UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 FORM
10-Q
 
 (Mark
      One)[X]  QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended May 31, 2009[   ]  TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from __________ to ______________000-51716(Commission
      File Number)CLEAN POWER TECHNOLOGIES
    INC.(Exact
      name of registrant as specified in its
charter)
 
 Nevada
              98-0413062(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)Unit 7(W) E-Plan Industrial Estate New Road, New
      Haven, East Sussex, UK
              BN90EX(Address
      of principal executive offices)
              (Zip
      Code)+ 44 1273-516013(Registrant’s
      telephone number, including area code)(Former
      name, former address and former fiscal year, if changed since last
      report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 
 Yes
      [X]  No [  ]Yes
      [X]  No [  ]
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes
      [  ]  No [X]
 Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See definition of “large accelerated filer,” “accelerated filer,” and
      “smaller reporting company” in Rule 12b-2 of the Exchange
    Act.Large
      accelerated filer
            [  ]
            Accelerated
      filer
            [  ]Non-accelerated
      filer
            [  ]
            Smaller
      reporting company
            [X]


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes
      [  ]  No [X]





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a
court.


Yes
      [  ]  No
[  ]





APPLICABLE
ONLY TO CORPORATE ISSUERS





71,749,970common shares
      outstanding as of June 30, 2009Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable
date.







CLEAN
POWER TECHNOLOGIES INC.


TABLE
OF CONTENTS





PART
      I – Financial InformationItem
      1.
            Financial
      Statements
            3Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            31Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            36Item
      4T.
            Controls
      and Procedures
            36PART
      II – Other InformationItem
      1.
            Legal
      Proceedings
            36Item
      1A.
            Risk
      Factors
            36Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            37Item
      3.
            Defaults
      Upon Senior Securities
            38Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            38Item
      5.
            Other
      Information
            38Item
      6.
            Exhibits
            39Signatures
            42




i


PART
I




ITEM
1.                                FINANCIAL
STATEMENTS





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 210 8-03 of
Regulation S-X.  Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.  In the opinion of management, all
adjustments considered necessary for a fair presentation have been
included.  All such adjustments are of a normal recurring
nature.  Operating results for the nine month period ended May 31,
2009, are not necessarily indicative of the results that may be expected for the
fiscal year ending August 31, 2009.  For further information refer to
the audited financial statements and footnotes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended August 31,
2008.





PageUnaudited
      Consolidated Financial StatementsConsolidated
      Balance Sheets
            5Consolidated
      Statements of Operations and Comprehensive Loss
            6Consolidated
      Statements of Cash Flows
            7
      to 8Notes
      to Unaudited Consolidated Financial Statements
            9
      to 25





3





CLEAN
POWER TECHNOLOGIES INC.





(A
Development Stage Company)





INTERIM
CONSOLIDATED FINANCIAL STATEMENTS


May 31,
2009





(Stated in US
Dollars)





(UNAUDITED)


4


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


CONSOLIDATED
BALANCE SHEETS


(Stated in U.S.
Dollars)


(Unaudited)


ASSETS
                
                May
      31,
                  2009
                
                
                August
      31,
                  2008CurrentCash
                
                $
                144,806
                
                
                $
                1,203,030Amounts
      Receivable - Note 4
                
                
                52,357
                
                
                
                15,071Prepaid
      expense
                
                
                45,402
                
                
                
                18,938242,565
                
                
                
                1,237,039Plant
      and equipment - Note 5
                
                
                838,870
                
                
                
                506,983Deferred
      financing costs, net of accumulated amortization
                  of
      $82,685 as of  May 31, 2009
                
                
                100,610
                
                
                
                169,795Total
      Assets
                
                $
                1,182,045
                
                
                $
                1,913,817Liabilities
      and Stockholders' DeficiencyCurrentAccounts
      payable and accrued liabilities
                
                $
                217,929
                
                
                $
                194,908Accounts
      payable – related party
                
                
                52,545
                
                
                
                -Prepaid
      deposit
                
                
                83,990
                
                
                
                -Wages
      payable - related party - Note 6
                
                
                365,582
                
                
                
                126,667Stock
      option liability - Note 10(ii)
                
                
                778,362
                
                
                
                380,290Total
      current liabilities
                
                
                1,498,408
                
                
                
                701,865Due
      to related party - Note 6
                
                
                179,316
                
                
                
                139,521Secured
      convertible notes payable - including $143,111 accrued interest - Note
      8
                
                
                279,369
                
                
                
                47,342Embedded
      derivative liability - Note 8
                
                
                962,733
                
                
                
                1,933,002Warrant
      liability - Note 8
                
                
                3,335,137
                
                
                
                3,372,000Total
      Liabilities
                
                
                6,254,963
                
                
                
                6,193,730Stockholders'
      DeficiencyPreferred
      stock:  100,000,000 Class "A"   preferred shares
      authorized with zero  shares
      outstanding;   100,000,000 Class
      "B"   preferred shares authorized with zero shares
      outstanding;
                
                
                -
                
                
                
                -Common
      Stock, $0.001 par value: 350,000,000 shares authorized;
                  69,564,970
      and 65,785,748 shares issued and outstanding
                  at
      May 31, 2009 and August 31, 2008, respectively.
                
                
                69,565
                
                
                
                65,786Additional
      paid in capital
                
                
                11,621,118
                
                
                
                9,403,842Accumulated
      other comprehensive loss
                
                
                (79,192
                )
                
                
                (51,668
                )Accumulated
      deficit during the development stage
                
                
                (16,684,409
                )
                
                
                (13,697,873
                )Total
      Stockholders' Deficiency
                
                
                (5,072,918
                )
                
                
                (4,279,913
                )Total
      Liabilities and Stockholders' Deficiency
                
                $
                1,182,045
                
                
                $
                1,913,817





SEE
ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS


5


CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS


(Stated in U.S.
Dollars)


(Unaudited)





Three
      months ended
                                    May
      31,
                                  
                                  
                                  Nine
      months ended
                                    May
      31,
                                  
                                  
                                  May
      12, 2006
                                    (Date
      of Inception) to May 31, 20092009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008ExpenseDepreciation
                                  
                                  $
                                  70,551
                                  
                                  
                                  $
                                  47,389
                                  
                                  
                                  $
                                  179,565
                                  
                                  
                                  $
                                  130,528
                                  
                                  
                                  $
                                  440,637Interest
      expense
                                  
                                  
                                  123,110
                                  
                                  
                                  
                                  3,088
                                  
                                  
                                  
                                  366,598
                                  
                                  
                                  
                                  26,648
                                  
                                  
                                  
                                  642,228Office
      and administration
                                  
                                  
                                  168,034
                                  
                                  
                                  
                                  255,324
                                  
                                  
                                  
                                  500,991
                                  
                                  
                                  
                                  755,880
                                  
                                  
                                  
                                  1,911,931Organization
      costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,500Research
      and development
                                  
                                  
                                  82,882
                                  
                                  
                                  
                                  23,695
                                  
                                  
                                  
                                  235,516
                                  
                                  
                                  
                                  82,899
                                  
                                  
                                  
                                  1,011,848Foreign
      exchange loss (gain)
                                  
                                  
                                  83
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11,913
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  11,998Deferred
      financing amortization costs
                                  
                                  
                                  23,315
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  69,185
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  82,685Amortization
      of stock option benefits
                                  
                                  
                                  184,911
                                  
                                  
                                  
                                  87,952
                                  
                                  
                                  
                                  398,071
                                  
                                  
                                  
                                  87,952
                                  
                                  
                                  
                                  778,362Derivative
      (income) expense - Note 8
                                  
                                  
                                  394,893
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,730,269
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,796,322Professional
      fees
                                  
                                  
                                  157,994
                                  
                                  
                                  
                                  76,572
                                  
                                  
                                  
                                  301,768
                                  
                                  
                                  
                                  213,082
                                  
                                  
                                  
                                  918,146Professional
      fees settled with shares
                                  
                                  
                                  1,176,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,176,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,809,609Salaries
      and consulting fees - Note 6
                                  
                                  
                                  392,601
                                  
                                  
                                  
                                  235,223
                                  
                                  
                                  
                                  1,066,610
                                  
                                  
                                  
                                  512,740
                                  
                                  
                                  
                                  2,410,722Salaries
      and consulting fees settled with shares - Note 6, Note 10
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,925,000
                                  
                                  
                                  
                                  33,630
                                  
                                  
                                  
                                  3,125,000
                                  
                                  
                                  
                                  3,770,130Directors'
      fees settled with shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  250,000
                                  
                                  
                                  
                                  430,000Administrator
      fees settled with shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  258,000Stock-based
      compensation - Note 10
                                  
                                  
                                  83,958
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  376,958
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  409,291Net
      income (loss) for the period
                                  
                                  
                                  (2,858,332
                                  )
                                  
                                  
                                  (3,654,243
                                  )
                                  
                                  
                                  (2,986,536
                                  )
                                  
                                  
                                  (5,184,729
                                  )
                                  
                                  
                                  (
      16,684,409
                                  )Other
      comprehensive loss:Unrealized
      foreign exchange on transactions
                                  
                                  
                                  1,589
                                  
                                  
                                  
                                  (14,598
                                  )
                                  
                                  
                                  (27,524
                                  )
                                  
                                  
                                  (30,953
                                  )
                                  
                                  
                                  (79,192
                                  )Comprehensive
      gain (loss) for the period
                                  
                                  $
                                  (2,856,743
                                  )
                                  
                                  $
                                  (3,668,841
                                  )
                                  
                                  $
                                  (3,014,060
                                  )
                                  
                                  $
                                  (5,215,682
                                  )
                                  
                                  $
                                  (16,763,601
                                  )Basic
      and diluted loss per share
                                  
                                  $
                                  (0.04
                                  )
                                  
                                  $
                                  (0.06
                                  )
                                  
                                  $
                                  (0.04
                                  )
                                  
                                  $
                                  (0.09
                                  )Basic
      and diluted weighted average number of shares
                                  
                                  
                                  69,561,673
                                  
                                  
                                  
                                  61,935,748
                                  
                                  
                                  
                                  67,455,633
                                  
                                  
                                  
                                  58,980,431





SEE
ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS


6


CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Stated in U.S.
Dollars)


(Unaudited)





Nine
      months ended May 31,
                      
                      
                      May
      12, 2006
                        (Date
      of Inception) to
                        May
      31, 20092009
                      
                      
                      2008Cash
      flows from operating activities:Net
      income (loss)
                      
                      $
                      (2,986,536
                      )
                      
                      $
                      (5,184,729
                      )
                      
                      $
                      (16,684,409
                      )Adjustments
      to reconcile net income (loss) to cash
                        used
      in operating activities:Depreciation
                      
                      
                      179,565
                      
                      
                      
                      130,528
                      
                      
                      
                      440,637Amortization
      of stock option benefit
                      
                      
                      398,071
                      
                      
                      
                      87,952
                      
                      
                      
                      778,362Amortization
      of debt discount
                      
                      
                      219,719
                      
                      
                      
                      -
                      
                      
                      
                      348,890Amortization
      of deferred financing costs
                      
                      
                      69,185
                      
                      
                      
                      -
                      
                      
                      
                      84,390Interest
      accrued on debt
                      
                      
                      30,042
                      
                      
                      
                      -
                      
                      
                      
                      140,946Interest
      accrued on senior convertible notes
                      
                      
                      120,000
                      
                      
                      
                      -
                      
                      
                      
                      143,111Derivative
      (income) expense
                      
                      
                      (1,730,269
                      )
                      
                      
                      -
                      
                      
                      
                      1,796,322Issuance
      of common stock for professional services
                      
                      
                      1,176,000
                      
                      
                      
                      -
                      
                      
                      
                      1,809,609Issuance
      of common stock for director services
                      
                      
                      -
                      
                      
                      
                      250,000
                      
                      
                      
                      430,000Issuance
      of common stock for consulting services
                      
                      
                      33,630
                      
                      
                      
                      525,000
                      
                      
                      
                      1,170,130Issuance
      of common stock for prior period salary
                      
                      
                      -
                      
                      
                      
                      2,600,000
                      
                      
                      
                      2,600,000Issuance
      of common stock for administrative services
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      258,000Issuance
      of common stock for R&D
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      402,000Stock-based
      compensation
                      
                      
                      376,958
                      
                      
                      
                      -
                      
                      
                      
                      409,291Changes
      in assets and liabilities:Amounts
      Receivable
                      
                      
                      (37,040
                      )
                      
                      
                      20,790
                      
                      
                      
                      (47,063
                      )Prepaid
      expenses and other current assets
                      
                      
                      (26,666
                      )
                      
                      
                      90,824
                      
                      
                      
                      (38,932
                      )Prepaid
      deposit
                      
                      
                      83,990
                      
                      
                      
                      -
                      
                      
                      
                      83,990Accounts
      payable and accrued expense
                      
                      
                      332,040
                      
                      
                      
                      156,573
                      
                      
                      
                      653,093Net
      cash used in operating activities:
                      
                      
                      (1,761,311
                      )
                      
                      
                      (1,323,062
                      )
                      
                      
                      (5,221,633
                      )Cash
      flows from investing activities:Acquisition
      of plant and equipment
                      
                      
                      (513,599
                      )
                      
                      
                      (123,483
                      )
                      
                      
                      (1,265,897
                      )Cash
      acquired from business combination
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      62,070Net
      cash used in investing activities:
                      
                      
                      (513,599
                      )
                      
                      
                      (123,483
                      )
                      
                      
                      (1,203,827
                      )Cash
      flows from financing activities:Proceeds
      from issuance of senior convertible notes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,815,000Proceeds
      from issuance of common stock
                      
                      
                      1,000,000
                      
                      
                      
                      815,000
                      
                      
                      
                      2,743,766Due
      to related party
                      
                      
                      259,664
                      
                      
                      
                      339,669
                      
                      
                      
                      2,088,834Net
      cash provided by financing activities:
                      
                      
                      1,259,664
                      
                      
                      
                      1,154,669
                      
                      
                      
                      6,647,600Effect
      of foreign exchange on transactions
                      
                      
                      (42,978
                      )
                      
                      
                      (23,264
                      )
                      
                      
                      (77,334
                      )Net
      increase (decrease) in cash
                      
                      
                      (1,058,224
                      )
                      
                      
                      (315,140
                      )
                      
                      
                      144,806Cash
      at beginning of period
                      
                      
                      1,203,030
                      
                      
                      
                      331,279
                      
                      
                      
                      -Cash
      and cash equivalents at end of period
                      
                      $
                      144,806
                      
                      
                      $
                      16,139
                      
                      
                      $
                      144,806





SEE
ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS


7





CLEAN POWER TECHNOLOGIES
INC.


(A
Development Stage Company)


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Stated in U.S.
Dollars)


(Unaudited)





Nine
      months ended May 31,
                    
                    
                    May
      12, 2006
                      (Date
      of Inception) to
                      February
      28, 20092009
                    
                    
                    2008Supplemental
      schedule of cash flows:Cash
      paid during the period for interest
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -Supplemental
      schedule of non-cash financing
                      and
      investing activities:Amortization
      of stock option benefit
                    
                    $
                    398,071
                    
                    
                    $
                    87,952
                    
                    
                    $
                    778,362Amortization
      of deferred financing costs
                    
                    
                    69,185
                    
                    
                    
                    -
                    
                    
                    
                    84,390Interest
      on note payable
                    
                    
                    30,042
                    
                    
                    
                    -
                    
                    
                    
                    140,946Interest
      accrued on senior convertible notes
                    
                    
                    120,000
                    
                    
                    
                    -
                    
                    
                    
                    120,000Derivative
      (income) expense
                    
                    
                    (1,730,269
                    )
                    
                    
                    -
                    
                    
                    
                    1,796,322Issuance
      of common stock for professional services
                    
                    
                    1,176,000
                    
                    
                    
                    -
                    
                    
                    
                    1,809,609Issuance
      of common stock for director services
                    
                    
                    -
                    
                    
                    
                    250,000
                    
                    
                    
                    430,000Issuance
      of common stock for consulting services
                    
                    
                    33,630
                    
                    
                    
                    525,000
                    
                    
                    
                    1,170,130Issuance
      of common stock for prior period salary
                    
                    
                    -
                    
                    
                    
                    2,600,000
                    
                    
                    
                    2,600,000Issuance
      of common stock for administrative services
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    258,000Issuance
      of common stock for R&D
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    402,000Stock-based
      compensation
                    
                    
                    376,958
                    
                    
                    
                    -
                    
                    
                    
                    409,291Total:
                    
                    $
                    473,617
                    
                    
                    $
                    3,462,952
                    
                    
                    $
                    9,999,050




SEE
ACCOMPANYING NOTES TO THE INTERIM CONSOLIDATED FINANCIAL
STATEMENTS


8


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
1            Nature and Continuance of
Operations




(a)  Organization





Clean
Power Technologies Inc. (the “Company”) was incorporated in the State of Nevada,
United States of America on October 30, 2003 as Sphere of
Language.  On June 13, 2006, the Company changed its name to Clean
Power Technologies Inc.





The
      Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on
      May 12, 2006 in the State of Nevada as a wholly-owned
      subsidiary.





By
      agreement dated May 22, 2006, the Company agreed to issue 30,765,377
      common shares for all the issued and outstanding common shares of Clean
      Power Technologies Inc. (“CPTI private”), a privately held company,
      incorporated on March 14, 2006 in the State of Nevada.  CPTI
      private  is developing a project for a gas/steam or diesel/steam
      hybrid technology. CPTI private has incorporated a wholly-owned
      subsidiary, Clean Power Technologies Limited, (“CPTL-UK”) a company based
      in, and incorporated under the laws of the United Kingdom on May 10, 2006,
      to carry on all its research and development.  On April 24,
      2006, CPTI private entered a research and development agreement to fund
      all future costs for research, development, patenting, licensing and
      marketing for an alternative hybrid fuel technology that combines diesel
      and steam and gas (petrol) and steam technologies for a 100% ownership of
      the technology and any associated intellectual rights (see Note
      6).  CPTI private and CEPS merged on June 20, 2006 with CEPS
      being the surviving entity. On July 10, 2006 CEPS became a wholly-owned
      subsidiary of the Company when the stockholders of CPTI private tendered
      their remaining shares.





The
      Company’s fiscal year-end is August
31.





(b)           Development
Stage Activities





The
Company is in the development stage and has not yet realized any revenues from
its planned operations.





The
primary operations of the Company are presently undertaken by CPTL-UK.
Initially, the primary focus of the Company was to develop two vehicles in order
to prove their concept.  The first vehicle was to be a prototype to
demonstrate the technology and the second vehicle was to be an engineered
vehicle to be unveiled to the auto industry.  In November 2007, the
Company decided to re-prioritize its development program.  While
development on the automobiles continued, it was decided that the fastest route
to market was to focus on the development of refrigeration units for grocery
trucks.





Note
2            Interim Financial
Statements





While the
information presented in the accompanying nine months to May 31, 2009 interim
consolidated financial statements is unaudited, it includes all adjustments
which are, in the opinion of management, necessary to present fairly the
financial position, results of operations and cash flows for the interim period
presented in accordance with accounting principles generally accepted in the
United States of America. It is suggested that these financial statements be
read in conjunction with the Company’s audited consolidated financial statements
for the fiscal year ended August 31, 2008.





Operating
results for the nine months ended May 31, 2009 are not necessarily indicative of
the results that can be expected for the fiscal year ending August 31,
2009.


9


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
3             Summary of Significant
Accounting Policies





These
      interim consolidated financial statements have, in management’s opinion,
      been properly prepared within the framework of the significant accounting
      policies summarized below:





(a)  Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company, and its
wholly-owned subsidiaries CEPS and CPTL-UK.  All inter-company
transactions have been eliminated.





(b)  Development
Stage Company





The
Company is a development stage company as defined in Statement of Financial
Accounting Standards No. 7.  The Company is devoting substantially all
of its present efforts to establish a new business and none of its planned
principal operations have commenced.  All losses accumulated since
inception have been considered as part of the Company’s development stage
activities.





(c)  Continuance of
Operations





These
interim consolidated financial statements have been prepared in accordance with
generally accepted accounting principles applicable to a going concern, which
assumes that the Company will be able to meet its obligations and continue its
operations for the next twelve months.  Realization values may be
substantially different from carrying values as shown and these consolidated
financial statements do not give effect to adjustments that would be necessary
to the carrying values and classification of assets and liabilities should the
Company be unable to continue as a going concern.  At May 31, 2009,
the Company had not yet achieved profitable operations, has accumulated losses
of $16,684,409 since its
inception, has negative working capital of $1,255,843 and expects to incur
further losses in the development of its business. The Company is currently
seeking additional financing opportunities.





(d)   Financial
Instruments





Financial
instruments, as defined in Financial Accounting Standards No. 107 Disclosures about Fair Value
of Financial Instruments (FAS 107), consist of cash, evidence of
ownership in an entity, and contracts that both (i) impose on one entity a
contractual obligation to deliver cash or another financial instrument to a
second entity, or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (ii) conveys to that second entity
a contractual right (a) to receive cash or another financial instrument from the
first entity, or (b) to exchange other financial instruments on potentially
favorable terms with the first entity. Accordingly, our financial instruments
consist of cash and cash equivalents, amounts receivable, accounts payable,
accrued liabilities, notes payable, derivative financial instruments, and
convertible notes payable.





We carry
cash and cash equivalents, amounts receivable, accounts payable and accrued
liabilities at historical costs; their respective estimated fair values
approximate carrying values due to their current nature. We also carry notes
payable and convertible debt at historical cost; however, fair values of debt
instruments are estimated for disclosure purposes (below) based upon the present
value of the estimated cash flows at market interest rates applicable to similar
instruments.





10


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
3             Summary of Significant
Accounting Policies (Continued)





(d)  Financial Instruments
(Cont’d)





As of May
31, 2009, the estimated fair value and carrying value of our secured convertible
notes payable is as follows:





Secured
      Convertible Notes Payable:
                
                Carrying
      Value
                
                
                Fair
      Value$2,000,000
      face value secured convertible notes due July 10, 2010
                
                $
                (136,258
                )
                
                $
                (1,932,214
                )





Derivative
financial instruments, as defined in Financial Accounting Standard No. 133,
Accounting for
Derivative Financial Instruments and Hedging Activities (FAS 133),
consist of financial instruments or other contracts that contain a notional
amount and one or more underlying (e.g. interest rate, security price or other
variable), require no initial net investment and permit net settlement.
Derivative financial instruments may be free-standing or embedded in other
financial instruments. Further, derivative financial instruments are initially,
and subsequently, measured at fair value and recorded as liabilities or, in rare
instances, assets.





We
generally do not use derivative financial instruments to hedge exposures to
cash-flow, market or foreign-currency risks. However, we have entered into
certain other financial instruments and contracts, such as debt financing
arrangements, and freestanding warrants with features that are either (i) not
afforded equity classification, (ii) embody risks not clearly and closely
related to host contracts, or (iii) may be net-cash settled by the counterparty.
As required by FAS 133, these instruments are required to be carried as
derivative liabilities, at fair value, in our financial statements.





The
following table summarizes the components of derivative liabilities as of the
quarterly period ended May 31, 2009:





Our
      financing arrangements giving rise to
                derivative
      financial instruments:
              
              Compound
                Embedded
                Derivative
              
              
              Warrant
                Derivatives
              
              
              Total
                Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
              
              $
              (962,733
              )
              
              $
              (2,612,857
              )
              
              $
              (3,575,590
              )$1,000,000
      common stock purchase agreement
              
              
              --
              
              
              
              (722,280
              )
              
              
              (722,280
              )$
              (962,733
              )
              
              $
              (3,335,137
              )
              
              $
              (4,297,870
              )





We
measure the fair values of derivative financial instruments using various
techniques (and combinations thereof) that are considered to be consistent with
the objective measuring fair values. In selecting the appropriate technique, we
consider, among other factors, the nature of the instrument, the market risks
that it embodies and the expected means of settlement. For less complex
derivative instruments, such as free-standing warrants, we generally use the
Black-Scholes-Merton option valuation technique, adjusted for the effect of
dilution, because it embodies all of the requisite assumptions (including
trading volatility, estimated terms, and risk free rates) necessary to fair
value these instruments. For complex derivative instruments, such as embedded
conversion options, puts and redemption features embedded in hybrid debt
instruments, we generally use the Monte Carlo


11


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
3              Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (Cont’d)





Simulation
valuation technique because it embodies all of the requisite assumptions
(including credit risk, interest-rate risk and exercise/conversion behaviors)
that are necessary to fair value these more complex instruments. For forward
contracts that contingently require net-cash settlement as the principal means
of settlement, we project and discount future cash flows applying
probability-weightage to multiple possible outcomes. Estimating fair values of
derivative financial instruments requires the development of significant and
subjective estimates that may, and are likely to, change over the duration of
the instrument with related changes in internal and external market factors. In
addition, option-based techniques are highly volatile and sensitive to changes
in the trading market price of our common stock, which has a high-historical
volatility. Since derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.





The
following table summarizes the effects on our income (expense) associated with
changes in the fair values of our derivative financial instruments by type of
financing for the quarterly period ended May 31, 2009.





Our
      financing arrangement giving rise toderivative
      financial instruments and the income effects:
                
                Compound
                  Embedded
                  Derivative
                
                
                Warrant
                  Derivatives
                
                
                Total
                  Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
                
                $
                (153,819
                )
                
                $
                (255,714
                )
                
                $
                (409,533
                )$1,000,000
      common stock purchase agreement
                
                
                --
                
                
                
                14,640
                
                
                
                14,640$
                (153,819
                )
                
                $
                (241,074
                )
                
                $
                (394,893
                )





The
following table summarizes the effects on our income (expense) associated with
changes in the fair values of our derivative financial instruments from
inception through the quarterly period ended May 31, 2009.





Our
      financing arrangement giving rise toderivative
      financial instruments and the income effects:
                
                Compound
                  Embedded
                  Derivative
                
                
                Warrant
                  Derivatives
                
                
                Total
                  Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
                
                $
                587,012
                
                
                $
                157,000
                
                
                $
                744,012$1,000,000
      common stock purchase agreement
                
                
                --
                
                
                
                21,960
                
                
                
                21,960$
                587,012
                
                
                $
                178,960
                
                
                
                765,972Day-one
      derivative losses:$2,000,000
      face value secured convertible notes due July 10, 2010
                
                
                
                
                
                
                
                
                
                
                (2,541,191
                )$1,000,000
      common stock purchase agreement
                
                
                
                
                
                
                
                
                
                
                (21,103
                )Total
      derivative income (expense):
                
                
                
                
                
                
                
                
                
                $
                (1,796,322
                )


12


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
3             Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (Cont’d)





Our
derivative liabilities as of May 31, 2009, our derivative gains during the
quarterly period May 31, 2009 and our derivative losses from inception through
May 31, 2009 are significant to our consolidated financial statements. The
magnitude of derivative income (expense) reflects the following:





· The market price of our common stock, which
significantly affects the fair value of our derivative financial instruments,
experienced material price fluctuations. To illustrate, the closing price of our
common stock increased from $0.55 on July 10, 2008 to $0.65 on August 31, 2008,
then decreased to $0.50 on February 28, 2009. The price increased to $0.55 on
May 31, 2009. The higher stock price on August 31, 2008 had the effect of
significantly increasing the fair value of our derivative liabilities and,
accordingly, we were required to adjust the derivatives to these higher values
with charges to derivative expense. Alternatively, the lower stock price on
February 28, 2009 had the effect of significantly decreasing the fair value of
our derivative liabilities and, accordingly, we were required to adjust the
derivatives to these lower values with charges to derivative income.
Subsequently, the effect of the higher stock price on May 31, 2009 required
charges to derivative expense.





·  In
connection with our accounting for the secured convertible note financing we
encountered the unusual circumstance of a day-one derivative loss related to the
recognition of derivative instruments arising from the arrangement. That means
that the fair value of the bifurcated compound derivative and warrants exceeded
the proceeds that we received from the arrangement and we were required to
record a loss to record the derivative financial instruments at fair value. The
loss that we recorded amounted to $2,541,191. We did not enter into any other
financing arrangements during the periods reported that reflected day-one
loss.





The
following table summarizes the number of common shares indexed to the derivative
financial instruments as of May 31, 2009:





Our
      financing arrangement giving rise to derivativefinancial
      instruments and indexed shares:
              
              Compound
                Embedded
                Derivatives
              
              
              Warrant
                Derivatives
              
              
              Total
                Derivatives$2,000,000
      face value secured convertible notes due July 10, 2010
              
              
              5,714,286
              
              
              
              7,142,858
              
              
              
              12,857,144$1,000,000
      common stock purchase agreement
              
              
              --
              
              
              
              3,000,000
              
              
              
              3,000,0005,714,286
              
              
              
              10,142,858
              
              
              
              15,857,144





During
December 2006, the Financial Accounting Standards Board released FASB Staff
Position FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements, which amended Financial Accounting Standards No.
133 Accounting for
Derivative Financial Instruments and Hedging Activities. Generally, the
standard provides for the exclusion of registration payment arrangements, such
as the liquidated damage provisions that are included in the financing contracts
underlying the convertible debt financing arrangements, from the consideration
of classification of financial instruments. Rather, such registration payments
are accounted for pursuant to Financial Accounting Standards No. 5 Accounting for
Contingencies, which is our current accounting practice. That is,
all


13


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
3              Summary of Significant
Accounting Policies (Continued)





(d)
            Financial
      Instruments (Cont’d)





registration
payments will require recognition when they are both probable and reasonably
estimable. As of May 31, 2009, our management concluded that registration
payments are not probable.





(e)
            Use
      of Estimates in the preparation of the financial
  statements





The
preparation of the Company's consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from those
estimates.





Note
4            Amounts
Receivable





Amounts
receivable of $52,357 consists of refundable tax credits for the Value Added Tax
(“VAT”) paid on purchases with respect to the operations of CPTL-UK in the
United Kingdom.  CPTL-UK files quarterly returns with respect to the
VAT transactions.





Note
5            Plant and
Equipment





May
      31, 2009Cost
                
                
                Accumulated
                  Amortization
                
                
                Net BookVehicles
                
                $
                105,719
                
                
                $
                (45,067
                )
                
                $
                60,652Machinery
                
                
                748,178
                
                
                
                (249,506
                )
                
                
                498,672Computer
      and office equipment
                
                
                201,531
                
                
                
                (109,626
                )
                
                
                91,905Leasehold
      improvements
                
                
                230,040
                
                
                
                (42,399
                )
                
                
                187,641$
                1,285,468
                
                
                $
                (446,598
                )
                
                $
                838,870





Note
6             Related PartyTransactions





On April
24, 2006 CPTI entered a research and development agreement (the “Agreement”) to
fund all future costs for research, development, patenting, licensing and
marketing for an alternative hybrid fuel technology that combines diesel and
steam and gas (petrol) and steam technologies for a 100% ownership of the
technology and any associated intellectual rights with two directors and
officers of CPTL-UK.  Under the terms of the Agreement, the Company
agreed to retain one director as the Company’s project director at a fee of
£3,000 (US$5,972) per month for a period of 36 months commencing May 2006 and
the second director as the Company’s project manager at a fee of £6,000
(US$11,945) per month for a period of 36 months commencing May
2006.  During March 2008 the monthly fee for the project manager was
increased to £10,000 (US$19,908).   On August 8, 2008 the project
director and the project manager resigned as directors of CPTL-UK. Concurrently,
the project manager entered into a new employment agreement (the “Employment
Agreement”) with the Company for a term of four (4) years.  Under the
terms of the Employment Agreement, from March 1, 2009 and on each subsequent
anniversary during the term of the Employment Agreement, the project manager is
entitled to an annual salary increase of 10%, as well as the following
performance based compensation:







14


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
6             Related PartyTransactions
(Continued)





·
            500,000
      shares of common stock when the Refrigeration Compact Heat Exchanger (the
      “Refrigeration Unit”) for the grocery truck/trailer is successfully
      tested;


·
            1,000,000
      shares of common stock when the first Refrigeration Unit is commercially
      sold;


·
            1,000,000
      shares each time when the heat recover system for the Marine application
      or An Auxiliary Steam Engine for Trucks or similar engines based on the
      Heat recovery and/or Steam technology is developmed and commercially sold
      to the first customer; 1,000,000 shares of common stock when the first
      automobile which is developed on the heat recovery system is successfully
      tested and verified by the E.P.A;
and


·
            1,000,000
      shares of common stock when the first automobile heat recovery system is
      commercially sold.





Using the
guidance provided in SFAS 123R the Company has not recorded compensation cost in
respect of these performance-based awards as at May 31, 2009.  The
Company has determined it is currently doubtful that employees will earn the
right to benefit from the awards.





On
February 1, 2009, the Company entered into an addendum to accelerate the annual
salary increase permitted under the contract upon achieving certain development
benchmarks.  As a result, starting March 1, 2009 Mr. Burn’s monthly
salary was adjusted to a base of £12,100.  During the nine month
period ended May 31, 2009, Michael Burns, the project manager who is also a
member of the Board of Directors of the Company and an officer of wholly-owned
subsidiary CPTL-UK was paid $149,811 (£97,300) under the terms of his
employment agreement.





Additionally
under the terms of the original April 24, 2006 Agreement, the Company agreed to
fund all future costs for research, development, patenting, licensing and
marketing of the technology in exchange for the transfer of all rights and
interests in technology to the Company.  As payment for this
technology, the Company’s subsidiary issued 2,000,000 shares of its common stock
at $0.001, which shares were exchanged for 2,000,000 shares of
the Company’s common stock.  The Company also agreed to fund up
to £2,000,000 (US$4,027,800) towards the development of the
technology.





On July
26, 2006, CPTL-UK entered into a lease agreement with an officer of CPTL-UK to
lease the office and laboratory premises for a term of three years. (see Note
7).  Under the terms of the lease, an expense of $20,800 (£13,500) was
charged during the nine months ended May 31, 2009 by an officer of CPTL-UK as
rent.





Pursuant
to an employment agreement dated May 22, 2008, between the Company and its CEO,
Mr. Abdul Mitha, Mr. Mitha
invoiced the Company $383,333 with respect to his monthly salary obligation for
the nine month period ended May 31, 2009.  During the nine month
period Mr. Mitha received payments against his accrued salary totaling $144,418,
leaving $365,582 due and payable to Mr. Mitha in salary obligations as at May
31, 2009.





During
the nine month period ended May 31, 2009 Mr. Mitha advanced $259,664 for
operations, under the terms of a convertible debenture approved September 28,
2006.  In respect of these advances, during the nine months ended May
31, 2009 the Company recorded amortization of loan discount in the amount of
$107,692 (2008 - $52,136).  Unamortized discount at May 31,
2009, which has been applied to additional paid in capital with respect to
the beneficial conversion feature associated with the provisions of the proceeds
during the nine months ending May 31, 2009, totalled $118,718 (2008 - $245,244),
which amount is being amortized over  the term of the note(s) or until
conversion.  During the quarter ended February 28, 2009, the Company
issued 850,000 shares of common stock to Mr. Mitha to retire $425,000 of the
cumulative loans as at that date, including all accrued interest as at the date
of settlement, at $0.50 per share. As at May 31, 2009 the balance sheet reflects
notes payable to Mr. Mitha of $179,316 which amount reflects convertible loans
totaling $312,262, net an unamortized discount of $132,946.


15


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
7             Commitments





(a)           On
July 26, 2006 CPTL –UK entered into a three year lease agreement for an office
and research facility located in Newhaven, United Kingdom.  The lease
expires on July 25, 2009.  The CPTL—UK lease calls for annual rent in
the amount of $29,150 (£18,000) plus applicable taxes, and is payable
quarterly.  CPTL-UK is required to make minimum lease payments
totalling $4,857 (£3,000) over the remaining term of the
lease.  Subsequent to the quarter ended May 31, 2009 the Company
entered into negotiations on a new lease at this location.





(b)  The
Company entered into a collaboration agreement dated October 11, 2006 for the
development of a steam accumulator and other related technologies in partnership
for use with the Company’s petrol (gas)/steam and diesel/steam hybrid
technologies project.  The agreement called for funding of
approximately US$400,000 by the partner.  As consideration, the
Company was required to issue 4,000,000 common shares of the
Company.





The
agreement further provides that within 18 months from the first vehicle being
publicly unveiled, the partner will have the option of either seeking cash
reimbursement of its development costs from the Company or retaining the
previously issued shares of common stock of the
Company.  Should the partner seek cash reimbursement then the
partner shall return a total of 3,000,000 shares of common stock to the
Company.  Should development costs exceed US$400,000 then the Partner
has the option to either receive cash reimbursement of the amount in excess of
US$400,000 or to receive additional shares of the Company at a price to be
negotiated.  Should the Company be unable to reimburse the partner on
any call for reimbursement as allowed under the collaboration agreement, the
Company will transfer an equal share of the intellectual property to the Partner
so that the Partner and the Company will own the intellectual property
equally.  On June 13, 2007, the Company issued a total of 4,000,000
shares of restricted Common Stock to Doosan Babcock Energy Ltd. (“Doosan”)
pursuant to the terms and conditions of a subscription agreement, received May
21, 2007 (the “Subscription Agreement”). The Subscription Agreement was executed
pursuant to the terms and conditions of that Collaboration Agreement entered
into between the parties on October 11, 2006.





The
Company provided an additional 100,000 common shares to Doosan, which shall be
used at their discretion to reward any of their employees who have helped in the
development of the technologies project.  The term of the agreement is
three years.





(c)  On July
1, 2007 CPTL –UK entered into a six month renewable lease agreement for a
corporate apartment located in Surrey, United Kingdom.  The initial
lease expired on December 31, 2007 and was last  renewed on July 1,
2008.  The lease called for monthly rent in the amount of $2,986
(£1,900) plus applicable taxes.  The lease expired without renewal
during the quarter ended February 28, 2009.





(d)           
During the year ended August 31, 2007, the Company entered into an agreement
with Abchurch Communications Limited to provide certain integrated financial and
corporate communications services.  Under the terms of the agreement,
Abchurch will provide four (4) phases of services to assist the Company in
securing a listing on the AIM Exchange in London.  Fees payable under
the agreement include a project fee of £40,000 (approximately U.S. $80,000), of
which, the Company has remitted a total of £35,000 (approximately U.S.
$70,000).  The agreement also provided for quarterly consulting fees
of £12,000 (approximately U.S. $24,400). The Company renegotiated the quarterly
payments required under the contract effective April 1, 2008 whereby quarterly
fees were reduced to £3,000 per month for the period January to March 2008,
and thereafter to £2,000 per month for the remaining term of the
contract.  During the 9 months ended May 31, 2009 the Company has
remitted a total of $21,038 in respect of these fees, with $8,211 remaining due
and payable at the end of the quarter.


16


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
7             Commitments(Continued)




(e)  On March
17, 2008, the Company entered into an agreement with steam technology specialist
Dampflokomotiv-und Maschinenfabrik DLM AG ("DLM") to act as a consultant for the
further development of the Company's Clean Energy Separation and Recovery
(“CESAR”) technology. Under the terms of the agreement DLM was
to provide a preliminary study to the Company at a cost of 34,375 Euros
(approximately U.S. $52,000) payable in 3 installments as follows:





·
            25%
      of the total sum upon signing of the
engagement;


·
            25%
      of the total sum upon presentation of the first results but not later than
      three (3) months after engagement date;
and


·
            Balance upon completion
      of work scope payable within 30 days of delivery of final
      invoice





During
the first quarter ended November 30, 2008, the Company received the preliminary
study report and remitted all remaining payments under the terms of the
engagement and entered into a further agreement regarding prototype
specifications for a Heat Exchanger at a total cost of 12,340 Euros (then
approximately US$15,680), which amount was remitted at the time of the
engagement.





(f)  On July
28, 2008, the Company entered into an agreement with Mr. George McLaine whereby
Mr. McLaine agreed to serve as a consultant to assist the Company with
introductions to transportation companies in the Province of Alberta, Canada,
and abroad with a purpose of locating collaborative partners to test the
Company’s heat recovery systems in trucks and trailers.  In
consideration for this service, Mr. McLaine shall receive 32,000 shares of the
Company’s common stock for each introduction that results in a collaboration
agreement.  Further, Mr. McLaine shall receive 25,000 shares of the
Company’s common stock per annum for serving as a consultant to the
Company.  The contract is for a period of two (2) years and may be
renewed by mutual consent.  Mr. McLaine is to also receive a 30%
commission for any advance purchase orders received on the advance deposit
required of 1% of the total purchase or $100 per unit ordered. 32,000 shares
were issued under the Company’s 2007 Stock Option and Stock Award Plan as of
September 8, 2008.





(g)  On June
1, 2008, the Company’s subsidiary CPTL-UK entered into an employment contract
with an IT specialist whereunder the employee will receive 25,000 shares of the
Company’s common stock after the initial three (3) months, and 25,000 shares of
the Company’s common stock each year on the anniversary of the completion of
certain work projects up to a maximum of 100,000 shares.  25,000
shares were issued under the Company’s 2007 Stock Option and Award Plan as of
September 8, 2008. As to the remaining 75,000 Shares of common stock available
for issue under the above-noted contract, due to the fact that they are service
based awards, the Company has recognized a stock-based compensation
expense.  Refer to Note 10(ii) – Restricted Stock Awards for
additional details.





(h)  On
October 27, 2008 the Company’s subsidiary CPTL-UK entered into an employment
agreement with Marco Cucinotta whereby Mr. Cucinotta will receive an annual
salary of $151,243 (£90,000) as well as the following performance based
compensation:





·
            200,000
      shares of the Company on commencement of
  employment;


·
            100,000
      shares of the Company on completion of the first complete system in test
      cell;


·
            100,000
      shares of the Company on completion of the first truck based
      system;


·
            100,000
      shares of the Company on sale of the first system;
  and


·
            100,000
      shares of the Company upon establishing a UK consultancy firm and
      generating £100,000 in gross
revenue.





The
Company issued a total of 200,000 shares in respect of the above agreement under
its 2007 Stock Option and Award Plan as to 100,000 shares on January 9, 2009 and
100,000 shares on March 3, 2009, respectively. Using the guidance provided in
SFAS 123R the Company has not recorded compensation cost in respect of the
above-noted performance-based awards as at May 31, 2009.  The Company
has determined it is currently doubtful that employees will earn the right to
benefit from the awards.


17


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
7             Commitments(continued)





(i)  In
November 2008 the Company’s wholly-owned subsidiary CPTL-UK entered into various
employment contracts which call for a total of 475,000 shares of the Company’s
common stock to be issued as stock awards upon completion of certain technology
development benchmarks.    Using the guidance provided in
SFAS 123R the Company has not recorded compensation cost in respect of these
performance-based awards as at May 31, 2009.  The Company has
determined it is currently doubtful that employees will earn the right to
benefit from the awards. Concurrently the Company entered into an employment
contract under which a certain employee is entitled to receive a total of 50,000
service-based awards, in respect of which the Company has recognized a
stock-based compensation expense.  Refer to Note 10(ii) – Restricted
Stock Awards for additional details.





(j)  Effective
November 13, 2008 the Company entered into a five (5) year lease for office and
warehouse space in a property located in New Haven, East Sussex, U.K., adjacent
to its current leased facilities at an annual rate of $24,291 (£15,000) payable
quarterly commencing March 2009.  Concurrently the Company entered
into an option to purchase the aforementioned property, exercisable March
through August 2010, for a purchase price the greater of (i) the price stated in
an Independent Valuation or (ii) £425,000 less any reductions previously
specified and agreed in a former option agreement.





The lease
payments for each of the five succeeding fiscal years are as
follows:





2009
                
                $
                12,1452010
                
                
                24,2912011
                
                
                24,2912012
                
                
                24,2912013
                
                
                24,291Thereafter
                
                
                12,146Total:
                
                $
                121,455





(k)  On
November 18, 2008 CPTL–UK entered into a six month renewable lease agreement for
a corporate housing facility located in Surrey, United Kingdom for use by the
Company’s CEO, Abdul Mitha.  The lease called for monthly rent in the
amount of $2,025 (£1,250) plus applicable taxes and expired May 17,
2009.  The lease was renewed subsequent to the quarter for a term of
12 months, expiring in May, 2010.   The lease payments for each
of the two succeeding fiscal years are as follows:





2009
              $
              6,0732010
              18,218Total:
              $
              24,291








(k) On
March 12, 2009 and May 5, 2009 the Company entered into two agreements with
Gersten Savage LLP, the Company’s attorneys, in connection with the filing and
prosecution of certain foreign patent applications with respect to the Unitary
Engine and Reservoir Engine Inventions as well as additional refrigeration
types; and, prosecution and filing of additional United States applications for
the Reefer Control System, In-line Automotive Auxiliary Power System and
Land-fill/Waste Heat Auxiliary Power Generation System.  Under the
terms of the retainer agreements, the Company agreed to pay fixed fees as
follows:





§
            $810,000
      worth of the Company’s restricted common shares with a deemed value of
      $0.375 per share. Subsequent to the quarter ended May 31, 2009 the Company
      issued a total of 2,160,000 shares in full and final settlement of this
      provision and a total of  $1,176,000, [$600,000 as to 1,200,000
      common shares with a market value of $0.50 on the date of the agreement,
      and $576,000 as to 960,000 common shares with a market value of $0.60 on
      the date of the agreement], has been expensed in respect of the issuance
      of these shares on the Company’s income statement during the
      quarter;




18


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
7                       Commitments(continued)




§
            $450,000
      in cash payments due under the March 12, 2009 agreement and $240,000 in
      cash payments due under the May 5, 2009 retainer agreement for a total of
      $690,000 in cash payments, which amount is payable as follows: $35,000 and
      $10,000, respectively, due  upon signing of the individual
      retainer agreements; $15,000 per month commencing 120 days from March 12,
      2009 and $7,500 per month commencing 120 days from May 5, 2009 until such
      time as the balance of the required cash amounts are settled in
      full.  During the quarter the Company did not make any cash
      payments in respect of the two retainer
  agreements;





§
            In
      the event the Company should obtain additional financing in an amount of
      $3 million US Dollars, there shall be an acceleration as to monthly
      amounts to be invoiced under the May 5, 2009 retainer agreement such that
      there will be an immediate settlement of $200,000 in outstanding fees,
      with a further settlement of $100,000 in fees with each subsequent
      $1,000,000 raised.





§
            Under
      the terms of the retainer agreements the Company further agrees to grant
      piggyback registration  and/or S-8 rights and shall include the
      Designees’ shares of restricted common stock in its next registration
      statement.





(l)  On April
29, 2009 the Company’s wholly-owned subsidiary CPTL-UK entered into an
employment contract which calls for a total of 25,000 shares of the Company’s
common stock to be issued as stock awards upon completion of certain technology
development benchmarks.    Using the guidance provided in
SFAS 123R the Company has not recorded compensation cost in respect of this
performance-based award as at May 31, 2009.  The Company has
determined it is currently doubtful that employees will earn the right to
benefit from the performance based awards. Concurrently under this employment
contract the employee is entitled to receive a total of 50,000 service-based
awards which are granted over a three year period on the anniversary date of the
contract.  In respect of these awards, the Company has recognized a
stock-based compensation expense.  Refer to Note 10(ii) – Restricted
Stock Awards for additional details.





Note
8              Secured Convertible Note
Financings





Secured
Convertible Notes consist of the following financings as of May 31,
2009:


Carrying
      Value8%
      face value $2,000,000 secured convertible notes issued July 10, 2008 and
      due on July 10, 2010
              
              $
              (136,258
              )





On July
10, 2008 we entered into a financing arrangement with The Quercus
Trust.  The financing arrangement involved the issuance of $2,000,000
of 8.0% secured convertible notes payable, due July 10, 2010 plus warrants to
purchase 4,285,715 (Class A Warrants) and 2,857,143 (Class B Warrants) shares of
our common stock with strike prices of $0.60 and $0.80, respectively, for a
period of five years from the date of issuance. The secured convertible notes
are convertible into our common shares based upon a fixed conversion price of
$0.35 and provide for customary conversion price adjustments. The holder has the
option to redeem the secured convertible notes for cash in the event of defaults
and certain other contingent events, including a change in control event and
events related to the common stock into which the instrument was convertible,
registration and listing (and maintenance thereof) of our common stock and
filing of reports with the Securities and Exchange Commission (the “Default
Put”). Further, the Company may, at its option, choose to redeem the convertible
notes at any time prior to the one (1) year anniversary of
issuance.  Any such redemption shall be at one hundred & twenty
percent (120%) of the principal amount of the Note. Moreover, interest on the
convertible note is payable at the option of the Company to the holder annually
either in cash or in common stock. In addition, we granted registration rights
to the holder that requires registration and continuing effectiveness thereof;
we would be required to pay monthly liquidating damages of 1.0% for defaults
under this provision.




19


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
8             Secured Convertible Note
Financings (Continued)





We
received net proceeds of $1,815,000 from the July 10, 2008 financing
arrangement. Incremental, direct financing costs of $185,000 (including
placement agent warrants valued at $221,588 using the Black-Scholes-Merton
valuation technique) are included in deferred financing costs and are subject to
amortization using the effective method. Accumulated amortization of deferred
financing costs, which is included in interest expense, during the current
quarterly period, amounted to $23,315.





In our
evaluation of the financing arrangement, we concluded that the conversion
features were not afforded the exemption as a conventional convertible
instrument due to the anti-dilution protection; and it did not otherwise meet
the conditions set forth in current accounting standards for equity
classification. Since equity classification is not available for the conversion
feature, we were required to bifurcate the embedded conversion feature and carry
it as a derivative liability, at fair value. We also concluded that the Default
Put required bifurcation because, while puts on debt instruments are generally
considered clearly and closely related to the host, the Default Put is indexed
to certain events, noted above, that are not associated debt instruments. We
combined all embedded features that required bifurcation into one compound
instrument that is carried as a component of derivative liabilities. We
determined that placement agent warrants met the conditions for equity
classification.  However, the investor warrants did not meet the
conditions for equity classification. Therefore, the investor warrants are also
required to be carried as a derivative liability, at fair value. Derivative
financial instruments are carried initially and subsequently at their fair
values.





We
estimated the fair value of the compound derivative on the inception dates, and
subsequently, using the Monte Carlo valuation technique, because that technique
embodies all of the assumptions (including credit risk, interest risk, stock
price volatility and conversion behavior estimates) that are necessary to fair
value complex, compound derivative instruments. We estimated the fair value of
the warrants on the inception dates, and subsequently, using the
Black-Scholes-Merton valuation technique, adjusted for the effect of dilution
because that technique embodies all of the assumptions (including, volatility,
expected terms, and risk free rates) that are necessary to fair value
freestanding warrants.





The
following tabular presentation sets forth the derivative fair values as of the
inception date of the financing transaction, year ended August 31, 2008 and the
current quarter ended May 31, 2009:




Compound
      Embedded
                  Derivatives
                
                
                Warrant
                  Derivative
                
                
                Total
                  DerivativesInception
      date (July 10, 2008)
                
                $
                (1,549,746
                )
                
                $
                (2,769,857
                )
                
                $
                (4,319,603
                )August
      31, 2008
                
                $
                (1,933,002
                )
                
                $
                (3,372,000
                )
                
                $
                (5,305,002
                )May
      31, 2009
                
                $
                (962,733
                )
                
                $
                (3,335,137
                )
                
                $
                (4,297,870
                )





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of the inception date of the financing are illustrated in the
following tables:




CompoundEmbeddedDerivative$2,000,000
      face value secured convertible notes due July 10, 2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                78.96
                %Equivalent
      term (years)
                
                
                1.82Credit-risk
      adjusted yield
                
                
                8.50
                %Interest-risk
      adjusted rate
                
                
                9.48
                %Dividends
                
                
                --


20


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
8             Secured Convertible Note
Financings (Continued)





Class
      AWarrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                98.83
                %
                
                
                98.83
                %Term
      (years)
                
                
                5.00
                
                
                
                5.00Risk-free
      rate
                
                
                3.10
                %
                
                
                3.10
                %Dividends
                
                
                --
                
                
                
                --





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of August 31, 2008 are illustrated in the following
tables:





CompoundEmbedded
                  Derivative$2,000,000
      face value secured convertible notes due July 10, 2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                77.12
                %Equivalent
      term (years)
                
                
                1.63Credit-risk
      adjusted yield
                
                
                9.21
                %Interest-risk
      adjusted rate
                
                
                9.49
                %Dividends
                
                
                --





Class
      AWarrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                100.83
                %
                
                
                100.83
                %Term
      (years)
                
                
                4.86
                
                
                
                4.86Risk-free
      rate
                
                
                3.10
                %
                
                
                3.10
                %Dividends
                
                
                --
                
                
                
                --





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of May 31, 2009 are illustrated in the following
tables:





CompoundEmbedded
                  Derivative$2,000,000
      face value secured convertible notes due July 10, 2010:Conversion
      price
                
                $
                0.35Volatility
                
                
                48,64
                %Equivalent
      term (years)
                
                
                1.10Credit-risk
      adjusted yield
                
                
                14.85
                %Interest-risk
      adjusted rate
                
                
                5.86
                %Dividends
                
                
                --


21


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
8             Secured Convertible Note
Financings (Continued)





Class
      AWarrant
                  Derivative
                
                
                Class
      B Warrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.80Volatility
                
                
                94.50
                %
                
                
                94.50
                %Term
      (years)
                
                
                4.11
                
                
                
                4.11Risk-free
      rate
                
                
                2.34
                %
                
                
                2.34
                %Dividends
                
                
                --
                
                
                
                --





Note
9             Stock Purchase
Agreement





On
February 10, 2009 we entered into a stock purchase agreement with The Quercus
Trust. The stock purchase agreement involved the issuance of 2,222,222 shares of
common stock plus warrants to purchase 1,666,667 (Investor Series A Warrants)
and 1,111,111 (Investor Series B Warrants) shares of our common stock with
strike prices of $0.60 and $0.85, respectively, for a period of one year from
the date of issuance. The stock purchase agreement resulted in gross proceeds of
$1,000,000. In connection with the purchase agreement, the placement agent
received warrants to purchase 133,333 (Agent Series A Warrants) and 88,889
(Agent Series B Warrants) shares of our common stock with strike prices of $0.60
and $0.85, respectively, for a period of one year from the date of issuance.
Incremental, direct financing costs (placement agent warrants valued at $55,129)
were allocated to the common stock and warrants based on their relative fair
values in accordance with Accounting Principles Board Opinion No. 14 Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants (APB 14). In connection
with our accounting for the Common Stock Purchase Agreement we recorded a
day-one derivative loss related to the portion of the placement agent costs that
were allocated to the warrants.





The
following table illustrates how the proceeds arising from the stock purchase
agreement were allocated on the inception date:





Classification
                
                AllocationDay-one
      derivative loss
                
                $
                (21,103
                )Common
      Stock (par value)
                
                
                2,222Paid-in
      Capital (Common Stock)
                
                
                274,641Derivative
      Liabilities (Warrants)
                
                
                744,240Proceeds
                
                $
                1,000,000





In our
evaluation of the purchase transaction, we concluded that the Common Stock
issued met equity classification. There were no terms and conditions associated
with the Common Stock that warranted classification outside of stockholders’
equity pursuant to either Statement of Financial Accounting Standards No. 150
Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(FAS 150) or Emerging Issues Task Force Consensus No. D-98 Classification and
Measurement of Redeemable Securities (EITF D-98). However, the investor
warrants and agent warrants did not meet the conditions for equity
classification. The warrant contracts embody a provision whereby the placement
warrants fall within the scope of FAS 150. Although the redemption event is
conditional in nature, the standards require liability classification as a
written put warrant under FAS 150 and must be recorded at fair value each
reporting period.





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of the inception date is illustrated in the following
tables:


22


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
9                 Stock Purchase Agreement
(Continued)





Series
      AWarrant
                  Derivative
                
                
                Series
      BWarrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.85Volatility
                
                
                161.85
                %
                
                
                161.85
                %Term
      (years)
                
                
                1.00
                
                
                
                1.00Risk-free
      rate
                
                
                0.60
                %
                
                
                0.60
                %Dividends
                
                
                --
                
                
                
                --





Information
and significant assumptions embodied in our valuations (including ranges for
certain assumptions during the subject periods that instruments were
outstanding) as of May 31, 2009 are illustrated in the following
tables:





Series
      AWarrant
                  Derivative
                
                
                Series
      BWarrant
                  DerivativeWarrants
      to purchase common stock:Strike
      price
                
                $
                0.60
                
                
                $
                0.85Volatility
                
                
                176.76
                %
                
                
                176.76
                %Term
      (years)
                
                
                0.70
                
                
                
                0.70Risk-free
      rate
                
                
                0.30
                %
                
                
                0.30
                %Dividends
                
                
                --
                
                
                
                --





The
shares and warrants in respect of the stock purchase agreement discussed above
were issued subsequent to the quarter ended February 28, 2009.





Note
10           Common
Stock





During
the quarter ended February 28, 2009, the Company reserved for issuance a total
of 850,000 shares with respect to the conversion of $425,000 of related party
debt to shares of common stock at $0.50 per share. (See Note 6 – Related Party
Transactions above).  The 850,000 shares were issued on March 9,
2009.





During
the quarter ended February 28, 2009, the Company  had a requirement to
issue a total of 2,222,222 shares of common stock in respect of a stock purchase
agreement, together with warrants to purchase 1,666,667 and 1,111,111 shares of
common stock with strike prices of $0.60 and $0.85, respectively, for a period
of one year from February 10, 2009.  There was a further 222,222
placement agent warrants required to be issued in respect of the
transaction.  (See Note 9 – Stock Purchase Agreement
above).  The 2,222,222 shares and all warrants associated with the
transaction were issued on March 9, 2009.





On March
12, 2009 the Company entered into a retainer agreement with the law firm of
Gersten Savage LLP, the Company’s attorneys, whereby the Company agreed to issue
a total of 1,200,000 shares of restricted common stock at a deemed price of
$0.375 per share in payment of certain fees.  These shares were issued
on June 5, 2009.





On May 5,
2009 the Company entered into a further retainer agreement with the law firm of
Gersten Savage LLP, the Company’s attorneys,  whereby the Company
agreed to issue a total of 960,000 shares of restricted common stock at a deemed
price of $0.375 per share in payment of certain fees.  The shares were
issued on June 5, 2009.




23


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
10           Common Stock
(continued)





Stock-based
compensation:





(i)
            Executive stock
      options





On May
22, 2008, the Board of Directors approved an Employment Agreement (the
“Agreement”) with Mr. Abdul Mitha, a director and executive officer of the
Company.  Under the terms of the Agreement, the Company has agreed to
enter into a stock option agreement with Mr. Mitha, granting Mr. Mitha the
option to purchase on each anniversary of the Agreement 1,000,000 shares of the
Company’s common stock at an  exercise price of the average 90 days
trading price immediately preceding the anniversary date of the
Agreement  The options vest immediately upon issuance of the
underlying agreement at each anniversary date, and the option shares shall be
exercisable by Mr. Mitha within 5 years from the date of
grant.   Further under the terms of the Agreement, all options
issued to Mr. Mitha in accordance with the Agreement shall become immediately
exercisable as to 100% of the shares of Common Stock not otherwise vested upon
any termination of employment.





Following
is a table outlining the number of options required to be granted as fully
vested under the Agreement at each anniversary date and the term of said
options:





Date
              
              Number
      of options
              
              Expiry
      dateMay
      1, 2009
              
              1,000,000
              
              April
      30, 2014May
      1, 2010
              
              1,000,000
              
              April
      30, 2015May
      1, 2011
              
              1,000,000
              
              April
      30, 2016May
      1, 2012
              
              1,000,000
              
              April
      30, 2017May
      1, 2013
              
              1,000,000
              
              April
      30, 2018May
      1, 2014
              
              1,000,000
              
              April
      30, 20196,000,000





For
financial reporting purposes, the Company has relied on the guidance provided in
FASB 123R and has valued the options over 1,2,3,4,5 and 6 years at inception
(May 1, 2008) applying variable accounting. The fair value of the shares will be
recalculated at each reporting date using an exercise price of the preceding 90
days applying Volume Weighted Average Pricing (VWAP). The value attributable to
the vested portion of each tranche will be amortized over its requisite period,
with a final value being calculated on the grant date for each tranche applying
the 90 day VWAP immediately preceding the actual date of grant. Additionally, we
have not applied a forfeiture rate to these shares as under the terms of the
Agreement the shares are guaranteed to become fully vested.





The fair
value of each option granted was computed using the Black-Scholes method using
the following weighted-average assumptions:





Stock
      Price (Issue date)
                Exercise
      price
                Risk
      Free interest rate
                Date
      of issue
                Expiration
      date
                Term
      (years)
                Volatility
                Value$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2014
                2.4260
                82.83%
                $0.27$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2015
                2.9192
                82.83%
                $0.30$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2016
                3.4030
                82.83%
                $0.32$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2017
                3.9055
                82.83%
                $0.33$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2018
                4.3986
                82.83%
                $0.35$      0.50
                $     0.548
                2.34%
                5/1/2008
                5/1/2019
                4.8918
                82.83%
                $0.36





The fair
value of the vested portion of options granted during the fiscal year ended
August 31, 2008 totals $380,290 which amount has been expensed and recorded
as a current liability on the Company’s balance sheet.  The fair value
of the vested portion of options during the nine month period ended May 31, 2009
totals $398,072 which amount has also been expensed and recorded as a
current liability on the Company’s balance sheet. The following table summarizes
details of the vesting schedule and associated fair value
calculations:


24


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
10           Common
Stock (continued)




Option
                Grant
      date
              Option
                Qty
              Fair
      Market Value as at May 31, 2008
                $
              AmortizationTerm
                (In
      months)
              Amortized
      value as at May 31, 2009
                $May
      1, 2009
              1,000,000
              273,038
              12
              273,038May
      1, 2010
              1,000,000
              295,633
              24
              160,135May
      1, 2011
              1,000,000
              315,123
              36
              113,795May
      1, 2012
              1,000,000
              333,111
              48
              90,217May
      1, 2013
              1,000,000
              348,922
              60
              75,600May
      1, 2104
              1,000,000
              363,196
              72
              65,5776,000,000
              1,929,023
              
              778,362





(ii)  Restricted stock
awards





The Board
of Directors approved a stock option and stock award plan on February 10, 2007
(the “2007 Plan”). Under the 2007 Plan, a maximum of 2,000,000 shares of the
common stock, par value $0.001 per share, may be awarded to directors, officers,
employees and consultants of the Company. The duration of the 2007 Plan has been
set at 10 years from the time of adoption thereof by the Board of
Directors.   The Board of Directors approved a further stock
option and stock award plan on February 10, 2008 (the “2008 Plan”). Under the
2008 Plan, a maximum of 2,500,000 shares of the common stock, par value $0.001
per share, may be awarded to directors, officers, employees and consultants of
the Company. The duration of the 2008 Plan has been set at 10 years from the
time of adoption thereof by the Board of Directors.





During
the nine month period ended May 31, 2009, the Company issued fully vested stock
awards totaling 707,000 shares to employees and consultants under its 2007 Stock
Option and Award plan as compensation for services rendered.  The
shares were valued at the closing price of the Company’s common stock on the
respective issue dates:





(a)
            September
      8, 2008, $0.59 per share with respect to 225,000 common shares issued to
      employees of wholly-owned subsidiary CPTL-UK, for a total of $132,750;
      and





(b)
            September
      8, 2008, $0.59 per share with respect to 32,000 common shares, for a total
      of $18,800.





(c)
            January
      9, 2009, $0.50 per share with respect to 350,000 common shares issued to
      an officer of the Company and an employee of the Company’s wholly-owned
      subsidiary CPTL-UK for a total of
$175,000.





(d)
            On
      March 3, 2009, $0.50 per share with respect to 100,000 common shares
      issued to an employee of the Company’s wholly-owned subsidiary CPTL-UK for
      a total of $50,000.





All
amounts have been expensed during the respective periods.





Under
SFAS 123R, restricted stock awards are granted subject to certain restrictions,
including in some cases service conditions. The grant-date fair value of
restricted stock awards, which has been determined based upon the market value
of the Company’s shares on the grant date, is expensed over the vesting
period.  During the nine months ended May 31, 2009 the Company has
granted 125,000 stock awards under the 2007 Stock Option and Stock Award Plan to
certain employees which are subject to certain service conditions, including
term of employment.  These stock awards remain unvested as at May 31,
2009.   In respect of these awards, the Company has recognized a
stock-based expense of $33,958 with respect to the vested portion at May 31,
2009, and unrecognized compensation expense totaling $56,042 is expected to be
recognized over fiscal 2009, 2010, 2011 and 2012 as to $10,375,
$29,800,  $13,200 and $2,667, respectively.


25


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
10           Common Stock
(continued)




The
following table summarizes information on the Company’s restricted stock
awards.





Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair
      ValueUnvested,
      at August 31, 2008
              
              
              -
              
              
              
              -Granted
              
              
              882,000
              
              
              $
              0.53Vested
              
              
              707,000Forfeited
              
              
              -Unvested,
      end of May 31, 2009
              
              
              175,000
              
              
              $
              0.51





As at May
31, 2009, the Company had available for issuance under its 2007 and 2008 Stock
Option and Award Plans a total of 68,000 common shares and 2,500,000 common
shares, respectively.





Note
11           Warrants





The
Company had outstanding warrants to purchase 10,714,286 and 7,714,286 shares of
its common stock at May 31, 2009 and August 31, 2008, respectively, at prices
ranging from $0.60 to $0.85 per share.





The
following schedule shows the warrants outstanding and changes made during the
nine month period ended May 31, 2009:





Number
                            
                            
                            
                            Weighted
      AverageExercise
      PriceWarrants
      outstanding, August 31, 2008
                            
                            
                            7,714,286
                            
                            (a)
                            
                            $
                            0.70Changes
      during the nine month period ended May 31, 2009Granted
                            
                            
                            3,000,000
                            
                            (b)
                            
                            $
                            0.70Exercised
                            
                            
                            -
                            
                            
                            
                            
                            -Expired
                            
                            
                            -
                            
                            
                            
                            
                            -Warrants
      outstanding, May 31, 2009
                            
                            
                            10,714,286
                            
                            
                            
                            $
                            0.70





Warrants
outstanding at May 31, 2009 expire as follow:





Year
                      
                      Number
      of Shares2010
                      
                      3,000,0002013
                      
                      7,714,286





Detailed
terms of the valuations of the above noted warrants are discussed above in Note
8 – Secured Convertible Note Financings and Note 9 – Stock Purchase
Agreement.


26


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
12           New Accounting
Standards





Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), BUSINESS
COMBINATIONS. This revision to SFAS No. 141 requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any non-controlling interest
in the acquiree at the acquisition date, at their fair values as of the
acquisition date, with limited exceptions. This revision also requires that
acquisition-related costs be recognized separately from the assets acquired and
that expected restructuring costs be recognized as if they were a liability
assumed at the acquisition date and recognized separately from the business
combination. In addition, this revision requires that if a business combination
is achieved in stages, that the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, be recognized at the full amounts
of their fair values.





In
December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS, an amendment of ARB No. 51.
The objective of this statement is to improve the relevance, comparability, and
transparency of the financial statements by establishing accounting and
reporting standards for the Noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The Company believes that this statement will
not have any impact on its financial statements, unless it deconsolidates a
subsidiary.





In March
2008, the FASB issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES (an amendment to SFAS No. 133). This statement is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008 and requires enhanced disclosures with respect to
derivative and hedging activities. The Company will comply with the disclosure
requirements of this statement if it utilizes derivative instruments or engages
in hedging activities upon its effectiveness.





In
April 2008, the FASB issued FASB Staff Position No. 142-3,
DETERMINATION OF THE USEFUL LIFE OF INTANGIBLE ASSETS (“FSP No. 142-3”) to
improve the consistency between the useful life of a recognized intangible asset
(under SFAS No. 142) and the period of expected cash flows used to measure
the fair value of the intangible asset (under SFAS No. 141(R)). FSP
No. 142-3 amends the factors to be considered when developing renewal or
extension assumptions that are used to estimate an intangible asset’s useful
life under SFAS No. 142. The guidance in the new staff position is to be
applied prospectively to intangible assets acquired after December 31,
2008. In addition, FSP No. 142-3 increases the disclosure requirements
related to renewal or extension assumptions. The Company does not believe
implementation of FSP No. 142-3 will have a material impact on its financial
statements.





In May
2008, the FASB issued SFAS No. 162, THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES.  This statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  This statement is effective
60 days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411, “the Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.”





In May
2008, the FASB issued SFAS No. 163,ACCOUNTING FOR FINANCE
GUARANTEE INSURANCE CONTRACTS – AN INTERPRETATION OF FASB STATEMENT NO. 60.The premium revenue
recognition approach for a financial guarantee insurance contract links premium
revenue recognition to the amount of insurance protection and the period in
which it is provided. For purposes of this statement, the amount of insurance
protection provided is assumed to be a function of the insured principal amount
outstanding, since the premium received requires the insurance enterprise to
stand ready to protect holders of an insured financial obligation from loss due
to default over the period of the insured financial obligation.  This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2008.


27


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
12           New Accounting
Standards(continued)





In
June 2008, the FASB issued FASB Staff Position Emerging Issues Task
Force (EITF) No. 03-6-1, DETERMINING WHETHER INSTRUMENTS GRANTED IN
SHARE-BASED PAYMENT TRANSACTIONS ARE PARTICIPATING SECURITIES (“FSP EITF No.
03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are participating securities, and should be included in the two-class
method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008, and interim periods within those years,
and is not expected to have a significant impact on the Company’s financial
statements.





In
November 2008, the Emerging Issues Task Force (“EITF”) issued Issue
No. 08-7, Accounting for
Defensive Intangible Assets(“EITF 08-7”). EITF 08-7 applies to all
acquired intangible assets in which the acquirer does not intend to actively use
the asset but intends to hold (lock up) the asset to prevent its competitors
from obtaining access to the asset (a defensive asset), assets that the acquirer
will never actually use, as well as assets that will be used by the acquirer
during a transition period when the intention of the acquirer is to discontinue
the use of those assets. EITF 08-7 is effective as of January 1, 2009. The
Company does not expect the adoption of EITF 08-7 to have a material impact on
its financial statements.





On
January 12, 2009 the FASB issued a final Staff Position ("FSP") amending the
impairment guidance in EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets to achieve
more consistent determination of whether another-than-temporary impairment has
occurred. This FSP does not have an impact on the Company at the present
time.





On April
1, 2009 the FASB issued FSP FAS 141(R)-1 that amends and clarifies FASB No. 141
(revised 2007), Business Combinations, to address application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosures of assets and liabilities arising from contingencies in a business
combination.





On April
9, 2009 the FASB issued three FSPs intended to provide additional application
guidance and enhance disclosures regarding fair value measurements and
impairments of securities. FSP FAS 157-4, Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly, provides guidelines for
making fair value measurements more consistent with the principles presented in
FASB Statement No. 157, Fair Value Measurements. FSP FAS 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments, enhances
consistency in financial reporting by increasing the frequency of fair value
disclosures. FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, provides additional guidance designed to
create greater clarity and consistency in accounting for and presenting
impairment losses on securities. These FSPs do not have an impact on the Company
at the present time.




On May
28, 2009 the FASB announced  the
issuance of SFAS 165, Subsequent Events. SFAS 165
should not result in significant changes in the subsequent events that an entity
reports. Rather, SFAS 165 introduces the concept of financial statements being
available to be issued. Financial statements are considered available to be
issued when they are complete in a form and format that complies with generally
accepted accounting principles (GAAP) and all approvals necessary for issuance
have been obtained.




On June
12, 2009 the FASB issued two statements  that amended the guidance for
off-balance-sheet accounting of financial instruments: SFAS No.
166,  Accounting for Transfers of Financial Assets, and SFAS No. 167,
Amendments to FASB Interpretation No. 46(R).




28




CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
12            New Accounting
Standards(continued)




SFAS No.
166 revises SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and will require entities to provide
more information about sales of securitized financial assets and similar
transactions, particularly if the seller retains some risk to the assets, the
FASB said. The statement eliminates the concept of a qualifying special-purpose
entity, changes the requirements for the de-recognition of financial assets, and
calls upon sellers of the assets to make additional disclosures about
them.




SFAS No.
167 amends FASB Interpretation (FIN) No. 46(R), Consolidation of Variable
Interest Entities, by altering how a company determines when an entity that is
insufficiently capitalized or not controlled through voting should be
consolidated, the FASB said. A company has to determine whether it should
provide consolidated reporting of an entity based upon the entity's purpose and
design and the parent company's ability to direct the entity's
actions.




The
standards will be effective at the start of the first fiscal year beginning
after November 15, 2009, which will mean January 2010 for companies that are on
calendar years. The guidance will have to be applied for first-quarter
filings.




The FASB
issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles, on June 29,
2009  and, in doing so, authorized the Codification as the sole source
for authoritative U.S. GAAP.   SFAS No. 168  will be
effective for financial statements issued for reporting periods that end after
September 15, 2009.  Once it's effective, it will supersede all
accounting standards in U.S. GAAP, aside from those issued by the
SEC.  SFAS No. 168 replaces SFAS No. 162 to establish a new hierarchy
of GAAP sources for non-governmental entities under the FASB Accounting
Standards Codification.




None of
the above new pronouncements has current application to the Company, but may be
applicable to the Company's future financial reporting.





Note
13           Other





On
October 31, 2008 the Company signed a letter of intent (“LOI”) with Flukong
Enterprise Inc. (“Flukong”) for a purchase order of up to 500 of Clean Power’s
steam hybrid engines to provide fuel savings of 40 per cent or better in
refrigerated trailer (“reefer”) applications with Flukong Enterprise Inc., an
Edmonton, Alberta based corporation. The LOI grants distributorship to Flukong
for new customers in both Canada and China, and is renewable annually if Flukong
can demonstrate inter aliaits capacity to meet a sales target of a pre-agreed number of reefer
engines per year.  Under the terms of the LOI, Flukong would purchase
up to 500 of Clean Power’s hybrid refrigeration engines over an 18 month period,
following their formal certification by US regulatory bodies, most notably the
Environmental Protection Agency (“EPA”).  Furthermore, upon
commencement of the first delivery, Clean Power would grant an option for
Flukong to purchase an additional 1,000 reefer engines per year for two years.
To secure these terms Flukong has paid a US$84,000 deposit to Clean Power
Technologies.





During
the quarter ended November 30, 2008, the Company and Quercus agreed to extend
the date for the filing of the registration statement on Form S-1, more
particularly described under Note 8 to these financial statements to November
19, 2008, on which date the Company successfully filed its Form
S-1.  The registration statement was declared effective by the SEC on
December 4, 2008.




29


CLEAN
POWER TECHNOLOGIES INC.


(A
Development Stage Company)


NOTES TO
THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (continued)


May 31,
2009


(Stated in U.S.
Dollars)


(Unaudited)





Note
14           Subsequent
events





Subsequent
to the quarter ended May 31, 2009 the Company issued a total of 25,000 shares
under the 2007 Stock option and Stock Award plan with respect to contractual
commitments under certain employment contracts.





Subsequent
to the quarter the Company issued a total of 2,160,000 shares to the legal firm
of Gersten Savage LLP to settle certain legal fees in respect of the filing and
prosecution of various domestic and foreign patents.  Please refer to
Notes 7 and 10 above.





On June
13, 2009 the Company held its 2009 Annual General Meeting of Shareholders (the
“Meeting”).  At the Meeting shareholders elected directors, ratified
the appointment of the Company’s independent auditors for the current fiscal
year and approved a 2009 Stock Option and Stock Award Plan whereby the Company
may issue up to 4,000,000 shares of the Company’s common stock to directors,
officers, employees and consultants, as further described in the Definitive
Schedule 14C filed with the SEC on May 19, 2009.




On June
29, 2009 the Company entered into a five (5) year lease for additional office
and warehouse space in a property located in New Haven, East Sussex, U.K.,
adjacent to its current leased facilities at an annual rate of $24,291 (£15,000)
payable quarterly commencing June 2009.   Concurrently the
Company entered into an option to purchase the aforementioned property,
exercisable June 2009 through December 2010, for a purchase price the greater of
(i) the price stated in an Independent Valuation or (ii) £425,000 less any
reductions previously specified and agreed in a former option
agreement.





The lease
payments for each of the five succeeding fiscal years are as
follows:





2009
                
                $
                4,0492010
                
                
                24,2912011
                
                
                24,2912012
                
                
                24,2912013
                
                
                24,291Thereafter
                
                
                20,242Total:
                
                $
                121,455




30




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







This
quarterly report contains forward-looking statements relating to future events
or our future financial performance.  In some cases, you can identify
forward-looking statements by terminology such as "may", "should", "intends",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"potential", or "continue" or the negative of these terms or other comparable
terminology.  These statements are only predictions and involve known
and unknown risks, uncertainties and other factors which may cause our or our
industry's actual results, levels of activity or performance to be materially
different from any future results, levels of activity or performance expressed
or implied by these forward-looking statements.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity or
performance.  You should not place undue reliance on these statements,
which speak only as of the date that they were made.  These cautionary
statements should be considered with any written or oral forward-looking
statements that we may issue in the future.  Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results, later events or circumstances or to reflect the
occurrence of unanticipated events.





In this
quarterly report unless otherwise specified, all dollar amounts are expressed in
United States dollars and all references to “common shares” refer to the common
shares of our capital stock.





The
management’s discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP").





As used
in this quarterly report and unless otherwise indicated, the terms “we”, “us”,
the “Company” and “Clean Power” refer to Clean Power Technologies Inc. and its
subsidiaries.





The
Company was incorporated in the State of Nevada, United States of America on
October 30, 2003 as Sphere of Language.  On June 13, 2006, the Company
changed its name to Clean Power Technologies Inc.





The
Company incorporated Clean Energy and Power Solutions Inc. (“CEPS”) on
May 12, 2006 in the State of Nevada as a wholly-owned
subsidiary.





By
agreement dated May 22, 2006, the Company agreed to issue 30,765,377 common
shares for all the issued and outstanding common shares of Clean Power
Technologies Inc. (“CPTI private”), a privately held company, incorporated on
March 14, 2006 in the State of Nevada.  CPTI private is developing a
project for a gas/steam or diesel/steam hybrid technology. CPTI private
incorporated a wholly-owned subsidiary, Clean Power Technologies Limited,
(“CPTL”) a company based in, and incorporated under the laws of the United
Kingdom on May 10, 2006, to carry on all its research and
development.  On April 24, 2006, CPTI private entered a research and
development agreement to fund all future costs for research, development,
patenting, licensing and marketing for an alternative hybrid fuel technology
that combines diesel and steam and gas (petrol) and steam technologies for a
100% ownership of the technology and any associated intellectual rights. CPTI
private and CEPS merged on June 20, 2006 with CEPS being the surviving entity.
On July 10, 2006 CEPS became a wholly-owned subsidiary of the Company when the
stockholders of CPTI private tendered their remaining shares.





We
presently have two subsidiaries, CEPS, which is a wholly-owned subsidiary of the
Company, and CPTL, which is a wholly-owned subsidiary of CEPS.  We
undertake all of our business operations indirectly through our wholly-owned
U.K. subsidiary, CPTL. These operations are presently focused on the research
and development of our technology, a steam hybrid engine.





Plan
of Operation





Our
Company is committed to developing hybrid fuel technology and alternative fuel
for a range of vehicles, including locomotives, heavy trucks and light cars. The
Company’s proprietary technology significantly reduces pollution through its
Clean Energy Separation and Recovery (“CESAR”) system, which takes otherwise
wasted heat from the exhaust of a conventional combustion engine and modifies it
through a heat recovery system to generate clean power for
vehicles.





31


The
Company operates out of its development facilities in Newhaven, East Sussex, in
the United Kingdom.





In 2006,
testing of the CESAR system began on a Mazda RX8 passenger vehicle engine, with
trials on a second identical engine commencing later that year. In June 2007,
testing also began on a Caterpillar C18 diesel engine to explore applications,
such as auxiliary power and trailer refrigeration, within the industrial vehicle
and truck industries. Testing on the CESAR process began in late October 2007,
with initial results recording a 40% improvement in fuel
efficiency.





Our CESAR
technology is designed to increase vehicle fuel economy and reduce emissions
through lowered fuel consumption by capturing, storing, and reusing otherwise
wasted heat from the exhaust of a conventional combustion engine. A heat
exchanger captures waste energy, which is then stored in the form of steam in an
accumulator, for ‘on demand’ use either in the same ‘primary’ engine, or in a
secondary vapour engine. Power can be produced solely by the secondary vapour
engine even after the primary combustion engine has shut down. Our CESAR system
can be used to power auxiliary truck systems, such as trailer refrigeration and
cab cooling or heating, in regulatory ‘no idle’ or ‘quiet’ zones. In additional
to initial truck applications, CESAR can be further applied in our well
developed passenger car programmed in addition to having longer-term potential
in the locomotive and marine sectors.





Our plan
of operation over the next twelve months is to further the research and
development on our technology resulting in a advanced prototype and commercial
application in mid 2010. If successful, we intend to license the technology or
form partnerships for the use of the technology with any customers we may
identify.





We have
to date been funded by existing working capital, by an offering of our
convertible debentures and common stock, and by stockholder loans from a
director and executive officer of the Company.  On July 11, 2008, the
Company closed on two million ($2,000,000) of a maximum of $5,000,000 of
convertible debentures. Under the terms of the agreement the Company could raise
an additional three million ($3,000,000) from one or more investors. On February
10, 2009, the Company closed an additional one million ($1,000,000) by way of an
equity financing at a price of $0.45 per share.  The Company issued a
total of 2,222,222 shares of common stock and warrants to purchase an aggregate
of 2,777,778 shares of common stock pursuant to this financing, excluding
placement agent warrants.  During the next twelve (12) months, the
Company will require approximately three and a half million ($3,500,000) dollars
for development and operating costs, of which approximately nine hundred
thousand ($900,000) dollars will be applied to research and development of the
project. The Company anticipates expending approximately $1,400,000 on salaries
for management, employees and consultants, $144,000 in lease and rental payments
for our development facility, $300,000 on patent related fees and legal fees,
$400,000 on taxes, insurance and administration of the project, $120,000 on
audit and accounting related fees and approximately $250,000 on travel,
investor/public relations and miscellaneous corporate expenses. As of May 31,
2009, the Company had available cash of $144,806 as compared to available cash
of $1,203,030 at August 31, 2008. During the nine month period covered by this
quarterly report, along with regular monthly operational expenditures, the
Company undertook certain leasehold improvements and acquired certain equipment
further reducing the Company’s cash position by approximately
$510,924.  The Company will not have sufficient capital to continue
operations for the next three months and will be required to raise additional
required capital by way of equity or stockholder loans.  The Company
is currently expending approximately $500,000 per quarter in operations and
therefore an additional $360,000 at a minimum will need to be raised during the
three months ended August 31, 2009, after taking into account the existing cash
available of approximately $140,000 as at the quarter ended May 31,
2009.   There can be no assurance that the Company will be able
to raise these required funds. If the Company cannot raise the required funds
then operations may cease.





We
believe that we have validated the theoretical predictions that were the
foundation of the CESAR system. A substantial development component of the
programme has now commenced and will require appropriate augmentation of the
engineering team, which the Company intends to continue to undertake this
calendar year. This is essential for design studies of potential applications of
the total system and will commence using the empirical data revealed by the
research programme undertaken. These applications include using the CESAR system
to provide refrigeration power for trucks when the main combustion engine is
shut down, with a target of road testing an especially directed system in late
summer of 2009. Further applications include provision of auxiliary power
derived at low recurrent cost from the exhaust heat of combustion engines for
other transportation areas, including lighter vehicles than trucks and heavier
in the form of railway locomotives. There is also a promising application in
marine applications, not excluding commercial vessels but particularly
attractive for pleasure craft with their heavy requirement for auxiliary
electrical power when not under way.





32


For the
lighter design of the CESAR system, for vans and passenger cars for example, a
substantial repetition of all the phases of the test programme commenced in
Spring 2008 using a smaller multi-cylinder reciprocating engine or a Wankel
engine to replace the current Caterpillar C-15 engine. This will require
appropriate and novel valve designs which are currently in hand to control the
fuel and vapour flows. This second programme would provide design support for
all components of the CESAR saturated liquid energy accumulator system with a
target of road testing such a vehicle in the near future, through the current
development focus is primarily on the truck based applications.





In order
to meet many challenges relating to the development of the steam technology, the
Company has appointed a Swiss steam technology specialist company called
Dampflokomotiv-und Maschinenfabrik DLM AG (“DLM”) to act as its outside
consultant for the further development of the Company’s CESAR technology. DLM
will advise and use its in-house expertise to assist and facilitate the
development of the next stage in our CESAR programme. DLM has professionally
qualified engineers with specialist experience. DLM will provide knowledge and
experience in such areas as the design of the process to predict and analyse the
heat transfer performance and issues associated with pressure losses for a range
of thermal operations involving liquids and gases with and without change of
phase. DLM has experience with stress analysis including pressure vessel design
to European and British standards. DLM will work with the engineers of the
Company on a routine basis. We intend to continue this development through the
fiscal year.





The
Company employed a CAD engineer in mid-January 2008 and work has commenced on
the development of the truck production and vehicle detail design and initial
system configuration feasibility. The CAD engineer is experienced in all aspects
of design and development. The Company has licensed UGS NX5 and S-IDEAS CAD
software to achieve its design objectives.  The Company, as it
continues to evolve from the research phase to that of testing and
pre-production, continues to bring additional engineering expertise
in-house.  Also acquired in January 2009, was a CNC milling machine,
enabling more rapid and cost effective metal fabrication work on-site, rather
than through a sub-contractor





In early
May 2008, the Company agreed to acquire additional space in Newhaven, UK, to
accommodate its corporate office and expanding test cell
facility.  Effective November 13, 2008 the Company entered into a five
(5) year lease for office and warehouse space in a property located in New
Haven, East Sussex, U.K., adjacent to its current leased facilities at an annual
rate of $25,207 (£15,000) payable quarterly commencing March
2009.  Concurrently, the Company entered into an option to purchase
the aforementioned property, exercisable March through August 2010, for a
purchase price of the greater of (i) the price stated in an Independent
Valuation or (ii) £425,000 less any reductions previously specified and agreed
in a former option agreement.





The
Company is presently undertaking a twin track process to design a new
refrigeration engine for reefers, while holding collaborative discussions with
major North American trailer fleet operators. During fiscal 2008, the Company
signed a memorandum of understanding (“MOU”) with one of the USA’s largest
grocery chains, under which the Company used a refrigerated vehicle for data
collection on a range of duty cycles in June, 2008. This was an off site data
collection process in order to validate test results which will be collected in
our test cell this summer 2009.





The
Company has acquired a further 7,500 sq ft of additional space in Newhaven, UK.
This additional space has been used for newly acquired test equipment and
offices.




The first
system has been installed on the Company’s truck, which was acquired and
delivered during in the prior quarterly reporting period.   The
Company’s truck is similar to the trucks in the U.S. trucking company fleet.
This truck is a Columbia CL120 Conventional Chassis with a Day Cab. This vehicle
has the same specifications as the current U.S. fleet of vehicles on which we
did our testing in mid 2008. The Company had conducted a series of tests in mid
2008 to collect data and validate test results to be used in this test
vehicle.




Customer
expectations are that any vehicle application will be fully reliable,
continuously delivering the performance benefits promised in all conditions over
a period of at least ten years. To this end the Company has recently made a
major investment of approximately $170,000 in a rolling road dynamometer
manufactured by Dynomite of New Hampshire USA. This substantial piece of
equipment can accommodate a maximum weight double-drive axle truck which turns
the dynamometer rollers against a variable load created by applying electrical
inertia. This allows the simulation of all road conditions that a truck may
encounter in its day to day operation such as hilly terrain, urban stop-start
and interstate highway running.





33


Using
field data collected in mid 2008 during a three week exercise with the U.S.
grocery hauler operations in Canada it will be possible, with appropriate
instrumentation, to simulate fleet routes, to develop and refine particular
applications, and to deliver maximum fuel benefits with minimum emissions. The
equipment will allow, under fully-controlled laboratory conditions, the speedy
characterisation of any vehicle exhaust temperature, flow and constituency
together with fuel usage.





The
Rolling Road will provide the “hub” of the development and validation programme
for the CESAR system ensuring optimum functionality for each vehicle
application. The issue of durability will also be addressed by other recent
investments such as multi-axis shaker test rigs which will be programmed to
home-in on harmful resonant frequencies for the system, as identified by data
collected over specific proving ground surfaces. By running these shaker rigs on
a 24 hour basis in environmental enclosures, capable of operating between -40
and +50 degrees Celsius, ten year life testing can be compressed into a period
of only a few months.  This rigorous testing of our technology and
associated refinements that ensure from the testing we believe will accelerate
our technology from an advanced prototype to a commercially viable
product.




The
Rolling Road, became fully operational in this quarter ended May 2009, with
testing having commenced on our truck.  This bespoke truck, fitted
with a Detroit Diesel engine and Eaton transmission, is designed to be used on
highways, hectic city streets, narrow roads and can also be driven
off-road.  The Rolling Road, which will be able to simulate all these
conditions, will be a perfect test ground for the vehicle, and allow Clean Power
to demonstrate how its CESAR technology improves the truck’s fuel efficiency in
these conditions. This vehicle has been installed with a Prototype 2 CESAR
system.. The testing underway will reproduce the delivery routes used in the
areas covered by the U.S. hauler. This will confirm the actual fuel savings to
the major grocery hauler when compared against their current fuel usage. Typical
routes we would use are Calgary to Banff and Calgary local area city
routes.




Prior to
this a Prototype 1 CESAR system has been tested and validated within the test
cell with the same vehicle package constraints being driven from our Caterpillar
C15 engine.




Once the
system is working on the truck with the Rolling Road, the vehicle will be used
for data collection at Millbrook Proving ground (this is GM built, proving
ground just outside Bedford). This data will be used for drive file
creation for accelerated durability testing on our hydraulic fatigue testing
machines in Newhaven. These tests will represent the equivalent to 10 years of
road durability in the space of 4 weeks.




It is
anticipated that the first vehicle may require some electronic tuning in order
for the system to work including steam valve optimization.  This should
take no longer than 4 weeks, and is planned to commence in September, 2009. We
can then successfully run the test to prove the fuel savings for our potential
customers.




The
Company anticipates that a newly designed reefer engine will be ready for road
testing by late summer of 2009. Following a ten month road trial and analysis,
and further design refinements, the Company expects to submit the CESAR
technology for regulatory approval under various jurisdictions worldwide,
including the US Environmental Protection Agency (“EPA”), with the hopes of
achieving commercialization during late spring of 2010.




Starting
June 1, 2009, our CAD engineering team will be preparing drawings for
production, with drawing release expected in  early 2010.




Michael
Roberts our Product Acceptability Engineer started work on April 27, 2009. His
role is to ensure that our product is suitable and acceptable to the end user /
customer. He will be responsible for the work content required to validate the
system for the North American markets and the introduction to the EPA of our
system and the market sectors that our product can enter.   He is
also responsible for negotiations of available tax benefits for our customers
installing our fuel saving environmentally friendly systems.unique electronic control
system, using Clean Power’s own Intellectual Property to ensure the maximum
possible fuel efficiency and emissions reductions in all operating
conditions




Also
recently joining the Company is Mr. Marco Cucinotta, a Control System
Specialist.  Under Mr. Cucinotta, the Company is undertaking the
development of a unique electronic control system, using Clean Power’s own
Intellectual Property to ensure the maximum possible fuel efficiency and
emissions reductions in all operating conditions.





34


On March
13, 2009, the Company and The University of Sussex (“Sussex”) entered into a
binding letter of intent (the “Letter of Intent”) providing for (i) the
assignment to the Company of Sussex’s existing patent application relative to
its high energy storage system for motor vehicles (“HYSTOR”); and (ii) an
understanding between the parties to collaborate on certain matters in
connection with the HYSTOR project.  Pursuant to the Letter of Intent,
the Company will be responsible for filing and prosecuting, at its sole expense,
territorial applications based upon the International Publication Number (“WIPO
Application”) in Japan, the United States, Canada, and the European Union.
Simultaneous with the execution of the Letter of Intent, the Company and Sussex
executed an Assignment (Non-Provisional Patent Application) (the “Assignment”)
to sell, assign, transfer and convey to the Company all right, title and
interest in and to the WIPO Application. Further, pursuant to the Letter of
Intent, the parties also agreed to enter into a separate collaborative
relationship agreement providing for the parties to collaborate in good faith to
secure funding to further develop the HYSTOR project.





During
the quarter ended May 31, 2009, Clean Power engaged Cascade Sierra Solutions
(“Cascade”) as potential advisors for the EPA and other Regulatory application
processes (www.cascadesierrasolutions.org). Located in the State of Oregon,
Cascade is a non-profit organization working with heavy duty truck operators to
save fuel and reduce emissions. Cascade is well connected with Federal and State
agencies, working especially closely with agenda-setting regulators in
California.  The Company believes this will assist in optimizing the
approval process, as well as benefitting from Cascade’s broad expertise in
implementation of innovative technologies in the trucking industry.








Although
the Company remains focused on completing this US reefer project on schedule,
there is significant interest in its steam hybrid technology for broader
applications (including automotive, marine and military) in a wide range of
countries. The Company continues to respond to these expressions of interest and
will pursue opportunities which may arise and which management believes to be in
the best interests of the Company.   As part of our new
development, we are developing a system for use in land fill site electrical
power generation; our system will deliver an estimated 20% or greater extra
power back to the national grid. The spark ignition engines are run using the
methane gas from the land fill, our system will add to this via heat recovery
from the otherwise wasted exhaust gases. The Company has already entered
into preliminary discussions with a regional landfill site operator in the U.K.
and will be meeting another larger UK player in the near future. Clean Power
intends to install a prototype test engine at a landfill site by early spring
2010.





With
respect to the intellectual property of the Company, as of May 31, 2009, patent
applications have been filed in five jurisdictions, with the intention to
include additional jurisdictions. Furthermore, the Company has received the
international search report and written opinion of the Searching Authority and
understands that all of the claims were deemed to have industrial applicability
and that 10 of the 19 claims were both novel and inventive. The Company intends
to make certain revisions to the other claims and seek to get additional claims
allowed. To further assist and accelerate this process, the Company has engaged
US legal counsel specifically for patent management.





Liquidity
and Capital Resources





As of May
31, 2009, we have a total of $144,806 in cash on hand.  The Company is
expending approximately $500,000 per quarter and we will therefore be required
to raise additional funds to continue operations.   The Company
expects to raise these funds by way of shareholder loans and equity
placements.




Results
of Operations





The
Company had no revenues for the period from inception to May 31,
2009.  The Company reported a loss from its operations totaling
$2,986,536 as compared to a loss from operations totaling $5,184,729 (2008) over
the 9 month period as a result of the quarterly revaluation of its derivative
financial instruments which resulted in a net gain of $1,730,269 with no
comparative entry over the comparative period for the nine months ending May 31,
2008. General and administrative expenses, net the aforementioned gain during
the current nine month period ended May 31, 2009, totaled $4,716,805 as compared
to $5,184,729 in the prior nine month period ended May 31, 2008, which amount
included $2,600,000 as compensation in the form of shares for the services
provided by Mr. Mitha to the Company from April 27, 2004 through May 1, 2008.
General and administrative expenses related primarily to salaries and consulting
fees totaling $1,066,610 (2008 - $512,740), office and administrative expenses
totaling $500,991 (2008 - $755,880), interest expense associated with the
amortization of certain convertible notes totaling $366,598 (2008 - $26,648) and
stock-based compensation expenses totaling $376,958 (2008 – Nil).  The
Company also expended a total of $301,768 (2008 – $213,082) on professional
fees, $33,630 (2008 – $3,125,000, primarily comprised of a single amount as
described above in this paragraph) in salaries and consulting fees settled by
the issuance of common stock, and $235,516 ($82,899 - 2008) in research and
development efforts.  Depreciation costs, amortization of stock option
costs and deferred financing costs cumulatively totaled $646,821 during the nine
month period as compared to $218,480 for the nine month period ended May 31,
2008.   Additionally during the nine month period ended May 31,
2008 the Company expensed $250,000 with respect to certain director’s fees
settled by the issuance of common stock, with no similar expenditure in the nine
month period ended May 31, 2009.


35





Reported
under other comprehensive loss the Company recorded an unrealized loss from
foreign exchange of $27,524 during the nine month period ended May 31, 2009, as
opposed to a unrealized loss from foreign exchange during the comparative nine
month period ended May 31, 2008 totaling $30,953.  The comprehensive
loss for the nine month period ended May 31, 2009 totaled $3,014,060 as compared
to a comprehensive loss totaling $5,215,682 for the nine month period ended May
31, 2008. The Company reported a basic and diluted loss of $0.04 per share for
the nine months ended May 31, 2009 as compared to a basic and diluted loss of
$0.09 per share for the nine months ended May 31, 2008.  The
comprehensive loss from inception to date totals $16,763,601 as at May 31,
2009.





Off-Balance
Sheet Arrangements





We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to
stockholders.





ITEM
3.                              
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM
4T.                             CONTROLS
AND PROCEDURES





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (“Exchange Act”), as of May 31, 2009.  Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to our Company required
to be included in our reports filed or submitted under the Exchange
Act.





Changes
in Internal Controls





There
were no significant changes (including corrective actions with regard to
significant deficiencies or material weaknesses) in our internal controls over
financial reporting that occurred during the quarter ended May 31, 2009, that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.





PART
II – OTHER INFORMATION




ITEM
1.                               
LEGAL PROCEEDINGS





The
Company is not a party to any legal proceedings and is not aware of any pending
legal proceedings as of the date of this Form 10-Q.





ITEM
1A.                        
   RISK FACTORS





Not
Applicable


36





ITEM
2.                               
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





During
the quarter ended May 31, 2009, we issued the following securities which were
issued without registration under the Securities Act of 1933, in reliance on
Section 4(2), and the provisions of Regulation S.  There were no
underwriting discounts or commissions paid in connection with the sale of these
securities.





Name
      & Address
              Number
      of Shares Issued
              Reason
      for IssuanceMarco
      Cucinotta
                550-127
      Broomfield Ave
                Worthing,
      Sussex BN14 7SF
              100,000
              Stock
      Award pursuant to an employment agreement.Abdul
      Mitha
                32
      Hawkwood Place NW
                Calgary,
      Alberta T3G 1X6
                Canada
              850,000
              Partial
      settlement on convertible debenturePeter
      J. Gennuso
                c/o
      Gersten Savage LLP
                600
      Lexington Ave, 9th Floor
                New
      York, NY 10022
              250,000
              Stock
      award for appointment as VP Corporate DevelopmentThe
      Quercus Trust
                1835
      Newport Boulevard
                A109-PMB
      467
                Costa
      Mesa, CA  92627
              2,222,222
      units, each unit consisting of one share of common stock and 1,666,667
      (Investor Series A Warrants) and 1,111,111 (Investor Series B Warrants)
      shares of our common stock with strike prices of $0.60 and $0.85,
      respectively,  for a period of one year from the date of
      issuance.
              Pursuant
      to private placement with the Company.vFinance
      Investments, Inc.,
                330
      Madison Avenue, 18th
      Floor
                New
      York, NY 10017
              Warrants
      to purchase 133,333 (Agent Series A Warrants) and 88,889 (Agent Series B
      Warrants) shares of our common stock with strike prices of $0.60 and
      $0.85, respectively, for a period of one year from the date of
      issuance.
              Placement
      Agent Warrants pursuant to The Quercus Trust private
      placement.





The
shares issued to Marco Cucinotta and Abdul Mitha above were issued under the
Regulation S exemption in compliance with the exemption from the registration
requirements found in Regulation S promulgated by the Securities and Exchange
Commission (the “SEC”) under the Securities Act of 1933.  The offer
and sale to the purchasers was made in an offshore transaction as defined by
Rule 902(h). No directed selling efforts were made in the U.S. as defined in
Rule 902(c).  The offer and sale to the purchasers was not made to a
U.S. person or for the account or benefit of a U.S. person. The following
conditions were present in the offer and sale:  a) The purchaser of
the securities certified that it is not a U.S. person and did not acquire the
shares for the account or benefit of any U.S. person; b) The purchaser has
agreed to resell the securities only in compliance with Regulation S pursuant to
a registration under the Securities Act, or pursuant to an applicable exemption
from registration; and has agreed not to engage in hedging transactions with
regard to the securities unless in compliance with the Securities Act; c) The
purchaser has acknowledged and agreed with the Company that the Company shall
refuse registration of any transfer of the securities unless made in accordance
with Regulation S, pursuant to a registration statement under the Securities
Act, or pursuant to an applicable exemption from registration; and d) The
purchaser has represented that it is acquiring the shares for its own account,
for investment purposes only and not with a view to any resale, distribution or
other disposition of the shares in violation of the United States federal
securities laws. Neither the Company nor any person acting on its behalf offered
or sold these securities by any form of general solicitation or general
advertising.  The shares sold are restricted securities and the
certificates representing these shares have been affixed with a standard
restrictive legend, which states that the securities cannot be sold without
registration under the Securities Act of 1933 or an exemption
therefrom.




37


The
shares issued to Peter Gennuso, the shares and warrants issued to The Quercus
Trust and the warrants issued to vFinance Investments Inc. were issued pursuant
to  an exemption from the registration requirements of the Securities
Act of 1933, as amended (the “Act”) for the private placement of these
securities pursuant to Section 4(2) of the Act and/or Rule 506 of Regulation D
promulgated thereunder since, among other things, the transaction did not
involve a public offering, the Investors are “accredited investors” and/or
qualified institutional buyers, the Investors have access to information about
the Company and its investment, the Investors will take the securities for
investment and not resale, and the Company is taking appropriate measures to
restrict the transfer of the securities.





ITEM
3.                               
DEFAULTS UPON SENIOR SECURITIES





Not
Applicable





ITEM
4.                               
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





On May
14, 2009, effective as of April 30, 2009, holders of a majority of our
outstanding Common Stock as of the Record Date approved the amendment to our
Articles of Incorporation and Bylaws. The Amendment to the Articles of
Incorporation will become effective upon filing of the Certificate of Amendment
with the Nevada Secretary of State, and the Amendment to the Bylaws of the
Company is expected to become effective on or about June 30,
2009.   A Preliminary Schedule 14C was filed with the SEC on May
26, 2009, and A Definitive Schedule 14C was filed on June 8, 2009.  As
of the date of this report the Amendment has been filed with the State of
Nevada, however, the Company has not yet received confirmation of
acceptance.





ITEM
5.                              
OTHER INFORMATION





On March
13, 2009, the Company and The University of Sussex (“Sussex”) entered into a
binding letter of intent (the “Letter of Intent”) providing for (i) the
assignment to the Company of Sussex’s existing patent application relative to
its high energy storage system for motor vehicles (“HYSTOR”); and (ii) an
understanding between the parties to collaborate on certain matters in
connection with the HYSTOR project.  Pursuant to the Letter of Intent,
the Company will be responsible for filing and prosecuting, at its sole expense,
territorial applications based upon the International Publication Number (“WIPO
Application”) in Japan, the United States, Canada, and the European Union.
Simultaneous with the execution of the Letter of Intent, the Company and Sussex
executed an Assignment (Non-Provisional Patent Application) (the “Assignment”)
to sell, assign, transfer and convey to the Company all right, title and
interest in and to the WIPO Application. Further, pursuant to the Letter of
Intent, the parties also agreed to enter into a separate collaborative
relationship agreement providing for the parties to collaborate in good faith to
secure funding to further develop the HYSTOR project.  A copy of the
Letter of Intent and Assignment are filed herewith as Exhibits 10.23 and 10.24,
respectively.





Subsequent
to the period covered by this quarterly report, on June 5, 2009 the Company
issued a total of 2,160,000 shares of common stock to certain members of the law
firm of Gersten Savage LLP, pursuant to a retainer  agreement entered
into between Gersten Savage LLP and the Company on March 12,
2009  whereby the Company agreed to issue a total of 1,200,000 shares
of restricted common stock at a deemed price of $0.375 per share in payment of
certain fees, and a further retainer agreement dated May 5, 2009, whereby the
Company agreed to issue a total of 960,000 shares of restricted common stock at
a deemed price of $0.375 per share in payment of certain fees.  The
effective date of the issuance of the shares for accounting purposes was June 2,
2009.





On June
29, 2009 the Company entered into a five (5) year lease for additional office
and warehouse space in a property located in New Haven, East Sussex, U.K.,
adjacent to its current leased facilities at an annual rate of $24,291 (£15,000)
payable quarterly commencing June 2009.   Concurrently the
Company entered into an option to purchase the aforementioned property,
exercisable June 2009 through December 2010, for a purchase price the greater of
(i) the price stated in an Independent Valuation or (ii) £425,000 less any
reductions previously specified and agreed in a former option
agreement.





The lease
payments for each of the five succeeding fiscal years are as
follows:





2009
                
                $
                4,0492010
                
                
                24,2912011
                
                
                24,2912012
                
                
                24,2912013
                
                
                24,291Thereafter
                
                
                20,242Total:
                
                $
                121,455




Subsequent
to the period covered by this quarterly report, on June 30, 2009 the Company
issued a total of 25,000 shares of common stock to Mr. Steve Wilson, as part of
his compensation agreement with the Company.  The effective date of
the issuance of the shares for accounting purposes was June 1,
2009.





38


ITEM
6.                               
EXHIBITS







EXHIBIT
      NO.
              IDENTIFICATION
      OF EXHIBIT3.1
              Articles
      of Incorporation
              Incorporated
      by reference to our SB-2 registration statement filed  with the
      Securities and Exchange Commission on March 15, 20043.1
      (i)
              Amendment
      to Articles of Incorporation dated June 12, 2006
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 20063.1(ii)
              Amendment
      to Articles of Incorporation dated June 13, 2006
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 20063.2
              Bylaws
              Incorporated
      by reference to our SB-2 registration statement filed with the Securities
      and Exchange Commission on March 15, 20043.2(i)
              Amended
      and Restated Bylaws
              Incorporated
      by reference to our Form 10-QSB filed with the Securities and Exchange
      Commission on January 22, 200710.1
              Agreement
      and Plan of Merger between the Company, Clean Energy and Power Solutions
      Inc. and the shareholders of Clean Power Technologies Inc.
      executed
                on
      May 22, 2006.
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 21, 200610.2
              Memorandum
      of Understanding between the Company and Mitsui Babcock Energy Limited
      dated September 11, 2006
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on September 12, 200610.3
              Collaboration
      Agreement between the Company and Mitsui Babcock Limited dated October 11,
      2006
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on October 19, 200610.4
              2007
      Stock Option and Stock Award Plan approved by the Board of Directors and
      the Shareholders
              Incorporated
      by reference to our Form SB-2 registration statement filed with the
      Securities and Exchange Commission on March 23, 200710.5
              Subscription
      Agreement from Doosan Babcock Energy Ltd., executed pursuant to the
      Collaboration Agreement between the Company and Doosan Babcock Energy Ltd.
      dated October 11, 2006
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on June 20, 2007





39


10.6
              2008  Stock
      Option and Stock Award Plan approved by the Board of Directors and the
      Shareholders
              Incorporated
      by reference to our Definitive 14-C filed with the Securities and Exchange
      Commission on April 17, 200810.7
              Employment
      Agreement between Abdul Mitha and the Company effective May 1, 2008,
      approved by the Board of Directors on May 22, 2008.
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on May 28, 200810.8
              Stock
      Purchase Agreement dated July 10, 2008, by and between the Company and The
      Quercus Trust
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.9
              Promissory
      Note issued by  the Company to The Quercus Trust
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.10
              Registration
      Rights Agreement by and between the Company and The Quercus
      Trust
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.11
              Pledge
      Agreement by and between the Company and The Quercus Trust
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.12
              Class
      A Warrant issued by the Company to the Quercus Trust pursuant to the Stock
      Purchase Agreement dated July 10, 2008
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on July 16, 200810.13
              Class
      B Warrant issued by the Company to the Quercus Trust pursuant to the Stock
      Purchase Agreement dated July 10, 2008
              Incorporated
      by reference to our Form 8-K filed  with the Securities and
      Exchange Commission on July 16, 200810.14
              Cooperation
      Agreement between the Company and Voith Turbo GmbH & Co., KG dated
      August 5, 2008
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on August 8, 200810.15
              Memorandum
      of Understanding between the Company and Farm Fresh Marketing Inc. dated
      December 12, 2008
              Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on December 16, 200810.16
              Lease
      Agreement between Quentin King and Clean Power Technologies Limited
      effective November 13, 2008
              Incorporated
      by reference to our Form 10-Q filed with the Securities and Exchange
      Commission on April 10, 2009.10.17
              Option
      Agreement between Quentin King  and Clean Power Technologies
      Limited effective November 13, 2008
              Incorporated
      by reference to our Form 10-Q filed with the Securities and Exchange
      Commission on April 10, 2009.





40


10.18
                  Lease
      Agreement between Mr. Andrew Leaver and Mrs. Hilary Leaver  and
      Clean Power Technologies Limited effective November 18, 2008
                  Incorporated
      by reference to our Form 10-Q filed with the Securities and Exchange
      Commission on April 10, 2009.10.19
                  Stock
      Purchase Agreement dated February 10, 2009, by and between the Company and
      The Quercus Trust
                  Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on February 13, 200910.20
                  Form
      of Registration Rights Agreement dated February 10, 2009, by and between
      the Company and The Quercus Trust
                  Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on February 13, 200910.21
                  Form
      of Warrant issued by the Company to the Quercus Trust pursuant to the
      Stock Purchase Agreement dated February 10, 2009
                  Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on February 13, 200910.22
                  Form
      of Warrant issued by the Company to the Quecus Trust pursuant to the Stock
      Purchase Agreement dated February 10, 2009
                  Incorporated
      by reference to our Form 8-K filed with the Securities and Exchange
      Commission on February 13, 200910.23
                  Binding
      Letter of Intent between the Company and  the University of
      Sussex dated March 13, 2009
                  Incorporated
      by reference to our Form 10-Q filed with the Securities and Exchange
      Commission on April 10, 2009.10.24
                  Assignment
      of Patent between the Company and the University of Sussex, Richard
      Stobart and Mudalige Weerasinghe dated     March
      13, 2009
                  Incorporated
      by reference to our Form 10-Q filed with the Securities and Exchange
      Commission on April 10, 2009.10.25
                  2009  Stock
      Option and Stock Award Plan approved by the Board of Directors and the
      Shareholders
                  Incorporated
      by reference to our Definitive 14-C filed with the Securities and Exchange
      Commission on May 19, 200810.26
                  Amendment
      to the Articles of Incorporation and Bylaws of the
Company.
                  Incorporated
      by reference to our Definitive Schedule 14C filed with the Securities and
      Exchange Commission on June 8, 2009.10.27
                  Option
      Agreement between Quentin King and Clean Power Technologies Limited
      effective June 29, 2009
                  Filed
      herewith10.28
                  Lease
      Agreement between Quentin King and Clean Power Technologies Limited
      effective June 29, 2009
                  Filed herewith




41





31.1
              Section
      302 Certification- Principal Executive Officer
              Filed
      herewith31.2
              Section
      302 Certification Principal Financial Officer
              Filed
      herewith32.1
              Certification
      Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
              Filed
      herewith32.2
              Certification
      Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
              Filed
      herewith





SIGNATURES





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




CLEAN
POWER TECHNOLOGIES INC.




/s/Abdul
      Mitha
                
                
                /s/Diane
      GlatfelterName:
      Abdul Mitha
                
                
                Name:Diane
      GlatfelterTitle:
      President, Principal Executive Officer
                
                
                Title:Secretary.
      Treasurer, Principal Financial OfficerDate:
      July 9, 2-009
                
                
                Date:
      July 9, 2009




42