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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File No.: 001-33710
 CLEAN DIESEL TECHNOLOGIES, INC.
  Delaware
    
    06-1393453(State or other jurisdiction of 
incorporation or organization
    
    (I.R.S. Employer
Identification No.)
 4567 Telephone Road, Suite 206
Ventura, CA 93003  (Address of principal executive offices) (Zip Code)
 (805) 639-9458
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.01 par value
    
    The NASDAQ Stock Market LLC
  o þ
 o þ
 þ o
 o o
 o
  Large Accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
   Documents incorporated by reference:




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##### 



CLEAN DIESEL TECHNOLOGIES, INC.
 Annual Report on Form 10-K
For the Year Ended December 31, 2010
 Table of Contents
 PART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    14Item 1B. Unresolved Staff Comments
    
    
    21Item 2. Properties
    
    
    21Item 3. Legal Proceedings
    
    
    22Item 4. (Removed and reserved)
    
    
    22PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    23Item 6. Selected Financial Data
    
    
    24Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    25Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    44Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
    
    
    44Item 9A. Controls and Procedures
    
    
    44Item 9B. Other Information
    
    
    46PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    47Item 11. Executive Compensation
    
    
    47Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    47Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    47Item 14. Principal Accounting Fees and Services
    
    
    47PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    48SIGNATURESEx-10.2Ex-10.4EX-21EX-23EX-31.1EX-31.2EX-32
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
  HELPFUL INFORMATION
    TRADEMARKS
 ® ® ® ® ® ® ® ® ® ® ® ® ® ®
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PART I
 
 ITEM 1. BUSINESS
 Overview
    ® ® ®
  Our Divisions
  
    
    Heavy Duty Diesel Systems: Our Heavy Duty Diesel Systems division is a leading
environmental business specializing in the design and manufacture of verified exhaust
emissions control solutions. Globally, our Heavy Duty Diesel Systems division offers a full
range of products for the verified retrofit and OEM markets through our distribution/dealer
network and direct sales. These Engine Control Systems (ECS) and Clean Diesel
Technologies-branded products, such as Purifilter®, Purifier and
ARIS®and exhaust gas recirculation with selective catalytic
reduction are used to reduce exhaust emissions created by on-road, off-road and stationary
diesel and alternative fuel engines including propane and natural gas. We will continue to
promote our Platinum Plus® range of fuel-borne catalyst solutions to
global markets.
    
    Catalyst: Our Catalyst division houses our proprietary
MPC® technology. This technology enables us to produce catalyst
formulations for gasoline, diesel and natural gas induced emissions that offer superior
performance, proven durability and cost effectiveness for multiple markets and a wide range
of applications. Using our proprietary MPC® technology, we have
developed a family of unique high-
 1




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performance catalysts  with base-metals or low platinum group metal and zero-platinum
group metal content  to provide increased catalytic performance and value for
technology-driven automotive industry customers and for our Heavy Duty Diesel Systems
division.
  Market Overview
       
    
    Diesel: U.S. and European legislation requiring significant reduction in
particulate matter and nitrogen oxide emissions from on-road and off-road diesel vehicles
is expected to be phased in through 2015. This provides an opportunity for growth for both
our diesel retrofit systems and catalyst products. Catalysts using traditional technology
will require high loadings of platinum group metals to comply with these standards, and
diesel engine manufacturers are very concerned about the high price of these units. Our low
platinum group metals catalysts are able to effectively address this concern.
Additionally, fleet owners and operators complying with existing on-road legislation and
regulations will be looking for more cost-effective suppliers for existing retrofit
technology applications as well as potential expansion into urea-based selective catalytic
reduction technologies. Our portfolio of California Air Resources Board, or CARB, and EPA
verified products provides effective solutions to address this need. This growing market is
 2




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highly driven by increasingly stringent worldwide regulatory standards and is sometimes
funded by both public and private sources for early, voluntary compliance.
    
    Automotive: Since 2005, 100% of new cars sold in the United States and over 90%
of all new cars sold worldwide have been equipped with a catalytic converter as the
principal means of meeting emissions standards (Manufacturers of Emissions Controls
Association, Clean Air Facts, The Catalytic Converter: Technology for Clean Air). The
regulations controlling auto emissions in countries throughout the world have become
increasingly restrictive and will continue to tighten in the future.
 ® ® ®
 Competitive Advantages
  ®
 ®
 ®
  
    
    Broad Portfolio of Verified Heavy Duty Diesel Systems: We offer one of the
industrys most comprehensive portfolios of system products that have been evaluated and
verified (approved) by the EPA and CARB for use in engine retrofit programs, as well as in
several European countries. Additionally, we have a thorough understanding of the
verification process and the demonstrated ability to get products broadly verified
specifically for the retrofit market.
    
    Superior Catalyst Performance: Our proprietary MPC®
technology enables us to produce catalytic coatings capable of significantly better
catalytic performance than previously available. We have achieved this demonstrated
performance advantage by creating a catalyst using unique nanostructures with superior
stability under prolonged exposure to high temperatures. This nanostructure technology
enables the oxide catalysts in its compounds to resist sintering, or fusing, thereby
maintaining a high catalytic surface area. As a result, in heavy duty diesel and automotive
applications, our catalyst formulations are able to maintain high levels of performance
over time using substantially lower platinum group metals than products previously
available.
    
    Cost Advantage: In the automotive market in particular, where platinum
group metal costs represent a large portion of manufacturers costs, a significant benefit
of our catalyst technology is that it offers performance
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equal to or exceeding that of competing catalytic coatings with a 30%  80% reduction in
platinum group metal loadings.
    
    Wide Range of Applications: Our proprietary MPC®
technology is a design approach, as opposed to a single chemical formulation. We have
developed this technology since inception as a platform that can be tailored for a range of
different industrial catalyst applications. Specifically, our formulations can be tailored
in two distinct ways. First, the oxide compounds used in our formulations can be adapted
for specific applications by adding to them, or doping them with, a wide range of chemical
elements, a process known as tuning. By contrast, the catalyst offerings of our competitors
can be tuned only by adjusting the platinum group metal content. Second, we are able to
vary the mixtures of our compounds to create customized solutions for specific
applications. These two independent design mechanisms allow for customization and
optimization for different vehicle platforms within the auto industry, complex heavy duty
diesel equipment for the OEM, aftermarket and retrofit markets, and for completely
different applications in the energy sector, such as selective catalyst reduction nitrogen
oxide control for industrial and utility boilers, process heaters, gas turbines and
generator sets. We believe that our portfolio of technologies are applicable to all
existing diesel engines, all new engines designed to meet upcoming emission standards and
all types of fuel, including biodiesel and ultra-low sulfur diesel. We offer a full range
of EPA and CARB verified heavy duty diesel emission control products.
    
    Proven Durability: Our products and systems have undergone substantial
laboratory and field testing by our existing and prospective customers and have
demonstrated their durability and reliability in a wide range of applications in actual use
for many years. In addition, our products and systems have achieved numerous certifications
and match or exceed industry standards.
    
    Compatibility with Existing Manufacturing Infrastructure and Operating
Specifications: Catalytic converters using our catalysts are compatible with existing
automotive manufacturing processes as well as specific vehicle operating specifications.
There is no need for our customers to change their manufacturing operations, processes, or
how their products operate, in order to utilize our proprietary technology. Our heavy duty
diesel emission control products and solutions are engineered to each customers specific
application and designed to deliver custom and industry-leading solutions that meet or
exceed environmental mandates.
 Strategy
  Vertical Integration
  Capitalize on growing market for heavy duty diesel systems
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Focused growth of catalyst business
  Partnerships and Acquisitions
   Technology
 ® ®
 ® ®
 ® ® ® ®
 5




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®
  Products
 Heavy Duty Diesel Systems Division
  Closed Crankcase Ventilation Systems
   Diesel Oxidation Catalysts
  ®
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Diesel Particulate Filters
 ® ® ® ®
 
    
    Purifilter® was the first passively regenerating diesel
particulate filter to attain an industry-leading 90% particulate matter emissions reduction
credit value. We believe our Purifilter® is more efficient than
competing products as it is manufactured with silicon carbide substrates, which offer
superior filtration and durability compared to other diesel particulate filter materials.
The Purifilter® employs a base and precious metal catalyst
impregnated onto the silicon carbide diesel particulate filter surface to passively oxidize
accumulated particulate while complying with stringent CARB limits on nitrogen dioxide
emissions.
    
    Combifilter® is an actively regenerated diesel particulate filter
system that typically removes over 90% of particulate matter while reducing nitrogen
dioxide emissions. The system is comprised of electric heating elements integrated with a
diesel particulate filter and silencer assembly. Periodically the system is plugged into an
off-board regeneration control panel or station to energize the electric elements when the
engine is not in service. Unlike passively regenerating diesel particulate filters that
rely on minimum exhaust temperature conditions to initiate the catalytic oxidation of
accumulated soot, Combifilter® equipped engines are simply plugged in
when not in service to heat the filter to a temperature where oxygen can directly oxidize
the soot.
    
    Purifilter® Plus combines the benefits of
Combifilters® active regeneration with
Purifilters® passive operation to provide the combined benefits of
both products. Purifilter® Plus employs a passive
Purifilter® diesel particulate filter to allow extended periods of
passive operation with periodic active regeneration (i.e., weekly, biweekly, every
preventative maintenance, etc.). This combination increases
Purifilter® tolerance of colder duty cycle variations and provides a
proactive fleet management tool that improves vehicle uptime and insures low backpressure
and fuel economy. Periodic active regeneration via connection to a common off-board
regeneration station allows on-board filter service that virtually eliminates the need to
remove a diesel particulate filter except for de-ashing at 1,500 engine hour intervals. We
believe that Purifilter® Plus is the perfect solution for high
utilization fleets (i.e., cargo handling at ports) or rental construction fleets who need a
quick way to insure the condition of diesel particulate filters installed on rental
equipment to a wide variety of customers with different equipment uses.
    
    Purifier e4 and e3 technologies integrate our Platinum Plus®
fuel-borne catalyst technology into passive particulate reduction systems for demanding
applications such as high sulfur or urban environments. Successfully implemented in London
for the initial stages of Londons LEZ, we anticipate further customer acceptance of these
products with the introduction of Phase 3 and 4 of Londons LEZ and the expected increased
demand for low emission zone technology elsewhere in Europe and Asia.
    
    Cattrap® is a passively regenerating diesel particulate filter designed
specifically for mining and other heavy industrial applications. Cattrap®
employs an advanced base metal soot ignition catalyst system that eliminates diesel
particulate emissions in excess of 85%, while actually reducing toxic nitrogen dioxide
emissions. Because it is listed on the U.S. Mine Safety Health Administration (MSHA) Table
2 List of Diesel Particulate Matter Control Technologies, our ECS-branded
Cattrap® can be employed in mining environments where most other
diesel particulate filters cannot.
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Platinum Plus® Fuel-Borne Catalyst
 ® ® ® ®
 ARIS® Selective Catalytic Reduction
 ® ® ® ® ® ®
 Combined Use of Exhaust Gas Recirculation and Selective Catalytic Reduction
  Catalyzed Wire Mesh Diesel Particulate Filter
 ® ®
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Alternative Fuel Products
  ® ®
 ® ®
 Exhaust Accessories and Miscellaneous Products
  ®
  ®
 Catalyst Division
  Catalysts for Gasoline (Light Duty Vehicle) Engines
  9




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Catalysts for Diesel Engines
  Catalysts for Energy Applications
 ®
 ®
 Sales and Marketing
    10




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Asian Joint Venture
     Competition
   Manufacturing Operations
  ®
 11




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Intellectual Property
  ®
  ® ® ® ® ® ® ® ® ® ® ® ® ® ®
 Regulation
   12




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Research and Development
  Employees
  13




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ITEM 1A. RISK FACTORS
 We are subject to many risks and uncertainties that may affect our future financial
performance and our stock price. Some of the risks and uncertainties that may cause our financial
performance to vary or that may materially or adversely affect our financial performance or stock
price are discussed below. Investors should carefully consider the risks described below and the
other information contained in this Annual Report on Form 10-K before making an investment
decision. We cannot assure you of a profit or protect you against a loss on an investment in our
company.
 Risks Relating to Our Business and Recent Merger
 We will need to have additional sources of funding in order to conduct our operations for any
reasonable length of time, and no such funding is yet in place or committed, nor do we have any
assurances of additional funding
  Our auditors report for the year ended December 31, 2010 includes a going concern explanatory
paragraph.
  Future growth of our business depends, in part, on the general availability of funding for
emissions control programs, as well as enforcement of existing emissions-related environmental
regulations and further tightening of emission standards worldwide.
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We have not experienced positive cash flow from our operations, and our ability to achieve positive
cash flow from operations, or finance negative cash flow from operations, could depend on
reductions in our operating costs, which may not be achievable, or from increased sales, which may
not occur.
  We may not realize all of the anticipated benefits of the Merger.
  
    
    maintaining employee morale and retaining key employees;
    
    preserving important strategic and customer relationships;
    
    the diversion of managements attention from ongoing business concerns;
    
    coordinating geographically separate organizations;
    
    unanticipated issues in integrating information, communications and other systems;
    
    coordinating marketing functions;
    
    consolidating corporate and administrative infrastructures and eliminating
duplicative operations; and
    
    integrating the cultures of CDTI and CSI.
  The Merger will likely adversely affect our ability to take advantage of the significant U.S.
Federal tax loss carryforwards accumulated.
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We have incurred significant expenses as a result of the Merger, and anticipate incurring
additional Merger-related expenses, which will reduce the amount of capital available to fund the
business after the Merger.
  We will continue to incur significant costs as a result of operating as a public company, and our
management may be required to devote substantial time to compliance initiatives.
    We have incurred losses in the past and expect to incur losses in the near future.
  Historically, we have been dependent on a few major customers for a significant portion of our
companys revenue and the revenue could decline if we are unable to maintain or develop
relationships with current or potential customers, or if such customers reduce demand for our products.
  16




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Foreign currency fluctuations could impact financial performance.
  Risks Related to Our Industry
 We face constant changes in governmental standards by which our products are evaluated.
  We face competition and technological advances by competitors.
  We depend on intellectual property and the failure to protect our intellectual property could
adversely affect our future growth and success.
     17




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If third parties claim that our products infringe upon their intellectual property rights, we may
be forced to expend significant financial resources and management time litigating such claims and
our operating results could suffer.
  Our results may fluctuate due to certain regulatory, marketing and competitive factors over which
we have little or no control.
  
    
    Actions taken by regulatory bodies relating to the verification, registration or health
effects of our products.
    
    The extent to which our Platinum Plus® fuel-borne catalyst and ARIS® nitrogen oxides
reduction products obtain market acceptance.
    
    The timing and size of customer purchases.
    
    Customer concerns about the stability of our business, which could cause them to seek
alternatives to our solutions and products; and
    
    Increases in raw material costs, particularly platinum group metals and rare earth
metals.
 Failure of one or more key suppliers to timely deliver could prevent, delay or limit us from
supplying products. Delays in delivery times for platinum group metal purchases could also result
in losses due to fluctuations in prices. Delays in the delivery times and cost impact of the
world-wide shortage of rare earth metals could delay us from supplying products and could result in
lower profits.
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Qualified management, marketing, and sales personnel are difficult to locate, hire and train, and
if we cannot attract and retain qualified personnel, it will harm the ability of the business to
grow.
  We may not be able to successfully market new products that are developed or obtain direct or
indirect verification or approval of our new products.
  Any liability for environmental harm or damages resulting from technical faults or failures of our
products could be substantial and could materially adversely affect our business and results of
operations.
  Future growth of our business depends, in part, on market acceptance of our catalyst products,
successful verification of our products and retention of our verifications.
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New metal standards, lower environmental limits or stricter regulation for health reasons of
platinum or cerium could be adopted and affect use of our products.
 ® ®
 Risks Related to Our Common Stock
 The investors in CSIs capital raise, who converted their shares of Class B common stock into
shares of our common stock in the Merger, collectively hold a large percentage of our outstanding
common stock, and, should they choose to act together, will have significant influence over the
outcome of corporate actions requiring stockholder approval; such shareholders priorities for our
business may be different from our other stockholders.
  The price of our common stock may be adversely affected by the sale of a significant number of new
common shares.
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The risk of dilution, perceived or actual, may contribute to downward pressure on the trading price
of our stock.
  There has historically been limited trading volume in, and significant volatility in the price of,
our common stock on The NASDAQ Capital Market.
   We have not and do not intend to pay dividends on shares of our common stock.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   21




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ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. REMOVED AND RESERVED
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Part II
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDERS MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Market Information
   NASDAQ Capital MarketHigh
    
    
    Low20091st Quarter
    
    $
    18.30
    
    
    $
    6.002nd Quarter
    
    $
    15.00
    
    
    $
    8.463rd Quarter
    
    $
    13.20
    
    
    $
    7.504th Quarter
    
    $
    13.38
    
    
    $
    8.4020101st Quarter
    
    $
    13.32
    
    
    $
    8.702nd Quarter
    
    $
    10.68
    
    
    $
    5.703rd Quarter
    
    $
    8.52
    
    
    $
    4.084th Quarter
    
    $
    44.38
    
    
    $
    3.00
 Holders
  Dividends
  Issuances of Unregistered Securities
  Issuer Purchases of Equity Securities
  23




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ITEM 6. SELECTED FINANCIAL DATA
  For the Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands, except per share amounts)STATEMENTS OF OPERATIONS DATARevenuesHeavy Duty Diesel Systems division
    
    $
    31,161
    
    
    $
    25,916
    
    
    $
    27,126
    
    
    $
    342
    
    
    $
    Catalyst division
    
    
    17,726
    
    
    
    25,074
    
    
    
    26,311
    
    
    
    29,792
    
    
    
    37,847Eliminations
    
    
    (770
    )
    
    
    (476
    )
    
    
    (874
    )
    
    
    
    
    
    
    Total revenues
    
    $
    48,117
    
    
    $
    50,514
    
    
    $
    52,563
    
    
    $
    30,134
    
    
    $
    37,847Gross profit
    
    $
    12,035
    
    
    $
    11,967
    
    
    $
    8,217
    
    
    $
    3,176
    
    
    $
    6,912Gross margin
    
    
    25.0
    %
    
    
    23.7
    %
    
    
    15.6
    %
    
    
    10.5
    %
    
    
    18.3
    %Selling, general and administrative
    
    
    11,923
    
    
    
    12,480
    
    
    
    15,776
    
    
    
    11,445
    
    
    
    7,653Research and development
    
    
    4,373
    
    
    
    7,257
    
    
    
    8,942
    
    
    
    7,702
    
    
    
    6,486In-process research and development (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,635
    
    
    
    Delphi bid (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,668
    
    
    
    Severance expense
    
    
    261
    
    
    
    1,429
    
    
    
    234
    
    
    
    
    
    
    
    Recapitalization expense
    
    
    3,247
    
    
    
    1,258
    
    
    
    
    
    
    
    
    
    
    
    Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    4,928
    
    
    
    
    
    
    
    Gain on sale of intellectual property
    
    
    (3,900
    )
    
    
    (2,500
    )
    
    
    (5,000
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    15,904
    
    
    
    19,924
    
    
    
    24,880
    
    
    
    28,450
    
    
    
    14,139Loss from operations
    
    
    (3,869
    )
    
    
    (7,957
    )
    
    
    (16,663
    )
    
    
    (25,274
    )
    
    
    (7,227
    )Total other (expense) income, net
    
    
    (5,463
    )
    
    
    (2,577
    )
    
    
    (2,601
    )
    
    
    1,376
    
    
    
    (25,520
    )Income tax expense (benefit) from continuing operations
    
    
    12
    
    
    
    (1,036
    )
    
    
    624
    
    
    
    16
    
    
    
    20Net loss from continuing operations
    
    
    (9,344
    )
    
    
    (9,498
    )
    
    
    (19,888
    )
    
    
    (23,914
    )
    
    
    (32,767
    )Net income (loss) from discontinued operations
    
    
    968
    
    
    
    1,522
    
    
    
    (916
    )
    
    
    748
    
    
    
    592Net loss
    
    $
    (8,376
    )
    
    $
    (7,976
    )
    
    $
    (20,804
    )
    
    $
    (23,166
    )
    
    $
    (32,175
    )Basic and diluted loss per common share:Net loss from continuing operations
    
    $
    (7.55
    )
    
    $
    (17.27
    )
    
    $
    (36.16
    )
    
    $
    (47.07
    )
    
    $
    (65.02
    )Net income (loss) from discontinued operations
    
    
    0.78
    
    
    
    2.77
    
    
    
    (1.67
    )
    
    
    1.47
    
    
    
    1.17Net loss
    
    $
    (6.77
    )
    
    $
    (14.50
    )
    
    $
    (37.83
    )
    
    $
    (45.60
    )
    
    $
    (63.84
    )Weighted average shares outstanding  basic and diluted
    
    
    1,238
    
    
    
    550
    
    
    
    550
    
    
    
    508
    
    
    
    504
 As of December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands)BALANCE SHEET DATATotal current assets
    
    $
    17,645
    
    
    $
    18,596
    
    
    $
    30,806
    
    
    $
    38,164
    
    
    $
    41,195Total assets
    
    $
    32,648
    
    
    $
    30,243
    
    
    $
    49,714
    
    
    $
    65,739
    
    
    $
    54,381Total current liabilities
    
    $
    14,753
    
    
    $
    22,949
    
    
    $
    35,853
    
    
    $
    13,603
    
    
    $
    5,713Total long-term liabilities
    
    $
    2,552
    
    
    $
    1,411
    
    
    $
    2,448
    
    
    $
    18,029
    
    
    $
    3,000Stockholders equity
    
    $
    15,343
    
    
    $
    5,883
    
    
    $
    11,413
    
    
    $
    34,447
    
    
    $
    45,716Short-term debt
    
    $
    2,431
    
    
    $
    8,147
    
    
    $
    17,880
    
    
    $
    408
    
    
    
    Long-term debt
    
    $
    1,456
    
    
    $
    75
    
    
    $
    33
    
    
    $
    15,494
    
    
    $
    3,000
 
 (1)
    
    In process research and development is related to the acquisition of Engine Control Systems and was expensed at acquisition.(2)
    
    Delphi bid represents expense incurred in our unsuccessful attempt to acquire Delphis catalyst business out of bankruptcy and consists primarily of legal and
consulting fees. 24




---



##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The Merger was accounted for as a reverse acquisition and, as a result, our companys (the
legal acquirer) consolidated financial statements are now those of CSI (the accounting acquirer),
with the assets and liabilities, and revenues and expenses, of CDTI included effective from October
15, 2010, the date of the closing of the Merger. For information regarding CDTIs financial
condition and results of operations as well as CDTIs financial statements and related notes
thereto reflecting CDTIs business as a stand-alone company for periods prior to the Merger, please
see our annual report on Form 10-K for the year ended December 31, 2009 and our quarterly reports
on Form 10-Q for periods prior to the closing of the Merger.
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with our annual consolidated financial statements and related notes
included elsewhere in this report on Form 10-K . This discussion contains forward-looking
statements, the accuracy of which involves risks and uncertainties, see Cautionary Statement
Concerning Forward-Looking Statements. Our actual results could differ materially from those
anticipated in these forward-looking statements for many reasons, as a result of many important
factors, including the consolidation of CDTI for periods after October 15, 2010, as well as those
set forth in the Item 1A Risk Factors.
 Overview
   Heavy Duty Diesel Systems: ® ®
 Catalyst:
 Sources of Revenues and Expenses
 Revenues
  25




---



##### Table of Contents



Cost of revenues
  Selling, general and administrative expenses
   Research and development expenses
  Recapitalization expenses
  Total other income (expense)
  Critical Accounting Policies and Estimates
  26




---



##### Table of Contents



Revenue Recognition
  Allowance for Doubtful Accounts
  Inventory Valuation
  Accounting for Income Taxes
   27




---



##### Table of Contents



Business Combinations
  Goodwill
  28




---



##### Table of Contents



Impairment of Long-Lived Assets Other Than Goodwill
  Fair Value of Embedded Financial Instruments
    29




---



##### Table of Contents



Stock-Based Compensation Expense
   Warrant Derivative Liability
  Recent Accounting Pronouncements
  ASU 2010-28, Intangibles Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (ASU 2010-28
 ASU No. 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations
 30




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##### Table of Contents



Recent Developments
 New Financing Agreement with FGI; repayment of Fifth Third Bank
  Loan from Shareholder; Repayment of Settlement Obligation
   Settlement of Litigation and Disputes Regarding August 2006 Purchase of Applied Utility Systems
  31




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##### Table of Contents



Closing of Merger
      CSI Pre-Merger Capital Raise
  32




---



##### Table of Contents



Asian Joint Venture
   Catalyst Division Restructuring
   Accrued severance at December 31, 2008
    
    $
    187Accrued severance expense during 2009
    
    
    1,429Paid severance expense during 2009
    
    
    (946
    )Accrued severance at December 31, 2009
    
    
    670Accrued severance expense during 2010
    
    
    261Paid severance expense during 2010
    
    
    (673
    )Accrued severance at December 31, 2010
    
    $
    258
  33




---



##### Table of Contents



Factors Affecting Future Results
     34




---



##### Table of Contents



Results of Operations
 Comparison of the Year Ended December 31, 2010 to the Year Ended December 31, 2009
  Revenues
  Year Ended December 31% of Total
    
    
    
    
    
    
    % of Total2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    $ Change
    
    
    % Change(Dollars in millions)Heavy Duty Diesel Systems
    
    $
    31.2
    
    
    
    64.9
    %
    
    $
    25.9
    
    
    
    51.3
    %
    
    $
    5.3
    
    
    
    20.5
    %Catalyst
    
    
    17.7
    
    
    
    36.8
    %
    
    
    25.1
    
    
    
    49.7
    %
    
    
    (7.4
    )
    
    
    (29.5
    )%Intercompany revenue
    
    
    (0.8
    )
    
    
    (1.7
    )
    
    
    (0.5
    )
    
    
    (1.0
    )%
    
    
    (0.3
    )
    
    
    (60.0
    )%Total revenue
    
    $
    48.1
    
    
    
    100.0
    %
    
    $
    50.5
    
    
    
    100.0
    %
    
    $
    (2.4
    )
    
    
    (4.8
    )%
     Cost of revenues
  35




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##### Table of Contents



Gross Profit
  Year Ended December 31% of
    
    
    
    
    
    
    % of2010
    
    
    Revenue (1)
    
    
    2009
    
    
    Revenue (1)(Dollars in millions)Heavy Duty Diesel Systems
    
    $
    8.9
    
    
    
    28.5
    %
    
    $
    8.2
    
    
    
    31.7
    %Catalyst
    
    
    3.1
    
    
    
    17.5
    %
    
    
    3.8
    
    
    
    15.1
    %Total gross profit
    
    $
    12.0
    
    
    
    24.9
    %
    
    $
    12.0
    
    
    
    23.8
    %
 
 (1)
    
    Division calculation based on division revenue. Total based on total revenue.    Operating Expenses
  Year Ended December 31% of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    %2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue
    
    
    $ Change
    
    
    Change(Dollars in millions)Selling, general and administrative
    
    $
    11.9
    
    
    
    24.8
    %
    
    $
    12.4
    
    
    
    24.5
    %
    
    $
    (0.5
    )
    
    
    (4.0
    )%Research and development
    
    
    4.4
    
    
    
    9.1
    %
    
    
    7.3
    
    
    
    14.5
    %
    
    
    (2.9
    )
    
    
    (39.7
    )%Recapitalization expenses
    
    
    3.2
    
    
    
    6.7
    %
    
    
    1.3
    
    
    
    2.6
    %
    
    
    1.9
    
    
    
    146.2
    %Gain on sale of intellectual
property
    
    
    (3.9
    )
    
    
    (8.1
    )%
    
    
    (2.5
    )
    
    
    (5.0
    )%
    
    
    (1.4
    )
    
    
    56.0
    %Severance expense
    
    
    0.3
    
    
    
    0.6
    %
    
    
    1.4
    
    
    
    2.8
    %
    
    
    (1.1
    )
    
    
    (78.6
    )%Total operating expenses
    
    $
    15.9
    
    
    
    33.1
    %
    
    $
    19.9
    
    
    
    39.4
    %
    
    $
    (4.0
    )
    
    
    (20.1
    )%
  36




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##### Table of Contents



Selling, general and administrative expenses
  Research and development expenses
  Recapitalization expenses
  Severance expense
  37




---



##### Table of Contents



Other expense, net
 Year Ended December 31% of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total2010
    
    
    Revenue
    
    
    2009
    
    
    Revenue(Dollars in millions)Interest expense
    
    $
    (3.6
    )
    
    
    (7.5
    )%
    
    $
    (2.3
    )
    
    
    (4.5
    )%(Loss) gain on change in fair
value of derivative financial
instruments
    
    
    (1.2
    )
    
    
    (2.5
    )%
    
    
    0.2
    
    
    
    0.4
    %Foreign currency exchange losses
    
    
    (0.9
    )
    
    
    (1.8
    )%
    
    
    (1.0
    )
    
    
    (2.1
    )%Gain on release of Delphi reserve
    
    
    
    
    
    
    0.0
    %
    
    
    0.4
    
    
    
    0.9
    %All other, net
    
    
    0.2
    
    
    
    0.4
    %
    
    
    0.1
    
    
    
    0.2
    %Total other expense, net
    
    $
    (5.5
    )
    
    
    (11.4
    )%
    
    $
    (2.6
    )
    
    
    (5.1
    )%
   Income taxes
  Net loss
  38




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##### Table of Contents



Liquidity and Capital Resources
       Year Ended December 312010
    
    
    2009
    
    
    $ Change
    
    
    % Change(Dollars in millions)Cash provided by (used in):Operating activities
    
    $
    (4.3
    )
    
    $
    (7.4
    )
    
    $
    3.1
    
    
    
    (41.9
    )%Investing activities
    
    $
    5.1
    
    
    $
    13.4
    
    
    $
    (8.3
    )
    
    
    (61.9
    )%Financing activities
    
    $
    2.0
    
    
    $
    (10.5
    )
    
    $
    12.5
    
    
    
    (119.0
    )%
 39




---



##### Table of Contents



Cash provided by (used in) operating activities
   Cash provided by investing activities
   Cash provided by financing activities
   Description of Indebtedness
  40




---



##### Table of Contents



December 31,2010
    
    
    2009(Dollars in millions)Line of credit
    
    $
    2.4
    
    
    $
    5.1Loan from shareholder
    
    
    1.4
    
    
    
    Consideration payable
    
    
    
    
    
    
    3.0Capital lease obligations
    
    
    0.1
    
    
    
    0.1Total borrowings
    
    $
    3.9
    
    
    $
    8.2
  FGI Financing Facility
     Loan from Kanis S.A.
  41




---



##### Table of Contents



Consideration Payable and Settlement Obligation
  Fifth Third Bank
    Secured convertible notes
    42




---



##### Table of Contents



Capital Expenditures
  Off-Balance Sheet Arrangements
  Commitments and Contingencies
  Related-Party Transactions
        43




---



##### Table of Contents



ITEM 7A. QUANTITATIVE AN QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
  44




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##### Table of Contents



Managements Annual Report on Internal Control over Financial Reporting
  
    
    pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and the directors of the company; and
    
    provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the companys assets that could have a
material effect on the financial statements.
  Internal Control  Integrated Framework
  45




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  Auditors Attestation
  
 ITEM 9B. OTHER INFORMATION
  46




---



##### Table of Contents



Part III
 
 Item 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
 Item 11.
    
    EXECUTIVE COMPENSATION
  
 Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 Item 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 Item 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
  47




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##### Table of Contents



Part IV
 
 Item 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    Exhibits and Financial Statement Schedules:
 (1)
    
    Financial StatementsSee Index to Financial Statements located on page F-1 of this Annual Report on
Form 10-K.(2)
    
    Financial Statement SchedulesNot applicable(3)
    
    ExhibitsSee the exhibit index included herein.
 48




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##### Table of Contents



SIGNATURES
  CLEAN DIESEL TECHNOLOGIES, INC.March 31, 2011
    
    
    
    By:
    
    /s/ Charles F. CallDate
    
    
    
    
    
    Charles F. CallChief Executive Officer and Director
  /s/ Charles F. Call
    
    Chief Executive Officer and DirectorCharles F. Call
    
    (principal
executive officer)/s/ Nikhil A. Mehta
    
    Chief Financial OfficerNikhil A. Mehta
    
    (principal
financial and accounting officer)/s/ Bernard H. (Bud) Cherry
    
    DirectorBernard H. (Bud) Cherry/s/ Alexander (Hap) Ellis III
    
    ChairmanAlexander (Hap) Ellis III/s/ Charles R. Engles, Ph.D.
    
    DirectorCharles R. Engles, Ph.D./s/ Derek R. Gray
    
    DirectorDerek R. Gray/s/ Mungo Park
    
    DirectorMungo Park/s/ Timothy Rogers
    
    Senior Corporate Vice President, Product Development and DirectorTimothy Rogers
  49




---



##### Table of Contents



Clean Diesel Technologies, Inc.
 INDEX TO FINANCIAL STATEMENTS
 Audited Consolidated Financial StatementsReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of December 31, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
    
    
    F-4Consolidated Statements of Stockholders Equity and Comprehensive Loss for the
years ended December 31, 2010 and 2009
    
    
    F-5Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Consolidated Balance Sheets
 (in thousands, except share amounts)
 December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,007
    
    
    $
    2,336Accounts receivable, less allowance for doubtful accounts
of $280 and $313 at December 31, 2010 and 2009,
respectively
    
    
    5,456
    
    
    
    8,066Inventories
    
    
    5,364
    
    
    
    6,184Prepaid expenses and other current assets
    
    
    1,818
    
    
    
    2,010Total current assets
    
    
    17,645
    
    
    
    18,596Property and equipment, net
    
    
    2,884
    
    
    
    2,897Intangible assets, net
    
    
    7,294
    
    
    
    4,445Goodwill
    
    
    4,579
    
    
    
    4,223Other assets
    
    
    246
    
    
    
    82Total assets
    
    $
    32,648
    
    
    $
    30,243LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit
    
    $
    2,431
    
    
    $
    5,147Current portion of long-term debt
    
    
    
    
    
    
    3,000Settlement obligation
    
    
    1,575
    
    
    
    Accounts payable
    
    
    4,588
    
    
    
    4,967Warrant liability
    
    
    1,238
    
    
    
    2Accrued expenses and other current liabilities
    
    
    4,466
    
    
    
    8,752Income taxes payable
    
    
    455
    
    
    
    1,081Total current liabilities
    
    
    14,753
    
    
    
    22,949Long-term debt, excluding current portion
    
    
    1,456
    
    
    
    75Deferred tax liability
    
    
    1,096
    
    
    
    1,336Total liabilities
    
    
    17,305
    
    
    
    24,360Commitments and contingencies (Note 19)Stockholders equity:Preferred stock, par value $0.01 per share: authorized 100,000;
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, par value $0.01 per share: authorized
12,000,000; issued and outstanding 3,959,208 and 550,189
shares at December 31, 2010 and 2009, respectively
    
    
    40
    
    
    
    6Additional paid-in capital
    
    
    173,262
    
    
    
    156,110Accumulated other comprehensive loss
    
    
    (239
    )
    
    
    (889
    )Accumulated deficit
    
    
    (157,720
    )
    
    
    (149,344
    )Total stockholders equity
    
    
    15,343
    
    
    
    5,883Total liabilities and stockholders equity
    
    $
    32,648
    
    
    $
    30,243
  F-3




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Consolidated Statements of Operations
 (in thousands, except per share amounts)
 Years EndedDecember 31,2010
    
    
    2009Revenues
    
    $
    48,117
    
    
    $
    50,514Cost of revenues
    
    
    36,082
    
    
    
    38,547Gross margin
    
    
    12,035
    
    
    
    11,967Operating expenses:Selling, general and administrative
    
    
    11,923
    
    
    
    12,480Research and development
    
    
    4,373
    
    
    
    7,257Severance expense
    
    
    261
    
    
    
    1,429Recapitalization expense
    
    
    3,247
    
    
    
    1,258Gain on sale of intellectual property
    
    
    (3,900
    )
    
    
    (2,500
    )Total operating expenses
    
    
    15,904
    
    
    
    19,924Loss from operations
    
    
    (3,869
    )
    
    
    (7,957
    )Other income (expense):Interest income
    
    
    4
    
    
    
    18Interest expense
    
    
    (3,646
    )
    
    
    (2,304
    )Other expense, net
    
    
    (1,821
    )
    
    
    (291
    )Total other expense
    
    
    (5,463
    )
    
    
    (2,577
    )Loss from continuing operations before income taxes
    
    
    (9,332
    )
    
    
    (10,534
    )Income tax expense (benefit) from continuing operations
    
    
    12
    
    
    
    (1,036
    )Net loss from continuing operations
    
    
    (9,344
    )
    
    
    (9,498
    )Discontinued operations:Income from operations of discontinued Energy Systems division

(including gain on disposal of $3.7 million in 2009)
    
    
    1,494
    
    
    
    2,554Income tax expense from discontinued operations
    
    
    526
    
    
    
    1,032Net income from discontinued operations
    
    
    968
    
    
    
    1,522Net loss
    
    $
    (8,376
    )
    
    $
    (7,976
    )Basic and diluted loss per share:Net loss from continuing operations per share
    
    $
    (7.55
    )
    
    $
    (17.27
    )Net income from discontinued operations per share
    
    
    0.78
    
    
    
    2.77Net loss per share
    
    $
    (6.77
    )
    
    $
    (14.50
    )Weighted-average number of common shares outstanding:Basic and diluted
    
    
    1,238
    
    
    
    550
  F-4




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Consolidated Statements of Stockholders Equity and Comprehensive Loss
 (in thousands)
 AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Accumulated
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Income /(Loss)
    
    
    Deficit
    
    
    EquityBalance at December 31, 2008
    
    
    550
    
    
    $
    6
    
    
    $
    157,913
    
    
    $
    (2,867
    )
    
    $
    (143,639
    )
    
    $
    11,413Cumulative effect of change in accounting for
warrants
    
    
    
    
    
    
    
    
    
    
    (2,494
    )
    
    
    
    
    
    
    2,271
    
    
    
    (223
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    691Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,976
    )
    
    
    (7,976
    )Unrealized gain on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,978
    
    
    
    
    
    
    
    1,978Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,998
    )Balance at December 31, 2009
    
    
    550
    
    
    
    6
    
    
    
    156,110
    
    
    
    (889
    )
    
    
    (149,344
    )
    
    
    5,883Conversion of secured convertible notes
    
    
    1,510
    
    
    
    15
    
    
    
    5,681
    
    
    
    
    
    
    
    
    
    
    
    5,696Beneficial conversion on secured convertible
notes
    
    
    
    
    
    
    
    
    
    
    1,342
    
    
    
    
    
    
    
    
    
    
    
    1,342Shares exchanged in reverse acquisition of CDTI
    
    
    1,512
    
    
    
    15
    
    
    
    7,557
    
    
    
    
    
    
    
    
    
    
    
    7,572Issuance of shares and warrants in lieu of fees
    
    
    217
    
    
    
    2
    
    
    
    1,257
    
    
    
    
    
    
    
    
    
    
    
    1,259Issuance of liability classified warrants
    
    
    
    
    
    
    
    
    
    
    (426
    )
    
    
    
    
    
    
    
    
    
    
    (426
    )Issuance of warrants with shareholder note
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    90Stock based compensation
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    275Exercise of stock warrants
    
    
    174
    
    
    
    2
    
    
    
    1,376
    
    
    
    
    
    
    
    
    
    
    
    1,378Restricted stock awards forfeited
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,376
    )
    
    
    (8,376
    )Unrealized gain on foreign currency
translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    
    
    
    
    650Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,726
    )Balance at December 31, 2010
    
    
    3,959
    
    
    $
    40
    
    
    $
    173,262
    
    
    $
    (239
    )
    
    $
    (157,720
    )
    
    $
    15,343
  F-5




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC
 
 Consolidated Statements of Cash Flows
 (in thousands)
 Years EndedDecember 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (8,376
    )
    
    $
    (7,976
    )Income from discontinued operations
    
    
    (968
    )
    
    
    (1,522
    )Adjustments to reconcile net loss to cash used in operating activities:Depreciation and amortization
    
    
    1,356
    
    
    
    1,394(Recovery of) provision for doubtful accounts
    
    
    (37
    )
    
    
    11Compensation expense for options
    
    
    275
    
    
    
    691Change in fair value of financial instruments
    
    
    337
    
    
    
    Beneficial conversion on convertible notes
    
    
    1,342
    
    
    
    Amortization of debt discount on convertible notes
    
    
    1,359
    
    
    
    Amortization of deferred financing
    
    
    272
    
    
    
    686Loss on foreign currency transactions
    
    
    530
    
    
    
    655Change in fair value of liability-classified warrants
    
    
    810
    
    
    
    (221
    )Loss on unconsolidated affiliate
    
    
    19
    
    
    
    1,271Gain on sale of interest in unconsolidated affiliate
    
    
    
    
    
    
    (1,165
    )Deferred income taxes
    
    
    (686
    )
    
    
    (1,347
    )Loss on disposal of property and equipment
    
    
    60
    
    
    
    60Gain on sale of intellectual property
    
    
    (3,900
    )
    
    
    (2,500
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    3,008
    
    
    
    (3,041
    )Inventories
    
    
    1,841
    
    
    
    3,184Prepaid expenses and other assets
    
    
    820
    
    
    
    1,036Accounts payable
    
    
    (788
    )
    
    
    1,662Income taxes payable
    
    
    (768
    )
    
    
    377Accrued expenses and other current liabilities
    
    
    (181
    )
    
    
    (820
    )Cash used in operating activities of continuing operations
    
    
    (3,675
    )
    
    
    (7,565
    )Cash (used in) provided by operating activities of discontinued
operations
    
    
    (589
    )
    
    
    195Net cash used in operating activities
    
    
    (4,264
    )
    
    
    (7,370
    )Cash flows from investing activities:Cash acquired in merger with Clean Diesel Technologies, Inc.
    
    
    3,916
    
    
    
    Investment in unconsolidated affiliate
    
    
    (413
    )
    
    
    Purchases of property and equipment
    
    
    (422
    )
    
    
    (629
    )Proceeds from sale of interest in unconsolidated affiliate
    
    
    
    
    
    
    108Proceeds from sale of intellectual property
    
    
    2,000
    
    
    
    5,400Proceeds from sale of discontinued Energy Systems division
    
    
    
    
    
    
    8,550Net cash provided by investing activities
    
    
    5,081
    
    
    
    13,429
 F-6




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Consolidated Statements of Cash Flows
(in thousands)
 Years EndedDecember 31,2010
    
    
    2009Cash flows from financing activities:Borrowings under line of credit
    
    
    1,057
    
    
    
    1,721Repayment of line of credit
    
    
    (4,140
    )
    
    
    (5,424
    )Proceeds from issuance of debt
    
    
    5,500
    
    
    
    30Proceeds from exercise of warrants
    
    
    1,378
    
    
    
    Repayment of long-term debt
    
    
    (1,530
    )
    
    
    (6,800
    )Payments for debt issuance costs
    
    
    (272
    )
    
    
    (14
    )Net cash provided by (used in) financing activities
    
    
    1,993
    
    
    
    (10,487
    )Effect of exchange rate changes on cash
    
    
    (139
    )
    
    
    38Net change in cash and cash equivalents
    
    
    2,671
    
    
    
    (4,390
    )Cash and cash equivalents at beginning of the year
    
    
    2,336
    
    
    
    6,726Cash and cash equivalents at end of the year
    
    $
    5,007
    
    
    $
    2,336Supplemental disclosures:Cash paid for interest
    
    $
    473
    
    
    $
    1,390Cash paid for income taxes
    
    $
    1,500
    
    
    $
    528Noncash investing and financing activities:Convertible notes converted into common stock
    
    $
    5,696
    
    
    
    Fair value of CDTI merger consideration, net of cash acquired
    
    $
    3,656
    
    
    
    Liabilities settled in common stock and warrants
    
    $
    1,259
    
    
    
    Settlement
obligation incurred in  settlement of long-term debt
    
    $
    1,575
    
    
    
    
  F-7




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 
 Notes to Consolidated Financial Statements
 1. Organization
 a. Description of Business
  b. Merger
    c. Liquidity
 
  F-8




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  2. Summary of Significant Accounting Policies
 a. Stockholders Equity
  b. Principles of Consolidation
  c. Concentration of Risk
  Years EndedDecember 31,2010
    
    2009CustomerA
    
    
    22
    %
    
    
    24
    %B
    
    
    10
    %
    
    
    22
    %
   December 31,2010
    
    2009CustomerA
    
    
    16
    %
    
    
    18
    %B
    
    
    14
    %
    
    
    15
    %C
    
    
    2
    %
    
    
    14
    %
   Years EndedDecember 31,2010
    
    2009VendorA
    
    
    22
    %
    
    
    16
    %B
    
    
    10
    %
    
    
    14
    %C
    
    
    11
    %
    
    
    11
    %
  F-9




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 d. Use of Estimates
  e. Cash and Cash Equivalents
  f. Accounts Receivable
    g. Inventories
  F-10




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 h. Property and Equipment
  Machinery and equipment
    
    2  10 yearsFurniture and fixtures
    
    2  5 yearsComputer hardware and software
    
    2  5 yearsVehicles
    
    2  5 years
  i. Goodwill
  j. Intangible Assets
  k. Long Lived Assets
  l. Warrants and Derivative Liabilities
  F-11




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 a)
    
    Equity if they (i) require physical settlement or net-share settlement, or (ii) give
the choice of net-cash settlement or settlement in the Companys own shares (physical
settlement or net-share settlement), or asb)
    
    Assets or liabilities if they (i) require net-cash settlement (including a requirement
to net cash settle the contract if an event occurs and if that event is outside the
Companys control), or (ii) give the counterparty a choice of net-cash settlement or
settlement in shares (physical settlement or net-share settlement).
  m. Income Taxes
  n. Revenue Recognition
  o. Cost of Revenue
  p. Selling, General and Administrative Expense
  q. Research and Development
  F-12




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  r. Recapitalization Expense
  s. Stock Compensation
  t. Foreign Currency
   u. Net Income (Loss) per Share
   v. Accounting Changes
   F-13




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  
    
    Level 1: Quoted prices (unadjusted) in active markets for identical assets or
liabilities.
 
    
    Level 2: Inputs other than quoted prices included within Level 1 that are either
directly or indirectly observable.
 
    
    Level 3: Unobservable inputs in which little or no market activity exists, therefore
requiring an entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
 w. Fair Value of Financial Instruments
    x. Reclassifications
  3. Merger with CDTI
   F-14




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
    Fair Value of CDTI common stock at October 15, 2010
    
    $
    7,401Fair value of stock options and warrants at October 15, 2010
    
    
    171Total purchase consideration
    
    $
    7,572
   Cash and cash equivalents
    
    $
    3,916Accounts receivable
    
    
    156Inventory
    
    
    872Other assets
    
    
    326Property and equipment
    
    
    216Intangible assets
    
    
    3,306Goodwill
    
    
    154Total assets acquired
    
    
    8,946Liabilities assumed
    
    
    (1,374
    )Total purchase consideration
    
    $
    7,572
   F-15




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
   WeightedAverageUseful Life inYears
    
    
    Fair ValueTrade name
    
    
    15.5
    
    
    $
    390Patents
    
    
    15.5
    
    
    
    1,446Backlog
    
    
    1.0
    
    
    
    180Customer relationships
    
    
    4.5
    
    
    
    1,290Total intangible assets acquired
    
    
    
    
    
    $
    3,306
   Supplemental Pro Forma Clean Diesel Technologies, Inc. for Business Combination
  Years EndedDecember 31,2010
    
    2009Revenues
    
    $
    49,732
    
    
    $
    51,735Net loss from continuing operations
    
    $
    (14,524
    )
    
    $
    (16,505
    )
   F-16




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 4. Inventories
  December 31,2010
    
    
    2009Finished goods
    
    $
    2,442
    
    
    $
    2,221Work in progress
    
    
    1,061
    
    
    
    1,255Raw materials
    
    
    1,861
    
    
    
    2,708$
    5,364
    
    
    $
    6,184
 5. Property and Equipment
  December 31,2010
    
    
    2009Buildings and land
    
    $
    837
    
    
    $
    679Furniture and fixtures
    
    
    2,428
    
    
    
    2,354Computer hardware and software
    
    
    1,415
    
    
    
    1,351Machinery and equipment
    
    
    11,990
    
    
    
    11,544Vehicles
    
    
    16
    
    
    
    5916,686
    
    
    
    15,987Less accumulated depreciation
    
    
    (13,802
    )
    
    
    (13,090
    )$
    2,884
    
    
    $
    2,897
 6. Goodwill and Intangible Assets
 Goodwill
  Balance at December 31, 2008
    
    $
    6,319Sale of Energy Systems division
    
    
    (2,600
    )Effect of translation adjustment
    
    
    504Balance at December 31, 2009
    
    
    4,223Acquisition of CDTI
    
    
    154Effect of translation adjustment
    
    
    202Balance at December 31, 2010
    
    $
    4,579
   F-17




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  Intangible Assets
  Useful Life
    
    
    December 31,in Years
    
    
    2010
    
    
    2009Trade name
    
    
    15  20
    
    
    $
    1,165
    
    
    $
    738Patents and know-how
    
    
    5  16
    
    
    
    5,416
    
    
    
    3,792Backlog
    
    
    1
    
    
    
    180
    
    
    
    Customer relationships
    
    
    4  8
    
    
    
    2,544
    
    
    
    1,2069,305
    
    
    
    5,736Less accumulated amortization
    
    
    
    
    
    
    (2,011
    )
    
    
    (1,291
    )$
    7,294
    
    
    $
    4,445
   Years ending December 31:2011
    
    $
    1,5182012
    
    
    1,0162013
    
    
    8552014
    
    
    7742015
    
    
    709
 7. Accrued Expenses and Other Current Liabilities
  December 31,2010
    
    
    2009Accrued salaries and benefits
    
    $
    1,515
    
    
    $
    1,294Deferred gain on sale of intellectual property
    
    
    
    
    
    
    1,900Accrued professional and consulting fees
    
    
    750
    
    
    
    2,375Accrued severance
    
    
    258
    
    
    
    670Accrued warranty
    
    
    466
    
    
    
    371Deferred revenue
    
    
    
    
    
    
    195Other
    
    
    1,477
    
    
    
    1,947$
    4,466
    
    
    $
    8,752
 F-18




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 8. Severance Charges
  December 31,2010
    
    
    2009Balance at beginning of year
    
    $
    670
    
    
    $
    187Accrued severance expense
    
    
    261
    
    
    
    1,429Paid severance expense
    
    
    (673
    )
    
    
    (946
    )Balance at end of year
    
    $
    258
    
    
    $
    670
  9. Accrued Warranty
  December 31,2010
    
    
    2009Balance at beginning of year
    
    $
    371
    
    
    $
    178Accrued warranty expense
    
    
    241
    
    
    
    354Warranty claims paid
    
    
    (164
    )
    
    
    (190
    )Translation adjustment
    
    
    18
    
    
    
    29Balance at end of year
    
    $
    466
    
    
    $
    371
 10. Debt
  December 31,2010
    
    
    2009Line of credit
    
    $
    2,431
    
    
    $
    5,147Consideration payable
    
    
    
    
    
    
    3,000Loan from shareholder
    
    
    1,410
    
    
    
    Capital lease obligation
    
    
    46
    
    
    
    753,887
    
    
    
    8,222Less current portion
    
    
    (2,431
    )
    
    
    (8,147
    )$
    1,456
    
    
    $
    75
  Line of Credit
  F-19




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
    Consideration Payable and Settlement Obligation
  Secured Convertible Notes Payable
  F-20




---



##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
        Loan from Shareholder
  F-21




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
   11. Stockholders Equity
   Balance at December 31, 2008 and 2009
    
    
    550,189Issuance for Directors Fees
    
    
    50,968Issuance on conversion of Secured Convertible Notes
    
    
    1,510,189Merger with CDTI
    
    
    1,511,621Issuance for financial advisor fees
    
    
    166,666Stock warrants exercised
    
    
    174,019Restricted stock awards forfeited
    
    
    (4,444
    )Balance at December 31, 2010
    
    
    3,959,208
    F-22




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 12. Warrants
  2010WeightedAverageExercise
    
    
    Range ofShares
    
    
    Price
    
    
    Exercise PricesOutstanding at beginning of year
    
    
    34,740
    
    
    $
    122.53
    
    
    
    $2.80 - $211.73Merger with CDTI
    
    
    248,090
    
    
    $
    24.47
    
    
    
    $7.92 - $  98.70Warrants issued
    
    
    836,847
    
    
    $
    7.92
    
    
    
    $7.92Warrants exercised
    
    
    (174,019
    )
    
    $
    7.92
    
    
    
    $7.92Warrants expired / forfeited
    
    
    (2,788
    )
    
    $
    76.05
    
    
    
    $60.00 - $211.73Outstanding at end of year
    
    
    942,870
    
    
    $
    16.36
    
    
    
    $2.80 - $169.47Warrants exercisable at year-end
    
    
    917,870
    
    
    $
    16.52
    
    
    
    $2.80 - $169.47Aggregate intrinsic value
    
    $
    1,329,012
 Warrants Outstanding December 31, 2009
  Warrants exercisable into common stock (issued in USD)
    
    
    295Exercise price
    
    $
    211.73Warrants exercisable into common stock (issued in GBX)
    
    
    34,445Weighted average exercise price
    
    $
    121.76
     F-23




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 Merger with CDTI
   2010 Issuances
    Valuation
  F-24




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  October 15
    
    December 21
    
    December 22
    
    December 30Expected volatility
    
    
    53.7
    %
    
    
    47.9
    %
    
    
    47.9
    %
    
    
    47.9
    %Risk-free interest rate
    
    
    0.79
    %
    
    
    1.27
    %
    
    
    1.27
    %
    
    
    2.39
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected life in years
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0Forfeiture rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Number of Warrants
    
    
    840,043
    
    
    
    25,000
    
    
    
    128,333
    
    
    
    25,000Weighted Average Fair
Value
    
    $
    0.94
    
    
    $
    2.91
    
    
    $
    2.84
    
    
    $
    3.59
   Classification
     Balance at beginning of year
    
    $
    2Issuance of common stock warrants
    
    
    426Remeasurement of common stock warrants
    
    
    810Balance at end of year
    
    $
    1,238
  F-25




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 13. Share Based Payment
     WeightedAverageWeighted
    
    
    RemainingAverage
    
    
    Contractual
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    (in years)
    
    
    ValueOutstanding at January 1, 2010
    
    
    36,606
    
    
    $
    219.33
    
    
    
    4.87
    
    
    
    Granted
    
    
    25,000
    
    
    $
    11.64
    
    
    
    9.88
    
    
    
    Replacement awards
    
    
    126,801
    
    
    $
    61.81
    
    
    
    2.81
    
    
    
    Cancelled
    
    
    (36,606
    )
    
    $
    219.33
    
    
    
    4.87
    
    
    
    Outstanding at December 31, 2010
    
    
    151,801
    
    
    $
    53.55
    
    
    
    3.98
    
    
    
    Exercisable at December 31, 2010
    
    
    135,134
    
    
    $
    58.72
    
    
    
    3.25
    
    
    
    Available for grant at December 31, 2010
    
    
    541,060
  F-26




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 Replacement Awards
  2010 Grants
  Expected volatility
    
    
    59.9
    %Risk-free interest rate
    
    
    1.5
    %Dividend yield
    
    
    0.0
    %Expected life in years
    
    
    5.0Forfeiture rate
    
    
    0.0
    %
   14. Other Expense, Net
  Years EndedDecember 31,2010
    
    
    2009(Loss) gain on change in fair value of derivative financial instruments
    
    $
    (1,147
    )
    
    $
    207Foreign currency exchange losses
    
    
    (881
    )
    
    
    (1,060
    )Gain on release of Delphi reserve
    
    
    
    
    
    
    432All other, net
    
    
    207
    
    
    
    130Total other expense, net
    
    $
    (1,821
    )
    
    $
    (291
    )
 F-27




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 15. Income Taxes
  Years EndedDecember 31,2010
    
    
    2009U.S.-based operations
    
    $
    (10,742
    )
    
    $
    (11,678
    )Non U.S.-based operations
    
    
    1,410
    
    
    
    1,144$
    (9,332
    )
    
    $
    (10,534
    )
  Current
    
    
    Deferred
    
    
    TotalYear ended December 31, 2010:U.S. Federal
    
    $
    (176
    )
    
    $
    (310
    )
    
    $
    (486
    )State and local
    
    
    (12
    )
    
    
    (87
    )
    
    
    (99
    )Foreign
    
    
    886
    
    
    
    (289
    )
    
    
    597Total
    
    $
    698
    
    
    $
    (686
    )
    
    $
    12Year ended December 31, 2009:U.S. Federal
    
    $
    (560
    )
    
    $
    (258
    )
    
    $
    (818
    )State and local
    
    
    (150
    )
    
    
    (70
    )
    
    
    (220
    )Foreign
    
    
    1,021
    
    
    
    (1,019
    )
    
    
    2Total
    
    $
    311
    
    
    $
    (1,347
    )
    
    $
    (1,036
    )
  Years EndedDecember 31,2010
    
    
    2009Expected tax benefit
    
    $
    (3,173
    )
    
    $
    (3,582
    )Net tax effects of:State taxes, net of federal benefit
    
    
    (54
    )
    
    
    (643
    )Research credits
    
    
    (18
    )
    
    
    (153
    )Permanent difference on convertible notes and warrants
    
    
    1,432
    
    
    
    Permanent difference on deemed dividend
    
    
    382
    
    
    
    Permanent difference on transaction costs
    
    
    945
    
    
    
    Other
    
    
    110
    
    
    
    (270
    )Change in deferred tax asset due to Section 382 net
operating loss carryforward limitation
    
    
    63,147
    
    
    
    25Change in deferred tax asset valuation allowance
    
    
    (62,759
    )
    
    
    3,587$
    12
    
    
    $
    (1,036
    )
 F-28




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  December 31,2010
    
    
    2009Deferred tax assets:Research and development credits
    
    $
    1,551
    
    
    $
    3,895Other credits
    
    
    
    
    
    
    366Operating loss carry forwards
    
    
    6,038
    
    
    
    34,509Warrant expense
    
    
    
    
    
    
    84Inventories
    
    
    377
    
    
    
    601Allowance for doubtful accounts
    
    
    189
    
    
    
    105Depreciation
    
    
    
    
    
    
    566Deferred research and development expenses for income tax
    
    
    331
    
    
    
    6,882Non-cash compensation
    
    
    1,293
    
    
    
    681Other
    
    
    696
    
    
    
    3,800Total gross deferred tax assets
    
    
    10,475
    
    
    
    51,489Valuation allowance
    
    
    (9,120
    )
    
    
    (48,536
    )Net deferred tax assets
    
    
    1,355
    
    
    
    2,953Deferred tax liabilities:Amortization
    
    
    (39
    )
    
    
    (2,749
    )Other identifiable intangibles
    
    
    (2,412
    )
    
    
    (1,540
    )Total gross deferred tax liabilities
    
    
    (2,451
    )
    
    
    (4,289
    )Net deferred tax liabilities
    
    $
    (1,096
    )
    
    $
    (1,336
    )
    F-29




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
   December 31,2010
    
    
    2009Balance, beginning of year
    
    $
    361
    
    
    $
    268Additions for current year tax positions
    
    
    112
    
    
    
    127Reductions for prior year tax positions
    
    
    
    
    
    
    (34
    )Balance, end of year
    
    $
    473
    
    
    $
    361
   Open Tax YearsUnited States  Federal
    
    
    2007  2010United States  State
    
    
    2006  2010Canada
    
    
    2005  2010Sweden
    
    
    2008  2010United Kingdom
    
    
    2006  2010
 16. TCC Joint Venture
     F-30




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  December 31,2010
    
    
    2009Assets
    
    $
    3,402
    
    
    $
    6,928Liabilities
    
    
    8,422
    
    
    
    10,980Deficit
    
    $
    (5,020
    )
    
    $
    (4,052
    )
 Years EndedDecember 31,2010
    
    2009Net sales
    
    $
    2,669
    
    
    $
    745Gross margin
    
    $
    (2,372
    )
    
    $
    (213
    )Net loss
    
    $
    (388
    )
    
    $
    (4,379
    )
 17. Sale of Energy Systems Division
   18. Related-party Transactions
    F-31




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
     19. Commitments and Contingencies
 Lease Commitments
  Capital
    
    
    Operatingleases
    
    
    leasesYears ending December 31:2011
    
    $
    32
    
    
    $
    1,2482012
    
    
    14
    
    
    
    1,1802013
    
    
    6
    
    
    
    8392014
    
    
    
    
    
    
    6412015
    
    
    
    
    
    
    388Later years, through 2018
    
    
    
    
    
    
    762Total minimum lease payments
    
    
    52
    
    
    $
    5,058Less amount representing interest
    
    
    (6
    )Present value of net minimum capital lease payments
    
    $
    46
 Legal Proceedings
   F-32




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
      Sales and use tax audit
  F-33




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 20. Segment Reporting
  Heavy Duty Diesel Systems division
 Catalyst division ®
 Corporate
 Discontinued operations
 F-34




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  Years EndedDecember 31,2010
    
    
    2009Net salesHeavy Duty Diesel Systems
    
    $
    31,161
    
    
    $
    25,916Catalyst
    
    
    17,726
    
    
    
    25,074Corporate
    
    
    
    
    
    
    Eliminations (1)
    
    
    (770
    )
    
    
    (476
    )Total
    
    $
    48,117
    
    
    $
    50,514Income (loss) from operationsHeavy Duty Diesel Systems
    
    $
    1,882
    
    
    $
    1,942Catalyst (2)
    
    
    (2,515
    )
    
    
    (5,730
    )Corporate
    
    
    (3,199
    )
    
    
    (4,169
    )Eliminations
    
    
    (37
    )
    
    
    Total
    
    $
    (3,869
    )
    
    $
    (7,957
    )Depreciation and amortizationHeavy Duty Diesel Systems
    
    $
    1,105
    
    
    $
    1,143Catalyst
    
    
    251
    
    
    
    251Corporate
    
    
    
    
    
    
    Total
    
    $
    1,356
    
    
    $
    1,394Capital expendituresHeavy Duty Diesel Systems
    
    $
    402
    
    
    $
    294Catalyst
    
    
    20
    
    
    
    335Eliminations
    
    
    
    
    
    
    Total
    
    $
    422
    
    
    $
    629
 December 31,2010
    
    
    2009Total assetsHeavy Duty Diesel Systems
    
    $
    36,489
    
    
    $
    28,181Catalyst
    
    
    33,567
    
    
    
    29,231Discontinued operations
    
    
    1,247
    
    
    
    532Eliminations
    
    
    (38,655
    )
    
    
    (27,701
    )Total
    
    $
    32,648
    
    
    $
    30,243
 
 (1)
    
    Elimination of Catalyst revenue related to sales to Heavy Duty Diesel Systems.(2)
    
    Catalyst division income from operations includes a $3.9 million gain on sale of
intellectual property to TKK in 2010 and $2.5 million in 2009.  F-35




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
  Years EndedDecember 31,2010
    
    
    2009United States
    
    $
    20,844
    
    
    $
    27,671Canada
    
    
    21,173
    
    
    
    18,247Europe
    
    
    6,100
    
    
    
    4,596Total
    
    $
    48,117
    
    
    $
    50,514
  Net Fixed Assets
    
    
    Total Assets2010
    
    
    2009
    
    
    2010
    
    
    2009United States
    
    $
    1,119
    
    
    $
    1,316
    
    
    $
    13,446
    
    
    $
    10,333Canada
    
    
    1,458
    
    
    
    1,313
    
    
    
    13,986
    
    
    
    16,016Europe
    
    
    307
    
    
    
    268
    
    
    
    5,216
    
    
    
    3,894Total
    
    $
    2,884
    
    
    $
    2,897
    
    
    $
    32,648
    
    
    $
    30,243
 21. Subsequent Events
      F-36




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##### Table of Contents



CLEAN DIESEL TECHNOLOGIES, INC.
 Notes to Consolidated Financial Statements
 22. Quarterly Results of Operations (unaudited)
  Three Months Ended2010
    
    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31Revenues
    
    $
    11,807
    
    
    $
    10,939
    
    
    $
    12,926
    
    
    $
    12,445Gross margin
    
    $
    2,737
    
    
    $
    2,523
    
    
    $
    3,169
    
    
    $
    3,606Net (loss) income from continuing operations
(1)
    
    $
    (6,081
    )
    
    $
    (4,069
    )
    
    $
    (1,861
    )
    
    $
    2,667Net (loss) income from discontinued operations
    
    
    397
    
    
    
    732
    
    
    
    (86
    )
    
    
    (75
    )Net (loss)income
    
    $
    (5,684
    )
    
    $
    (3,337
    )
    
    $
    (1,947
    )
    
    $
    2,592Net (loss) income from continuing operations
per common shareBasic
    
    $
    (1.85
    )
    
    $
    (7.40
    )
    
    $
    (3.38
    )
    
    $
    4.85Diluted
    
    $
    (1.85
    )
    
    $
    (7.40
    )
    
    $
    (3.38
    )
    
    $
    4.84Net (loss) income per common share:Basic
    
    $
    (1.73
    )
    
    $
    (6.07
    )
    
    $
    (3.54
    )
    
    $
    4.71Diluted
    
    $
    (1.73
    )
    
    $
    (6.07
    )
    
    $
    (3.54
    )
    
    $
    4.70
 Three Months Ended2009
    
    December 31
    
    
    September 30
    
    
    June 30
    
    
    March 31Revenues
    
    $
    17,969
    
    
    $
    13,401
    
    
    $
    9,866
    
    
    $
    9,278Gross margin
    
    $
    5,119
    
    
    $
    3,286
    
    
    $
    1,180
    
    
    $
    2,382Net income (loss) from continuing operations
(1)
    
    $
    672
    
    
    $
    (3,174
    )
    
    $
    (5,035
    )
    
    $
    (1,961
    )Net income (loss) from discontinued operations
    
    
    2,645
    
    
    
    36
    
    
    
    141
    
    
    
    (1,300
    )Net income (loss)
    
    $
    3,317
    
    
    $
    (3,138
    )
    
    $
    (4,894
    )
    
    $
    (3,261
    )Net income (loss) from continuing operations
per common shareBasic
    
    $
    1.22
    
    
    $
    (5.77
    )
    
    $
    (9.34
    )
    
    $
    (3.38
    )Diluted
    
    $
    1.22
    
    
    $
    (5.77
    )
    
    $
    (9.34
    )
    
    $
    (3.38
    )Net income (loss) per common share:Basic
    
    $
    6.03
    
    
    $
    (5.71
    )
    
    $
    (9.09
    )
    
    $
    (5.74
    )Diluted
    
    $
    6.00
    
    
    $
    (5.71
    )
    
    $
    (9.09
    )
    
    $
    (5.74
    )
 
 (1)
    
    Includes a pre-tax gain of $3.9 million and $2.8 million from the sale of intellectual
property to TKK in the quarters ended March 31, 2010 and March 31, 2009, respectively. F-37




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of May 13, 2010, among Clean Diesel Technologies, Inc.,
CDTI Merger Sub, Inc. and Catalytic Solutions , Inc. (incorporated by reference to Annex A to the
joint proxy statement/information statement and prospectus included in Clean Diesels
Registration Statement on Form S-4/A filed on September 23, 2010).2.2
    
    Letter Agreement dated September 1, 2010 amending the Agreement and Plan of Merger dated as of
May 13, 2010 (incorporated by reference to Exhibit 2.2 to the joint proxy statement/information
statement and prospectus included in Clean Diesels Registration Statement on Form S-4/A filed on
September 23, 2010).2.3
    
    Letter Agreement dated September 14, 2010 amending the Agreement and Plan of Merger dated as of
May 13, 2010 (incorporated by reference to Exhibit 2.3 to the joint proxy statement/information
statement and prospectus included in Clean Diesels Registration Statement on Form S-4/A filed on
September 23, 2010).3.1
    
    Restated Certificate of Incorporation of Clean Diesel Technologies, Inc. dated as of March 21,
2007 (incorporated by reference to Exhibit 3(i)(a) to Clean Diesels Annual report on Form 10-K
for the year ended December 31, 2006 and filed on March 30, 2007).3.2
    
    Certificate of Amendment of Restated Certificate of Incorporation of Clean Diesel Technologies,
Inc. dated as of June 15, 2007 (incorporated by reference to Exhibit 3(i)(b) to Clean Diesels
Registration Statement on Form S-1 (No. 333-144201) dated on June 29, 2007).3.3
    
    Certificate of Amendment of Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.3 to Clean Diesels Post-Effective Amendment No.1 to Form S-4 on Form S-3 (No.
333-166865) filed on November 10, 2010).3.4
    
    By-Laws of Clean Diesel Technologies, Inc. as amended through November 6, 2008 (incorporated by
reference to Exhibit 3.1 to Clean Diesels Quarterly Report on Form 10-Q filed on November 10,
2008).4.1
    
    Specimen of Certificate for Clean Diesel Technologies, Inc. Common Stock (incorporated by
reference to Exhibit 4.1 to Clean Diesels Post-Effective Amendment No.1 to Form S-4 on Form S-3
(No. 333-166865) filed on November 10, 2010).10.1
    
    Letter Agreement, dated May 13, 2010 between Clean Diesel and Innovator Capital, Ltd.
(incorporated by reference to Exhibit 10.1 to Clean Diesels Current Report on Form 8-K filed on
May 18, 2010) as amended by the Letter Agreement, dated August 23, 2010 between Clean Diesel and
Innovator Capital, Ltd. (incorporated by reference to Exhibit 10.1 to Clean Diesels Current
Report on Form 8-K filed on August 25, 2010).10.2*
    
    Form of Warrant issued to Innovator Capital, Ltd., dated October 15, 2010.10.3
    
    Engagement Letter between Clean Diesel and Innovator Capital Ltd., dated November 20, 2009
(incorporated by reference to Exhibit 10 to Clean Diesels Current Report on Form 8-K filed on
November 24, 2009) as amended by the Amendment of Engagement Letter between Clean Diesel and
Innovator Capital Ltd dated April 21, 2010 (incorporated by reference to Exhibit 10(a) to Clean
Diesels Quarterly Report on Form 10-Q filed on May 14, 2010).10.4*
    
    Form of Clean Diesel Offshore Private Placement Commitment Letter, including Form of Warrant.10.5
    
    Form of Warrant to purchase Common Stock (incorporated by reference to Exhibit 4.2 to Clean
Diesels Post-Effective Amendment No. 1 to Form S-4 on Form S-3 (No. 333-166865) filed on
November 10, 2010).




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##### Table of Contents



ExhibitNo.
    
    Description10.6
    
    Registration Rights Agreement dated October 15, 2010 (incorporated by reference to Exhibit 10.1
to Clean Diesels Current Report on Form 8-K filed on October 21, 2010).10.7
    
    Assignment and Assumption Agreement dated October 15, 2010 (incorporated by reference to Exhibit
10.2 to Clean Diesels Current Report on Form 8-K filed on October 21, 2010).10.8
    
    Settlement Agreement and Releases between Mansour and M.N. Mansour Inc. (collectively Mansour)
and Catalytic Solutions, Inc. and Applied Utility Systems, Inc. dated October 20, 2010
(incorporated by reference to Exhibit 10.1 to Clean Diesels Current Report on Form 8-K filed on
October 25, 2010).10.9
    
    Loan Commitment Letter, dated December 30, 2010, between Kanis S.A. and Clean Diesel
(incorporated by reference to Exhibit 10.1 to Clean Diesels Current Report on Form 8-K filed on
January 5, 2011).10.10
    
    Form of $1,500,000 Promissory Note Dated December 30, 2010 (incorporated by reference to Schedule
A to Loan Commitment Letter filed as Exhibit 10.1 to Clean Diesels current report on Form 8-K
filed on January 5, 2011).10.11
    
    Form of Warrant issued to Kanis S.A., dated December 30, 2010 (incorporated by reference to
Schedule B to Loan Commitment Letter filed as Exhibit 10.1 to Clean Diesels current report on
Form 8-K filed on January 5, 2011).10.12
    
    Letter Agreement dated January 13, 2011 among Fifth Third Bank, Catalytic Solutions, Inc. and
certain other direct or indirect subsidiaries of Clean Diesel (incorporated by reference to
Exhibit 10.1 to Clean Diesels Current Report on Form 8-K filed on January 20, 2011).10.13
    
    Form of Agreement of Sale of Accounts and Security Agreement, dated February 14, 2011 between
Faunus Group International, Inc. and Clean Diesel (incorporated by reference to Exhibit 10.1 to
Clean Diesels Current Report on Form 8-K filed on February 16, 2011).10.14
    
    Form of Agreement Guaranty, dated February 14, 2011 between Faunus Group International, Inc. and
Clean Diesel, Clean Diesel International LLC, Catalytic Solutions, Inc., Engine Control Systems,
Ltd., Engine Control Systems Limited, Clean Diesel Technologies Limited, Engine Control Systems
Europe AB, ECS Holdings, Inc., Catalytic Solutions Holdings, Inc. and CSI Aliso, Inc.
(incorporated by reference to Exhibit 10.2 to Clean Diesels Current Report on Form 8-K filed on
February 16, 2011).10.15**
    
    Employment Agreement, dated October 17, 2006, between Charles F. Call and CSI (incorporated by
reference to Exhibit 10.3 to Amendment No. 2 to Clean Diesels Registration Statement on Form
S-4/A (No. 333-166865) filed on August 30, 2010).10.16**
    
    Employment Agreement, dated July 9, 2008, between Nikhil A. Mehta and CSI (incorporated by
reference to Exhibit 10.4 to Amendment No. 2 to Clean Diesels Registration Statement on Form
S-4/A (No. 333-166865) filed on August 30, 2010).10.17**
    
    Employment Agreement, dated October 17, 2006, between Stephen J. Golden, Ph.D., and CSI
(incorporated by reference to Exhibit 10.5 to Amendment No. 2 to Clean Diesels Registration
Statement on Form S-4/A (No. 333-166865) filed on August 30, 2010).10.18**
    
    Employment Agreement effective January 16, 2009 between Dr. Daniel K. Skelton and Clean Diesel
(incorporated by reference to Exhibit 10(t) to Clean Diesels Annual Report on Form 10-K filed on
March 25, 2010).10.19**
    
    Employment Agreement effective March 30, 2009 between Michael L. Asmussen and Clean Diesel
(incorporated by reference to Exhibit 10 to Clean Diesels Quarterly Report on Form 10-Q filed on
May 11, 2009).10.20**
    
    Employment Agreement, dated September 23, 2003, between Tim Rogers, and Clean Diesel
(incorporated by reference to Exhibit 10(x) to Clean Diesels Annual Report on Form 10-K filed on
March 30, 2007) as amended by the letter agreement dated May 3, 2004 (incorporated by reference
to Exhibit 10(n) to Clean Diesels Annual Report on Form 10-K filed on March 25, 2010).10.21**
    
    Interim Services Agreement between Clean Diesel and SFN Professional Services LLC d/b/a Tatum as
of April 23, 2010 (incorporated by reference to Exhibit 10(b) to Clean Diesels Quarterly Report
on Form 10-Q filed on May 14, 2010).




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##### Table of Contents



ExhibitNo.
    
    Description10.22**
    
    Consulting Services Agreement effective January 27, 2010 between David F. Merrion and Clean
Diesel (incorporated by reference to Exhibit 10(u) to Clean Diesels Annual Report on Form 10-K
filed on March 25, 2010).10.23**
    
    1994 Incentive Plan as amended through June 11, 2002 (incorporated by reference to Exhibit 10(d)
to Clean Diesels Annual Report on Form 10-K filed on March 30, 2007).10.24**
    
    Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10(h) to Clean
Diesels Form 10-K filed on March 30, 2007).10.25**
    
    Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10(h) to Clean
Diesels Form 10-K filed on March 30, 2007).10.26**
    
    Form of Non-Executive Director Stock Option Agreement (incorporated by reference to Exhibit to
Clean Diesels Registration Statement on Form S-8 (No. 333-117057) dated July 1, 2004).21*
    
    Subsidiaries of Clean Diesel Technologies, Inc.23*
    
    Consent of KPMG LLP, Independent Registered Public Accountants.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232*
    
    Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
    
    Filed or furnished herewith**
    
    Indicates a management contract or compensatory plan or arrangement