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

FORM 10-Q
_______________

(Mark One)
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008

or

£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______

Commission file number: 001-33710

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

Delaware
06-1393453
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)


300 Atlantic Street - Suite 702, Stamford, CT
06901-3522
(Address of principal executive offices)
(Zip Code)

 
(203) 327-7050
 
 
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 S   No £

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

Large Accelerated Filer £
 
Accelerated Filer S
Non-Accelerated Filer £ (Do not check if a smaller reporting company.)
 
Smaller reporting company £

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

As of November 7, 2008, there were 8,138,303 outstanding shares of common stock, par value $0.01 per share.
 
 
 
CLEAN DIESEL TECHNOLOGIES, INC.

Quarterly Report on Form 10-Q
for the Quarter Ended September 30, 2008

INDEX


     
Page
PART I.
FINANCIAL INFORMATION
   
       
Item 1.
 
3
       
   
3
       
   
4
       
   
5
       
   
6
       
Item 2.
 
18
       
Item 3.
 
25
       
Item 4.
 
25
       
PART II.
OTHER INFORMATION
 
 
       
Item 1A.
 
26
       
Item 5.
 
26
       
Item 6.
 
27
       
   
28

- 2 -
 
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements

CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)

   
September 30,
   
December 31,
 
   
2008
   
2007
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 6,691     $ 1,517  
Accounts receivable, net of allowance of $516 and $49, respectively
    1,093       1,927  
Investments
 
─
      7,100  
Inventories, net
    831       1,093  
Other current assets
    170       234  
                 
Total current assets
    8,785       11,871  
                 
Investments
    10,975       11,725  
Patents, net
    992       817  
Fixed assets, net of accumulated depreciation of $486 and $421, respectively
    220       175  
Other assets
    71       75  
Total assets
  $ 21,043     $ 24,663  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Accounts payable
  $ 469     $ 757  
Accrued expenses
    476       850  
Short-term debt
    3,000    
─
 
Customer deposits
    78       56  
                 
Total current liabilities
    4,023       1,663  
                 
Commitments
               
                 
Stockholders’ equity:
               
                 
Preferred stock, par value $0.01 per share: authorized 100,000 shares; no shares issued and outstanding
 
─
   
─
 
Common stock, par value $0.01 per share: authorized 12,000,000 shares; issued and outstanding 8,138,303 and 8,124,056 shares, respectively
    81       81  
Additional paid-in capital
    73,490       72,447  
Accumulated other comprehensive loss
    (925 )     (16 )
Accumulated deficit
    (55,626 )     (49,512 )
Total stockholders’ equity
    17,020       23,000  
Total liabilities and stockholders’ equity
  $ 21,043     $ 24,663  

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

- 3 -

CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts) (Unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenue:
                       
Product sales
  $ 1,415     $ 223     $ 6,432     $ 567  
Technology licensing fees and royalties
    165       2,237       368       3,352  
Consulting and other
 
─
   
─
   
─
   
─
 
Total revenue
    1,580       2,460       6,800       3,919  
                                 
Costs and expenses:
                               
Cost of revenue ─ product sales
    1,174       167       5,232       388  
Cost of revenue ─ licensing fees and royalties
 
─
   
─
   
─
   
─
 
Cost of revenue ─ consulting and other
 
─
   
─
   
─
   
─
 
Selling, general and administrative
    2,403       1,659       7,447       4,957  
Research and development
    162       100       316       292  
Patent amortization and other expense
    65       86       143       262  
Operating costs and expenses
    3,804       2,012       13,138       5,899  
                                 
(Loss) income from operations
    (2,224 )     448       (6,338 )     (1,980 )
                                 
Other income (expense):
                               
Interest income
    125       204       481       298  
Interest expense
    (14 )  
─
      (14 )  
─
 
Other income (expense), net
    (268 )     (1 )     (243 )     (1 )
                                 
(Loss) income before provision/benefit for income taxes
    (2,381 )     651       (6,114 )     (1,683 )
                                 
Provision/benefit for income taxes
 
─
   
─
   
─
   
─
 
                                 
Net (loss) income
  $ (2,381 )   $ 651     $ (6,114 )   $ (1,683 )
(Loss) income per share:
                               
Basic
  $ (0.29 )   $ 0.09     $ (0.75 )   $ (0.25 )
Diluted
  $ (0.29 )   $ 0.09     $ (0.75 )   $ (0.25 )
Weighted-average number of common shares outstanding:
                               
Basic
    8,138       7,377       8,137       6,685  
Diluted
    8,138       7,580       8,137       6,685  

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

- 4 -
 
CLEAN DIESEL TECHNOLOGIES, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands) (Unaudited)

   
Nine Months Ended
September 30,
 
   
2008
   
2007
 
Operating activities
           
Net loss
  $ (6,114 )   $ (1,683 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation and amortization
    110       100  
Provision for doubtful accounts, net
    499       28  
Compensation expense for stock options and warrants
    1,033       733  
Changes in operating assets and liabilities:
               
Accounts receivable
    335       (1,827 )
Inventories
    262       (361 )
Other current assets and other assets
    68       (28 )
Accounts payable, accrued expenses and other liabilities
    (640 )     (47 )
Net cash used for operating activities
    (4,447 )     (3,085 )
                 
Investing activities
               
Sales (purchases) of investments
    7,100       (11,825 )
Patent costs
    (220 )     (212 )
Purchases of fixed assets
    (110 )     (71 )
Net cash provided by (used for) investing activities
    6,770       (12,108 )
                 
Financing activities
               
Proceeds from short-term debt
    3,000    
─
 
Proceeds from issuance of common stock, net
 
─
      4,313  
Proceeds from issuance of warrants, net
 
─
      6,867  
Stockholder-related charges
    (14 )     (143 )
Proceeds from exercise of stock options
    24       83  
Net cash provided by financing activities
    3,010       11,120  
                 
Effect of exchange rate changes on cash
    (159 )     10  
                 
Net increase (decrease) in cash and cash equivalents
  $ 5,174     $ (4,063 )
Cash and cash equivalents at beginning of the period
    1,517       5,314  
Cash and cash equivalents at end of the period
  $ 6,691     $ 1,251  
                 
Supplemental non-cash activities:
               
Payment of accrued directors’ fees in common stock
 
$ 
─
    $ 140  
Unrealized loss on available-for-sale securities
  $ 750    
$
─
 

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

- 5 -
 
CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  Significant Accounting Policies

Basis of Presentation:

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

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed.  These interim consolidated financial statements should be read in conjunction with Clean Diesel’s consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2007.

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

Reverse Split of Common Stock:

On June 15, 2007, the Company effected a five-for-one reverse split of its common stock.  All historical share numbers and per share amounts in these financial statements have been adjusted to give effect to this reverse split.

Revenue Recognition:

The Company generates revenue from product sales comprised of fuel-borne catalysts, including the Platinum Plus fuel-borne catalyst products and concentrate, and hardware including the U.S. Environmental Protection Agency (EPA) verified Purifier System, ARIS advanced reagent injection system injectors and dosing systems; license and royalty fees from the ARIS system and other technologies; and consulting fees and other.

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

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

- 6 -
 
Cost of Revenue:

Our cost of revenue – product sales includes the costs we incur to formulate our finished products into saleable form for our customers, including material costs, labor and processing costs charged to us by our outsourced blenders, installers and other vendors, packaging costs incurred by our outsourced suppliers, freight costs to customers and inbound freight charges from our suppliers.  Our inventory is primarily maintained off-site by our outsourced suppliers.  To date, our purchasing, receiving, inspection and internal transfer costs have been insignificant and have been included in cost of revenue – product sales.  In addition, the costs of our warehouse of approximately $21,000 per year are included in selling, general and administrative expenses.  Cost of revenue – licensing fees and royalties is zero as there are no incremental costs associated with the revenue.  Cost of revenue – consulting and other includes incremental out of pocket costs to provide consulting services.

Patent Expense:

Patents, which include all direct incremental costs associated with initial patent filings and costs to acquire rights to patents under licenses, are stated at cost and amortized using the straight-line method over the remaining useful lives, ranging from one to twenty years.  During the nine months ended September 30, 2008, we capitalized $220,000 of patent costs.  Indirect and other patent-related costs are expensed as incurred.  Patent amortization expense for the three and nine months ended September 30, 2008 was $17,000 and $45,000, respectively, and for the three and nine months ended September 30, 2007 was $17,000 and $50,000, respectively.  At September 30, 2008 and December 31, 2007, the Company’s patents, net of accumulated amortization, were $992,000 and $817,000, respectively.

Selling, General and Administrative Expense:

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

(in thousands)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Non-cash stock-based compensation
  $ 259     $ 91     $ 797     $ 733  
Compensation and benefits
    1,176       843       3,256       2,097  
Total compensation and benefits
    1,435       934       4,053       2,830  
Professional
    215       228       1,247 *     816  
Travel
    183       145       548       441  
Occupancy
    167       120       677       355  
Sales and marketing expenses
    108       182       337       342  
Bad debt provision
    258       28       499       58  
Depreciation and all other
    37       22       86       115  
Total selling, general and administrative expenses
  $ 2,403     $ 1,659     $ 7,447     $ 4,957  

*  Includes $227,000 of non-cash stock-based compensation charges for fair value of warrants.

We account for stock-based compensation in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004), “Accounting for Stock-Based Compensation” (“SFAS No. 123R”).  Aggregate non-cash stock-based compensation charges incurred by the Company in the three and nine months ended September 30, 2008 were $262,000 and $1,033,000, respectively, (including $3,000 and $9,000, respectively, in research and development expenses) and in the three and nine months ended September 30, 2007 were $91,000 and $733,000, respectively (see Note 4).

- 7 -
 
Basic and Diluted Loss per Common Share:

Basic and diluted loss per share is calculated in accordance with the provisions of SFAS No. 128, “Earnings Per Share.”  Basic loss per share is computed by dividing net loss by the weighted-average number of shares outstanding during the reporting period.  Diluted loss per share is computed in a manner similar to basic earnings per share except that the weighted-average number of shares outstanding is increased to include additional shares from the assumed exercise of stock options and warrants, if dilutive, using the treasury stock method.  The Company’s computation of diluted net (loss) income per share for the three and nine months ended September 30, 2008 and for nine months ended September 30, 2007, respectively, does not include common share equivalents associated with 812,178 and 699,419 options, respectively, and 424,992 and 922,049 warrants, respectively, as the result would be anti-dilutive.  Dilutive common share equivalents included in the diluted weighted-average shares outstanding for the three months ended September 30, 2007 consist of 128,896 related to stock options and 73,526 related to warrants.

Income Taxes:

We adopted FASB Interpretation No. 48 (“FIN 48”) effective January 1, 2007.  There were no unrecognized tax benefits at the date of adoption of FIN 48, and there were no unrecognized tax benefits at September 30, 2008.  It is the Company’s policy to classify in the financial statements accrued interest and penalties attributable to a tax position as income taxes.

As of September 30, 2008, the Company has tax losses available for offset against future years’ taxable income of approximately $40.6 million, expiring between 2009 and 2027. The Company also had research and development tax credit carryforwards of approximately $1.7 million, expiring between 2011 and 2027. The Company has provided a full valuation allowance to reduce the related deferred tax asset to zero because of the uncertainty relating to realizing such tax benefits in the future. Utilization of CDT's U.S. federal tax loss carryforwards for the period prior to December 12, 1995 is limited as a result of the ownership change in excess of 50% attributable to the 1995 Fuel-Tech N.V. rights offering to a maximum annual allowance of $734,500. Utilization of CDT's U.S. federal tax loss carryforwards for the period after December 12, 1995 and before December 30, 2006 is limited as a result of the ownership change in excess of 50% attributable to the private placement which was effective December 29, 2006 to a maximum annual allowance of $2,518,985. Utilization of CDT's tax losses subsequent to 2006 may be limited due to cumulative ownership changes in any future three-year period. It is not anticipated that CDT's U.S. taxable income for the full calendar year 2008 will be in excess of the limited allowable loss carryforwards.

No income taxes were provided on the income before income taxes for the three months ended September 30, 2007 because at September 30, 2007, the Company had tax losses available for offset against future years’ taxable income.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate.  Our tax years ranging from 2004 through 2007 remain open to examination by various taxing jurisdictions as the statute of limitations has not expired.

Investments:

Investments represent auction rate securities (“ARS”) which are variable-rate debt securities, the majority of which are AAA/Aaa rated, that are collateralized by student loans substantially guaranteed by the U.S. Department of Education.  These investments are classified as "available for sale" under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."  Liquidity for these ARS is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals.  While the underlying securities have a long-term nominal maturity, the interest rate is reset through dutch auctions that are held at pre-determined intervals, typically every 28 days.  The securities can be resold in the auction at par and are callable at par any time at the option of the issuer.  Interest is paid at the end of each auction period.  The investments are reported at fair value (see further discussion below under caption “Newly Adopted Accounting Standards”).  Classification of marketable securities as current or non-current is dependent upon management’s intended holding period, the security’s maturity date and liquidity considerations based on market conditions.  If management intends to hold the securities for longer than one year as of the balance sheet date, or, if the state of the auction market effectively prevents their liquidation on resale, they are classified as non-current.  All income generated from these investments has been recorded as interest income.   The contractual maturities of the ARS held by us range from 2027 to 2047.   Accrued interest receivable at September 30, 2008 and December 31, 2007 was approximately $17,000 and $49,000, respectively.

- 8 -
 
During the first two months of 2008, the Company sold $7.1 million of the ARS.  However, starting on February 15, 2008 and continuing through the third quarter of 2008, the Company experienced difficulty in selling additional securities because of the failure of the auction mechanism as a result of sell orders exceeding buy orders.  These failed auctions represent liquidity risk exposure and are not defaults or credit events.  Holders of the securities continue to receive interest on the investment, currently at a pre-determined rate, and the securities will be auctioned at the pre-determined intervals until the auction succeeds, the issuer calls the securities, or they mature.  Accordingly, because there may be no effective mechanism for selling these securities, the securities may be viewed as non-current assets.  The investments associated with failed auctions will not be accessible until a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities mature.  We classified the fair value of approximately $11.0 million (par value of $11.7 million) and $11.7 million of these auction rate securities as non-current investments as of September 30, 2008 and December 31, 2007, respectively, reflecting a $750,000 decline from par value based upon management’s internal assessment and information provided by the investment bank through which the Company holds such securities.  Although these securities have continued to pay interest according to their stated terms and most of these securities continue to be AAA/Aaa rated, for the nine months ended September 30, 2008, the Company recorded an unrealized temporary loss of $750,000 which is reflected in our consolidated balance sheet in accumulated other comprehensive loss, resulting in a reduction in stockholders’ equity.  Factors we considered in determining whether this loss was temporary included the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuers, and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.  At September 30, 2008, because the Company has the ability and intent to hold these securities until recovery of their value, the Company does not believe such securities are other-than-temporarily impaired or that the failure of the auction mechanism will have a material impact on the Company’s liquidity or financial position.

The Company does not expect to need to access these funds in the short-term; however, in May 2008, we arranged a $3 million demand loan facility using our ARS as collateral and in July 2008, borrowed those funds (see Note 5).  On August 8, 2008, the Securities and Exchange Commission’s Division of Enforcement announced it had entered into an agreement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively “UBS”), whereby UBS will use its best efforts to liquidate at par value by the end of 2009 but not later than June 30, 2010.  Our investment holdings of $11.7 million par value of auction rate securities were purchased and held through UBS.

In October 2008, the Company received an offer (the “Offer”) from UBS AG for a put right permitting us to sell to UBS at par value all ARS previously purchased from UBS at a future date (any time during a two-year period beginning June 30, 2010).  The Offer also includes a commitment to loan us 75% of the UBS value of the ARS at any time until the put is exercised.  The Offer is non-transferable and expires on November 14, 2008 (see Note 11 “Subsequent Events”).

Newly Adopted Accounting Standards:

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” for assets and liabilities measured at fair value on a recurring basis.  SFAS 157 accomplishes the following key objectives:
 
 
·
Defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date;
 
·
Establishes a three-level hierarchy (“valuation hierarchy”) for fair value measurements;
 
·
Requires consideration of the Company’s creditworthiness when valuing liabilities; and
 
·
Expands disclosures about instruments measured at fair value.

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

- 9 -
 
 
·
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
·
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

In October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3 clarified the application of FAS 157.  FSP 157-3 demonstrated how the fair value of a financial asset is determined when the market for that financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.  The guidance provided by FSP 157-3 is consistent with our approach to valuing our ARS for which there is no active market.

The Company’s assets carried at fair value on a recurring basis are its investments in ARS as described above under the caption “Investments.”  The securities have been classified within level 3 as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.  The valuation may be revised in future periods as market conditions evolve.

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

The table below includes a roll forward of the Company’s investments in ARS from January 1, 2008 to September 30, 2008, and a reclassification of these investments from level 2 to level 3 in the valuation hierarchy.  When a determination is made to classify a financial instrument within level 3, the determination is based upon the significance of the unobservable parameters to the overall fair value measurement.  However, the fair value determination for level 3 financial instruments may include observable components.

As noted above, typically, the fair value of ARS investments approximates par value due to the frequent resets through the auction process.  While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently trading and therefore do not have a readily determinable market value.  Accordingly, the estimated fair value of the ARS no longer approximates par value.  At September 30, 2008, management’s internal assessment included an income approach analysis of expected future cash flows and included assumptions for interest rates, timing and amount of cash flows, credit and liquidity premiums, and expected holding periods of the ARS.  These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.  Based on this Level 3 valuation, the Company valued the ARS investments at $11.0 million, which represents a decline in value of $750,000 from par.

- 10 -

The estimated fair value at September 30, 2008 is based upon management’s internal assessment and information provided by the investment bank through which the Company holds such securities.

(in thousands)            
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
Fair value January 1, 2008
  $ 18,825     $ —  
Purchases
    —       —  
Sales
    (7,100 )     —  
Transfers (out) in
    (11,725 )     11,725  
Unrealized loss included as reduction in stockholders’ equity and not in operations
    —       (750 )
Fair value September 30, 2008
  $ —     $ 10,975  

In February 2008, the FASB issued Staff Position 157-2 (“FSP 157-2”).  FSP 157-2 permits delayed adoption of SFAS 157 for certain non-financial assets and liabilities, which are not recognized at fair value on a recurring basis, until fiscal years and interim periods beginning after November 15, 2008.  As permitted by FSP 157-2, the Company has elected to delay the adoption of SFAS 157 for qualifying non-financial assets and liabilities, such as fixed assets and patents.  The Company is in the process of evaluating the impact, if any, that the application of SFAS 157 to its non-financial assets will have on the Company’s consolidated results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.”  SFAS No. 159 permits an entity to elect fair value as the initial and subsequent measurement attribute for many financial assets and liabilities.  Entities electing the fair value option would be required to recognize changes in fair value in earnings.  Entities electing the fair value option are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute.  SFAS No. 159 became effective beginning January 1, 2008.  The Company elected not to measure any eligible items using the fair value option in accordance with SFAS No. 159 and therefore, the adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Recent Accounting Pronouncements:

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”).  SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination.  SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations.  SFAS No. 141R is effective, on a prospective basis, for us in the fiscal year beginning January 1, 2009.  The Company does not expect a significant impact on its consolidated financial position and results of operations from the adoption of SFAS No. 141R.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”  SFAS No. 160 establishes requirements for ownership interests in subsidiaries held by parties other than the Company (sometimes called “minority interests”) be clearly identified, presented, and disclosed in the consolidated statement of financial position within equity, but separate from the parent’s equity.  All changes in the parent’s ownership interests are required to be accounted for consistently as equity transactions and any noncontrolling equity investments in deconsolidated subsidiaries must be measured initially at fair value.  SFAS No. 160 is effective, on a prospective basis, for us in the fiscal year beginning January 1, 2009.  However, presentation and disclosure requirements must be retrospectively applied to comparative financial statements.  The Company does not expect a significant impact on its consolidated financial position and results of operations from the adoption of SFAS No. 160.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161").  SFAS 161 requires enhanced disclosures about an entity's derivative and hedging activities and is effective for us as of January 1, 2009.  We do not expect the adoption of SFAS 161 to have a material effect on our consolidated financial statements.

- 11 -
 
Note 2.  Inventories

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

(in thousands)
     
   
September 30,
   
December 31,
 
   
2008
   
2007
 
Finished goods (Platinum Plus fuel-borne catalyst)
  $ 145     $ 165  
Raw materials (primarily, platinum concentrate)
    364       656  
Hardware
    343       260  
Other
    1       34  
    $ 853     $ 1,115  
Less: inventory reserves
    (22 )     (22 )
Inventories, net
  $ 831     $ 1,093  

Note 3.  Stockholders’ Equity

In the first nine months of 2008, we issued 14,247 shares of our common stock upon the exercise of 27,166 stock options.  In connection therewith, we received approximately $24,000 in cash and the surrender of 12,920 stock options.

There was no activity in the Company's 424,992 outstanding warrants during the nine months ended September 30, 2008.

In the first nine months of 2008, the Company charged approximately $14,000 to additional paid-in capital for costs incurred in connection with our filing of a Post-effective Amendment to a Registration Statement on Form S-1 and a Registration Statement on Form S-8 with the SEC on June 19, 2008.

At the Company’s annual meeting of stockholders held on June 7, 2007, the stockholders approved a five-for-one reverse split of the Company’s common stock, a reduction of the par value of the Company’s preferred and common stock from $0.05 per share to $0.01 per share and an increase in the number of shares of common stock the Company is authorized to issue from 9 million to 12 million.  Such actions became effective at the close of business on June 15, 2007 when the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation with the Secretary of State of Delaware.  The historical share numbers and per share amounts in these financial statements have been adjusted to give effect to the reverse split.  In conjunction with the reverse split, we incurred costs aggregating approximately $25,000, primarily from our transfer agents and outside legal counsel which were charged to additional paid-in capital in the nine months ended September 30, 2007.  We also charged an aggregate of $118,000 to additional paid-in capital for costs incurred in connection with our filing of a Registration Statement on Form S-1 with the SEC on June 29, 2007 and our submission of an application for listing on the NASDAQ Capital Market on June 29, 2007.

In the first nine months of 2007, the Company issued 667,998 shares of its common stock in consideration of approximately $4.5 million ($4.3 million, net of expenses) cash received from investors to settle stock subscriptions entered into pursuant to CDT’s December 2006 private placement.  In the December 2006 placement, the Company secured commitments for the purchase of 1,400,000 shares of its common stock, par value $0.01, and warrants for the purchase of an additional 1,400,000 shares of common stock for aggregate gross cash proceeds of $9.5 million (net proceeds of approximately $9.0 million).  The securities were sold in investment units consisting of one share of common stock, one Class A Warrant and one Class B Warrant, each warrant entitling the holder to purchase one additional share of common stock for every two shares of common stock acquired in the offering at a purchase price of $6.75 per unit.  The Class A Warrants entitled the holder until July 2, 2007 to purchase, at a price of $10.00 per share, one share of common stock for every two shares of common stock acquired in the December 2006 private placement and the Class B Warrants entitled the holder until December 29, 2007 to purchase, at a price of $12.50 per share, one share of common stock for every two shares of common stock acquired in the December 2006 private placement.

- 12 -
 
In the nine months ended September 30, 2007, the Company received approximately $6.9 million, net of expenses, upon the exercise of warrants to acquire 709,383 shares of our common stock.

On January 12, 2007, we issued 17,142 shares of our common stock to three non-executive members of our board of directors as payment (or partial payment in the case of one director) of $115,000 in lieu of cash for directors’ fees earned in 2006.  On June 19, 2007, the Company issued 2,457 shares of common stock, valued at $25,000, to two non-executive members of the Board of Directors in lieu of fees for services rendered during the first quarter of 2007.  The number of shares of our common stock issued to the directors was determined based upon the average of the high and low share prices during each quarter.  The grant date for such shares of common stock for purposes of measuring compensation is the last day of the quarter in which the shares are earned, which is the date that the director begins to benefit from, or be adversely affected by, subsequent changes in the price of the stock.  Directors’ compensation charged to operations did not materially differ from such measurement.

In the first nine months of 2007, CDT issued 29,441 shares of its common stock upon exercise of 42,201 stock options for aggregate proceeds to the Company of approximately $83,000.

Note 4.  Stock-Based Compensation

Share-based compensation cost recognized under SFAS 123(R) was approximately $262,000 and $91,000 for the three months ended September 30, 2008 and 2007, respectively, and $1,033,000 and $733,000 for the nine months ended September 30, 2008 and 2007, respectively.  Of such 2008 nine-month total, $1,024,000 is classified in selling, general and administrative expenses ($797,000 as employee compensation and $227,000 as investor relations compensation for advisory services) and $9,000 is included in research and development expenses.  Compensation costs for stock options which vest over time are recognized over the vesting period.  As of September 30, 2008, there was approximately $1.0 million of unrecognized compensation cost related to stock options granted under the Plan.  The cost is expected to be recognized over a weighted-average period of 0.74 years.

The Company maintains an equity compensation plan approved by its stockholders, the 1994 Incentive Plan (the “Plan”).  Under the Plan, awards may be granted to participants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, performance awards, bonuses or other forms of share-based awards or cash, or combinations of these as determined by the board of directors.  Awards are granted at fair market value on the date of grant and typically expire ten years after date of grant.  Participants in the Plan may include the Company’s directors, officers, employees, consultants and advisors (except consultants or advisors in capital-raising transactions) as the board of directors may determine.  The maximum number of awards allowed under the Plan is 17.5% of the Company’s outstanding common stock less the then outstanding awards, subject to sufficient authorized shares.

- 13 -
 
The following table summarizes information concerning options outstanding including the related transactions under the Plan for the nine months ended September 30, 2008:

   
Number of Shares
   
Weighted-Average Exercise Price
   
Weighted-Average Remaining Contractual Term in Years
   
Aggregate Intrinsic Value
 
Options outstanding as of December 31, 2007
    812,844     $ 11.716              
Granted
    28,000     $ 13.359              
Exercised
    (27,166 )   $ 10.37              
Forfeited
 
   
$ 
             
Expired
    (1,500 )   $ 10.00              
Options outstanding as of September 30, 2008
    812,178     $ 11.821       6.3     $ –  
Options exercisable as of September 30, 2008
    663,177     $ 11.091       5.7     $ –  
Options outstanding as of September 30, 2008 and  expected to vest
    765,478     $ 11.821       6.3     $ –  
 
The aggregate intrinsic value (market value of stock less option exercise price) in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price on September 30, 2008, which would have been received by the option holders had all holders of options in the money exercised their options as of that date.
 
Proceeds received from the exercise of stock options were approximately $24,000 and $83,000, respectively, in the nine months ended September 30, 2008 and 2007, and were included in financing activities on the Company’s consolidated statements of cash flows.  In addition, for the nine months ended September 30, 2008, 12,920 options were surrendered upon the exercise of options to fund the purchase.  The total intrinsic value of stock options exercised for the three months ended September 30, 2008 and 2007 was zero and $151,000, respectively, and for the nine months ended September 30, 2008 and 2007 was $288,000 and $261,000, respectively.

During the nine months ended September 30, 2008, the board of directors granted 28,000 option shares to employees at a weighted average exercise price of $13.359 per share.  During the nine months ended September 30, 2007, the board of directors granted 125,000 option shares to employees, directors and consultants at an exercise price of $9.10 per share.  The non-executive directors’ options are exercisable immediately.  All other options vest as to one-third, immediately upon grant and as to one-third, upon each of the first and second anniversaries of grant.  The weighted-average fair value at the date of grant for options granted during the nine months ended September 30, 2008 was $10.311 per share and was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions:

Expected term in years
    8.63  
Risk-free interest rate
    3.69 %
Expected volatility
    92.4 %
Dividend yield
    0 %

The Company estimates the fair value of stock options using a Black-Scholes option pricing model.  Key input assumptions used to estimate the fair value of stock options include the expected term, expected volatility of the Company’s stock, the risk free interest rate, option forfeiture rates, and dividends, if any.  The expected term of the options is based upon the historical term until exercise or expiration of all granted options.  The expected volatility is derived from the historical volatility of the Company’s stock on the U.S. NASDAQ Capital Market (the Over-the-Counter market prior to October 3, 2007) for a period that matches the expected term of the option.  The risk-free interest rate is the constant maturity rate published by the U.S. Federal Reserve Board that corresponds to the expected term of the option.  SFAS No. 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest.  The estimate is based on the Company’s historical rates of forfeitures.  SFAS No. 123R also requires estimated forfeitures to be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The dividend yield is assumed as 0% because the Company has not paid dividends and does not expect to pay dividends in the future.

- 14 -
 
Note 5.  Short-term Debt

On July 25, 2008, we borrowed $3 million from the demand loan facility with UBS collateralized by our auction rate securities, a facility we had arranged on May 8, 2008.  Management determined to draw down the entire facility as a matter of financial prudence to secure available cash.  The loan facility may be used for our working capital purposes.  We must continue to meet certain collateral maintenance requirements, such that our outstanding borrowings may not exceed 50% of the value of our auction rate securities as determined by the lender.  No facility fee is required and borrowings will be at a floating interest rate per annum equal to the sum of the prevailing daily 30-day Libor plus 25 basis points.  Interest expense for the three and nine months ended September 30, 2008 was $14,000.

In October 2008, the Company received an Offer from UBS AG for a put right permitting us to sell to UBS at par value all ARS previously purchased from UBS at a future date (commencing not later than June 30, 2010) and committing to loan us 75% of the value of the ARS as determined by the lender at any time until the put is exercised.  Further, the loan would be on a no-cost basis to the Company, and UBS would reimburse us for any interest expense incurred under previous loan arrangements (see Note 11 “Subsequent Events”).

Note 6.  Commitments

The Company is obligated under a five-year sublease agreement through March 2009 for its principal office (3,925 square feet) at an annual cost of approximately $128,000, including rent, utilities and parking.  We entered into another lease for our principal office (5,515 square feet) that commences January 1, 2009, has a seven-year term and an annual base rent of approximately $128,000.  The Company was obligated under a four-year lease which expired in July 2008 for 2,750 square feet of warehouse space at an annual cost of approximately $21,000, including utilities.  We have renewed our lease for the warehouse space at the same annual cost until July 2009.  In addition, the Company is obligated under a 64-month lease through March 2013 for 1,942 square feet of administrative space in the U.K. at an annual cost of approximately $65,000, including utilities and parking.

Effective October 28, 1994, Fuel Tech, Inc., successor to Fuel-Tech N.V. (“Fuel Tech”), the company that spun CDT off in a rights offering in December 1995, granted two licenses to the Company for all patents and rights associated with its platinum fuel-based catalyst technology.  Effective November 24, 1997, the licenses were canceled and Fuel Tech assigned to CDT all such patents and rights on terms substantially similar to the licenses.  In exchange for the assignment commencing in 1998, the Company is obligated to pay Fuel Tech a royalty of 2.5% of its annual gross revenue attributable to sales of the platinum fuel-borne catalysts.  The royalty obligation expires in December 2008.  CDT may terminate the royalty obligation to Fuel Tech by payment of $1.1 million.  CDT, as assignee and owner, maintains the technology at its expense.  Royalty expense incurred under this obligation for the three months ended September 30, 2008 and 2007 was approximately $5,000 and $4,000, respectively, and for the nine months ended September 30, 2008 and 2007 was approximately $14,000 and $10,000, respectively.  Royalties payable to Fuel Tech at September 30, 2008 and December 31, 2007 were $14,000 and $14,300, respectively.

Note 7.  Related Party Transactions

The Company has a Management and Services Agreement with Fuel Tech that requires the Company to reimburse Fuel Tech for management, services and administrative expenses incurred on the Company’s behalf at a rate equal to an additional 3% to 10% of the costs paid on the Company’s behalf, dependent upon the nature of the costs incurred.  Currently, the Company reimburses Fuel Tech for the expenses associated with one Fuel Tech officer/director who also serves as an officer/director of CDT.  The Company’s condensed consolidated statements of operations include charges from Fuel Tech of certain management and administrative costs of approximately $18,000 in each of the three-month periods ended September 30, 2008 and 2007 and $53,000 in each of the nine-month periods ended September 30, 2008 and 2007.  The Company believes the charges under this Management and Services Agreement are reasonable and fair.  The Management and Services Agreement is for an indefinite term but may be cancelled by either party by notifying the other in writing of the cancellation on or before May 15 in any year.  We intend to cancel the Management and Services Agreement in 2009.

- 15 -
 
Note 8.  Significant Customers

For the three and nine months ended September 30, 2008 and 2007, revenue derived from certain customers comprised 10% or more of our consolidated revenue (“significant customers”) as set forth in the table below:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
                         
Customer A
    16.4 %     *       15.6 %     *  
Customer B
    *       *       *       29.1 %
Customer C
    *       61.0 %     *       38.3 %
Customer D
    *       24.3 %     *       18.2 %

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

At September 30, 2008, Clean Diesel had one customer (not included in the table above) that represented approximately 15.2% of its gross accounts receivable balance.

Note 9.  Comprehensive (Loss) Income

Components of comprehensive (loss) income follow:

(in thousands)
                 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Net (loss) income
  $ (2,381 )   $ 651     $ (6,114 )   $ (1,683 )
Other comprehensive (loss) income:
                               
Foreign currency translation adjustment
    (180 )     10       (159 )     10  
Unrealized loss on available- for-sale securities
 
─
   
─
      (750 )  
─
 
Comprehensive (loss) income
  $ (2,561 )   $ 661     $ (7,023 )   $ (1,673 )


- 16 -
 
Note 10.  Geographic Information

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

(in thousands)
                 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Revenue:
                       
U.S.
  $ 271     $ 1,370     $ 673     $ 2,239  
U.K./Europe
    1,282       1,034       6,032       1,603  
Asia
    27       56       95       77  
Total
  $ 1,580     $ 2,460     $ 6,800     $ 3,919  

The Company has patent coverage in North and South America, Europe, Asia, Africa and Australia.  As of September 30, 2008 and December 31, 2007, the Company’s assets comprise the following:

   
September 30,
   
December 31,
 
   
2008
   
2007
 
U.S.
  $ 17,791     $ 22,680  
Foreign
    3,252       1,983  
Total assets
  $ 21,043     $ 24,663  

Note 11.  Subsequent Events

In October 2008, the Company received an Offer from UBS to sell at par value auction-rate securities originally purchased from UBS (approximately $11.7 million) at any time during a two-year period beginning June 30, 2010.  The Offer also provides for a no-cost loan for the Company of 75% of the value of the ARS as determined by UBS and reimbursement of interest expense incurred under previous loan arrangements.  Based upon the UBS value of our ARS at September 30, 2008, the additional borrowings available to us (over the $3.0 million we have borrowed to date) would be approximately $4.5 million.  UBS significantly reduced its value of our ARS as of October 31, 2008 which would decrease our additional available loan to approximately $3.9 million.  The Offer is non-transferable and expires on November 14, 2008.

On November 6, 2008, the Company accepted the Offer.  The Company’s right under the Offer is in substance a put option (with the strike price equal to the par value of the ARS) which it expects to record as an asset, measured at its fair value (pursuant to SFAS No. 159), with the resultant gain recognized in earnings.  Concurrently, the Company will also recognize an other-than-temporary impairment on the ARS, measured as the amount of unrealized loss in the stockholders’ equity component accumulated other comprehensive loss related to the ARS, which would be offset, to a great extent, by the gain recognized upon recording the put option.

 
- 17 -
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical facts, so-called “forward-looking statements,” are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned that all forward-looking statements involve risks and uncertainties, including those detailed in the Company’s filings with the Securities and Exchange Commission.  See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations

Three Months ended September 30, 2008 Compared to Three Months ended September 30, 2007

Total revenue in the three months ended September 30, 2008 was $1,580,000 compared to $2,460,000 in the three months ended September 30, 2007, a decrease of $880,000, or 35.8%, primarily attributable to significant up-front license fees recognized in the prior year third quarter.  Of our operating revenue for the three months ended September 30, 2008, approximately 89.6% was from product sales and 10.4% was from technology licensing fees and royalties.  Of our operating revenue for the three months ended September 30, 2007, approximately 9.1% was from product sales and 90.9% was from technology licensing fees and royalties.  The mix of our revenue sources during any reporting period may have a material impact on our operating results.  In particular, our execution of technology licensing agreements, and the timing of the revenue recognized from these agreements, has not been predictable.

Product sales were $1,415,000 in the third quarter of 2008 compared to $223,000 in the same 2007 quarter, an increase of $1,192,000, or 534.5%.  The increase in product sales is attributable primarily to our Platinum Plus Purifier Systems, a product comprised of a diesel particulate filter along with our Platinum Plus fuel-borne catalyst to enable regeneration.  We received approval in October 2007 from Transport for London to supply our Purifier Systems as an emission reduction solution that meets the standards established for the London Low Emission Zone.  The deadlines for compliance with the London Low Emission Zone are being phased in over time for different classifications of vehicles.  February 2008 was the compliance deadline for vehicles greater than 12 metric tons and July 2008 was the deadline for motor coaches and vehicles greater than 3.5 metric tons.  The next compliance deadline is October 2010 for larger vans and minibuses, followed by further compliance deadlines in 2012.  We believe these sales of our Purifier Systems for compliance with the requirements of the London Low Emission Zone may provide us with recurring revenue from use of our Platinum Plus fuel-borne catalyst that enables the regeneration of the diesel particulate filter and that we will have the opportunity to expand this business model as additional Low Emission Zones are established throughout Europe.    

Our technology licensing fees and royalties were $165,000 in the three months ended September 30, 2008 compared to $2,237,000 in the same quarter of 2007, a decrease of $2,072,000, or 92.6%, due to recognition of significant license fees in the prior year.  In each of the three-month periods ended September 30, 2008 and 2007, we executed new technology licensing agreements and recognized revenue from license fees for the use of our ARIS® technologies for control of oxides of nitrogen (NOx) using our selective catalytic reduction (SCR) emission control, the combination of exhaust gas recirculation (EGR) with SCR technologies, and hydrocarbon injection for lean NOx traps, NOx catalysts and diesel particulate filter regeneration.  We are continuing our efforts to consummate technology license agreements with manufacturers and component suppliers for the use of our ARIS technologies. 

- 18 -
 
Our total cost of revenue was $1,174,000 in the three-month period ended September 30, 2008 compared to $167,000 in the three-month period ended September 30, 2007 with the increase due to higher product sales volume.  Our gross profit as a percentage of total revenue was 25.7% and 93.2% for the three-month periods ended September 30, 2008 and 2007, respectively, with the decrease attributable to the mix of lower margin product sales.  Gross profit as a percentage of product sales was 17.0% and 25.1% for the three-month periods ended September 30, 2008 and 2007, respectively.  We experienced higher costs in the third quarter of 2008 due to reduced volume discounts from our supplier of Purifier Systems because of lower demand for such products as key 2008 LEZ compliance deadlines had passed.  Our planned gross margins for products compliant with the LEZ requirements was initially set at a low level, based upon low pricing, to attract interest in our offering to establish greater visibility of the Company in the marketplace.  Our international operation implemented price increases late in the third quarter of 2008.

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

Selling, general and administrative expenses were $2,403,000 in the three months ended September 30, 2008 compared to $1,659,000 in the comparable 2007 period, an increase of $744,000, or 44.8%.  The increase in selling, general and administrative costs is primarily attributable to higher compensation and benefits, as well as higher bad debt provision, occupancy and travel costs as further discussed below.  Selling, general and administrative expenses are summarized as follows:

(in thousands)
     
   
Three Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Non-cash stock-based compensation
  $ 259     $ 91  
Compensation and benefits
    1,176       843  
Total compensation and benefits
    1,435       934  
Professional
    215       228  
Travel
    183       145  
Occupancy
    167       120  
Sales and marketing expenses
    108       182  
Bad debt provision
    258       28  
Depreciation and all other
    37       22  
Total selling, general and administrative expenses
  $ 2,403     $ 1,659  

Aggregate non-cash charges for the fair value of stock options and warrants in the three months ended September 30, 2008 were $262,000, of which $259,000 has been included in selling, general and administrative expenses and $3,000 in research and development expenses.  This compares to $91,000 in non-cash stock option compensation expense in the three months ended September 30, 2007.

Excluding the non-cash stock-based charges, compensation and benefit expenses were $1,176,000 for the three months ended September 30, 2008 compared to $843,000 in the comparable prior year period, an increase of $333,000, or 39.5%, due to new personnel, recruitment and relocation costs, and higher salaries for existing personnel in 2008 compared to 2007.  The three months ended September 30, 2008 included approximately $15,000 for bonuses, whereas, the comparable 2007 period included $309,000 in bonuses based on achievement of certain 2007 milestones.

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Professional fees include public relations, investor relations and financial advisory fees, along with audit-related costs and costs of complying with the requirements of the Sarbanes-Oxley Act of 2002.  Occupancy costs include office rents, insurance and related costs.  The higher occupancy costs in 2008 are attributable to higher costs for our U.K. office under a new lease that we entered into in November 2007.  We executed a lease for a new U.S. office, effective January 1, 2009, and expect the rent expense will be approximately the same level as our current rent expense but with a lower cash outlay in the early years of the lease.  Bad debt provision as a percentage of product sales in the three months ended September 30, 2008 and 2007 was 18.2% and 12.6%, respectively, with the increased rate in 2008 attributable to specific aged accounts.

Research and development expenses were $162,000 in the three months ended September 30, 2008 compared to $100,000 in the three months ended September 30, 2007, an increase of $62,000, or 62.0%.  The 2008 projects include laboratory testing on additive formulations, fuel economy and carbon reduction along with field testing of emission control technologies.  The 2008 research and development expenses include $3,000 of non-cash charges for the fair value of stock options.

Patent amortization and other patent expenses were $65,000 in the three months ended September 30, 2008 compared to $86,000 in the same period in 2007, a decline of $21,000, or 24.4%.

Interest income was $125,000 in the three months ended September 30, 2008 compared to $204,000 in the three months ended September 30, 2007, a decrease of $79,000, or 38.7%, due to lower interest rates in the 2008 period.

Interest expense was $14,000 in the three months ended September 30, 2008.  In July 2008, we borrowed all of the $3.0 million line of credit from UBS that is secured by our investments in ARS (see Note 5).  We expect the interest expense incurred will be reimbursed by UBS in conjunction with our acceptance of their Offer as outlined in Note 11 “Subsequent Events.”

Other expense was $268,000 in the three months ended September 30, 2008 and is comprised of foreign currency transaction losses, net of gains, primarily attributable to cash balances on the U.S. records denominated in U.K. pounds sterling.

Nine Months ended September 30, 2008 Compared to Nine Months ended September 30, 2007

Total revenue for the nine months ended September 30, 2008 increased $2,881,000, or 73.5%, to $6,800,000 from $3,919,000 in the nine months ended September 30, 2007 due primarily to sales of our Purifier Systems as an emission reduction solution that meets the standards established for the London Low Emission Zone.  Operating revenue in the nine months ended September 30, 2008 consisted of approximately 94.6% in product sales and 5.4% in technology licensing fees and royalties.  Operating revenue in the nine months ended September 30, 2007 consisted of approximately 14.5% in product sales and 85.5% in technology licensing fees and royalties.

The mix of our revenue sources during any reporting period may have a material impact on our operating results.  In particular, our execution of technology licensing agreements, and the timing of the revenue recognized from these agreements, has not been predictable.

Product sales in the nine months ended September 30, 2008 were $6,432,000 compared to $567,000 in the same prior year period, an increase of $5,865,000, or 1,034.4%.  The increase in product sales is attributable primarily to higher demand for our Platinum Plus Purifier Systems, a product comprised of a diesel particulate filter along with our Platinum Plus fuel-borne catalyst to enable regeneration.  We received approval in October 2007 from Transport for London to supply our Purifier Systems as an emission reduction solution that meets the standards established for the London Low Emission Zone.  The deadlines for compliance with the London Low Emission Zone will be phased in over time for different classifications of vehicles.  February 2008 was the compliance deadline for vehicles greater than 12 metric tons and July 2008 was the compliance deadline for motor coaches and vehicles greater than 3.5 metric tons.  The next compliance deadline is October 2010 for large vans and minibuses, followed by further compliance deadlines in 2012.  During our first quarter of 2008, our Purifier Systems were approved for emissions reduction in Scotland under a grant-supported retrofit program for Scottish council fleets.  We believe these sales of our Purifier Systems for compliance with the requirements of the London Low Emission Zone may provide us with recurring revenue from use of our Platinum Plus fuel-borne catalyst that enables the regeneration of the diesel particulate filter.  We believe we will have the opportunity to expand this business model as additional Low Emission Zones are established throughout Europe.

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Technology licensing fees and royalties included fees upon execution of new agreements and royalties from existing licensees, primarily for use of our ARIS technologies.  Our technology licensing fees and royalties were $368,000 and $3,352,000 for the nine months ended September 30, 2008 and 2007, respectively, a decline of $2,984,000, or 89.0%, attributable to recognition of significant up-front license fees in 2007.  In the nine months ended September 30, 2008 and 2007, we executed new technology licensing agreements and recognized revenue from license fees for the use of our ARIS® technologies for control of oxides of nitrogen (NOx) using our selective catalytic reduction (SCR) emission control, the combination of exhaust gas recirculation (EGR) with SCR technologies, and hydrocarbon injection for lean NOx traps, NOx catalysts and diesel particulate filter regeneration.  Our license agreements executed in 2008 include Headway Machinery Co., Ltd. (Zhucheng City, China) and Hilite International, Inc. (Cleveland, Ohio), among others.  The new license agreements executed in the first nine months of 2007 included Robert Bosch GmbH, Tenneco Automotive Operating Company Inc. and Combustion Components Associates, Inc.  We are continuing our efforts to consummate technology license agreements with manufacturers and component suppliers for the use of our ARIS technologies. 

Our total cost of revenue was $5,232,000 in the nine-month period ended September 30, 2008 compared to $388,000 in the nine-month period ended September 30, 2007 due to higher product sales volume.  Our gross profit as a percentage of total revenue was 23.1% and 90.1% for nine-month periods ended September 30, 2008 and 2007, respectively, with the decrease attributable to the mix of lower margin product sales.  Gross profit as a percentage of product sales was 18.7% and 31.6% for nine-month periods ended September 30, 2008 and 2007, respectively.  The gross margin for products compliant with the LEZ requirements was initially set at a low level, based on low prices for our products, to attract interest in our offering to establish greater visibility of the Company in the marketplace.  Our international operation implemented price increases late in the third quarter of 2008.

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

Selling, general and administrative expenses were $7,447,000 in the nine months ended September 30, 2008 compared to $4,957,000 in the comparable 2007 period, an increase of $2,490,000, or 50.2%.  The increase was primarily due to higher compensation and benefit costs, as well as higher professional fees, occupancy costs and bad debt provision.  Selling, general and administrative expenses are summarized as follows:

(in thousands)
     
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Non-cash stock-based compensation
  $ 797     $ 733  
Compensation and benefits
    3,256       2,097  
Total compensation and benefits
    4,053       2,830  
Professional
    1,247 *     816  
Travel
    548       441  
Occupancy
    677       355  
Sales and marketing expenses
    337       342  
Bad debt provision
    499       58  
Depreciation and all other
    86       115  
Total selling, general and administrative expenses
  $ 7,447     $ 4,957  

*  Includes $227,000 of non-cash stock-based compensation charges for fair value of warrants.

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The Company’s aggregate non-cash charges for the fair value of stock options and warrants in the nine months ended September 30, 2008 were $1,033,000, of which $1,024,000 has been included in selling, general and administrative expenses ($797,000 in compensation and $227,000 in professional) and $9,000 in research and development expenses.  This compares to $733,000 in total non-cash stock-based compensation expense in the nine months ended September 30, 2007.

Excluding the non-cash stock-based charges, compensation and benefit expenses were $3,256,000 for the nine months ended September 30, 2008 compared to $2,097,000 in the comparable prior year period, an increase of $1,159,000, or 55.3%, due to new personnel, recruitment and relocation costs, and higher salary rates in 2008 compared to 2007.  The 2008 compensation includes approximately $41,000 in bonuses, whereas, the 2007 compensation includes approximately $382,000 bonus expense based upon achievement of milestones.

Professional fees include public relations, investor relations and financial advisory fees, along with audit-related costs and costs of complying with the requirements of the Sarbanes-Oxley Act of 2002.  The significant component of the increase in professional fees is attributable to stock-based compensation charges for the fair value of warrants issued for investor relations services.  Occupancy costs include office rents, insurance, telephone and communications, office supplies and related costs.  We moved our U.K. administrative offices in November 2007 and will relocate the U.S. office in January 2009.  The lease for the new U.S. office will result in rent expense at approximately the current level but the cash outlay in the early years of the new lease is expected to be lower than our current requirement.  Bad debt provision as a percentage of product sales in the nine months ended September 30, 2008 and 2007 was 7.8% and 10.2%, respectively.  The 2008 provision is attributable to specific aged accounts.

Research and development expenses were $316,000 in the nine months ended September 30, 2008 compared to $292,000 in the nine months ended September 30, 2007, a decrease of $24,000, or 8.2%.  The 2008 projects include laboratory testing on additive formulations, fuel economy and carbon reduction along with and field testing of emission control technologies.  The 2008 research and development expenses include $9,000 of non-cash charges for the fair value of stock options.

Patent amortization and other patent related expense was $143,000 in the nine months ended September 30, 2008 compared to $262,000 in the same prior year period, a decline of $119,000, or 45.4%, due to additional costs in 2007 associated with the protection of our patents.

Interest income was $481,000 in the nine months ended September 30, 2008 compared to $298,000 in the nine months ended September 30, 2007, an increase of $183,000, or 61.4%, due to higher invested balances during the 2008 period, although at lower rates in 2008.

Interest expense was $14,000 in the nine months ended September 30, 2008 compared to zero in the nine months ended September 30, 2007.  In July 2008, we borrowed all of the $3.0 million line of credit from UBS (see Note 5).  We expect the interest expense incurred will be reimbursed by UBS in conjunction with our acceptance of their Offer as outlined in Note 11 “Subsequent Events.”

Other expense was $243,000 in the nine months ended September 30, 2008 and is comprised of foreign currency transaction losses, net of gains.

Liquidity and Sources of Capital

We require capital resources and liquidity to fund our global development and for working capital.  Our working capital requirements vary from period to period depending upon manufacturing volumes, the timing of deliveries and payment cycles of our customers.  At September 30, 2008 and December 31, 2007, we had cash, cash equivalents and investments classified as current assets of $6,691,000 and $8,617,000, respectively, to use for our operations.

Net cash used for operating activities was $4,447,000 in the nine months ended September 30, 2008 and was used primarily to fund the net loss of $6,114,000, adjusted for non-cash items.  Included in the non-cash items was stock-based compensation expense of $1,033,000 accounted for in accordance with SFAS No. 123R.

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Our working capital was $4,762,000 at September 30, 2008 compared to $10,208,000 at December 31, 2007, a decrease of $5,446,000.  Accounts receivable, net decreased to $1,093,000 at September 30, 2008 from $1,927,000 at December 31, 2007 due to collection of receivables, an increase in the allowance for doubtful accounts and lower third quarter sales of our Purifier Systems to meet the requirements of the London Low Emission Zone.  Inventories, net decreased to $831,000 at September 30, 2008 from $1,093,000 at December 31, 2007.  Our accounts payable and accrued expenses decreased by $662,000 compared to December 31, 2007 reflecting lower business activity.

Net cash provided by investing activities was $6,770,000 in the nine months ended September 30, 2008, primarily due to sales of investments (see further discussion below).  We invested $220,000 in patents in 2008 and expect to continue to invest in our patents.

Cash provided by financing activities was $3,010,000 in the nine months ended September 30, 2008 and was primarily due to proceeds from short-term debt borrowing.  At September 30, 2008, our outstanding short-term debt was $3,000,000.  Management determined to draw down the entire $3 million loan facility from UBS as a matter of financial prudence to secure available cash.  The demand loan facility allows us to borrow up to $3 million, subject to collateral maintenance requirements, at a floating interest rate per annum equal to the sum of the prevailing daily 30-day Libor plus 25 basis points (see Note 5).  Effective upon the Company’s acceptance of the UBS Offer, the Company would have a commitment from UBS of additional availability of cash under the terms of the UBS no-cost loan program (see Note 11 “Subsequent Events”).

At September 30, 2008, our investments are recorded at fair value in accordance with SFAS No. 157.  At September 30, 2008 and December 31, 2007, we held approximately $11.0 million ($11.7 million par value) and $18.8 million, respectively, in investments in auction rate securities collateralized by student loans which are substantially guaranteed by the U.S. Department of Education.  We sold $7.1 million of these investments in 2008.  However, starting on February 15, 2008 and continuing to date in 2008, the Company experienced difficulty in effecting additional sales of such securities because of the failure of the auction mechanism as a result of sell orders exceeding buy orders.  Liquidity for these auction rate securities is typically provided by an auction process that resets the applicable interest rate at pre-determined intervals.  These failed auctions represent liquidity risk exposure and are not defaults or credit events.  Holders of the securities continue to receive interest on the investments (currently at pre-determined rates), and the securities will be auctioned at the pre-determined intervals (typically every 28 days) until the auction succeeds, the issuer calls the securities, or they mature.  Accordingly, because there may be no effective mechanism for selling these securities, the securities may be viewed as long-term assets.  The funds associated with failed auctions will not be accessible until a successful auction occurs, the issuer redeems the issue, a buyer is found outside of the auction process or the underlying securities mature.  We classified the fair value of approximately $11.0 million (par value of $11.7 million) and $11.7 million of these auction rate securities as non-current investments as of September 30, 2008 and December 31, 2007, respectively, reflecting a $750,000 decline from par value based upon management’s internal assessment, including review of discounted cash flows, and information provided by the investment bank through which the Company holds such securities.  Although these securities have continued to pay interest according to their stated terms and most of these securities continue to be AAA/Aaa rated, for the nine months ended September 30, 2008, the Company recorded an unrealized temporary loss of $750,000 which is reflected in our consolidated balance sheet in accumulated other comprehensive loss, resulting in a reduction in stockholders’ equity.  Factors we considered in determining whether this loss was temporary included the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the issuers, and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value.  At September 30, 2008, because the Company has the ability and intent to hold these securities until recovery of their value, the Company does not believe such securities are other-than-temporarily impaired or that the failure of the auction mechanism will have a material impact on the Company’s liquidity or financial position.

The Company does not expect to need to access these funds in the short-term; however, in May 2008, we arranged a $3 million demand loan facility using our ARS as collateral and in July 2008, borrowed those funds as noted above.  On August 8, 2008, the Securities and Exchange Commission’s Division of Enforcement announced it had entered into an agreement in principle with UBS Securities LLC and UBS Financial Services, Inc. (collectively “UBS”), whereby UBS will use its best efforts to liquidate at par value by the end of 2009 but not later than June 30, 2010.  Our investment holdings of $11.7 million par value of auction rate securities were purchased and held through UBS.

In October 2008, the Company received an offer (the “Offer”) from UBS for a put right permitting us to sell to UBS at par value all ARS previously purchased from UBS at a future date (any time during a two-year period beginning June 30, 2010).  The Offer also includes a commitment to loan us 75% of the UBS-determined value of the ARS at any time until the put is exercised.  The Offer is non-transferable and expires on November 14, 2008.  On November 6, 2008, the Company accepted the Offer.  The Company’s right under the Offer is in substance a put option (with the strike price equal to the par value of the ARS) which it expects to record as an asset, measured at its fair value (pursuant to SFAS No. 159), with the resultant gain recognized in earnings.  Concurrently, the Company will also recognize an other-than-temporary impairment on the ARS, measured as the amount of unrealized loss in accumulated other comprehensive loss related to the ARS (a component of stockholders’ equity), which would be offset, to a great extent, by the gain recognized upon recording the put option.

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The Company has requested that it be recharacterized by UBS as in the class of ARS holders that may exercise the put right commencing January 2, 2009 rather than the period starting June 30, 2010.  There can be no assurance that UBS will take any action on our request.

The Company will be exposed to credit risk should UBS be unable to fulfill its commitment under the Offer.  There can be no assurance that the financial position of UBS will be such as to afford the Company (a) the ability to acquire the par value of its ARS upon exercise of the put right, or (b) that the Company may receive significant loan proceeds from the UBS loan facility.

Our management believes that based upon the Company’s cash and cash equivalents at September 30, 2008, the current lack of liquidity in the credit and capital markets will not have a material impact on our liquidity, cash flow, financial flexibility or our ability to fund our operations for at least the next 12 months.

We have incurred losses since inception aggregating $55.6 million, which amount includes $4.8 million of non-cash preferred stock dividends.  We expect to incur losses through the foreseeable future, until our products and technological solutions achieve greater awareness.  Although we have generated revenue from sales of our Platinum Plus fuel-borne catalyst, Purifier Systems, ARIS advanced reagent injector and dosing systems for selective catalytic reduction, catalyzed wire mesh filters and from technology licensing fees and royalties, revenue to date has been insufficient to cover our operating expenses, and we continue to be dependent upon sources other than operations to finance our working capital requirements.  Historically, we have been primarily dependent upon funding from new and existing stockholders.  The Company can provide no assurance that it will be successful in any future financing effort to obtain the necessary working capital to support operations or if such financing is available, that it will be on acceptable terms.

In the event that our business does not generate sufficient cash and external financing is not available or timely, we would be required to substantially reduce our level of operations and capital expenditures in order to conserve cash and possibly seek joint ventures or other transactions, including the sale of assets.  These reductions could have an adverse effect on our relationships with our customers and suppliers.  Our long-term continuation is dependent upon the achievement of profitable operations and the ability to generate sufficient cash from operations, equity financings and other funding sources to meet our obligations.

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

As of September 30, 2008, we had no commitments for capital expenditures and no material commitments are anticipated in the near future.

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Item 3.
Quantitative and Qualitative Disclosures about Market Risk

In the opinion of management, with the exception of exposure to fluctuations in the cost of platinum, exchange rates for pounds sterling and Euros, and current turmoil in the capital markets and auction rate securities, we are not subject to any significant market risk exposure.  We monitor the price of platinum and exchange rates and adjust our procurement strategies as needed.  There have been no material changes in our market risk exposures at September 30, 2008 as compared to December 31, 2007.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the President and Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q.  Based upon that evaluation, the Company’s President and Chief Executive Officer and Chief Financial Officer concluded that Clean Diesel had effective disclosure controls and procedures for (i) recording, processing, summarizing and reporting information that is required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) ensuring that information required to be disclosed in such reports is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.

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

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PART II.
OTHER INFORMATION

Item 1A.
Risk Factors

An Inability to realize Proceeds from Our Auction Rate Securities Right issued by UBS May Significantly Impact Our Liquidity.

On November 6, 2008 the Company accepted from UBS an Offer to acquire a “put” right to sell to UBS commencing June 30, 2010 the Company's holdings of $11.7 million in ARS securities.  Also, UBS has established a loan facility whereby the Company may under certain conditions borrow up to 75% of the UBS-determined value of these ARS securities collateralized by the securities.  Finally, the Company has requested that it be recharacterized by UBS as in the class of ARS holders that may exercise its put right commencing January 2, 2009 rather than the period starting June 30, 2010.  There can be no assurance that the financial position of UBS will be such as to afford the Company (a) the ability to acquire the par value of ARS securities on exercise of the put right, or (b) that the Company may receive significant loan proceeds from the UBS loan facility.  Further, there can be no assurance that UBS will use its discretion to reclassify the Company to enable the Company to exercise its put right commencing on a date before June 30, 2010.

Item 5.
Other Information

On November 6, 2008, the Board of Directors of the Company amended the By-Laws of the Company in several respects.  A copy of such amended By-Laws is attached to this Quarterly Report on Form 10-Q as Exhibit 3.1.

The effect of Sections 2.2 and 2.12 of the By-Laws, as amended, is to require, with respect to stockholder proposals for action at annual or special meetings of stockholders, including the nomination for election of persons as Directors of the Company, that there be, with respect to annual meetings, timely and adequate notice, and, with respect to special meetings that there be adequate notice.

Timely notice with respect to annual meetings requires that the notice of the stockholder proposal be received by the Secretary of the Company not earlier than one hundred fifty (150) days and not later than sixty-five (65) days before the first anniversary of the annual meeting of the Company in the preceding year.

Adequate notice with respect to business sought to be brought before either annual or special meetings requires that the notice must set forth as to each matter sought to be brought before a meeting (i) a brief description of the business desired to be brought before the meeting which business shall be a proper matter for stockholder action under the Delaware General Corporation Law, (ii) the reasons for conducting such business at the meeting, (iii) any material interest in such business of the stockholder of record and the beneficial owners , if any, on whose behalf the proposal is made, (iv) the name and address of the stockholder of record and such beneficial stockholders, if any, (v) the class and number of shares owned of record and beneficially by the stockholder of record and such beneficial owners, (vi) a representation by the stockholder of record that such stockholder intends to appear at the meeting in person or by proxy to bring the business before the meeting, and (vii) if such business includes a proposal to amend the Certificate of Incorporation or the By-Laws of the Corporation, the language of the proposed amendment.

Further, where the proposed business is the nomination for election of a Director or Directors, the notice in order to be adequate shall set forth as to each person whom the stockholder or stockholders propose to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupations or employments of the person currently and for the prior five years, (iii) a description of all arrangements or understandings between or among the person or persons proposed as a nominee and the proposing stockholder or stockholders and any other person including their names, and (iv) a statement signed by the person that such person consents to being named as a nominee, and, if elected, the person intends to serve as a Director.

Information concerning the proposed nominee need not be included in the proxy statement furnished to stockholders by the Corporation in connection with an annual meeting and nothing in the By-Law as amended is intended to govern or shall be deemed in any way to affect any rights of stockholders of the Corporation or the Corporation to request or deny inclusion of proposals in a proxy statement issued by the Corporation pursuant to Rule 14a-8 under the Securities Exchange Act of 1934.

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Also, under Section 2.2 of the By-Laws as amended, the Board of Directors with respect to a special meeting properly called by stockholders, including a meeting called to nominate persons for election as Directors of the Company, shall fix the time and place of such meeting which shall be not less than thirty-five (35) and not more than one hundred twenty (120) days after the date of receipt of the request for the special meeting.

Item 6. 

(a)
Exhibits
   
 
       
 
 
Exhibit Number
 
Description
       
   
By-Laws of the Company as amended through November 6, 2008.
       
   
Company Acceptance dated November 6, 2008 of UBS Offer relating to Auction Rate Securities.
       
   
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange Act.
       
   
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange Act.
       
   
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350.

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SIGNATURES


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


 
CLEAN DIESEL TECHNOLOGIES, INC.
 
 
(Registrant)
 
       
Date:  November 10, 2008
By:
 /s/  Bernhard Steiner
 
   
Bernhard Steiner
 
   
Director, President and
 
   
Chief Executive Officer
 
       
Date:  November 10, 2008
By:
/s/  Ann B. Ruple
 
   
Ann B. Ruple
 
   
Chief Financial Officer,
 
   
Vice President and Treasurer
 
 
 
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Exhibit 3.1
 
Clean Diesel Technologies, Inc.
A Delaware Corporation

BY-LAWS

As Amended Through November 6, 2008


ARTICLE I

OFFICES

Section 1.1.                Registered Office .  The Corporation's registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 1.2.                Other Offices .  The Corporation may also have offices at such other places within or without the State of Delaware as the Board of
Directors shall determine.


ARTICLE II

STOCKHOLDERS

Section 2.1.                Place of Meeting .  Meetings of stockholders may be held at such places within or without the State of Delaware as the Board of Directors shall determine.

Section 2.2.                Annual and Special Meetings .  Annual meetings of stockholders shall be held at dates, times, and places fixed by the Board of Directors and stated in the notice of meeting to elect Directors and to transact such other business as may properly come before the meeting; provided, however, that the date of each annual meeting shall be within thirteen months subsequent to the date of the Corporation’s last annual meeting of stockholders.

Special meetings of stockholders for any proper purpose or purposes, including the election of Directors, may be called at any time by the Board of Directors, the Chairman of the Board or the Chief Executive at such date, time and place as the Board of Directors shall determine. If requested in writing by the holders of not less than 25% of the aggregate of the Corporation's then outstanding capital stock specifying the purpose or purposes of the meeting and delivered to the Chairman of the Board, the Chief Executive Officer or the Secretary, special meetings of stockholders shall be called by the Chairman of the Board, the Chief Executive Officer or the Secretary. Only such business as is specified in the notice of any special meeting of the stockholders shall come before a special meeting. If a special meeting is properly called by the stockholders, the Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) and not more than one hundred twenty (120) days after the date of receipt of the request. For a special meeting to be properly called by the stockholders, the request in writing for such special meeting shall be adequate as provided in Section 2.12 below.

Section 2.3.               Stockholders List .   The Secretary of the Corporation shall, or shall cause the Corporation's Transfer Agent to prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting.  Such list shall be arranged in alphabetical order and shall show each stockholder's address and the number of shares registered in such stockholder's name.  Such list shall be open to examination by any stockholder for any purpose germane to the meeting during ordinary business hours for a period of at least ten (10) days prior to the meeting at the principal place of business of the Corporation.  If the meeting is to be held at a place or specific location, then the list shall be produced and kept at the time and place or specific location of the meeting during the whole time thereof and may be inspected by any stockholder who is present.

 
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Section 2.4.                Notice .  Except as otherwise provided by law, written notice which shall state the place, if any, date and time of the meeting (and, in the case of a special meeting, the purpose thereof) shall be given to each stockholder entitled to vote at such meeting not less than ten (10) days and not more than (60) days before the date on which the meeting is to be held.

Section 2.5.                Organization .  The Chairman of the Board, if there shall be an incumbent Chairman of the Board, or, otherwise the person designated by the Board of Directors (or, in the absence of such designation, the highest ranking officer of the Corporation who is present at the meeting) shall call to order meetings of stockholders and shall act as chairman of such meetings.  The Secretary of the Corporation shall act as secretary of meetings of stockholders.  If the Secretary of the Corporation is absent from the meeting, the secretary of the meeting shall be such person as the chairman of the meeting shall appoint.

Section 2.6.                Inspectors of Election .  In advance of any meeting of stockholders, the Chairman of the Board, the Chief Executive Officer, the Secretary or the chairman of the meeting, shall appoint one (1) or more inspectors of election, who may be employed by the Corporation and who, after taking and signing an oath to act as such according to law, shall act at the meeting and make a written report thereof.

Section 2.7.                Conduct of Business .  The chairman of any meeting of stockholders shall determine the order of business and the procedures to be followed at the meeting, including regulation of the manner of voting and of the conduct of discussion. The chairman or secretary of the meeting shall announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote.
 
Section 2.8.                Quorum .  At any meeting of stockholders, the holders of record (present in person or by proxy) of one-third of the shares of capital stock entitled to vote at the meeting shall constitute a quorum for the transaction of business, except as otherwise required by law.  In the absence of a quorum, the chairman or secretary of the meeting may adjourn the meeting in the manner provided in Section 2.9 hereof until a quorum is present.

Section 2.9.                Adjournment .  Any meeting of stockholders, annual or special, may be adjourned from time to time to reconvene at the same place or another place.  A determination in accordance with Article V hereof of stockholders of record with respect to a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors shall have authority to fix a new record date for the adjourned meeting.  Notice need not be given of any such adjourned meeting if the date, time, and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the adjournment is for more than thirty (30) days or if a new record date is fixed for the adjourned meeting, written notice of the date, time, and place of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.  At the adjourned meeting, any business may be transacted which might have been transacted at the original meeting.

 
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Section 2.10.              Proxies and Voting .  At any meeting of stockholders, each stockholder entitled to vote may vote in person or by proxy.  Each stockholder shall have one vote for each share of capital stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided in these By-Laws or as otherwise required by law.  All voting by stockholders, except on the election of Directors and except as otherwise required by law, may be by voice vote; provided, however, that upon demand therefor by a stockholder (or by his proxy) entitled to vote, a stock vote shall be taken.  Each stock vote shall be taken by written ballots, each of which shall state the name of the stockholder (or proxy) voting.  Each vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting.  Elections of Directors shall be determined by a plurality of the votes cast; except as otherwise required by law, all other matters shall be determined by a majority of votes cast.

Section 2.11              Consent of Stockholders in Lieu of Meeting .  Nothing contained in these By-Laws shall be deemed to restrict the power of the stockholders to take any action by means of a consent or consents in writing according to applicable law.
 
Section 2.12              Proper Business; Stockholder Proposals; Notice Requirements; Nomination of Directors for Election .  At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before the meeting, business must be (i) specified in the notice of the meeting given by or at the direction of the Board of Directors, (ii) properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder of the Corporation who gives timely and adequate written notice to the Secretary of the Corporation of such business such stockholder intends to bring before the meeting, was a stockholder of record at the time such stockholder gives such notice and who is entitled to vote at the meeting.

To be timely, such notice must be received by the Secretary not earlier than one hundred fifty (150) and not later than ninety (90) days before the first anniversary of the annual meeting in the preceding year.

To be adequate, such notice shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting which business shall be a proper matter for stockholder action under the Delaware General Corporation Law, (ii) the reasons for conducting such business at the meeting, (iii) any material interest in such business of the stockholder of record and the beneficial owners, if any, on whose behalf the proposal is made, (iv) the name and address of the stockholder of record and such beneficial stockholders, if any, (v) the class and number of shares owned by the stockholder of record and such beneficial owners, (vi) a representation by such stockholder of record that such stockholder intends to appear at the meeting in person or by proxy to bring the business before the meeting,  and (vii) if such business includes a proposal to amend the Certificate of corporation or the By-Laws of the Corporation, the language of the proposed amendment.

 
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Where the business proposed is the nomination for election or re-election of a Director or Directors at an annual or special meeting, a notice of proposed business intended to be brought before an annual meeting or a request in writing for a special meeting by holders of the proper amount of the Corporation’s capital stock, shall, in order to be adequate, set forth as to each person whom the stockholder or stockholders propose to nominate for election or reelection as a Director, (i) the name, age, business address and residence address of the person, (ii) the principal occupations or employments of the person currently and for the prior five years, (iii) a description of all arrangements or understandings between or among the person or persons proposed as a nominee and the proposing stockholder or stockholders and any other persons including their names, and (iv) a statement signed by the person that such person consents to being named as a nominee, and, if elected, the person intends to serve as a Director.

The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of the proposed nominee to serve as a Director of the Corporation. Information concerning the proposed nominee need not be included in the proxy statement furnished to stockholders by the Corporation in connection with an annual meeting and nothing in this Section is intended to govern or shall be deemed to affect any rights of stockholders or the Corporation to request or deny inclusion of proposals in a proxy statement issued by the Corporation pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of any class or series of capital stock pursuant to the terms of such capital stock or pursuant to the terms of any contract to which the Corporation shall be a party.


ARTICLE III

DIRECTORS

Section 3.1.                General Powers .  Except as may otherwise be provided by law, the Certificate of corporation or these By-Laws, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all of the powers of the Corpor a tion.

Section 3.2.                Number, Election, Term, and Removal of Directors .  The number of Directors shall be as determined from time to time by the Board of Directors or by the stockholders.  Each Director shall be elected for a term of one year and until a successor is duly elected or until the Director shall sooner resign, retire, become deceased or be removed by the stockholders. Any Director may be removed by the stockholders with or without cause at any time. Any Director may resign at any time by submitting an electronic transmission or by delivering a written notice of resignation, signed by such Director to the Chairman, the Chief Executive Officer or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. Vacancies and newly created Directorships resulting from an increase in the number of Directors may be filled (for the unexpired term and until a successor Director is elected) by a majority of the Directors then in office (although less than a quorum), by the sole remaining Director, or by the stockholders. Any decrease in the authorized number of Directors shall not become effective until the expiration of the term of the Directors then in office unless, at the time of such decrease, there shall be vacancies on the Board which are being eliminated by the decrease.

 
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Section 3.3.                Chairman of the Board .  The Directors may elect one of their members to be Chairman of the Board of Directors.  The Chairman of the Board of Directors shall be subject to the control of, and may be removed with or without cause by, the Board of Directors.  The Chairman of the Board of Directors shall perform such duties as may from time to time be assigned to him or her by the Board of Directors.

Section 3.4.                Board Meetings.   Regular meetings of the Board of Directors shall be held at such dates, times, and places as may from time to time be fixed by the Board of Directors. Notice need not be given of regular meetings of the Board of Directors. Special meetings of the Board of Directors may be held at any date, time, and place upon the call of the Chairman of the Board or the Chief Executive Officer, and shall be called by the Secretary, if and as directed by one-third of the Directors then in office. Notice of the place, date and time of special meetings shall be given but, unless required by law, the Certificate of Incorporation or these By-Laws, notice of the business to be transacted at, or the purpose of regular or special meetings need not be specified. If notice of a special meeting is given in writing, including by facsimile, e-mail or other electronic means, it must be delivered at least twenty-four (24) hours before the meeting to a Director’s business or residence, and, if such notice is given in person or by telephone, it must be given at least twelve (12) hours before the meeting. Meetings of the Board of Directors may be held without notice immediately after annual meetings of stockholders.

Section 3.5.                Action Without Meeting .  Nothing contained in these By-Laws shall be deemed to restrict the power of the Board of Directors or of any committee of the Board of Directors to take any action without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, or by electronic transmission, including by facsimile or e-mail.

Section 3.6.                Telephonic Meetings .  Nothing contained in these By-Laws shall be deemed to restrict the power of members of the Board of Directors, or of any committee of the Board of Directors to participate in meetings of the Board of Directors (or of such committees) by means of conference telephone or other communications equipment by means of which all persons participating in such meeting can hear each other.

Section 3.7.                Quorum; Act of the Board of Directors .  One-half of the total number of Directors shall constitute a quorum for the transaction of business.  If a quorum is not present at any meeting of the Board of Directors, a majority of the Directors present may adjourn the meeting to another place, date, and time without further notice or waiver.  Except as otherwise provided by law, by the Certificate of Incorporation, by these By-Laws, or by any binding contract or agreement to which the Corporation is a party, the act of a majority of the Directors present at any meeting at which there is a quorum shall be the act of the Board of Directors.

Section 3.8.                Committees of the Board of Directors .  The Board of Directors, by resolution adopted by a majority of the whole Board of Directors, may designate one or more committees (including, without limitation, an Executive Committee) to have and to exercise such power and authority as the Board of Directors shall specify, and, in accordance with applicable law or stock exchange rules, may adopt a charter for such committees. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting may (whether or not he, she or they constitute a quorum) unanimously appoint another Director, who is not disqualified by applicable law or stock exchange rules from voting or from acting as a member of such committee, to act at the meeting in place of the absent or disqualified committee member. Each committee may fix procedural rules for meeting and for conducting its business and shall act in accordance therewith, except as otherwise provided in these By-Laws or as otherwise required by law. Notice to committee members of all committee meetings shall be given in the manner provided in Section 3.3 above for notice to Directors of Board Meetings, except that the Chairman of the committee shall be substituted for the Chairman of the Board and the committee shall be substituted for the Board with respect to members of the committee calling a meeting. One-half of the members of each committee shall constitute a quorum (unless the committee shall consist of one member, in which event one member shall constitute a quorum). A quorum being present, all matters shall be determined by a majority vote of the committee members present at a committee meeting

 
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Section 3.9.                Minutes of Meetings of Committees .  Each committee of the Board of Directors shall keep minutes of its meetings and shall report the same when and as required by the Board of Directors.

Section 3.10.             Compensation of Directors .  Pursuant to resolution of the Board of Directors, Directors may be paid their expenses of attendance at meetings of the Board of Directors and may also be paid a fixed sum for attendance at each meeting of the Board of Directors, a stated salary or annual retainer, and stock options or other equity awards, or any combination of the foregoing, for service as a Director.  Pursuant to resolution of the Board of Directors, members of committees of the Board of Directors may also be allowed similar compensation for service as a Committee member as provided above for service as a Director. No payment referred to in this Section 3.9 shall preclude any Director from serving the Corporation in any other capacity or from receiving compensation therefor.


ARTICLE IV

OFFICERS

Section 4.1.                General .  The Corporation's officers shall consist of a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary, a Treasurer, and such other officers (which may include one or more Assistant Secretaries and Assistant Treasurers) with such titles and duties as the Board of Directors shall determine.  Any number of offices may be held by the same person.  Each officer shall be elected by the Board of Directors, shall be subject to supervision and direction by the Board of Directors, shall serve at the pleasure of the Board of Directors, and shall hold office for the term prescribed by the Board of Directors.  The salaries of all officers shall be fixed by the Board of Directors.  The authority, duties, or responsibilities of any officer may be suspended by the Board of Directors with or without cause.  Any officer may be removed at any time by the Board of Directors with or without cause.

Section 4.2.                The Chief Executive Officer .  The Chief Executive Officer shall be the Corporation's chief executive officer.  Subject to the provisions of these By-Laws and to the direction of the Board of Directors, the Chief Executive Officer shall have responsibility for general management and control of the Corporation's affairs and business and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him by the Board of Directors.  The Chief Executive Officer shall have power to sign all stock certificates, contracts, and other authorized instruments of the Corporation.  The Chief Executive Officer shall have general supervision and direction of the Corporation's other officers and agents.

 
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Section 4.3.                The President .   The President shall be responsible forthe day to day operations of the Corporation as may be delegated to the President by the Chief Executive Officer from time to time and, if the Chief Executive Officer shall be absent or unable to act, the President shall act in the stead of the Chief Executive Officer.

Section 4.4                 The Chief Financial Officer .  The Chief Financial Officer shall be responsible for the financial affairs of the Corporation as may be delegated to the Chief Financial Officer by the Chief Executive Officer and, if the Chief Financial Officer shall be absent or unable to act, the Board of Directors shall promptly elect a permanent or temporary Chief Financial Officer.

Section 4.5.                The Vice Presidents .  In the President's absence (or in the event of his or her inability or refusal to act), the Vice President (or if there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected), shall perform all duties of the President.  When so acting, such Vice President shall have all powers of, and be subject to all restrictions upon, the President.  The Vice President(s) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe.

Section 4.6.               The Secretary; Assistant Secretaries .  The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders, and shall record the proceedings of such meetings in a book or books to be kept for that purpose.  If so directed by the Board of Directors, the Secretary shall perform similar duties with respect to meetings of committees of the Board of Directors.  The Secretary shall give (or cause to be given) notice of all meetings of stockholders and of all special meetings of the board of Directors.  The Secretary shall have custody of the Corporation's seal and he (or any Assistant Secretary) shall have authority to affix such seal to any appropriate instrument.  When so affixed, such seal may be attested by the Secretary's (or such Assistant Secretary's) signature.  The Board of Directors may give general authority to any other officer to affix the Corporation's seal and to attest such affixation by such other officer's signature.  In the Secretary's absence (or in the event of his inability or refusal to act), the Assistant Secretary (or if there shall be more than one Assistant Secretary, the Assistant Secretaries in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected) shall have all powers of, and be subject to all restrictions upon, the Secretary.  The Secretary and the Assistant Secretary (or Assistant Secretaries) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe with respect to each such office.

Section 4.6.                The Treasurer; Assistant Treasurers .  The Treasurer shall have custody of the Corporation's monies and securities, shall keep regular books of account, and shall deposit all of the Corporation's monies and other valuable effects in the name of (and to the credit of) the Corporation in one or more depositories designated by the Board of Directors.  The Treasurer shall disburse the Corporation's funds as directed by the Board of Directors and shall take vouchers for such disbursements.  The Treasurer shall render to the Board of Directors at its regular meetings (or when otherwise directed by the Board of Directors) an account of his transactions as Treasurer and of the Corporation's financial condition.  In the absence of the Treasurer (or in the event of his inability or refusal to act), the Assistant Treasurer (or if there shall be more than one Assistant Treasurer, the Assistant Treasurers in the order designated by the Board of Directors, or in the absence of such designation, then in the order of their election, starting with the first to be elected) shall have all powers of, and be subject to all restrictions upon, the Treasurer.  The Treasurer and the Assistant Treasurer (or Assistant Treasurers) shall perform such other duties, and shall have such other powers, as the Board of Directors shall prescribe with respect to each such office.

 
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Section 4.7.                Delegation of Authority .  The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any other provision of these By-Laws.

Section 4.8.                Facsimile Signatures of Officers .  Facsimile or electronic signatures of any officer may be used whenever authorized by these By-Laws or by the Board of Directors.

Section 4.9.                Action with Respect to Securities of Other Entities .  Unless otherwise prescribed by the Board of Directors, the Chief Executive Officer, the President or Secretary (or any other officer designated by the Chief Executive Officer to act in their stead) shall have power and authority on the Corporation's behalf to attend (and to act and vote at) meetings of holders of securities of any entity in which the Corporation shall own or hold securities.  At such meetings, the Chief Executive Officer, the President, Secretary or Chief Executive Officer's designee, as the case may be, shall possess (and may exercise) all rights and powers incident to the ownership or holding of such securities which the Corporation might have possessed and exercised.  The Chief Executive Officer, the President, the Secretary or the Chief Executive Officer's designee may execute and deliver on the Corporation's behalf powers of attorney, proxies, consents, waivers, and other instruments relating to the securities owned or held by the Corporation.


ARTICLE V

CAPITAL STOCK

Section 5.1.               Stock Certificates .  Certificates for shares of the Corporation's capital stock shall be in such form as shall be permitted by law and approved by the Board of Directors. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by the Chairman of the Board of Directors if one shall be incumbent) or the Chief Executive Officer or the President or the Chief Financial Officer or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, certifying the number of shares owned by him in the Corporation. If such certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signatures on the certificate may be facsimile. In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue.

If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the Corporation shall issue to represent such class or series of stock or there shall be set forth on the face or back of the certificates which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish, without charge to each stockholder who so requests, the designations, references and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.  Any restriction imposed upon the transfer of shares or registration of transfer of shares shall be noted conspicuously on the certificate representing the shares subject to such restriction.

 
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Section 5.2.                Transfer of Shares .  Shares of the Corporation's capital stock may be transferred on the Corporation's books or on the books of the Corporation’s transfer agent only by the holder of such shares (or by such holder's authorized attorney) upon surrender to the Corporation or to the Corporation's transfer agent of the properly endorsed certificate(s) representing such shares.

Section 5.3.                Lost, Stolen, or Destroyed Certificates .  The Board of Directors (or the Corporation's transfer agent) may authorize the issuance of a new share certificate to replace any certificate theretofore issued by the Corporation which is alleged to have been lost, stolen, or destroyed.  The Board of Directors, as a condition to such issuance, may require that the owner of such lost, stolen, or destroyed certificate, or his legal representative, (i) submit to the Corporation an affidavit stating that such certificate has been lost, stolen, or destroyed, (ii) advertise the same in such manner as the Board of Directors shall require, and/or (iii) give the Corporation a bond in such sum as the Board of Directors shall require to indemnify the Corporation against any claim that may be made against the Corporation in respect of the certificate alleged to have been lost, stolen, destroyed or the certificate to be issued.

Section 5.4.                Record Date .  In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting.

In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action.

If no record date is fixed:

(1)  The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.  A determination of stockholders of record entitled to notice of or to a vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

 
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(2)  The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in this State, its principal place of business, or an officer of agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded.  Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested.

(3)  The record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when prior action by the Board of Directors is required, shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

(4)  The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 5.5.                Registered Stockholders .  The Corporation shall be entitled to recognize the exclusive right of a person registered on the Corporation's books as the owner of shares of capital stock to receive dividends on such shares and to vote as owner of such shares.  The Corporation need not recognize any claim to (or interest in) such shares by any other person, whether or not the Corporation shall have notice thereof, except as otherwise required by law.

Section 5.6.                Regulations .  The Board of Directors shall have power and authority to make all rules and regulations which it deems expedient concerning the issuance, transfer, registration, cancellation, and replacement of certificates representing the Corporation's capital stock.

Section 5.7.                United Kingdom Stock Exchanges .   In connection with the trading of Shares of the Company's capital stock on exchanges or facilities in the United Kingdom, the officers, agents and other persons acting on behalf of the Company shall be guided by the regulations set forth on Schedule A to these By-Laws.

Section 5.8                Direct Registration .   Notwithstanding any other provision in these By-Laws, the Directors may resolve to adopt a system of issuance, recordation and transfer of its shares of capital stock by electronic or other means not involving any issue of certificates (a “Direct Registration System”), including provisions for notice to purchasers in substitution for any required statements with respect to certificates, and as may be required by or is in accord with applicable securities laws or stock exchange listing rules. Any Direct Registration under this Direct Registration System as adopted shall not become effective as to issued and outstanding certificated securities until the certificates therefor have been surrendered to the Corporation.

 
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ARTICLE VI

GENERAL PROVISIONS

Section 6.1.                Checks, etc .  All checks, other drafts, and notes of the Corporation shall be signed by such persons as the Board of Directors shall designate.  Any persons designated by the Board of Directors to sign checks, other drafts and notes of the Corporation are authorized in accordance with such designation to open and use such accounts with such banks or trust companies as may from time to time be required for the purposes of the Corporation, all in accordance with such resolutions or authority limitations or regulations as the Board of Directors may adopt from time to time.

Section 6.2.                Contracts .  All contracts, agreements, indentures or other written commitments intended to bind the Corporation shall be signed by an officer or officers in accordance with such resolutions or authority limitations or regulations as the Board of Directors may adopt from time to time.

Section 6.3.                Pro-Forma Banking and Qualification Resolutions .  Resolutions from time to time necessary or appropriate for the opening or maintenance by the Corporation of any account with any bank, trust company, or broker-dealer or for the qualification of the Corporation to do business under the laws of any state shall be effective and shall be adopted in the exact words of such pro-forma resolution as of the date of certification thereof so long as such resolutions shall be certified by the Secretary or an Assistant Secretary of the Corporation and filed with the permanent records of the resolutions of the Directors of the Corporation.

Section 6.4.                Fiscal Year .  The Corporation's fiscal year shall be the twelve calendar months ending December 31 in each year unless otherwise fixed by the Board of Directors.

Section 6.5.                Corporate Seal .  The Corporation's corporate seal shall have inscribed thereon the Corporation's name, the year of its corporation, and the words "Corporate Seal" and "Delaware".

Section 6.6.                Notices .  Whenever any law, the Certificate of Incorporation, or these By-Laws requires that notice be given to any Director, officer, or stockholder, such notice may be given personally, which shall include by telephone, or in writing by mail, addressed to such Director, officer, or stockholder at his address which appears on the Corporation's records.  Any notice given by mail shall be deemed to have been given when deposited in the United States mail, with postage thereon prepaid.  Notice to Directors or officers may be given personally, including by telephone, or, in writing, including by facsimile or by e-mail or other electronic means addressed to such Director or officer at his address which appears on the Corporation's records, in which case notice shall be deemed to have been given when made or delivered for transmission.

Section 6.7.                Time Periods .  Whenever these By-Laws require that an act be done or not be done a specified number of days prior to or after the occurrence of any event (or require that an act be done or not be done within a period of days prior to or after the occurrence of an event), calendar days shall be used, with the day of the doing of such act excluded and the day of the occurrence of such event included.

 
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ARTICLE VII

AMENDMENTS

The holders of shares of capital stock entitled at the time to vote for the election of Directors shall have power to amend or repeal these By-Laws by vote of not less than a majority of such shares.  Except as otherwise provided by law, the Board of Directors shall have power to amend or repeal these By-Laws by vote of not less than a majority of the entire Board of Directors.  Any by-law adopted by the Board of Directors, however, may be amended or repealed by vote of the holders of a majority of the shares of capital stock entitled at the time to vote for the election of Directors.

 
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Schedule A to the By-Laws of Clean Diesel Technologies, Inc.

(a) In the event that the Company receives a Transfer Form in relation to any shares in respect of which a valid Stock Deposit Transaction has been entered into the CREST system, the officers of the Company are authorized to interpret, and are authorized to instruct any transfer agent of the Company to interpret, such a  Transfer Form as an instruction to transfer the shares which are the subject of the Transfer Form not to the transferee named in the Transfer Form, but rather to the Depository, who shall, in accordance with the Deed Poll, interpret such a transfer as an instruction to issue an equivalent number of CDTI Depository Interests to the transferee specified in the Transfer Form;

(b) In the event that the Company receives a Demat Form in relation to any shares in respect of which a valid Stock Deposit Transaction has been entered into the CREST system, the officers of the Company are authorized to interpret, and are authorized to instruct any transfer agent of the Company to interpret, such a Demat Form as an instruction to transfer the shares which are the subject of the Demat Form to the Depository, who shall, in accordance with the Deed Poll, interpret such a transfer as an instruction to issue an equivalent number of CDTI Depository Interests to the holder(s) of shares named in the Demat Form;

(c) In the event that the Depository receives a Stock Withdrawal Instruction in relation to any CDTI Depository Interests and the Depository, by virtue of the Deed Poll, treats such stock withdrawal instruction as an instruction (without the need for any further transfer documentation to be issued) to cancel the relevant Depository Interests, the officers of the Company are authorized to interpret and are authorized to instruct any transfer agent of the Company to interpret such an instruction as an instruction to transfer the shares, to which such CDTI Depository Interests relate, to the transferee (if any) named in the Stock Withdrawal Instruction or, if no transferee is named, to the person by whom the relevant CDTI Depository Interests were held immediately prior to their cancellation; provided, in each case, that any such officer, agent or other person shall reasonably believe that the transaction so effectuated accurately reflects the intent of the holder of such securities (or beneficial interests of depository interests therein).

(d) For purposes of this Schedule A, the terms identified below shall have the meaning set forth opposite each respective term.

CDTI Depository Interests
depository interests of a particular series issued in uncertificated form from time to time by the Depository on the terms and conditions of the Deed Poll and in accordance with the Regulations (as defined in the Deed Poll), title to which is evidenced by entry on the Clean Diesel Depository Interest Register (as defined in the Deed Poll) and which represent a particular class of Company securities.

CREST member
a person who has been admitted by CRESTCo Limited or such other person, who is for the time being the Operator of the CREST system for the purposes of the Regulations (as defined in the Deed Poll), as a system member.

 
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CREST system
the systems and procedures relating to the two CREST Applications Hosts (core processors) at two physically remote locations; the leased line communications between the two Applications Hosts and the System Controller's room at CRESTCo offices; the CREST Courier & Sorting Service; and the System Controller's room at CRESTCo offices.

Demat Form
the CREST Dematerialization Request Form, in use from time to time within the CREST system for conversion of a certificated unit of a participating security held by a CREST member into uncertificated form, which has been completed with a specified number of Company securities and executed by or on behalf of the holder of such Company securities.

Deed Poll
that certain deed poll made by the Depository on January 29, 2002 in relation to the constitution and issue of CDTI Depository Interests by the Depository.

Depository
Capita IRG Trustees Limited and any successor depository appointed from time to time in accordance with the Deed Poll.

Stock Deposit Transaction
a properly authenticated dematerialized instruction in respect of a transaction which enables a shareholder to change the form in which securities are held from certificated to uncertificated, either as a result of a transfer from a certificated investor to a CREST member or as a result of a member dematerializing part of his own certificated holding.

Stock Withdrawal Transaction
a properly authenticated instruction in respect of a transaction which enables a CREST member to change the form in which securities are held from uncertificated to certificated, either as a result of a transfer to an investor who is to hold the securities in certificated form or as a result of recertificating part of his own uncertificated holding.

Transfer Form
the CREST Transfer Form, in use from time to time within the CREST system for a transfer of a certificated unit of a participating security to a CREST member to be held by that CREST member in uncertificated form, which has been completed with a specified number of Company securities and executed by or on behalf of the holder of such Company securities.
 
 
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Exhibit 10.1

UBS Financial Services Inc.

Please complete and sign this form.
We must receive it by November 14, 2008.

ACCEPTANCE OF UBS’S OFFER RELATING TO AUCTION RATE SECURITIES


By signing below and returning this form, I accept UBS’s offer of Rights relating to my Eligible ARS in the account listed below.  I understand and acknowledge the following:

·  
All eligible ARS must remain in my UBS account listed below until I exercise my Rights to sell my Eligible ARS to UBS or they are redeemed by the issuer or purchased or sold on my behalf by UBS;
·  
I will instruct my UBS Financial Advisor or Branch Manager if and when I want to exercise my Rights and sell my Eligible ARS to UBS during the period of June 30, 2010, through July 2, 2012;
·  
The acceptance of UBS’s offer constitutes consent (to the extent legally required) for UBS, acting as principal, to purchase my Eligible ARS or to sell them on my behalf at any time in its sole discretion and without other prior notice to me, from the date that I accept this offer through July 2, 2012;
·  
If UBS purchases, sells or otherwise disposes of my Eligible ARS, it will deposit the par value in my account within one business day of settlement of the transaction;
·  
I release UBS and its employees/agents from all claims except claims for consequential damages directly or indirectly relating to its marketing and sale of ARS and expressly agree that I will not seek any damages or costs (punitive damages, attorney fees, etc.) other than consequential damages.  I also will not serve as a class representative or receive benefits under any class action settlement or investor fund;
·  
If the account named below is in the name of a corporation, partnership, trust or other equity, I represent and warrant that I have the power and authority to accept this offer on behalf of that entity.

Clean Diesel Technologies, Inc.
Please complete and sign this form.
Attn:  Ann Ruple
We must receive it by November 14, 2008.
300 Atlantic Street
   
Suite 702
Mail
UBS Financial Services, Inc.
Stamford CT  06901-3522
 
ATTN:  ARS Group
   
1000 Harbor Boulevard
   
Weehawken, NJ  07086
     
 
Fax
+1-201-442-7766

Account Number:  CP 06577
       
         
Account Owner Signature
/s/  Ann B. Ruple    Vice President
 
Date
11/5/08
         
Additional Party Signature
/s/  C. W. Grinnell   Vice President
 
Date
11/5/08
         
Daytime Telephone Number
(203) 327-7050
     

If you have questions, please contact your UBS Financial Advisor or Branch Manager at +1-312-525-4500.
Clients outside the U.S. may call +1-201-352-0105 collect.

We kindly request that you do not include comments or questions on this form as it could delay processing of your instructions.

UBS AG has filed a registration statement (including a prospectus) with the SEC for the offering to which this communication relates.  Before you make an investment decision, you should read the prospectus in that registration statement and other documents that UBS has filed with the SEC for more complete information about UBS and this offering.  You may get these documents for free by visiting EDGAR on the SEC Web site at www.sec.gov or by calling UBS’s ARS Client Service Center at +1-800-253-1974.

UBS Financial Services Inc. serves as the clearing firm for UBS International Inc.  Accordingly, the information and terms contained in this letter and the accompanying materials are directed to clients of both UBS Financial Services Inc and UBS International Inc.
 
 
Exhibit 31(a)
CERTIFICATION


I, Bernhard Steiner, certify that:

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

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

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

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

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

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

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


Date:  November 10, 2008
By:
/s/ Bernhard Steiner
 
   
Bernhard Steiner
 
   
Director, President and Chief Executive Officer
 
 
 
Exhibit 31(b)
CERTIFICATION


I, Ann B. Ruple, certify that:

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

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

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

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

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

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

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


Date:  November 10, 2008
By:
/s/ Ann B. Ruple
 
       
   
Ann B. Ruple
 
   
Chief Financial Officer,
 
   
Vice President and Treasurer
 
 
 
Exhibit 32
CERTIFICATIONS


Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350


The undersigned, Bernhard Steiner and Ann B. Ruple, in their capacities as Chief Executive Officer and Chief Financial Officer, respectively, of Clean Diesel Technologies, Inc. (the “Registrant”) do each hereby certify with respect to the Quarterly Report on Form 10-Q of the Registrant for the period ended September 30, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), that, to the best of his or her knowledge:

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

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


/s/  Bernhard Steiner

Bernhard Steiner
President, Chief Executive Officer and Director
November 10, 2008


/s/  Ann B. Ruple

Ann B. Ruple
Chief Financial Officer, Vice President and Treasurer
November 10, 2008

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

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