expenses:     Cost of revenue                               471              455              219     General and administrative                  4,963            3,962            2,695     Research and development                      439              506              855     Patent amortization and other expense         170               90               58                                             ----------       ----------       ----------  Loss from operations                           (5,231)          (4,291)          (3,260) Other income (expense)     Foreign currency exchange gain (loss)        (221)             101               --     Interest income                                26               47               15                                             ----------       ----------       ----------  Net loss                                    $  (5,426)       $  (4,143)       $  (3,245)                                             ==========       ==========       ==========  BASIC AND DILUTED LOSS PER COMMON SHARE     $   (0.30)       $   (0.26)       $   (0.26)                                             ==========       ==========       ==========  WEIGHTED-AVERAGE NUMBER OF COMMON       SHARES OUTSTANDING                       18,389           16,071           12,721                                             ==========       ==========       ==========  See accompanying notes.                                           23    CLEAN DIESEL TECHNOLOGIES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                                                        (IN THOUSANDS)                                                         Common Stock                                   Common Stock         To be Issued      Additional                     Total                                -------------------  -------------------    Paid-in    Accumulated    Stockholders'                                 Shares    Amount     Shares    Amount      Capital      Deficit         Equity                                --------  ---------  --------  ---------  ----------  -------------  ---------------         Balance at December 31, 2002     11,968  $     598        --         --  $  28,519   $   ( 26,779)  $        2,338 Net loss for year                    --         --                              --         (3,245)          (3,245) Exercise of warrants                 17          1                              (1)            --               -- Issuance of common stock          3,679        184                           7,265             --            7,449 Payment of directors' fees in   common stock                       13          1                              26             --               27 Exercise of warrants                  2         --                               4             --                4                                --------  ---------  --------  ---------  ----------  -------------  ---------------  Balance at December 31, 2003     15,679  $     784        --         --  $  35,813   $   ( 30,024)  $        6,573  Net loss for year                    --         --                              --         (4,143)          (4,143) Options exercised                    34          2                              87             --               89 Issuance of common stock          1,427         71                           2,472             --            2,543 Payment of directors' fees in        26          1                              56                              57   common stock                                                                                 -- Broker fee credit from 2003                                                      3                               3                                --------  ---------  --------  ---------  ----------  -------------  ---------------  Balance at December 31, 2004     17,166  $     858        --         --  $  38,431   $   ( 34,167)  $        5,122  NET LOSS FOR YEAR                                                                          (5,426)          (5,426) OPTIONS EXERCISED                     2         --                               2             --                2 ISSUANCE OF COMMON STOCK          8,174        409                           5,113             --            5,522 COMMON STOCK SUBSCRIBED AND TO BE ISSUED                                             705         35        453                             488                                --------  ---------  --------  ---------  ----------  -------------  --------------- PAYMENT OF DIRECTORS' FEES IN        27          1                              69             --               70   COMMON STOCK                                --------  ---------  --------  ---------  ----------  -------------  ---------------  BALANCE AT DECEMBER 31, 2005     25,369  $   1,268       705  $      35  $  44,068   $    (39,593)  $        5,778                                ========  =========  ========  =========  ==========  =============  ===============  See accompanying notes.                                           24    CLEAN DIESEL TECHNOLOGIES, INC. STATEMENTS OF CASH FLOW                                                                         (IN THOUSANDS)                                                                             FOR THE YEARS ENDED DECEMBER 31,                                                                          -------------------------------------                                                                             2005         2004         2003                                                                          -----------  -----------  -----------     OPERATING ACTIVITIES Net loss                                                                 $   (5,426)  $   (4,143)  $   (3,245) Adjustments to reconcile net loss to cash used in operating activities:   Depreciation and amortization                                                 163          132           81   Write-off of inventory and patents and bad debt                                89           19           --   Non-cash compensation expense for stock options                                --           88           -- Changes in operating assets and liabilities:   Accounts receivable                                                             7          (40)         169   Inventories                                                                    59          (76)          (6)   Other current assets and security deposits                                    (23)          (7)           3   Deferred compensation and pension benefits                                     --         (306)          --   Accounts payable and accrued expenses                                         175           21          254                                                                          -----------  -----------  -----------  Net cash used in operating activities                                        (4,956)      (4,312)      (2,744)                                                                          -----------  -----------  -----------  INVESTING ACTIVITIES Patent costs                                                                   (235)        (186)        (192) Purchase of fixed assets                                                        (85)        (164)         (85)                                                                          -----------  -----------  ----------- Net cash used in investing activities                                          (320)        (350)        (277)                                                                          -----------  -----------  -----------  FINANCING ACTIVITIES Proceeds from exercise of stock options                                           2            1            4 Proceeds from broker fee credit                                                  --            3           -- Proceeds from issuance of common stock, net                                   5,522        2,408        7,449                                                                          -----------  -----------  -----------  Net cash provided by financing activities                                     5,524        2,412        7,453                                                                          -----------  -----------  -----------  NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            248       (2,250)       4,432 Cash and cash equivalents at beginning of the year                            4,265        6,515        2,083                                                                          -----------  -----------  -----------  CASH AND CASH EQUIVALENTS AT END OF THE YEAR                             $    4,513   $    4,265   $    6,515                                                                          ===========  ===========  ===========  NON-CASH FINANCING ACTIVITIES  Payment of accrued directors' fees in common stock                       $       70   $       57   $       28 Stock issued as payment for deferred compensation                                            135           -- Common stock subscribed                                                         488           --           --  See accompanying notes.                                           25  CLEAN DIESEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS  1.   BUSINESS  AND  BASIS  OF  PRESENTATION       Clean  Diesel  Technologies,  Inc.  ("CDT" or "Clean Diesel" or "Company"), located  in  Stamford  Connecticut  was incorporated in the State of Delaware on January  19,  1994.  Clean  Diesel is a specialty chemical and energy technology company  supplying  fuel  additives  and  proprietary  systems to reduce harmful emissions  from  internal  combustion engines while improving fuel economy. Over the past several years the Company has filed patents, developed its technologies and  is  now  commercializing  Platinum  Plus,  a fuel borne catalyst (FBC); the Purifier  System,  which  includes  the  FBC  combined with a traditional diesel oxidation  catalyst;  the  FBC/catalyzed wire mesh filter (CWMF) system; and the ARIS  NOx  reduction  system  through  a direct sales and licensing distribution strategy.  CDT  is  developing  a  network  of licensed distributors to sell and market  its patented Platinum Plus FBC, EPA verified Purifier System and the EPA verified  FBC/CWMF  system.  CDT  continues to market and sell the FBC, Purifier and  CWMF  systems  to  key  corporate  fleets  to  generate  demand  for  its technologies.  CDT's  strategy  for the ARIS NOx reduction system is to continue licensing the patented technology to engineering and automotive companies for an up-front  license  fee and an ongoing royalty. The success of CDT's technologies will  depend  upon  the  commercialization  opportunities  of  the technologies, governmental  regulations,  and corresponding foreign and state agencies.  CDT's raw  materials  are  maintained  offsite  and  the  majority of its blending and manufacturing  is  performed  by  third  parties.  During  2005,  2004  and  2003, the Company incurred net losses of approximately $5.4  million,  $4.1 million and $3.2 million, respectively, and at December 31, 2005,  has an accumulated deficit of approximately $40 million. In addition, net cash  used  in  operating  activities  for the year ended December 31, 2005, was approximately  $5  million.  Commencing in 2006, the Company initiated a plan to reduce  administrative  overhead,  primarily  through  the  reduction  of  cash compensation  to  certain  employees and the elimination of several consultants. In  addition  the  Company completed a private placement of its common stock and raised  net  proceeds  of  approximately  $6.0 million of which $5.5 million was received  in  the  fourth  quarter  of 2005 and $0.5 million was received in the first  quarter of 2006.  Based on a forecast of 2006 cash flows and factoring in cash  on  hand  at December 31, 2005, of $4.5 million and the Company's plans as described  above,  management  believes  that  the  company will have sufficient working  capital  to  fund  its  operations  in  2006.  2.   SIGNIFICANT  ACCOUNTING  POLICIES  USE OF ESTIMATES       The  preparation  of the financial statements in conformity with accounting principles  generally  accepted  in  the  United  States  of  America  requires management to make estimates and assumptions that affect the reported amounts of assets  and  liabilities and disclosures of contingent assets and liabilities at the  date  of  the  financial statements and the reported amounts of revenue and expenses  during  the period.  Actual results could differ from those estimates.  CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS       Clean  Diesel  Technologies  considers  all  highly liquid investments with original  maturities  of  three  months  or  less  when  purchased  to  be  cash equivalents.  At  December  31,  2005,  substantially all of CDT's cash and cash equivalents  were  on  deposit  with  two financial institutions.  All financial instruments  are  reflected  in  the accompanying balance sheets at amounts that approximate  fair  market  value.  FOREIGN CURRENCY       The US dollar is considered the functional currency for CDT.  CDT maintains a  UK  bank  account  for  its  UK  representative  office.  Foreign  currency translation  gains  or  losses  are  recognized in the period incurred, which is included in other income/(expense) in the accompanying statements of operations. CDT  recorded a foreign currency loss of $221,000 on its UK bank holding in 2005 versus  a  gain  of  $101,000  in  2004.  INVENTORIES       Inventories  are  stated  at the lower of cost or market and consist of the following:        (in thousands)                2005   2004                                  -----  -----        Finished Platinum Plus FBC   $  59  $ 142     Platinum concentrate/metal     119    150     Hardware (ARIS and Purifier)    55     77     Other                           52     18                                  -----  -----     Total inventory              $ 285  $ 387                                           26  CLEAN  DIESEL  TECHNOLOGIES,  INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)  REVENUE RECOGNITION       Clean  Diesel  generates  revenue  from the sale of additives including the Platinum  Plus FBC products and concentrate; hardware including the EPA verified Purifier System, ARIS injectors and dosing systems; and license and royalty fees from  the  ARIS  System.       CDT  shipping  terms are FOB shipping point, but revenue is recognized when its  products  are  received  and  collections are reasonably assured unless the purchase order or contract specifically requires CDT to provide installation for hardware  purchases.  For  hardware  projects  where  CDT  is  responsible  for installation  either directly or indirectly (third-party contractor), revenue is recognized  when  the  hardware  is  installed  and/or  accepted  if the project requires  inspection/acceptance.       For  2005,  a  single customer accounted for 24% of Clean Diesel's revenue. For 2004, a different customer accounted for 35% of Clean Diesel's revenue.  For 2003, two customers, including the 2004 key customer, accounted for 59% of Clean Diesel's  revenue.       License  revenue  is recognized when the license agreement is entered into, the  license  period  commences, the technology rights, information and know-how have  been  transferred  to  the  licensee  and  CDT  does  not have any ongoing responsibilities  or  performance  requirements  and  collection  is  reasonably assured.  Royalty  income  is  recognized  when  earned.       In  August  2001,  Clean Diesel Technologies completed an exclusive license agreement  with Mitsui Ltd. for CDT's ARIS NOx control system for all stationary diesel  power generators in Japan for the remaining life of the patents, through 2018.  Under  the  agreement,  CDT  received  a  nonrefundable  up-front license payment  of  $495,000,  and  will  receive ongoing standard royalties of between $1,500  and  $2,500  on  each  system sold by Mitsui. CDT recognized the license payment  as  revenue in 2001, as there are no significant ongoing services to be performed  by  CDT.       In  December  2002,  Clean  Diesel  Technologies  completed  an  additional exclusive license agreement with Mitsui for the mobile ARIS technology for Japan for  the  remaining  life  of  the  patents,  through  2018.  Under terms of the agreement  Mitsui  agreed to pay CDT a $250,000 license fee and Mitsui committed to  spend  an  additional $200,000 in developing, testing and demonstrating ARIS mobile  prototypes.  CDT  recognized  the $250,000 license revenue in the fourth quarter  of  2002.       In  May 2005, CDT and Mitsui Ltd. mutually agreed to transfer both Mitsui's exclusive  ARIS mobile and stationary licenses to DENOX Inc. of Japan.  DENOX is a  former  joint venture of Mitsui.  No additional license fees or payments were involved  and  DENOX  agreed  to  the  same  per unit royalties and terms of the original  license  agreement.       In  April  2003, Clean Diesel Technologies completed a nonexclusive license agreement  with  Combustion  Component  Associates  Inc.  (CCA)  of  Monroe, Connecticut,  for the mobile ARIS technology in the US for the remaining life of the  patents, through 2018.  Under terms of the agreement, CCA agreed to pay CDT a  $150,000  nonrefundable  license  fee  and the licensee committed to spend an additional  $100,000  in  developing,  testing  and  demonstrating  ARIS  mobile prototypes.  CDT will also receive ongoing royalty payments on a per unit basis. CDT  recognized  the  $150,000 license revenue in the second quarter of 2003, as there  are  no  significant  ongoing  services  required to be performed by CDT.       In  September  2004,  CCA  was granted a limited two-year nonexclusive ARIS stationary license for the US market.  The license fee of $150,000 is due by the end  of  a  two-year trial period.  Similar to the other ARIS license agreements for  stationary  applications, a per unit royalty of approximately $1,500 (based on  percentage  of  sales  price) is due for each ARIS system sold.  CDT did not recognize  any  revenue  from  this  license  in  2004  and  2005.  GEOGRAPHIC INFORMATION       CDT  sells  its  Platinum  Plus  additives  and  licenses  its ARIS systems throughout  the  world.  A  geographic  breakdown  of  revenue  consists  of the following:                                          27    CLEAN  DIESEL  TECHNOLOGIES,  INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)       (in thousands)   2005    2004    2003                      ------  ------  ------          REVENUE:      US              $  675  $  468  $  364      UK/Europe           48       2       9      Asia                89     252     194                      ------  ------  ------      Total revenue   $  812  $  722  $  567        Patents held by Clean Diesel consist of capitalized patent costs net of accumulated amortization and are as follows:         (in thousands)          2005   2004                             -----  -----         US patents, net        $ 138  $  79      Foreign patents, net     429    339                             -----  -----      Total patents, net     $ 567  $ 418   PATENT  EXPENSE       CDT capitalizes all direct incremental costs associated with initial patent filing  costs  and  amortizes the cost over the estimated remaining life of such patent.  Patents  are reviewed regularly and the remaining carrying value of any patents deemed not commercial or cost effective are written off.  The expiration dates  of CDT's patents, in numerous countries throughout the world, ranges from 2006  to  2025.  RESEARCH AND DEVELOPMENT COSTS       Costs  relating  to  the  research, development and testing of products are charged  to  operations as they are incurred. These costs include test programs, salary  and benefits, consultancy fees, materials and certain testing equipment.  GENERAL AND ADMINISTRATIVE EXPENSE       General  and  administrative  expense  is  summarized  as  the  following:    (in  thousands)                             2005    2004    2003                                            ------  ------  ------     Compensation and benefits                  $3,319  $2,535  $1,650 Occupancy                                     485     420     320 Professional                                  831     740     425 Other                                         328     267     300                                            ------  ------  ------ Total general and administrative expense   $4,963  $3,962   2,695   STOCK-BASED COMPENSATION       Clean  Diesel  Technologies  accounts  for  employee/director  stock option grants  in  accordance  with  Accounting  Principles Board (APB) Opinion No. 25, "Accounting  for  Stock  Issued  to Employees," and its related interpretations. Under  CDT's  current  plan,  options  may  be granted at not less than the fair market  value  on  the  date  of  grant and therefore no compensation expense is recognized  for  the  stock  options  granted  to  employees.       If  compensation  expense  for  CDT's plan had been determined based on the fair  value  at  the  grant dates for awards under its plan, consistent with the method  described  in  SFAS  No.  123  as  amended, CDT's net loss and basic and diluted  loss  per common share would have been as follows on a pro forma basis:                                                                         2005      2004      2003                                                                    --------  --------  --------          Net loss attributable to common stockholders as reported      $(5,426)  $(4,143)  $(3,245)      Add: Stock-based compensation expense included in reported          net loss, net of related tax effects                           --        88        --      Deduct: Total stock-based employee compensation expense          determined under fair value-based method for all awards,          net of related tax effects                                   (875)     (826)   (1,176)                                                                    ----------------------------      Pro forma net loss attributable to common stockholders        $(6,301)  $(4,881)  $(4,421)      Net loss per share attributable to common stockholders:      Basic and diluted net loss per common share-as reported       $ (0.30)  $ (0.26)  $ (0.26)      Basic and diluted per common share-pro forma                  $ (0.34)  $ (0.30)  $ (0.35)                                           28  CLEAN  DIESEL  TECHNOLOGIES,  INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)       In  December  2004,  the  FASB  issued SFAS No 123R, "Share-Based Payment," which  requires  all  share-based  payments  to  employees,  including grants of employee stock options, to be recognized in the income statement as an operating expense,  based on their fair values on the grant date.  Pro forma disclosure is no  longer an alternative.  That cost will be recognized as compensation expense over  the  service  period,  which  would normally be the vesting period  of the options. The effective date of SFAS No. 123R for the Company is January 1, 2006. As  permitted  by  SFAS  No. 123, the Company currently accounts for share-based payments to employees using APB Opinion  No. 25's intrinsic value method and, as such,  recognizes no compensation cost for employee stock options unless options granted  have  an  exercise  price  below  market  value  on  the date of grant. Accordingly,  the  adoption  of  SFAS  No. 123R's fair value method could have a significant impact on the Company's results of operations, although it will have no  impact  on the Company's overall financial position.  The impact of adoption of  SFAS  No.  123R  cannot  be predicted at this time because it will depend on various  factors including levels of share-based payments granted in the future.       In  March  2005,  the  Board  of  Directors  elected to vest all employees' outstanding,  unvested  2003 option grants and up to 25,000 unvested 2004 option grants.  Since  the market price at the time of the vesting was below the option grant  price, no additional expense was recognized on the Company's statement of operations.  The  remaining  compensation  value  for the 363,000 of accelerated unvested  option  grants  was  $498,000  and  is included in the pro forma table above.  The  CDT  Board's  decision  to  accelerate  the vesting of these option grants  was  in  response  to  the issuance by the FASB of SFAS No. 123R, "Share Based  Payment."  As  a  result  of  this  measure,  CDT will not be required to recognize  any  compensation  expense  in  future  periods associated with these option  grants.       The fair value of each option grant, for pro forma disclosure purposes, was estimated  based  on  the  date  of  grant  using  the  modified  Black-Scholes option-pricing  model  with  the  following  weighted-average  assumptions:                                          2005       2004       2003                                    ---------  ---------  ---------             Expected dividend yield         0.0%       0.0%       0.0%         Risk-free interest rate         4.2%       4.2%       4.1%         Expected volatility           106.9%      99.4%      99.4%         Expected life of option      4 YEARS    4 years    4 years        The weighted-average fair value per option granted was calculated as $0.86, $1.39 and $2.10 in 2005, 2004 and 2003, respectively.  BASIC AND DILUTED LOSS PER COMMON SHARE       Basic  and diluted loss per share is calculated in accordance with SFAS No. 128,  "Earnings  Per  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 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.  CDT's  computation of diluted net loss per share  for  2005,  2004  and  2003  does  not  include  common share equivalents associated  with  3,246,000,  2,668,000 and 2,248,000 options, respectively, and 507,000,  532,000  and  557,000  warrants,  respectively, as the result would be anti-dilutive.  3.   INCOME  TAXES  The  Company  follows  the liability method of accounting for income taxes. Such method  requires  recognition  of  deferred  tax  liabilities and assets for the expected  future  tax  consequences  of  events  that  have been included in the financial  statements  or  tax  returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of  assets  and  liabilities  using  enacted tax rates in effect for the year in which  the  differences  are  expected  to  reverse.       At  December  31,  2005,  Clean  Diesel had tax losses available for offset against  future  years'  taxable income of approximately $32.5 million, expiring between  2009  and  2025.  Temporary  differences  were  insignificant as of the balance  sheet dates.  CDT has provided a full valuation allowance to reduce the related  deferred  tax  asset  to  zero  because  of the uncertainty relating to realizing  these  tax  benefits  in  the  future.                                          29  CLEAN  DIESEL  TECHNOLOGIES,  INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)       Under  the  provisions  of  the  United  States  Tax  Reform  Act  of 1986, utilization  of CDT's US federal tax loss carry forwards for the period prior to December  12, 1995, may be limited as a result of the ownership change in excess of  50% related to the 1995 Fuel Tech Rights Offering.  Losses subsequent to the aforementioned  date  may  be limited due to cumulative ownership changes in any three-year  period.  4.   STOCKHOLDERS'  EQUITY       During  2005,  Clean  Diesel  received  proceeds  of  $5.5  million (net of expenses) through a private placement of approximately 8.2 million shares of its common stock on the AIM of the London Stock Exchange.  In addition, Clean Diesel received  subscriptions  for  an additional $487,500 (net of expense) related to the  above  transaction for 0.7 million  shares of its common stock of which all $487,500  had  been  received  by March 3, 2006.  In 2004, Clean Diesel received cash  proceeds  of $2.4 million (net of expenses) through two private placements totaling  approximately 1.4 million shares of its common stock on the AIM of the London  Stock  Exchange.  In  2003,  proceeds  of $7.5 million (net of expenses) through  two private placements totaling approximately 3.7 million shares of its common  stock  on  the  AIM  of  the  London  Stock  Exchange  were  received.       In  June  2005,  July  2004 and October 2003, CDT issued 27,179, 26,031 and 13,276  shares,  respectively, of common stock to its Board of Directors in lieu of  approximately  $70,000, $56,500 and $27,500 of directors' fees pertaining to their services for the years ended December 31, 2004, 2003 and 2002.   The share price  used  represented  the  average of CDT's quarter-end high and low trading prices.  Such  directors'  fees  had  been accrued and charged to expense during 2004,  2003  and  2002.  5.   STOCK  OPTIONS  AND  WARRANTS       Clean  Diesel  maintains  a  stock award plan, the 1994 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 or non-share-based  awards,  or  combinations  thereof.  CDT  grants awards at fair market  value  on the date of grant with expiration dates of typically 10 years. Participants  in  the  Plan  may  include  CDT's directors, officers, employees, consultants  and  advisors  (except  consultants  or advisors in capital-raising transactions) as the directors determine are key to the success of the business. The percentage of outstanding common shares of CDT used to determine the maximum number  of awards to participants is 17.5%.  In general, the policy of the Board was  to grant stock options vesting in three equal portions on the first through third  anniversaries  of  the  grant date for grants prior to 1997, and in equal portions  on  the grant date and the first and second anniversaries of the grant date  for  grants  awarded  after  1997.       The  following  table  presents  a  summary  of Clean Diesel's stock option activity  and  related  information  for  the  years  ended  December  31:                                                  2005                             2004                             2003                                  ----------------------------------------------------------------  -------------------------------                                    OPTIONS     WEIGHTED-AVERAGE     OPTIONS     WEIGHTED-AVERAGE     OPTIONS     WEIGHTED-AVERAGE                                    (000'S)      EXERCISE PRICE      (000'S)      EXERCISE PRICE      (000'S)      EXERCISE PRICE                                  ----------------------------------------------------------------  -------------------------------        Outstanding, beginning   of year                              2,668   $            2.39        2,248   $            2.45         1,567  $            2.60 Granted                                  674                1.17          469                1.97           681               2.12 Exercised                                 (2)               0.90          (49)               1.22            --                 -- Forfeited                                (94)               4.93           --                  --            --                 --                                  ----------------------------------------------------------------  ------------------------------- Outstanding, end   of year                              3,246   $            2.06        2,668   $            2.39         2,248  $            2.45                                  ================================================================  =============================== Exercisable, end   of year                              2,835   $            2.19        2,197   $            2.47         1,711  $            2.49 Weighted-average fair value of options granted during the year                $            0.86                $            1.39                $            2.10                                           30    CLEAN DIESEL TECHNOLOGIES, INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)  The following table summarizes information about stock options outstanding at December 31, 2005:                      OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE =====================================================================  ============================                                WEIGHTED-AVERAGE    RANGE OF       NUMBER OF  REMAINING CONTRACTUAL  WEIGHTED-AVERAGE   NUMBER OF   WEIGHTED-AVERAGE EXERCISE PRICES    OPTIONS       LIFE IN YEARS       EXERCISE PRICE     OPTIONS     EXERCISE PRICE - ---------------------------------------------------------------------  ----------------------------       $ .20 - $2.49     2,177,437           7.55                $1.54         1,766,435       $1.62  2.50 -  4.63     1,063,500           5.42                 3.11         1,063,500        3.11  5.63 -  6.82         5,000           0.42                 5.63             5,000        5.63 - --------------------------------------------------------------------------------------------------- $0.20 - $6.82     3,245,937           6.84                $2.06         2,834,935       $2.19        In conjunction with the September 2003 stock offering, Clean Diesel granted the  private placement investors 230,240 warrants (approximately one warrant for each  10 shares of common stock purchased) at the same $1.63 price as the common stock  issued.       The following table presents a summary of Clean Diesel warrant activity and related  information  for  the  years  ended  December  31:                                               Clean Diesel Warrants                                  2005                        2004                        2003                         --------------------------  --------------------------  --------------------------                         Warrants   EXERCISE PRICE   Warrants   EXERCISE PRICE   Warrants   EXERCISE PRICE                          (000'S)      PER SHARE      (000'S)      PER SHARE      (000'S)      PER SHARE                         --------------------------  --------------------------  --------------------------        Outstanding, beginning   of year                    532   $1.50  - $10.00       557   $ 1.50 - $10.00       379   $ 1.50 - $10.00 Granted                        -                 -        --                --       230   $          1.63 Exercised                      -                 -        --                --       (19)  $   1.50 - 2.00 Forfeited or expired         (25)  $          3.00       (25)  $         10.00       (33)                -                         ---------------------------------------------------------------------------------- Outstanding, end   of year                    507   $  1.50 - $2.25       532   $ 1.50 - $10.00       557   $ 1.50 - $10.00                         ==================================================================================                    WARRANTS  OUTSTANDING                                  WARRANTS EXERCISABLE ================================================================  ===============================                              WEIGHTED-AVERAGE RANGE OF          NUMBER OF  REMAINING YEARS   WEIGHTED-AVERAGE                  WEIGHTED-AVERAGE EXERCISE PRICES   WARRANTS    EXERCISE LIFE     EXERCISE PRICE      EXERCISABLE      PRICE - ----------------------------------------------------------------  ------------------------------       $1.50 - $2.00       466,908         5.58              $1.73          466,908          $1.73      2.25            39,825         4.40               2.25           39,825           2.25 - ------------------------------------------------------------------------------------------ $1.50 - $2.25       506,733         5.49              $1.77          506,733          $1.77   6.   COMMITMENTS       Clean Diesel is obligated under a sublease agreement through March 2009 for its  principal  office,  through  July 2008 for its Connecticut warehouse space, and  through  September  2007  for  its  Surrey,  England, administrative space. Annual  rent  including  utilities  is $125,000 for the US administrative space, $21,000  for  the  warehouse  space and $33,000 for the UK administrative space. For  the  years  ended  December  31,  2005,  2004  and  2003,  rental  expense approximated  $162,000,  $128,000  and  $111,000,  respectively.       Effective  October 28, 1994, Fuel Tech granted two licenses to Clean Diesel for  all  patents  and  rights  associated  with  its  platinum  fuel  catalyst technology.   Effective  November  24, 1997, the licenses were canceled and Fuel Tech  assigned to CDT all such patents and rights on terms substantially similar to  the  licenses.  In  exchange  for  the  assignment, CDT will pay Fuel Tech a royalty  of  2.5%  of  its  annual gross revenue from sales of the platinum fuel catalysts  commencing  in  1998. The royalty obligation expires in 2008. CDT may terminate  the  royalty  obligation  to  Fuel Tech by payment of $3.3 million in 2006,  $2.2  million in 2007 or $1.1 million in 2008.  CDT as assignee and owner will  maintain  the  technology  at its own expense. Royalties incurred in 2005, 2004  and  2003  amounted to $10,300 $7,450 and $4,800, respectively.  Royalties payable  to  Fuel  Tech at December 31, 2005, 2004 and 2003 were $10,300, $7,450 and  $4,800,  respectively.  7.   RELATED  PARTY  TRANSACTIONS       Clean  Diesel  has  a Management and Services Agreement with Fuel Tech. The agreement  requires Clean Diesel to reimburse Fuel Tech for management, services and  administrative  expenses incurred on behalf of Clean Diesel.   Clean Diesel agreed  to  pay Fuel Tech a fee equal to an additional 3 to10% of the costs paid on  Clean  Diesel's  behalf,  dependent                                          31  CLEAN  DIESEL  TECHNOLOGIES,  INC. NOTES  TO  FINANCIAL  STATEMENTS  (CONTINUED)  upon the nature of the costs incurred.  One Fuel Tech officer/director serves as an  officer/director  of Clean Diesel.  The financial statements include charges from Fuel Tech of certain management and administrative costs, which approximate $71,000,  $69,000  and  $69,000  for the years ended December 31, 2005, 2004 and 2003,  respectively.       Clean  Diesel  had  a  deferred salary plan with its former Chief Executive Officer  in  which he deferred $62,500 of his annual salary until CDT reaches $5 million  in  revenue.  This  agreement  was  terminated  in  March  2001 and the executive's  salary  was returned to full pay.  In October 2004 as part of Clean Diesel's  private placement on the AIM exchange, the former CEO exchanged all of his  outstanding  $135,400  of  deferred compensation for 73,587 shares of CDT's common  stock.       Clean  Diesel  made  annual  pension  payments  or  accruals  pursuant to a deferred  compensation plan on behalf of its former Chief Executive Officer. The former  CEO also agreed to defer payment of the deferred compensation plan until the  Company  reached  $5 million in revenue or he retired. In June 2003 the CEO elected  to  discontinue  his  deferred  compensation  plan.  For the year ended December  31,  2003,  $22,900  of  expense was recognized in connection with the plan.  In  September 2004, the CEO retired and in October 2004 the full $305,600 balance  was  paid.  8.   MARKETING  AND  JOINT  DEVELOPMENT  AGREEMENTS       Clean  Diesel and AMBAC International reached an agreement in December 1997 under  which  the  parties  will jointly share in the cost of development of the ARIS  injector  for  urea  SCR  (selective  catalytic  reduction).  CDT  holds  the  exclusive marketing rights to the injector for a period of five years  subject  to certain minimum purchases of injectors from AMBAC. CDT agreed to  purchase  injectors exclusively from AMBAC until November 3, 2002, or to pay AMBAC  for  50%  of  AMBAC's  development  cost  and a royalty on injectors made elsewhere  for  CDT.  No rights or licenses have been granted by either party to the  other  on  patents or inventions conceived prior to the agreement. However, the  parties  have  filed  a joint patent on the specific ARIS injector. CDT has retained  all  rights  to  its  underlying  patents  including  the  fundamental return-flow  injection  concept  on which the US Patent Office has granted CDT a patent.  9.   RECENT  ACCOUNTING  PRONOUNCEMENTS       FAS Statement 154, "Accounting Changes and Error Corrections" was issued in May  2005  and  is effective for fiscal years beginning after December 15, 2005. Unless  impracticable,  the  statement requires the retrospective application of changes  in  accounting  principle to prior periods' financial statements versus recognizing  the effect in net income of the period of change.  The Company does not  expect the statement to have a material impact on its financial statements.  10.  QUARTERLY  FINANCIAL  DATA  (UNAUDITED)           (IN THOUSANDS EXCEPT PER SHARE DATA)                                                       1st Quarter      2nd Quarter      3rd Quarter      4th Quarter                                                   Ended 3/31/05    Ended 6/30/05    Ended 9/30/05    Ended 12/31/05    Total Year                                                     Unaudited        Unaudited        Unaudited        Unaudited          2005                                                  ---------------------------------------------------------------------------------       TOTAL REVENUE                                    $          192   $          268   $          166   $           186   $       812 GROSS PROFIT *                                               82              107               64                88           341  NET LOSS ATTRIBUTABLE TO    COMMON STOCKHOLDERS          (1,191)          (1,286)          (1,489)           (1,460)       (5,426)  BASIC NET LOSS PER COMMON SHARE                           (0.07)           (0.07)           (0.09)            (0.07)        (0.30)  DILUTED NET LOSS PER COMMON SHARE                         (0.07)           (0.07)           (0.09)            (0.07)        (0.30)                                           32                                                       1st Quarter      2nd Quarter      3rd Quarter      4th Quarter                                                   Ended 3/31/04    Ended 6/30/04    Ended 9/30/04    Ended 12/31/04    Total Year                                                     Unaudited        Unaudited        Unaudited        Unaudited          2004                                                  ---------------------------------------------------------------------------------       Total revenue                                    $          194   $           93   $          241   $           194   $       722 Gross profit *                                               62               40               92                73           267 Net loss attributable to common stockholders                                        (808)            (885)          (1,243)           (1,207)       (4,143) Basic net loss per common share                           (0.05)           (0.06)           (0.08)            (0.07)        (0.26) Diluted net loss per common share                         (0.05)           (0.06)           (0.08)            (0.07)        (0.26) - ----------------------------------------------------------------------------------------------------------------------------------  Note:  The sum of the quarters' earnings per share may not equal the full-year per share amounts. * Gross profit is defined as total revenue less cost of revenue.
None.
As of the date of this filing, an evaluation was performed under the supervision and with the participation of the Company's management, including its CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures.  Based on that evaluation, the Company's management, including its CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2005. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2005.
NONE  PART III
Information  regarding  directors and executive officers of CDT will be set forth  under  the  captions  "Election  of  Directors", "Directors and Executive Officers  of  Clean  Diesel Technologies" and "Committees of the Board" in CDT's Proxy  Statement  related to the 2006 annual meeting of stockholders (the "Proxy Statement")  and  is  incorporated  by  reference  herein.       Clean Diesel has adopted a code of Ethics and Business Conduct (the "Code") that  applies  to  all  employees,  officers  and Directors, including the Chief Executive  Officer,  Chief Financial Officer and Controller.  A copy of the code is  available free of charge on written or telephone request to the Secretary of the  Company  at the address or telephone number of the Company set out in Clean Diesel's  annual  report  to  Stockholders.
Information  required  by  this  item  will  be set forth under the caption "Executive Compensation" in the Proxy Statement and is incorporated by reference herein  excluding,  however,  the  information under the captions "Report of the Board  of Directors on Executive Compensation" and "Performance Graph," which is not  incorporated  by  reference.  ITEM  12.  SECURITY  OWNERSHIP  OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED  STOCKHOLDERS  MATTERS       Information  required  by  this  item  will  be set forth under the caption "Principal  Stockholders  and  Stock  Ownership  of  Management"  in  the  Proxy Statement  and  is  incorporated  by  reference  herein.                                          33
Information  required  by  this  item  will be set forth under the captions "Compensation  Committee  Interlocks  and  Insider  Participation"  and "Certain Relationships  and  Related  Transactions"  in  the  Proxy  Statement  and  is incorporated  by  reference  herein.
Information required by this item will be set forth under the caption "Audit Fees" in the Proxy Statement and is incorporated by reference herein.  PART IV  ITEM  15.  EXHIBITS  AND  FINANCIAL  STATEMENT  SCHEDULES  (A)  (1)  FINANCIAL  STATEMENTS      The  Financial  Statements  identified below and required by Part II, Item      8 of this Form 10-K are set forth above.                Report  of  Independent  Registered  Public  Accounting  Firm                Balance  Sheets  as  of  December  31,  2005,  and  2004                Statements  of  Operations for the years ended December 31, 2005,                  2004,  and  2003                Statements of Changes in Stockholders' Equity for the years ended                  December  31,  2005,  2004,  and  2003                Statements  of  Cash Flows for the years ended December 31, 2005,                  2004,  and  2003       (2)  FINANCIAL  STATEMENT  SCHEDULES      Schedules  have been omitted because of the absence of the conditions under      which  they are required or because the required information where material      is  shown  in  the  financial  statements  or  the  notes  thereto.                                          34  (B) EXHIBITS  The following exhibits are, as indicated by reference symbol, filed herewith or incorporated by refernce.  Portions of Exhibits 10 (o) and 10(p) have been omitted pursuant to a request for confidential treatment.      *3(i)(a)     Restated Certificate of Incorporation of June 18, 2004. *3(i)(b)     Certificate of Elimination of Series A Convertible Preferred Stock of June 18, 2004. *3(ii)       By-Laws. **4          Specimen Stock Certificate, Common Stock. ***10(a)     Assignment of Intellectual Property Rights Fuel Tech N.V. to Platinum Plus, Inc. As of November 5, 1997. ***10(b)     Assignment of Intellectual Property Rights by Fuel Tech, Inc. to Clean Diesel Technologies, Inc. as of              November 5, 1997. ***10(c)     Assignment Agreement as of November 5, 1997 among Platinum Plus, Inc., Fuel-Tech N.V. and Clean              Diesel Technologies, Inc. ****10(d)    1994 Incentive Plan as amended through August 8, 1996. *****10(e)   Amendment of Section 5.1 of 1994 Incentive Plan, effective June 9, 1999. *10(f)       Amendment of Section 6.11 of 1994 Incentive Plan, effective June 11, 2004. *10(g)       Form of Incentive Stock Option Agreement. *10(h)       Form of Non-Qualified Stock Option Agreement. *10(i)       Form of Non-Executive Director Stock Option  Agreement. +10(j)       Management Services Agreement between Clean Diesel Technologies, Inc., Fuel Tech, Inc. and Fuel-              Tech N.V. as of June 1, 1996. ++10(k)      Office Premises Lease of January 29, 2004. ***10(l)     Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of              November 5, 1997. +++10(m)     Registration Rights Agreement between Clean Diesel Technologies, Inc. and Fuel-Tech N.V. of March              24, 1997. ++++10(n)    Registration Rights Agreement between Clean Diesel Technologies, Inc. and the holders of Series A              Convertible Preferred Stock as of  November 11, 1998. ++10(0)      License Agreement of July 13, 2001 between Clean Diesel Technologies, Inc. and Mitsui Co., Ltd  as              amended by Amendment No. 1 of December 18,  2002. ++10(p)      License Agreement of March 31, 2003 between Clean Diesel Technologies, Inc. and Combustion              Components Associates, Inc. ++10(t)      Agreement by and between David W. Whitwell and  Clean Diesel Technologies, Inc. dated as of              March 1, 2001. ++10(u)      Agreement by and between R. Glen Reid and Clean Diesel Technologies, Inc. dated as of April 1, 2002. @10(s)       Agreement by and between Bernhard Steiner and Clean Diesel Technologies, Inc., dated as of September              13, 2004. #10(v)       Amendment No.1 of 1 March 2006 to agreement of September 13, 2004 between Bernhard Steiner and              Clean Diesel Technologies Inc. @@           Separation Agreement of January 19, 2006 between James M. Valentine and Clean Diesel Technologies,              Inc. 14@@@        Codes of Ethics and Business Conduct #23(a)       Consent of Eisner LLP. #31(a)       Bernhard Steiner Certification #31(b)       David Whitwell Certification #32          Certification by CEO and CFO   - - - - - - - - - - - - - - - -   # Filed herewith.   *            Previously filed as Exhibit to Registration Statement on Form S-8 (No. 333-117057) of July 1, 2004. **           Previously filed as Exhibit to Registration Statement on Form S-1 (No. 33-95840) of August 16, 1995. ***          Previously filed as Exhibit to Form 10-K for the year ended December 31, 1997. ****         Previously filed as Exhibit to Form 10-K for the year ended December 31, 1996. *****        Previously filed as Exhibit to Form 10-K for the year ended December 31, 2000. +            Previously filed as Exhibit to Form 10-Q for the period ended September 30, 1996. ++           Previously filed as Exhibit to Form 10-Q for period ended June 30, 2004. +++          Previously filed as Exhibit to Registration Statement on Form S-1 of August 7, 1998. ++++         Previously filed as Exhibit to Form 10-Q for the period ended  September 30, 1998. @            Previously filed as Exhibit to Form 8-K of July 30, 2004. @@           Previously filed as Exhibit to Form 8-K of January 19, 2006. @@@          Previously filed as Exhibit to Form 10-K for the year ended December 31, 2004.                                           35                                     SIGNATURES       Pursuant  to  the  requirements  of  Section  13 or 15(d) of the Securities Exchange  Act  of  1934,  Clean  Diesel  Technologies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                          CLEAN  DIESEL  TECHNOLOGIES,  INC.   March 28, 2006                          By:  /s/  Bernhard Steiner - --------------                             -------------------------------------      Date                                         Bernhard Steiner                                                   Chief Executive Officer and                                                   Director            Pursuant  to  the requirements of the Securities Exchange Act of 1934, the  following  persons  on behalf of Clean Diesel Technologies, Inc. and in the capacities  and  on  the  date  indicated  have  duly  signed this report below.      /s/ Bernhard Steiner        Chief Executive Officer, President and Director - --------------------------  (principal executive officer)     Bernhard Steiner   /s/ David W. Whitwell       Chief Financial Officer, Sr. Vice President, and Treasurer - --------------------------  (principal financial and accounting officer)     David W. Whitwell   /s/ Jeremy D. Peter-Hoblyn  Director - --------------------------     Jeremy D. Peter-Hoblyn   /s/ John A. de Havilland    Director - --------------------------     John A. de Havilland   /s/ Derek R. Gray           Director, Non-Executive Chairman of the Board of Directors - --------------------------     Derek R. Gray   /s/ Charles W. Grinnell     Director, Vice President, and Corporate Secretary - --------------------------     Charles W. Grinnell    /s/ John J. McCloy         Director - --------------------------      John J. McCloy        Dated: March 28, 2006                                          36      EX-10.V 2 ex10_v.txt EXHIBIT 10.V                                                                     Exhibit 10(V)                          Amendment to Executive Agreement  Amendment No. 1 dated 1 March, 2006 ("this Amendment")to Executive Agreement of 13 September, 2004 ("the Agreement") between Clean Diesel Technologies, Inc. (the "Company"), a Delaware corporation of 300 Atlantic Street, Suite 702, Stamford CT 06901 and Bernhard Steiner (the "Executive") of Am Rosenwald 14, D-65779 Kelkhein-Ruppertshain, Germany. The Paragraph references herein correspond to those in the Agreement.  The parties agree that:  1. Employment Capacity. The title "President" is inserted before the title    ------------------- "Chief Executive Officer," in the first sentence of Paragraph 1 of the Agreement.  2. Duties. The phrase "London, United Kingdom" is replaced by the phrase "at his    ------ home in Germany" in the first sentence of Paragraph 2 of the Agreement.  3. Term. The date "September 13, 2006" is replaced by the date "September 13,    ---- 2008" in the first sentence of Paragraph 3 of the Agreement.  4 a. Basic Salary. The phrase "Euros Two Hundred Thousand (200,000 Euro) per      ------------ annum" is replaced by the phrase "Euros One Hundred Seventy Thousand (170,000 Euro) per annum, effective January 1, 2006," in Paragraph 4 a.  4 b. Annual Bonus. The terms of Paragraph 4 b. of the Agreement are revoked in      ------------ their entirety and replaced by the following text:       "For the year 2006 and thereafter, the Executive shall be entitled to      participate in the Annual Bonus Program established by the Board of      Directors for the respective year according to the terms and conditions of      such Program as agreed in writing by the Executive and the Company."  4. f. Stock. The terms of Paragraph 10 f. are revoked in their entirety and       ----- replaced by the following text:       "The Executive shall receive non-qualified stock option awards on the      Company's standard terms and conditions to acquire shares of the Company's      common stock at an exercise price equal to the fair market value of such      stock on the respective dates of closing or completion of Company debt or      equity financings, as follows:       (i) 50,000 shares, if on or before December 31, 2006 the Company shall raise at least $5 Million; and      (ii) Up to an additional 50,000 shares, if on or before June 30, 2007 the Company shall raise up to $10 million, inclusive of the amount of $5 million in sub-paragraph (i) above), pro-rata at the rate of 10,000 shares per $1 million in excess of said $5 million."  10. c. At Will. The terms of Paragraph 10 c. of the Agreement are revoked in        ------- their entirety and replaced by the following text:       "Either party may terminate this Agreement at will and without cause. If      the Agreement is terminated by the Company without cause, the Executive      shall receive his Basic Salary for the greater of the remaining term of the      Agreement or six (6) months, but not after the Executive accepts a      comparable position with equivalent compensation.  Clean Diesel Technologies, Inc & Berhard Steiner, Amendment No. 1, p. 2.         During such period of Basic Salary continuation by the Company, such Basic      Salary shall be reduced by any salary the Executive earns from other      employment. If this Agreement is terminated by the Executive, he will, at      any time, give six (6) months advance notice and shall not be entitled to      any further compensation after such six (6) month notice period."  In all other respects the Agreement is confirmed and republished.  IN WITNESS WHEREOF, each of the parties hereto has duly executed this Amendment No. 1 to the Agreement of 19 September, 2004 on 1 March, 2006.   Clean Diesel Technologies, Inc.                                           /s/ Bernhard Steiner    EX-23.A 3 ex23_a.txt EXHIBIT 23.A                                                                     Exhibit 23(a)  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We  consent  to  the incorporation by reference in the registration statement on Form  S-8  (Registration Nos. 333-16939, 333-33276 and 333-117057) of our report dated  February  15,  2006, except note 4 as to which the date is March 3, 2006, relating  to  our  audit of the financial statements for the year ended December 31,  2005  of Clean Diesel Technologies, Inc. included in the 2005 annual report on  Form  10-K.     /s/  Eisner  LLP New  York,  New  York March  24,  2006    EX-31.A 4 ex31_a.txt EXHIBIT 31.A  SIGNATURES  AND  CERTIFICATES                                                                    Exhibit 31(a)  I, Bernhard Steiner, certify that:  1.     I  have  reviewed  the Annual Report on Form 10-K (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  officers  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  disclosures  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;  and           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  fourth  fiscal  quarter  of  2004  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 officers 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:  March  28,  2006            By: /s/  Bernhard  Steiner                                        Bernhard Steiner                                        Director, President and Chief                                        Executive Officer    EX-31.B 5 ex31_b.txt EXHIBIT 31.B                                                                     Exhibit 31(b)  I,  David  W.  Whitwell,  certify  that:  1.     I  have  reviewed  the  amendment  to the Annual Report on Form 10-K (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  officers  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  disclosures  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;  and           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 fourth fiscal quarter of 2004 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 officers 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:  March 28, 2006              By:  /s/David W. Whitwell                                         David W. Whitwell                                         Chief Financial Officer,                                         Vice President and Treasurer    EX-32 6 ex32.txt EXHIBIT 32                                                                        Exhibit 32            Certification of CEO and CFO Pursuant to18 U.S.C. Section 1350  The  undersigned, Bernhard Steiner and David W. Whitwell, in their capacities as Chief  Executive  Officer  and  Chief  Financial  Officer  of  Clean  Diesel Technologies, Inc. (the "Registrant") do each hereby certify with respect to the Annual  Report  on Form 10-K of the Registrant for the period ended December 31, 2004,  as  filed with the Securities and Exchange Commission on the date thereof (the  "Report"),  that,  to  the  best  of  his  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 Registrant as of, and for, the periods presented in         this Report.                       /S/  BERNHARD  STEINER                     ---------------------------------------------                     BERNHARD STEINER                     PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR                     MARCH 28, 2006                      /S/  DAVID  W.  WHITWELL                     ---------------------------------------------                     DAVID W. WHITWELL                     CHIEF FINANCIAL OFFICER, VICE PRESIDENT AND TREASURER                     MARCH 28, 2006  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.    -----END PRIVACY-ENHANCED MESSAGE-----