Edgar Filing: CLEAN DIESEL TECHNOLOGIES INC

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A-3

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from ________________ to __________________

COMMISSION FILE NO. 0-27432

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

Delaware 06-1393453
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)

SUITE 702, 300 ATLANTIC STREET
STAMFORD, CT 06901
(203) 327-7050
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(Address and telephone number of principal executive offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK $0.05 PAR VALUE PER SHARE
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(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

Yes No X
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Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices as of June 30, 2003:
$2.65 and as of March 19, 2004: $3.02

Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 25, 2004: 15,679,337 shares Common Stock, $0.05 par value.
Certain portions of the Proxy Statement for the annual meeting of stockholders
to be held in 2003 are incorporated by reference into parts II, III and IV
hereof.

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EXPLANATORY NOTE

This is an amendment of the Clean Diesel Technologies, Inc. Annual Report
to the Commission on Form 10-K for the period ended December 31, 2003 which was
previously filed on March 24, 2004 (the "10-K") and later amended on March 29,
2004 and May 7, 2004. The purpose of this third amendment is to eliminate the
legend "Draft Subject to Revision" inadvertently left on the Auditors Report in
Item 8 of the electronic transmission of the 10-K, to correct a typo in item 6
current liabilities (changed to 868 from 8,687) and to conform the certificates
and consent attached as Exhibits 23-1, 31.1, 31.2 and 32.

TABLE OF DEFINED TERMS

TERM TERM DEFINITIONS
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ARIS(R) 2000 Clean Diesel Technologies' Advanced Reagent Injection System for Urea SCR

AIM Alternative Investment Market of the London Stock Exchange

Bhp hour Break horsepower per hour

BUWAL Bundesamt fur Umwelt, Wald und Landschaft (German Federal Office for
Environment, Forest and Landscape)

CARB California Air Resources Board

CDT Clean Diesel Technologies, Inc.

CNG Compressed Natural Gas

CO Carbon Monoxide

CO(2) Carbon dioxide

CWMF Catalyzed Wire Mesh Filter

DOCs Diesel Oxidizing Catalysts

DPFs Diesel Particulate Filters

EGR Exhaust Gas Recirculation

FBC Fuel Borne Catalyst

Fuel Tech Fuel-Tech N. V., a substantial shareholder of Clean Diesel Technologies

HC Hydrocarbons

LOE-NOx(TM) Clean Diesel Technologies' diesel fuel water emulsion technology

NESCAUM North East States for Coordinated Air Use Management

NOx Nitrogen Oxide

PFCs Platinum Fuel Catalysts

Platinum Plus(R) Clean Diesel Technologies' Platinum & Cerium fuel additive

PM Particulate Matter

SCR Selective Catalytic Reduction

US EPA United States Environmental Protection Agency

Usg US gallons

VERT Program in Germany and Switzerland to develop, test and certify diesel
particulate filter systems

PART I

FORWARD-LOOKING STATEMENTS

Statements in this Form 10-K 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 Clean Diesel Technologies' filings with the Securities and
Exchange Commission. See "Risk Factors of the Business" in Item 1, "Business,"
and also Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

ITEM 1. BUSINESS

GENERAL

Clean Diesel Technologies, Inc. "Clean Diesel Technologies", a Delaware
corporation with a principal place of business at 300 Atlantic Street, Stamford
CT 06901, was formed in 1994 as a wholly owned subsidiary of Fuel Tech to
develop technologies for cleaning up harmful emissions from diesel engines while
reducing fuel consumption. Clean Diesel Technologies was spun-off from Fuel
Tech in December 1995 by way of a rights issue. Over the past eight years, CDT
has developed its technologies and is now commercializing Platinum Plus(R) fuel
borne catalyst, and the ARIS(R) 2000 NOx reduction system.

Management has worked together for over 15 years in the chemical, power,
fuel and emission control fields and has brought Clean Diesel Technologies to
the commercialization stage on a cost effective basis by co-operative funding
for development and demonstration programs with industry partners. Clean Diesel
Technologies has a strong patent position with 26 US patents issued and 8 US
patent applications pending as well as 70 other international patents issued and
76 international patent applications pending.

Combustion engine development is influenced by concern over global warming
caused by CO2 emissions from fossil fuels and toxic exhaust emissions. Since
CO2 is the result of combustion of fossil fuels, the primary way to reduce CO2
emissions is to reduce fuel consumption. The diesel engine is as much as 40%
more fuel-efficient than gasoline engines. Thus, increased use of diesel
engines relative to gasoline engines is one way to reduce overall fuel
consumption and thereby significantly reduce CO2 emissions. Diesel engines,
however, emit higher levels of two toxic pollutants, namely particulates and
NOx, than gasoline engines fitted with auto catalysts. Each of these pollutants
affects human health and the environment.

TECHNOLOGIES AND PRODUCTS

Clean Diesel Technologies' products, combined with other devices, can
reduce particulate emissions and NOx from diesel engines to or below the
emission levels of natural gas engines, while also reducing fuel consumption.
This results in a reduction in fuel costs and greenhouse gas emissions,
primarily CO2, as well as in emissions of particulates, NOx, CO and un-burnt
hydrocarbons.

PLATINUM PLUS(R)

Platinum Plus is a patented, fuel soluble, fuel borne catalyst, which
contains minute amounts of platinum and cerium catalysts. Platinum Plus takes
the catalytic action into engine cylinders where it improves combustion thereby
reducing particulates, un-burnt hydrocarbons and CO emissions as well as
improving fuel economy. Recent fleet tests using Platinum Plus have shown
improvement in fuel economy of between 3% and 12%. Platinum Plus can be used on
its own with either regular or ultra low sulphur diesel fuel to reduce
particulate emissions by 10% to 25% while also improving the performance of
diesel oxidation catalysts and particulate filters (which trap up to 95% of
particulates but in doing so clog up with soot) by burning off the soot
particles and further reducing toxic emission components of CO and un-burnt
hydrocarbons.

From 1996 to 1999, Clean Diesel Technologies defined and managed several
research and development programs on platinum fuel catalysts which were
conducted by Delft Technical University (Netherlands), Ricardo Consulting
Engineers (UK), Cummins Engine Company (USA) and Southwest Research Institute
(USA). Through its strategy of using independent test houses, Clean Diesel
Technologies' small technical team has been able to run several programs on a
cost effective basis while bringing in a wide range of expertise. Most
importantly, the results have been independently derived.

Development of Platinum Plus was completed in 1999. In December of that
year, Clean Diesel Technologies received its US EPA registration of Platinum
Plus for use in bulk fuel by refiners, distributors and fleets. In 2000, CDT
completed the European VERT certification protocol for particulate filters and
additives for use with particulate filters and in 2001 BUWAL approved Platinum
Plus for use as a fuel borne catalyst with particulate filters. In 2002, the
Mining, Safety and Health Administration (MSHA) accepted the Platinum Plus FBC
for use in mines. In 2003 CDT received EPA verification for its FBC and a
diesel oxidation catalyst (Purifier system). CDT has completed a second
verification program for the FBC and a catalyzed wire mesh filter (CWMF) from

Mitsui & Co. of Japan and is awaiting final verification results from the EPA.
CDT is applying to CARB for verification of both the FBC/DOC and FBC/CWMF
systems. Verification is needed for the end user of Platinum Plus to get
emission reduction credit from the EPA's voluntary retrofit program or CARB's
mandatory retrofit program.

Over the past three years, eleven large fleet demonstration trials have
been carried out in the US in a range of industries including the beverage
delivery, waste hauling, grocery and fuel delivery. The improvement in fuel
economy from using Platinum Plus ranged from 3% to 12% with an average 7%
improvement. The best results were generally attributable to short haul "stop
and go" driving where Platinum Plus has the greatest opportunity to improve the
combustion process. The field testing programs have confirmed the 3% to 8%
improvement measured in lab engine test beds at both Cummins Engine Company and
the Southwest Research Institute.

In several tests above, it was shown that Platinum Plus based systems do
not increase emissions of NO2 which is the much more toxic component of NOx.
This is in contrast to many of the systems currently on the market which are
heavily catalyzed with platinum.

Platinum Plus is effective with normal sulfur diesel, ultra low sulfur
diesel, arctic diesel (kerosene) and biodiesel. When used with biodiesel and
No1D, Platinum Plus FBC prevents the normal increase in NOx associated with
biodiesel.

ARIS(R) 2000

The ARIS 2000 (Advanced Reagent Injection System) is a patented injection
system for the reduction of NOx emissions from diesel engines. The system
comprises a single fluid computer-controlled injector that provides precise
injection of non-toxic urea-based reagents into the exhaust of a stationary or
mobile engine where it converts NOx across a catalyst to nitrogen and water
vapor. The system has shown NOx reductions of up to 90% or more on a steady
state operation and of up to 85% in transient operations. This process, known
as selective catalytic reduction (SCR), has been in use for many years in power
stations and is considered by management to be well proven. ARIS 2000 is a
miniature version of the SCR injection system. The principle advantage of the
patented ARIS system is that it does not require compressed air to operate. The
system is designed for volume production and is very compact with very few
components, making it inherently cheaper than the compressed air systems which
were first to be developed for heavy duty vehicles. The ARIS system is
applicable to both stationary diesel engines for power generation and mobile
diesels used in trucks, buses, trains and boats.

THE MARKET AND THE REGULATORY ENVIRONMENT

Clean Diesel Technologies estimates that worldwide annual consumption of
diesel fuel amounts to approximately 200 billion gallons (US), including 50
billion in the United States, 60 billion in Europe and 50 billion in Asia.

NEW DIESEL ENGINES

While engine manufacturers have, to date, met emissions regulations by
engine design changes (which tend to increase fuel consumption), management
believes that further reductions can only be achieved by using combinations of
cleaner burning fuels and after treatment systems such as diesel particulate
filters and catalytic systems for NOx reduction.

There is an immediate market for NOx reduction systems for stationary
diesel engines, many of which are used in power generation. Some 9,000 new high
horse power engines are sold each year in the US. An SCR system comprising an
ARIS 2000 injection system and a suitable catalyst is being sold into the US
market by the RJM Corporation (a licensee of the ARIS 2000 technology). Mitsui
& Co. Ltd has also licensed both the ARIS stationary and mobile technology for
Japan. Combustion Component Associates (CCA) of Monroe Connecticut licensed the
ARIS mobile technology for the US market in 2003.

In the last several years, emissions regulations for new mobile diesel
engines in the major world markets have continued to tighten. Emission levels
which came into effect in 1999 for new vehicles were some 40% to 90% less than
levels of the mid 1980s. Regulations for introduction over the next seven years
in Europe, the United States and Japan should reduce emission levels by 85% to
99% below the mid 1980s levels. The market for mobile NOx reduction systems is
expected by management to develop between 2005 and 2010. European engine
manufacturers have decided to use urea SCR in 2006, at least on heavy duty
vehicles and very likely on medium and light trucks in later years. There is a
clear preference to use a single fluid system for the medium and light-duty
trucks which have no compressed air system. It also seems probable that European
manufacturers will adopt particulate filters to meet 2010 regulations which are
being formulated

In the opinion of management, the US market for diesel engines is expected
to grow significantly in the next few years based on fuel economy
considerations, if NOx and particulate emissions can be controlled. Engine
manufacturers have indicated that they will use diesel particulate filters to
meet regulations for 2007. US regulations for 2010 are fixed and require a
further 50% reduction

in NOx over 2007. Urea SCR is a candidate technology for 2010. However, the US
EPA has a preference to adopt alternative technology named "NOx Traps" or "Lean
NOx Catalysis". The advantage of these systems is that they do not require an
infrastructure to supply urea but so far these technologies have not
demonstrated durable performance at the required levels.

EXISTING DIESEL ENGINES AND THE RETROFIT MARKET

While much of the regulatory pressure and the response from engine
manufacturers has been focused on new engine emissions, there is increasing
concern over pollution from existing diesel engines which have a life of 20 to
30 years and hence there is a growing interest in the potential for retrofitting
diesel engines with emission reduction systems. These include stationary
diesels, construction equipment and public transportation vehicles such as buses
as well as truck fleets.

In 1998, CARB declared diesel particulates to be toxic and in 2000 it
proposed reductions in particulate emissions from over one million existing
engines in California as well as more stringent controls for new engines. In
March 2000, the US EPA announced a program to provide emissions credits for
reduction in emissions from existing heavy-duty diesel engines. The US EPA has
stated its objective for retrofitting vehicles with particulate controls and has
developed the Clean School Bus USA program to reduce emissions on school buses
and the Smartway Transport Program to reduce both diesel emissions and fuel
consumption on over-the-road trucks.

Japan has announced a retrofit program, which would require all diesel
vehicles residing or passing through Tokyo to install particulate matter traps
phasing in between April 2004 and April 2007.

MARKET OPPORTUNITY

Continuing tightening of clean air standards, emission control regulations,
pressure for fuel efficiency and growing international awareness of the
greenhouse effect provide Clean Diesel Technologies with a substantial
opportunity in world markets.

Without compromising the fuel economy benefits of diesel, a significant
reduction of particulate and NOx emissions can only be achieved by using
combinations of improved engine design, cleaner burning fuels and after
treatment systems such as diesel particulate filters and catalytic systems.
Clean Diesel Technologies' Platinum Plus (which improves combustion
catalytically) and the ARIS 2000 technology (which allows engines to be tuned
for best fuel economy while reducing NOx emissions) can form key components of
both these after treatment systems.

The convergence of requirements for emission compliance and the high cost
of fuel, make the use of CDT's products economical. With diesel fuel selling at
about $1.75 per USG in the United States, the fuel economy improvement alone
pays for the use of Platinum Plus. A fuel saving of 3% will provide a payback
to US fleet operators. Platinum Plus in controlled fleet tests showed an
average of 7% fuel economy improvement. In Europe, where in some countries
diesel fuel retails for as much as $4.00 per gallon, because of the high tax
component, fuel economy benefits are even more pronounced.

Accordingly, there are two basic market drivers for CDT's products, namely
reduction in emissions and reduction in fuel consumption. Platinum Plus is an
"enabling technology" which enables reductions from the engine itself and
enhances performance of the exhaust treatment system whilst improving fuel
economy.

MARKETING STRATEGY AND COMMERCIALIZATION

Clean Diesel Technologies' plan is to supply finished fuel additive
products direct in certain North American markets and to license its ARIS 2000
NOx reduction technology and Platinum Plus products for international markets
and in some sectors of the North American market. Large chemical and additive
companies will be supplied platinum concentrate by Clean Diesel Technologies and
they will blend and market Platinum Plus. CDT believes its strategy of
licensing represents the most efficient way to gain widespread distribution
quickly and exploit worldwide demand for its technologies.

Clean Diesel Technologies has licensed the RJM Corporation on a
non-exclusive basis to market the ARIS 2000 technology for stationary, marine
and railroad diesels in the Americas. The market in the US alone is estimated
at over 9,000 new engines per year with an installed base of over 150,000
engines. Clean Diesel received $1.1 million in initial license revenue from the
RJM Corporation and is receiving a $1,500 to $2,500 royalty on each stationary
ARIS unit sold. Clean Diesel Technologies has also exclusively licensed Mitsui
& Co., Ltd. ("Mitsui") to market the ARIS 2000 technology for stationary
engines in Japan. CDT received $495,000 in non-refundable up front license fees
and will earn a $1,500 to $2,500 royalty on each ARIS unit sold.

Mitsui also exclusively licensed the ARIS technology for mobile
applications in Japan. Mitsui paid $250,000 in mobile license fees and invested
an additional $200,000 in the development and testing of mobile ARIS systems.
CDT also receives a per unit royalty on each mobile ARIS system sold. CDT has
licensed Combustion Component Associates for the ARIS mobile

technology for the US market. CDT received an upfront license fee and an ongoing
per unit royalty. CDT is in discussions with several companies to license the
mobile ARIS technology for retrofit and OEM opportunities in the United States
and Europe.

Clean Diesel Technologies has also entered into a number of marketing
distribution agreements with chemical additive companies, fuel delivery
companies ("wet hosers") and fuel marketers. CDT has licensed Baker Petrolite
Corporation (a division of Baker Hughes) for the non-exclusive distribution of
Platinum Plus to refiners and terminals in the United States and the Global
Companies, LLC to supply Platinum Plus treated fuels to fleets in New England.
CDT is also working with Texas Night Fueling and Taylor Oil to supply Platinum
Plus treated fuel directly to fleets.

HEALTH EFFECTS AND REGISTRATION OF ADDITIVES

Metallic additives have come under scrutiny for their possible effects on
health. Clean Diesel Technologies registered its platinum additive in 1997 in
both the US and United Kingdom. The platinum - cerium bimetallic additive
required further registration in the US and that process involved a 1,000-hour
engine test and extensive emission measurements and analysis. The registration
was completed in 1999 and issued in December 1999.

Germany, Austria and Switzerland have set up a protocol (VERT) for
approving diesel particulate filters and additive systems used with them. Clean
Diesel Technologies completed the required tests under the VERT protocol in 2000
and in January 2001, the Swiss authority BUWAL approved the Platinum Plus fuel
additive for use with a filter.

Engine tests, in US and Switzerland, show that 95 to 99% of the catalyst
metal introduced to the fuel by the FBC is retained within the engine and
exhaust and that the amount of platinum emitted from the use of Platinum Plus is
roughly equivalent to platinum attrition from automotive catalytic converters.

In December 1996, the United Kingdom Ministry of Health's Committee on
Toxicity reviewed the product and all the data submitted by Clean Diesel
Technologies and in its response stated "The Committee is satisfied that the
platinum emission from vehicles would not be in an allergenic form and that the
concentrations are well below those known to cause human toxicity." In 1997,
Radian Associates reviewed Clean Diesel Technologies' data and the literature on
platinum health effects and concluded, "the use of Clean Diesel Technologies
Platinum containing diesel fuel additive is not expected to have a adverse
health effect on the population under the condition reviewed." Radian also
concluded that emissions of platinum from the additive had a margin of safety
ranging from 2,000 to 2,000,000 times below workplace standards.

In 2002 the Mining Safety and Health Administration (MSHA) accepted the use
of Platinum Plus with particulate filters and also allowed its use in all fuel
used in underground mining even without filters.

In October 2003, the EPA verified the Platinum Plus Purifier System, which
is the first time the EPA has verified a metal catalyst additive based system.

SOURCES OF SUPPLY

Clean Diesel Technologies has outsourcing arrangements with two companies
in the precious metal refining industry and may make arrangements with others.
Clean Diesel Technologies has made the product itself in the past but considers
outsourcing to a precious metal refinery to be more cost effective. Clean Diesel
Technologies has established several sources of cerium to use in its bimetallic
diesel additive.

RESEARCH AND DEVELOPMENT

During 2003, Clean Diesel Technologies employed 3 individuals, including
one executive officer, in engineering and product development. During the years
ended December 31, 2003, 2002, and 2001, Clean Diesel Technologies' research and
development expenses exclusive of patent costs totaled approximately $855,000,
$693,000, and $365,000, respectively. The recent increase can be attributed to
EPA and CARB verification programs and testing. Clean Diesel Technologies
expenses all research and development costs as incurred.

PROTECTION OF PROPRIETARY INFORMATION

Clean Diesel Technologies holds the rights to a number of patents and
patent applications pending. There can be no assurance that pending patent
applications will be approved or that the issued patents or pending applications
will not be challenged or circumvented by competitors. Certain critical
technology incorporated in Clean Diesel Technologies' products is protected by
trademark and trade secret laws and confidentiality and licensing agreements.
There can be no assurance that such protection will prove adequate or that Clean
Diesel Technologies will have adequate remedies for disclosure of its trade
secrets or violations of its intellectual property rights.

INSURANCE

Clean Diesel Technologies maintains coverage for the customary risks
inherent in its operations. Although Clean Diesel Technologies believes its
insurance policies to be adequate in the amount and coverage for its current
operations, no assurance can be given that this coverage will, in fact, be or
continue to be available in adequate amounts or at a reasonable cost or that
such insurance will be adequate to cover any future claims against Clean Diesel
Technologies.

EMPLOYEES

Clean Diesel Technologies has ten full-time employees. In addition, one
executive officer of Fuel Tech provides management and legal services for Clean
Diesel Technologies pursuant to a Management and Services Agreement between Fuel
Tech and Clean Diesel Technologies on an as needed basis. Clean Diesel
Technologies also retains several outside technical consultants and marketing
agents for specific projects related to platinum, engines and NOx reduction and
fuel additive selling.

Clean Diesel Technologies enjoys good relations with its employees and is
not a party to any labor management agreements.

RISK FACTORS OF THE BUSINESS

Investors in Clean Diesel Technologies should be mindful of the following
risk factors relative to Clean Diesel Technologies business:

LIQUIDITY & CONTINUING OPERATING LOSSES

Prior to 2000, Clean Diesel Technologies was a development stage business
and has incurred losses since inception totaling $25,272,000 (excluding the
effect of non-cash preferred stock dividends). At the date of this report,
Clean Diesel Technologies has cash resources estimated to be sufficient for its
needs through the year 2005. See the text below under the captions "Liquidity
and Sources of Capital" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," elsewhere herein.

Clean Diesel Technologies has had minimal revenues through December 31,
2003. CDT expects to continue to incur operating losses at least through 2004.
There can be no assurance that Clean Diesel Technologies will achieve or sustain
significant revenues or profitability in the future. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
elsewhere herein.

COMPETITION

Competition in the diesel fuel additive market is from other additive
suppliers such as Lubrizol, Octel and O2 Diesel (AAE Technologies
International), supplying other additives and other emission reduction companies
such as Johnson Matthey, Engelhard, Environmental Solutions Worldwide and Engine
Control Systems (ECS), supplying other emission reduction systems. CDT competes
on the basis of effectiveness, price, proprietary technology, and emission
reduction performance.

Competition in the NOx control market is from other suppliers of
reagent-based post-combustion NOx control systems such as KleenAir Systems,
Miratech Corporation and Siemens inc. as well as the engine manufacturing
companies. CDT has proprietary technology.

NEED FOR REGISTRATION

Clean Diesel Technologies needs to comply with registration requirements
for each territory in which it sells its products. CDT received its
registration from USEPA under Tier 1 of 211(b) registration for its platinum -
cerium additive in December 1999. It can sell the product with its current
registration status, which provides for pass through rights for other additive
companies to use the product without further registration. However, there are
provisions in the Act under which EPA could require further testing. The EPA has
not exercised these provisions yet for any additive. Registration will be
required in other countries as markets are expanded and further testing in
support of these registrations is likely to be necessary.

Clean Diesel Technologies' business is impacted by air quality regulations
and regulations governing vehicle emissions as well as emissions from stationary
engines. If such regulations were to be abandoned or held invalid, CDT's
prospects would be adversely affected.

NEED FOR PRODUCT VERIFICATION

In the USA verification of the system or products performance over time is
required to be demonstrated against newly established protocols. There are
separate verification protocols for the EPA and CARB. Verification is required
for systems to be sold into the mandated or state funded programs. CDT has
achieved verification with the EPA for its first system as listed on the EPA
website (http://www.epa.gov/otaq/retrofit/retroverifiedlist.htm). Verification
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for a second system is pending with the EPA. Applications are being made to
CARB and further applications to extend the verification to additional engine
categories and models will be necessary as new CARB and EPA programs become
effective or as marketing is expanded. Failure to achieve verifications for a
specific category would effectively prevent sales developing in that area. CARB
also requires a multimedia assessment for all verified fuel or fuel additive
technologies.

NO ASSURANCES OF ADDITIONAL FUNDING

Clean Diesel Technologies may seek additional funding in the form of a
private offering of additional shares of equity securities. Any offering of
such securities would result in dilution to the stockholders of Clean Diesel
Technologies. The ability of CDT to consummate financing will depend on the
status of CDT's marketing programs and commercialization progress, as well as
conditions then prevailing in the relevant capital markets. There can be no
assurance that such funding will be available if needed, or on acceptable terms.
In the event that Clean Diesel Technologies needs additional funds and is unable
to raise such funds, CDT may be required to delay, scale back, or severely
curtail its operations or otherwise impede its ongoing commercialization, which
could have a material adverse effect on the business, operating results,
financial condition and long-term prospects. See the text below under the
captions "Liquidity and Sources of Capital" in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," elsewhere
herein.

UNCERTAINTY OF MARKET ACCEPTANCE

The commercial success of CDT's products will depend upon acceptance by the
fuel additive, oil, and engine industries, and acceptance by governmental
regulatory bodies. This market acceptance will in turn depend upon competitive
developments and CDT's ability to demonstrate the efficiency, cost
effectiveness, safety, and ease of use of the PFCs and NOx control products of
Clean Diesel Technologies. The failure to receive market acceptance for the PFCs
and NOx control products would have an adverse effect on the business, operating
results and financial condition. See "Products and Markets" in Item 1,
"Business."

NO ASSURANCE OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

Clean Diesel Technologies holds licenses to a number of patents, holds
certain patents, and has patent applications pending. There can be no assurance
that pending patent applications will be approved or that the issued patents or
pending applications will not be challenged or circumvented by competitors.
Certain critical technology incorporated in Clean Diesel Technologies' products
is protected by trademark and trade secret laws and confidentiality and
licensing agreements. There can be no assurance that such protection will prove
adequate or that CDT will have adequate remedies for disclosure of its trade
secrets or violations of its intellectual property rights. See "Protection of
Proprietary Information" in Item 1, "Business."

PLATINUM PRICE

The cost of platinum may have a direct impact on the future pricing and
profitability of the Platinum Plus FBCs. Although Clean Diesel Technologies
intends to minimize this risk through various purchasing and hedging strategies,
there can be no assurance that CDT will be able to do so. A significant
prolonged increase in the price of platinum could have a material adverse effect
on the business, operating results and financial condition.

DEPENDENCE ON ATTRACTING AND RETAINING PERSONNEL

The success of Clean Diesel Technologies will depend, in large part, on its
ability to retain current key personnel, attract and retain additional qualified
management, scientific, and manufacturing personnel; and develop and maintain
relationships with research institutions and other outside consultants. The loss
of key personnel or the inability of Clean Diesel Technologies to hire or retain
qualified personnel, or the failure to assimilate effectively such personnel
could have a material adverse effect on the business, operating results and
financial condition. See "Employees" in Item 1, "Business."

ITEM 2. PROPERTIES

FACILITIES

Clean Diesel Technologies has a month to month lease of 2,900 square feet
of office space for administrative purposes at 300 Atlantic Street, Stamford,
Connecticut. CDT has signed a lease in the same building for 3,925 square feet

of administrative space beginning in May 2004. The 5 year lease will have annual
cost of $115,875, including rent, utilities and parking.

PATENTS AND TECHNOLOGY ASSIGNMENTS

CDT's technology is comprised of patents, patent applications, trade or
service marks, data, and know-how. This technology was acquired by assignment
from Fuel Tech or developed internally. This assignment agreement provides for
running royalties of 2.5% of gross revenues derived from the sale of the
Platinum Plus FBC, commencing in 1998 and terminating in 2008. Clean Diesel
Technologies may at any time terminate this royalty obligation by payment to
Fuel Tech of amounts in 2004 of $5.5 million and declining annually to $1.1
million in 2008. CDT, as owner, maintains the technology at its expense.

During 2003, Clean Diesel Technologies filed 4 additional US patent
applications and 9 international patent applications. Clean Diesel Technologies
now has a total of 26 US patents granted and 70 international patents. There are
currently 8 US patent applications pending and 76 international applications
pending. These patents and patent applications cover the means of controlling
the four principal emissions from diesel engines (NOx, particulates, CO, and
HC).

ITEM 3. LEGAL PROCEEDINGS

Clean Diesel Technologies is not involved in any legal proceedings.

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

There were no submissions of matter to a vote of security holders in the
fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

Clean Diesel Technologies' Common Stock is traded in the US on the
over-the-counter (OTC) market and on the London Stock Exchange through the
Alternative Investment Market (AIM). Reports of transactions of Clean Diesel
Technologies' shares are available on the OTC Electronic Bulletin Board (Symbol
CDTI) and on the AIM (Symbol CDT and CDTS). At March 3, 2004, there are 192
registered holders and approximately 700 beneficial holders of Common Stock.

No dividends have been paid on CDT's Common Stock and Clean Diesel
Technologies does not intend to pay dividends on these shares in the foreseeable
future.

OTC LONDON STOCK EXCHANGE
BULLETIN BOARD AIM
(IN US$) (IN GBP)
STOCK PRICE DATE: HIGH LOW HIGH LOW
---------------- ---- ---- ---- ----

1st Quarter 2002 . . . . . . . . . 3.50 2.10 2.55 1.56
2nd Quarter 2002 . . . . . . . . . 4.00 2.60 2.35 1.40
3rd Quarter 2002 . . . . . . . . . 2.60 1.30 1.60 0.97
4th Quarter 2002 . . . . . . . . . 1.90 1.25 1.40 1.10

1st Quarter 2003 . . . . . . . . . 3.00 1.40 1.54 1.10
2nd Quarter 2003 . . . . . . . . . 2.40 1.41 1.48 1.25
3rd Quarter 2003 . . . . . . . . . 2.00 1.50 1.35 1.05
4th Quarter 2003 . . . . . . . . . 4.70 1.85 2.55 0.95

SALES AND USES OF UNREGISTERED SECURITIES DURING THE PERIOD

Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective December 1, 2003, 1,282,600 shares of
its Common Stock. The price of the Common Stock was 1.70 GBP per share
(approximately $2.92 per share). The proceeds of the Common Stock issuance,
$3.583 million, net of $170,000 in expenses, will be used for the general
corporate purposes of Clean Diesel Technologies.

Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective September 26, 2003, 2,395,597 shares
of its Common Stock. The price of the Common Stock was $1.63 per

share. The proceeds of the Common Stock issuance, $3.866 million, net of $39,000
in expenses, will be used for the general corporate purposes of Clean Diesel
Technologies.

ITEM 6. SELECTED FINANCIAL DATA

Clean Diesel Technologies was incorporated on January 19, 1994, as a wholly
owned subsidiary of Fuel Tech. Effective December 12, 1995, Fuel Tech completed
a Rights Offering of CDT's Common Stock, with Fuel Tech retaining a 27.6%
ownership interest in Clean Diesel Technologies. In 2003 and 2002, CDT obtained
$7.449 million and $1.356 million of proceeds, respectively, through private
placement sales of shares of its Common Stock. As a result of the additional
stock transactions, Fuel Tech's 1,825,119 shares of CDT's Common Stock represent
approximately a 11.6% interest in Clean Diesel Technologies at December 31,
2003.

As discussed elsewhere herein, prior to 2000, Clean Diesel Technologies was
a development stage business. The following selected data are derived from the
financial statements of CDT. The data should be read in conjunction with the
financial statements, related notes and other financial information herein.

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------

STATEMENTS OF OPERATIONS DATA (in thousands, except per share data)

Product Revenue $ 373 $ 142 $ 176 $ 199 $ 142
License and Royalty Revenue 194 299 1,424 383 --
-------- -------- -------- -------- --------
Total Revenues 567 441 1,600 582 142
Costs and expenses:
Cost of product sales 219 86 117 133 81
General and administrative 2,695 2,291 1,858 1,799 1,585
Research and development 855 693 365 534 827
Patent filing and maintenance 58 43 196 152 134
-------- -------- -------- -------- --------

Loss from operations (3,260) (2,672) (936) (2,036) (2,485)
Interest income/(expense), net 15 30 (170) 35 44
-------- -------- -------- -------- --------
Loss before preferred stock dividend (3,245) (2,642) (1,106) (2,001) (2,441)

Preferred Stock Dividend (non-cash) -- -- (621) (712) (393)
One-time Preferred Stock conversion premium -- -- (1,276) -- --
One-time imputed non-cash preferred dividend -- -- -- -- (1,750)
-------- -------- -------- -------- --------

Net loss attributable to common stockholders $(3,245) $(2,642) $(3,003) $(2,713) $(4,584)
======== ======== ======== ======== ========

Basic and diluted loss per common share $ (0.26) $ (0.23) $ (1.08) $ (1.03) $ (1.77)

Weighted-average shares outstanding 12,721 11,419 2,777 2,631 2,594

Cash dividends paid $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00

DECEMBER 31,
---------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------- ------

BALANCE SHEET DATA (in thousands)

Current assets $7,023 $2,757 $4,612 $ 965 $1,311

Total assets 7,441 2,979 4,658 1,057 1,346

Current liabilities 868 223 808 400 494

Long-term liabilities 0 418 368 808 196

Working capital 6,155 2,534 3,804 565 817

Stockholders' equity (deficit) 6,573 2,338 3,482 (151) 656

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Prior to 2000, Clean Diesel Technologies was a development stage enterprise
and its efforts were devoted to the research and development of platinum fuel
catalysts and nitrogen oxide reduction technologies to reduce emissions from
diesel engines. During December 1999, CDT received its EPA registration for its
platinum-cerium product and in early

2000 completed its first commercial sales; accordingly, in the opinion of
management, Clean Diesel Technologies was no longer a development stage
enterprise. Although the Company has been unable to generate positive cash
flows, it has made significant progress in commercializing its technologies.

RESULTS OF OPERATIONS
2003 VERSUS 2002

Revenues and cost of product sales were $567,000 and $219,000,
respectively, in 2003 versus $441,000 and $86,000, respectively, in 2002. The
2003 revenues consist of Platinum Plus sales, ARIS 2000 system sales, ARIS
license revenue and royalties, and miscellaneous equipment sales.

CDT received EPA verification of its purifier system (FBC and DOC) in
October 2003, and has completed a second verification program with the EPA for
the FBC and Mitsui CWMF and is waiting for final verification results from the
EPA to be posted. Clean Diesel Technologies has applied for verification for
emission reduction by CARB as well. The Platinum Plus FBC is registered with the
EPA. In 2003, sales of the platinum-cerium additive totaled $192,000. Based on
initial trial results and licensing agreements, ongoing revenues from sales of
its Platinum Plus additives are expected from distributors, refiners, additive
marketing companies and fleets.

Clean Diesel Technologies identified a market opportunity for urea
selective catalytic reduction (SCR) systems for use with stationary diesel
engines primarily for power generation. The ARIS 2000 is a single-fluid
injection and metering system complete with an electronic control unit that can
be integrated with engine electronic and diagnostic systems. CDT has licensed
the ARIS 2000 system for stationary diesel engines in North, South and Central
America to the RJM Corporation on a non-exclusive basis and completed a
stationary license agreement with Mitsui for Japan on an exclusive basis. In
December of 2002 Clean Diesel Technologies completed an additional exclusive
license agreement with Mitsui Ltd for the mobile ARIS technology in Japan. In
2003 CDT completed an ARIS mobile license with Combustion Components Associates
for the US market. Total sales of systems and license/royalties of the ARIS 2000
in 2003 were $111,000 and $194,000, respectively, versus $102,000 and $298,000
in 2002, respectively. CDT and its licensees have sold and installed over 175
systems. CDT believes that the ARIS 2000 NOx reduction system has applications
for both stationary engines and mobile engines. While the ARIS system for
stationary use is being sold commercially, the ARIS system for mobile
applications needs further development from the present prototype stage. CDT
believes that the ARIS 2000 system can most effectively be commercialized
through licensing several companies with a related business in these markets.
Clean Diesel Technologies is actively seeking to license the mobile ARIS
technology in the US and Europe and the stationary technology in the US, Europe
and Asia.

General and administrative expenses increased to $2,695,000 in 2003 from
$2,291,000 in 2002. The increases is the result of an increase in staff expense
and marketing and travel relating to the increased sales effort in marketing
CDT's technologies. The increase is also related to higher professional fees
including the effects of exchange rates, associated with being listed on AIM.
Research and development expenses increased to $855,000 in 2003 from $693,000 in
2002. The increase in research and development in 2003 is due to the development
of new applications for CDT's technologies and for verification testing relating
to CARB and EPA certification.

Patent filing and maintenance expenses increased to $58,000 in 2003 versus
$43,000 in 2002. The increase is attributable to the canceling of some patents
in non-viable countries and the resultant charge to income of the related asset
amounts which had been accrued. Clean Diesel Technologies capitalizes the
expenses related to filing and maintaining each patent and then amortizes the
expense over the remaining life of the patent. Interest income decreased to
$15,000 in 2003 from $39,000 in 2002 due to the decrease in funds used for
operations. Interest expense decreased to $0 in 2003 from $9,000 in 2002 as a
result of using equity to fund operations.

2002 VERSUS 2001

Revenues and cost of product sales were $441,000 and $86,000, respectively,
in 2002 versus $1,600,000 and $117,000, respectively, in 2001. The 2002
revenues consist of Platinum Plus sales, ARIS 2000 system sales and ARIS license
revenue and royalties.

Clean Diesel Technologies received its EPA registration of the
platinum-cerium additive. Field trials of the platinum-cerium additive for fuel
economy started in 2000 and continued in 2002. In 2002, CDT initiated field
trials of platinum-cerium for emission reduction as well. Clean Diesel
Technologies applied for the platinum-cerium product to be verified for emission
reduction by both the EPA and CARB. In 2002, sales of the platinum-cerium
additive totaled $40,000. Based on initial trial results and licensing
agreements, ongoing revenues from sales of its Platinum Plus additive is
expected from distributors, refiners, additive marketing companies and fleets.

Clean Diesel Technologies identified a market opportunity for urea
selective catalytic reduction (SCR) systems for use with stationary diesel
engines primarily for power generation. The ARIS 2000 is a single-fluid
injection and metering system complete with an electronic control unit that can
be integrated with engine electronic and diagnostic systems. CDT has licensed
the ARIS 2000 system for stationary diesel engines in North, South and Central
America to the RJM Corporation and completed a stationary license agreement with
Mitsui for Japan. In December of 2002 Clean Diesel Technologies completed an
additional license agreement with Mitsui Ltd for the mobile ARIS technology in
Japan. Total sales of systems and license/royalties of the ARIS 2000 in 2002
were $102,000 and $298,000, respectively, versus $62,000 and $1,424,000 in 2001,
respectively. CDT and its licensees have sold and installed over 150 systems.
CDT believes that the ARIS 2000 NOx reduction system has applications for both
stationary engines and mobile engines. While the ARIS system for stationary use
is being sold commercially, the ARIS system for mobile applications needs
further development from the present prototype stage. CDT believes that the
ARIS 2000 system can most effectively be commercialized through licensing
several companies with a related business in these markets. Clean Diesel
Technologies is actively seeking to license the mobile ARIS technology in the US
and Europe and the stationary technology in Europe and Asia.

General and administrative expenses increased to $2,291,000 in 2002 from
$1,858,000 in 2001. The increase is the result of higher professional fees
associated with listing on AIM. There were also increases in marketing and
travel relating to the increased effort in marketing CDT's technologies.
Research and development expenses increased to $693,000 in 2002 from $365,000 in
2001. The increase in research and development in 2002 is due to the development
of new applications for CDT's technologies and for verification testing relating
to CARB and EPA certification.

Patent filing and maintenance expenses decreased to $43,000 in 2002 versus
$196,000 in 2001. The decrease relates to a change in accounting policy. Clean
Diesel Technologies now capitalizes the expenses related to filing and
maintaining each patent and then amortizes the expense over the remaining life
of the patent. Interest income increased to $39,000 in 2002 from $11,000 in
2001 due to funds raised from the issuance of CDT's Common Stock. Interest
expense decreased to $9,000 in 2002 from $181,000 in 2001 due to the retirement
of the term loan financing arrangement in January 2002.

In 2002, Clean Diesel Technologies recorded no in-kind preferred stock
dividends on its Series A Preferred Stock due to the conversion of the preferred
stock into common stock in December 2001, for which no dividends are paid. In
2001, CDT recorded $1,897,000 of in-kind preferred stock dividends on its Series
A Preferred Stock.

LIQUIDITY AND SOURCES OF CAPITAL

Prior to 2000, Clean Diesel Technologies was primarily engaged in research
and development and has incurred losses since inception aggregating $25,272,000
(excluding the effect of the preferred stock dividends). CDT expects to incur
losses through the foreseeable future as it further pursues its
commercialization efforts. Although CDT has begun selling limited quantities of
Platinum Plus additive and generating ARIS licensing and royalties, revenue to
date has been insufficient to cover operating expenses, and Clean Diesel
Technologies continues to be dependent upon sources other than operations to
finance its working capital requirements.

For the years ended 2003, 2002 and 2001, Clean Diesel Technologies used
cash of $2,744,000, $2,836,000 and $725,000, respectively, in operating
activities.

At December 31, 2003, and December 31, 2002, Clean Diesel Technologies had
cash and cash equivalents of $6,515,000 and $2,083,000, respectively. The
increase in cash and cash equivalents in 2003 from 2002 was due to the fund
raising completed in the second half of 2003. Working capital increased to
$6,155,000 at December 31, 2003, from $2,534,000 at December 31, 2002. CDT
anticipates incurring additional losses through at least 2004 as it further
pursues its commercialization efforts.

In April 2003, Clean Diesel Technologies completed a non-exclusive license
agreement with Combustion Component Associates Inc. (CCA) of Monroe,
Connecticut, for the mobile ARIS technology in the US. Under terms of the
agreement CCA agreed to pay CDT a $150,000 license fee and committed to spend an
additional $100,000 in developing, testing and demonstrating ARIS mobile
prototypes. CDT recognized the $150,000 license revenue in the second quarter of
2003, as there are no significant ongoing services required to be performed by
CDT.

In December 2002, Clean Diesel Technologies completed an additional
exclusive license agreement with Mitsui for the mobile ARIS technology for
Japan. Under terms of the agreement Mitsui agreed to pay CDT a $250,000 license
fee and Mitsui committed to spend an additional $200,000 in developing, testing
and demonstrating ARIS mobile prototypes. CDT recognized the $250,000 of license
revenue in the fourth quarter of 2002.

In August 2001, Clean Diesel Technologies completed a license agreement
with Mitsui for CDT's ARIS 2000 NOx control system for all stationary diesel
power generators in Japan. Under the agreement, CDT received nonrefundable
up-front license payments of $495,000 and will receive ongoing standard
royalties on each system sold by Mitsui. Mitsui also has an option to license
the ARIS technology for mobile applications in Japan for an additional license
fee.

In November 2000, Clean Diesel Technologies secured a $1,000,000 privately
financed term loan facility. In December 2000, CDT drew down $500,000 of the
term loan facility and in March 2001 the remaining $500,000 of the term loan was
drawn down. As part of the private placement stock transaction in December
2001, $750,000 of the outstanding term loan plus accrued interest was converted
to Common Stock. In January 2002, the remaining $250,000 and accrued interest
for the term loan was repaid.

In December 2001, Clean Diesel Technologies received $3.721 million (net of
expenses) through a private placement of 2,580,664 shares of its common stock.
In conjunction with the private placement, CDT converted all of its Series A
Preferred Stock to Common Stock. All of CDT's Common Stock shares were
registered to trade on the AIM of the London Stock Exchange.

In October 2002, Clean Diesel Technologies received $1.356 million (net of
$69,000 in expenses) through a private placement of 704,349 shares of its Common
Stock on AIM.

In September 2003, Clean Diesel Technologies received $3.866 million (net
of $39,000 in expenses) through a private placement of 2,395,597 shares of its
Common Stock on AIM.

In December 2003, Clean Diesel Technologies received $3.583 million (net of
$170,000 in expenses) through a private placement of 1,282,600 shares of its
Common Stock on AIM.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results can differ from those estimates. The
Company believes that of its significant accounting policies (see Note 1 to the
Financial Statements), the following may involve a higher degree of judgment and
complexity.

REVENUE RECOGNITION

Clean Diesel Technologies recognizes revenue from sales of Platinum Plus
fuel borne catalyst and ARIS systems upon shipment. CDT sells to end user
fleets, resellers, and additive distribution companies primarily in the US. CDT
recognizes license revenue at the time of the license agreement when there are
no significant ongoing services to be performed by CDT.

RESEARCH AND DEVELOPMENT COSTS

Costs relating to the research, development and testing of products are
charged to operations as they are incurred. These costs include test programs,
salary and benefits, consultancy fees, materials and certain testing equipment.

PATENT EXPENSE

Effective January 1, 2002, all patent costs are capitalized and amortized
over the remaining life of each patent. Patents are reviewed regularly and any
patents deemed not commercial or cost effective are dropped and the cumulative
accrued expense is written off. Prior to this all patent related costs were
expensed as incurred.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the opinion of management, with the exception of exposure to
fluctuations in the cost of platinum, it is not subject to any significant
market risk exposure. See "Risk Factors of the Business - Platinum Price" in
Item 1, "Business."

Clean Diesel Technologies generally receives all income in United States
dollars. CDT typically makes several small payments monthly in various foreign
currencies for patent expenses, product tests and registration, local marketing
and promotion and consultants.

ITEM 8. FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

BOARD OF DIRECTORS AND STOCKHOLDERS
Clean Diesel Technologies, Inc.

We have audited the accompanying balance sheet of Clean Diesel Technologies,
Inc. as of December 31, 2003 and the related statements of operations, changes
in stockholders' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
as of December 31, 2003 and the results of its operations and its cash flows for
the year then ended in conformity with U.S. generally accepted accounting
principles.

/s/ Eisner, LLP
New York, New York
February 18, 2004

REPORT OF INDEPENDENT AUDITORS - 2002

The Board of Directors and Stockholders
Clean Diesel Technologies, Inc.

We have audited the accompanying balance sheet of Clean Diesel Technologies,
Inc. as of December 31, 2002, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each the two years in the
period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
at December 31, 2002, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Stamford, Connecticut
January 24, 2003

CLEAN DIESEL TECHNOLOGIES, INC.
BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE DATA)

DECEMBER 31,
--------------------
2003 2002
--------- ---------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,515 $ 2,083
Accounts receivable, net of allowance of $3 and $0 in 2003 and
2002, respectively 115 284
Inventories 320 314
Other current assets 73 76
--------- ---------
TOTAL CURRENT ASSETS 7,023 2,757
Patents, net 274 114
Fixed assets, net of accumulated depreciation of $123 in 2003 and
$74 in 2002, respectively 126 90
Other assets 18 18
--------- ---------
TOTAL ASSETS $ 7,441 $ 2,979
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

Deferred compensation and pension benefits $ 441 $ --
Accounts payable and accrued expenses 427 223
--------- ---------
TOTAL CURRENT LIABILITIES 868 223

Deferred compensation and pension benefits -- 418
--------- ---------
TOTAL LONG-TERM LIABILITIES -- 418

STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
authorized 80,000 , no shares issued and outstanding -- --
Series A Convertible Preferred Stock, par value $0.05 per share,
$500 per share liquidation preference, authorized 20,000
shares, no shares issued and outstanding -- --
Common Stock, par value $0.05 per share, authorized
30,000,000 shares, issued and outstanding 15,679,337
and 11,986,387 shares 784 598
Additional paid-in capital 35,813 28,519
Accumulated deficit (30,024) (26,779)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 6,573 2,338
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,441 $ 2,979
========= =========

See accompanying notes.

CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED DECEMBER 31,
----------------------------
2003 2002 2001
-------- -------- --------

Product revenue $ 373 $ 142 $ 176
License and royalty revenue 194 299 1,424
-------- -------- --------
Total revenue 567 441 1,600

Costs and expenses:
Cost of revenue 219 86 117
General and administrative 2,695 2,291 1,858
Research and development 855 693 365
Patent amortization and other expense 58 43 196
-------- -------- --------

Loss from operations before interest, expense
and preferred dividends (3,260) (2,672) (936)
Interest income 15 39 11
Interest expense -- (9) (181)
-------- -------- --------

Net loss before preferred stock dividends (3,245) (2,642) (1,106)
Preferred Stock dividends -- -- (621)
Preferred Stock conversion premium -- -- (1,276)
-------- -------- --------

Net loss attributable to common stockholders $(3,245) $(2,642) $(3,003)
======== ======== ========

BASIC AND DILUTED LOSS PER COMMON SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.26) $ (0.23) $ (1.08)
======== ======== ========

WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 12,721 11,419 2,777
======== ======== ========

See accompanying notes.

CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)

Series A Convertible Total
Preferred Stock Common Stock Additional Stockholders'
----------------- --------------- Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
------- -------- ------ ------- --------- ---------- ----------

Balance at December 31, 2000 14.6 $ 1 2,660 $ 133 $ 20,849 $ (21,134) $ (151)
Net loss for year -- -- -- -- -- (1,106) (1,106)
Issuance of common stock warrants -- -- -- -- 157 -- 157
Payment of directors' fees in
common stock -- -- 26 1 40 -- 41
Stock options exercised -- -- 13 1 2 -- 3
Declared but not issued preferred
dividend 1.2 -- -- -- 621 (621) --
Conversion of Preferred Shares to
common stock (15.8) (1) 5,299 265 (264) -- --
Premium (12%) paid to preferred
shareholders for conversion to
common stock -- -- 636 32 1,244 (1,276) --
Issuance of common stock -- -- 2,175 109 3,612 -- 3,721
Term loan and related interest
conversion to common stock -- -- 405 20 797 -- 817
------- -------- ------ ------- --------- ---------- ----------

Balance at December 31, 2001 -- $ -- 11,214 $ 561 $ 27,058 $ (24,137) $ 3,482
Net loss for year -- -- -- -- -- (2,642) (2,642)
Issuance of common stock warrants -- -- -- -- 95 -- 95
Payment of directors' fees in
common stock -- -- 23 1 46 -- 47
Exercise of warrants -- -- 27 1 (1) -- --
Issuance of common stock -- -- 654 33 1,224 -- 1,257
Issuance of common stock -- -- 50 2 97 -- 99
------- -------- ------ ------- --------- ---------- ----------

BALANCE AT DECEMBER 31, 2002 -- $ -- 11,968 $ 598 $ 28,519 $( 26,779) $ 2,338
NET LOSS FOR YEAR -- -- -- -- -- (3,245) (3,245)
EXERCISE OF WARRANTS -- -- 17 1 (1) -- --
ISSUANCE OF COMMON STOCK -- -- 2,396 120 3,746 -- 3,866
PAYMENT OF DIRECTORS' FEES IN
COMMON STOCK -- -- 13 1 26 -- 27
ISSUANCE OF COMMON STOCK -- -- 1,283 64 3,519 -- 3,583
EXERCISE OF WARRANTS -- -- 2 -- 4 -- 4

------- -------- ------ ------- --------- ---------- ----------

BALANCE AT DECEMBER 31, 2003 -- $ -- 15,679 $ 784 $ 35,813 $( 30,024) $ 6,573

======= ======== ====== ======= ========= ========== ==========

See accompanying notes.

CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- ------------

OPERATING ACTIVITIES
Net loss $(3,245) $(2,642) $ (1,106)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 81 26 11
Amortization of deferred financing costs -- 8 91
Interest expense from term loans converted to common shares -- -- 65
Compensatory stock warrant -- 95 120
Changes in operating assets and liabilities:
Accounts receivable 169 (87) (147)
Inventories (6) (18) (9)
Other current assets 3 20 (9)
Accounts payable and accrued expenses 254 (238) 259
-------- -------- ------------

Net cash used in operating activities (2,744) (2,836) (725)
-------- -------- ------------

INVESTING ACTIVITIES
Patent activities (192) (122) --
Purchase of fixed assets (85) (88) (17)
-------- -------- ------------
Net cash used in investing activities (277) (210) (17)

FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants 4 -- 3
Proceeds from (repayment of) term loans -- (250) 500
Proceeds from issuance of common stock, net
7,449 1,356 3,721
-------- -------- ------------

Net cash provided by financing activities 7,453 1,106 4,224
-------- -------- ------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH EQUIVALENTS 4,432 (1,940) 3,482
Cash and cash equivalents at beginning of the year 2,083 4,023 541
-------- -------- ------------

CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 6,515 $ 2,083 $ 4,023
======== ======== ============

NON-CASH INVESTING AND FINANCING ACTIVITIES

Preferred Stock dividend $ -- $ -- $ 621

Preferred Stock conversion premium (non-cash) -- -- 1,276

Conversion of term loans and related interest into -- -- 817

Stock to be issued to Directors in lieu of cash fee $ 57 $ 28 $ 47

See accompanying notes.

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS

Clean Diesel Technologies, Inc. ("CDT") located in Stamford CT, was
incorporated in the State of Delaware on January 19, 1994, as a wholly owned
subsidiary of Fuel-Tech N.V. ("Fuel Tech"). Effective December 12, 1995, Fuel
Tech completed a Rights Offering of CDT's Common Stock, and reduced its
ownership in CDT's Common Stock to 27.6%. As a result of additional equity
offerings in subsequent years, Fuel Tech currently holds a 11.6% interest in CDT
as of December 31, 2003.

Clean Diesel Technologies is a specialty chemical and energy technology
company supplying fuel additives and proprietary systems to reduce harmful
emissions from internal combustion engines while improving fuel economy. Over
the past several years the Company has filed patents, developed its technologies
and is now commercializing Platinum Plus, a fuel borne catalyst (FBC), the
Purifier System which includes the FBC combined with a traditional diesel
oxidation catalyst, the FBC/catalyzed wire mesh (CWMF) system and the ARIS 2000
NOx reduction system through a direct sales and licensing distribution strategy.
CDT is developing a network of licensed distributors to sell and market its
patented Platinum Plus FBC, recently verified Purifier System and the FBC/CWMF
system (verification pending). CDT continues to market and sell the FBC,
Purifier and CWMF systems to key corporate fleets to generate demand for its
technologies. CDT's strategy for the ARIS 2000 NOx reduction system is to
continue licensing the patented technology to engineering and automotive
companies for an upfront license fee and an on-going royalty. The success of
CDT's technologies will depend upon the commercialization opportunities of the
technologies, governmental regulations, and corresponding foreign and state
agencies. CDT's raw materials are maintained off site and the majority of its
blending and manufacturing is performed by third parties.

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

Clean Diesel Technologies considers all highly liquid investments with
maturity of three months or less when purchased to be cash equivalents. At
December 31, 2003, substantially all of CDT's cash and cash equivalents were on
deposit with one financial institution. All financial instruments are reflected
in the accompanying balance sheets at amounts that approximate fair market
value.

RECLASSIFICATION

Certain prior year balances have been reclassified in order to confirm to
the current year's presentation.

INVENTORIES

Inventories are stated at the lower of cost or market and consist primarily
of finished product ($73,000) platinum (metal) concentrate ($171,000) and ARIS
injectors and parts ($56,000). Cost is determined using the first-in, first-out
(FIFO) method.

REVENUE RECOGNITION

Clean Diesel Technologies recognizes revenue from sales of Platinum Plus
fuel borne catalyst, Purifier and ARIS systems upon shipment. CDT sells to end
user fleets, resellers, and additive distribution companies primarily in the US.
One customer represents 65% of CDT's accounts receivable at December 31, 2003
and 26% of revenue for 2003.

In August 2001, Clean Diesel Technologies completed an exclusive license
agreement with Mitsui Ltd for CDT's ARIS 2000 NOx control system for all
stationary diesel power generators in Japan for the remaining life of the
patents. Under the agreement, CDT received a nonrefundable up-front license
payment of $495,000, and will receive ongoing standard royalties on each system
sold by Mitsui. CDT recognized the license payment as revenue in 2001, as there
are no significant ongoing services to be performed by CDT.

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In December 2002, Clean Diesel Technologies completed an additional
exclusive license agreement with Mitsui for the mobile ARIS technology for Japan
for the remaining life of the patents. Under terms of the agreement Mitsui
agreed to pay CDT a $250,000 license fee and Mitsui committed to spend an
additional $200,000 in developing, testing and demonstrating ARIS mobile
prototypes. CDT recognized the $250,000 license revenue in the fourth quarter of
2002.

In April 2003, Clean Diesel Technologies completed a non-exclusive license
agreement with Combustion Component Associates Inc. (CCA) of Monroe,
Connecticut, for the mobile ARIS technology in the US for the remaining life of
the patents. Under terms of the agreement CCA agreed to pay CDT a $150,000
license fee and the licensee committed to spend an additional $100,000 in
developing, testing and demonstrating ARIS mobile prototypes. CDT will also
receive ongoing royalty payments on a per unit basis. CDT recognized the
$150,000 license revenue in the second quarter of 2003, as there are no
significant ongoing services required to be performed by CDT.

Royalty fees are recognized by Clean Diesel Technologies when earned and
royalty revenue for 2003 was $44,000.

RESEARCH AND DEVELOPMENT COSTS

PATENT EXPENSE

Effective January 1, 2002, CDT commenced capitalizing all direct
incremental costs associated with initial patent filing costs and amortized the
cost over the estimated remaining life of such patent. Patents are reviewed
regularly and any patents deemed not commercial or cost effective are dropped
and the cumulative accrued expense is written off. Prior to this all patent
related costs were expensed as incurred. The expiration of CDT's patents range
from 2008 to 2021.

STOCK-BASED COMPENSATION

Clean Diesel Technologies accounts for employee/director stock option
grants in accordance with Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Under CDT's current plan, options
may be granted at not less than the fair market value on the date of grant and
therefore no compensation expense is recognized for the stock options granted to
employees. In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value- based method of
accounting for stock-based employee compensation. In addition, the Statement
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company adopted the disclosure requirements of
this Statement as of December 31, 2002.

If compensation expense for CDT's plan had been determined based on the
fair value at the grant dates for awards under its plan, consistent with the
method described in SFAS No. 123, CDT's net loss and basic and diluted loss per
common share would have been increased to the pro forma amounts indicated below:

2003 2002 2001
-------- -------- --------

Net loss attributable to common stockholders as reported $(3,245) $(2,642) $(3,003)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,176) (591) (422)
----------------------------
Pro forma net loss attributable to common stockholders $(4,421) $(3,233) $(3,425)
Net loss per share attributable to common stockholders:
Basic and diluted net loss per common share-as reported $ (0.26) $ (0.23) $ (1.08)
Basic and diluted per common share-pro forma $ (0.35) $ (0.28) $ (1.23)

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In accordance with the provisions of SFAS No. 123, for purposes of the pro
forma disclosures the estimated fair value of the options is amortized over the
option vesting period. The application of the pro forma disclosures presented
above are not representative of the effects SFAS No. 123 may have on operating
results and earnings (loss) per share in future years due to the timing of stock
option grants and considering that options vest over a period of three years.

The fair value of each option grant, for pro forma disclosure purposes, was
estimated on the date of grant using the modified Black-Scholes option-pricing
model with the following weighted-average assumptions:

2003 2002 2001
-------- -------- --------

Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.1% 4.85% 4.66%
Expected volatility 99.4% 94.2% 94.2%
Expected life of option 4 YEARS 4 years 4 years

The 2003 weighted average fair value per option granted was $2.10.

BASIC AND DILUTED LOSS PER COMMON SHARE

Basic and diluted loss per share is calculated in accordance with SFAS No.
128, Earnings Per Share. Basic loss per share is computed by dividing net
earnings by the weighted-average shares outstanding during the reporting period.
Diluted loss per share is computed similar to basic earnings per share except
that the weighted-average shares outstanding are increased to include additional
shares from the assumed exercise of stock options and warrants, if dilutive.
CDT's computation of diluted net loss per share for 2003 does not include the
common shares associated with 1,020,000 in the money options as of December 31,
2003, as this would be anti-dilutive.

3. INCOME TAXES

The Company follows the liability method of accounting for income taxes. Such
method requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.

At December 31, 2003 and 2002, Clean Diesel Technologies had tax losses
available for offset against future years' earnings of approximately $23.0
million and $19.8 million, respectively. Temporary differences were
insignificant as of such dates. CDT has provided a full valuation allowance to
reduce the related deferred tax asset to zero.

Approximately $0.9 million, $2.0 million, $3.2 million, $3.4 million, $3.0
million, $1.9 million, $1.9 million, $0.9 million, $2.6 million and $3.2 million
of the tax loss carryforwards expire in 2009, 2010, 2011, 2012, 2018, 2019,
2020, 2021, 2022 and 2023, respectively. CDT has not recognized any benefit from
the aforementioned tax loss carryforwards. The Taxpayer Relief Act of 1997
modified the net operating loss provisions so that losses arising for tax years
beginning after the effective date of the Act (August 5, 1997) would be eligible
for carryforward for 20 years. Existing losses would still be subject to a
15-year carryforward period.

Under the provisions of the United States Tax Reform Act of 1986,
utilization of CDT's US federal tax loss carry forwards for the period prior to
December 12, 1995 may be limited as a result of the ownership change in excess
of 50% related to the 1995 Fuel Tech Rights Offering. Losses subsequent to the
aforementioned date may be limited due to cumulative ownership changes in any
three-year period.

4. STOCKHOLDERS' EQUITY

During 2003, Clean Diesel Technologies received proceeds of $7.5 million
(net of expenses) through two private placements totaling approximately 3.7
million shares of its Common Stock on the AIM of the London Stock Exchange. In
2002, Clean Diesel Technologies received proceeds of $1.356 million (net of
expenses) through a private placement of approximately 0.7 million shares of its
Common Stock on the AIM of the London Stock Exchange. In 2001, CDT

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

received proceeds of $3.721 million (net of $0.644 million in expenses and
$0.817 million in term loan repayment) through a private placement of
approximately 2.6 million shares of its Common Stock.

During 2001, $1.9 million of dividends were declared for Series A Preferred
Stock and converted into CDT's Common Stock. On December 28, 2001, CDT converted
all outstanding Series A Preferred Stock (15,897 shares) including accrued stock
dividends, into Common Stock (approximately 5.9 million shares).

In October 2003 and May 2002, CDT issued 13,276 and 22,658 shares,
respectively, of Common Stock to its Board of Directors in lieu of approximately
$27,500 and $46,800 of Director's fees pertaining to their services for the
years ended December 31, 2002 and 2001. The share price used represented the
average of CDT's quarter-end high and low trading prices. Such Director's fees
had been accrued and charged to expense during 2002 and 2001.

5. STOCK OPTIONS AND WARRANTS

Clean Diesel Technologies maintains a stock award plan, the 1994 Incentive
Plan (the "Plan"). Under the Plan, awards may be granted to participants in the
form of incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock, performance awards, bonuses, or other forms of
share-based or non-share-based awards, or combinations thereof. CDT grants
awards at fair market value on the date of grant with expiration dates typically
10 years. Participants in the Plan may include CDT's directors, officers,
employees, consultants and advisers (except consultants or advisers in
capital-raising transactions) as the Directors determine are key to the success
of the business. The percentage of outstanding Common Shares of CDT used to
determine the maximum number of awards to participants is 17.5%. In general,
the policy of the Board was to grant stock options vesting in three equal
portions on the first through third anniversaries of the grant date for grants
prior to 1997, and in equal portions on the grant date and the first and second
anniversaries of the grant date for grants awarded after 1997.

The following table presents a summary of CDT's stock option activity and
related information for the years ended December 31:

2003 2002 2001
---------------------------------------------------------- ---------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
--------- ----------------- --------- ----------------- -------- -----------------

Outstanding, beginning
of year 1,567 $ 2.60 1,139 $ 2.48 974 $ 2.54
Granted 681 2.12 470 2.94 240 1.97
Exercised -- -- -- -- (12) .20
Forfeited -- -- (42) 2.97 (63) 2.00
---------------------------------------------------------- ---------------------------
Outstanding, end
of year 2,248 $ 2.45 1,567 $ 2.60 1.139 $ 2.48
========================================================== ===========================
Exercisable, end
of year 1,711 $ 2.49 1,220 $ 2.56 939 $ 2.55
Weighted-average fair value of
options granted during the year $ 2.10 $ 2.01 $ 1.38

The following table summarizes information about stock options outstanding
at December 31, 2003:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
---------------------------------------------------------------- ----------------------------

$ .20 - $2.49 1,142,500 7.58 $ 1.63 852,500 $ 1.9
2.50 - 4.63 1,046,000 7.35 3.11 798,665 3.14
5.63 - 6.82 59,450 2.05 6.72 59,450 6.72
---------------------------------------------------------------- ----------------------------
$ .20 - $6.82 2,247,950 7.33 $ 2.45 1,710,615 $ 2.49

In November 2000, CDT granted the lenders a total of 100,000 warrants in
conjunction with a $1,000,000 term loan agreement. Fifty thousand of the
warrants were awarded in November 2000, 25,000 of the warrants were awarded in
December 2000 when $500,000 of the term loan was borrowed and the remaining
25,000 warrants were awarded when the remaining $500,000 was borrowed in March
2001. The warrants were priced at $2.00 per share. The value of the

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

warrants issued was $60,750 and has been capitalized as a deferred financing
cost and will be amortized over the life of the loan. The value of the 25,000
warrants issued in March 2001 was $37,250 and has also been capitalized as a
deferred financing cost. In December 2001, CDT converted $750,000 of the
outstanding $1,000,000 loan into Common Stock and expensed $16,100 of the
remaining capitalized warrant expense.

In February 2001, in consideration of their performing investor relations
on behalf of Clean Diesel Technologies in the UK, CDT granted Equity Development
Limited two 50,000 blocks of warrants at $1.50 per share. The first 50,000
block of warrants has a one year term and vests when CDT's stock price remains
above $2.50 for seven consecutive days. The second 50,000 block of warrants has
a term of two years and vests when CDT's stock price remains above $3.00 for
seven consecutive days. The value of such warrants was $119,500 and charged to
earnings in 2001. In 2002, as a result of the warrants becoming vested, CDT
charged to earnings an additional $95,000 for the 100,000 warrants.

In conjunction with CDT's December 2001 AIM listing and private placement
of Common Stock, Clean Diesel Technologies granted its financial advisor,
Nabarro Wells Limited, 51,613 warrants at $2.00 per share on December 28, 2001,
which was considered cost of capital.

In conjunction with the September 2003 stock offering CDT granted the
private placement investors 230,240 warrants (approximately one warrant for each
10 shares of common stock purchased) at the same $1.63 price as the common stock
issued.

CDT Warrants

2003 2002 2001
-------------------------- -------------------------- --------------------------
Warrants EXERCISE PRICE Warrants EXERCISE PRICE Warrants EXERCISE PRICE
(000'S) PER SHARE (000'S) PER SHARE (000'S) PER SHARE
--------- --------------- --------- --------------- --------- ---------------

Outstanding, beginning
of year 379 N/A 429 N/A 302 N/A
Granted 230 $ 1.63 - - 177 $ 1.50 - 2.00
Exercised 19 $ 1.50 - 2.00 50 $ 1.50 - 2.00 - -
Forfeited 33 - - - (50) $ 6.50
------------------------------------------------------ --------------------------
Outstanding, end
of year 557 $ 1.50 - 10.00 379 $ 1.50 - 10.00 429 $ 1.50 - 10.00
====================================================== ==========================

WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------------------------- ------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING (YEARS) WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES WARRANTS EXERCISE LIFE EXERCISE PRICE EXERCISABLE PRICE
----------------------------------------------------------------- ------------------------

$1.50 - $2.00 466,908 6.55 $ 1.73 466,908 $ 1.73
2.25 - 3.00 64,825 4.41 2.54 64,825 2.54
10.00 25,000 0.33 10.00 25,000 10.00
----------------------------------------------------------------- ------------------------
$1.50 - $10.00 556,733 6.02 $ 2.19 556,733 $ 2.19

6. COMMITMENTS

Clean Diesel Technologies is obligated under a sublease agreement for its
principal office, through the end of 2003. CDT has agreed to move to a larger
space within the same building and has signed a new 5 year lease directly with
Equity Office beginning May 1, 2004. Annual rent will be $115,875 and the
company will remain in its current location until the new space is available.
For the years ended December 31, 2003, 2002 and 2001, rental expense
approximated $110,500, $112,100 and $81,500, respectively.

Effective October 28, 1994, Fuel Tech granted two licenses to Clean Diesel
Technologies for all patents and rights associated with its platinum fuel
catalyst technology. Effective November 24, 1997, the licenses were canceled
and Fuel Tech assigned to CDT all such patents and rights on terms substantially
similar to the licenses. In exchange for the assignment, CDT will pay Fuel Tech
a royalty of 2.5% of its annual gross revenue from sales of the platinum fuel
catalysts commencing in 1998. The royalty obligation expires in 2008. CDT may
terminate the royalty obligation to Fuel Tech by payment of $5,454,546 in 2004
and declining annually to $1,090,910 in 2008. CDT as assignee and owner will
maintain the technology at its own expense. Minimum royalties were paid to Fuel
Tech in 2002 and royalties payable to Fuel Tech at December 31, 2003 were
$4,800.

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. RELATED PARTY TRANSACTIONS

In November 2000, Clean Diesel Technologies secured a $1,000,000 term loan
facility at a 10% interest rate from several preferred shareholders, including
Fuel Tech Inc., which pledged $250,000. In 2000 and 2001 CDT drew down the
entire $1,000,000 term loan. As part of the December 2001 private placement of
Common Stock discussed in Note 4, $750,000 of the term loan plus accrued
interest was repaid in common stock. In January 2002, the remaining $250,000
plus accrued interest of the term loan was repaid.

Clean Diesel Technologies has a Management and Services Agreement with Fuel
Tech. The agreement requires CDT to reimburse Fuel Tech for management, services
and administrative expenses incurred on behalf of CDT. CDT agreed to pay Fuel
Tech a fee equal to an additional 3-10% of the costs paid on CDT's behalf,
dependent upon the nature of the costs incurred. One Fuel Tech officer/director
serves as an officer/director of Clean Diesel Technologies. The financial
statements include charges from Fuel Tech of certain management and
administrative costs, which approximate $69,000, $69,000 and $70,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.

Clean Diesel Technologies had a deferred salary plan with its Chief
Executive Officer in which he deferred $62,500 of his annual salary until CDT
reaches $5 million in revenue. This agreement was terminated in March 2001 and
the executive's salary was returned to full pay. No additional expense has been
accrued. At December 31, 2003 and 2002, total obligations were $135,400 in both
years pertaining to this plan.

Clean Diesel Technologies makes annual pension payments or accruals
pursuant to a deferred compensation plan on behalf of its Chief Executive
Officer. The CEO has also agreed to defer payment of the deferred compensation
plan until the Company reaches $5 million in revenue or he retires. In June 2003
the CEO elected to discontinue his deferred compensation plan. For the three
years ended December 31, 2003, $22,900, $50,000 and $50,000 of expense was
recognized each year in connection with the plan. At December 31, 2003 and
2002, total obligations were $305,600 and $282,700, respectively, pertaining to
this plan.

8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS

Clean Diesel Technologies and AMBAC International reached an agreement in
December 1997 under which the parties will jointly share in the cost of
development of the ARIS injector for urea SCR (Selective Catalytic Reduction).
CDT holds the exclusive marketing rights to the injector for a period of five
years subject to certain minimum purchases of injectors from AMBAC. CDT has
agreed to purchase injectors exclusively from AMBAC until November 3, 2002 or to
pay AMBAC for 50% of AMBAC's development cost and a royalty on injectors made
elsewhere for CDT. Clean Diesel Technologies has assigned its rights with AMBAC
to the RJM Corporation as part of its License Agreement. No rights or
licenses have been granted by either party to the other on patents or inventions
conceived prior to the agreement. However, the parties have filed a joint patent
on the specific ARIS injector. CDT has retained all rights to its underlying
patents including the fundamental return-flow injection concept on which the US
patent office has issued a "notice of allowance."

9. RECENT ACCOUNTING PRONOUNCEMENTS

Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued SFAS No. 144. This standard supersedes
SFAS No. 121 and the provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with
regard to reporting the effects of a disposal of a segment of a business. SFAS
No. 144 establishes a single accounting model for assets to be disposed of by
sale and addresses several SFAS No. 121 implementation issues. Clean Diesel
Technologies is required to adopt SFAS No. 144 effective January 1, 2002 and
does not expect the impact of the adoption of SFAS No. 144 to have a material
effect on CDT's results of operations or financial position.

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/03 Ended 6/30/03 Ended 9/30/03 Ended 12/31/03 Total Year
Unaudited Unaudited Unaudited Unaudited 2003
---------------------------------------------------------------------------------

TOTAL REVENUE $ 96 $ 283 $ 99 $ 89 $ 567

GROSS PROFIT * 39 219 52 38 348
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS (907) (585) (664) (1,089) (3,245)
BASIC NET LOSS PER COMMON
SHARE (0.08) (0.05) (0.05) (0.08) (0.26)
DILUTED NET LOSS PER COMMON
SHARE (0.08) (0.05) (0.05) (0.08) (0.26)

--------------------------------------------------------------------------------------------------------------

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/02 Ended 6/30/02 Ended 9/30/02 Ended 12/31/02 Total Year
Unaudited Unaudited Unaudited Unaudited 2002
---------------------------------------------------------------------------------
Total revenue $ 71 $ 19 $ 51 $ 300 $ 441
Gross profit * 27 7 34 287 355
Net loss attributable to
common stockholders (662) (860) (717) (403) (2,642)
Basic net loss per common
share (0.06) (0.08) (0.06) (0.03) (0.23)
Diluted net loss per common
share (0.06) (0.08) (0.06) (0.03) (0.23)
--------------------------------------------------------------------------------------------------------------

Note: The sum of the quarters' earnings per share may not equal the full year per share amounts
* Gross profit is defined as total revenue less cost of revenue.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and executive officers of CDT will be set
forth under the captions "Election of Directors", "Directors and Executive
Officers of Clean Diesel Technologies" and "Committees of the Board" in CDT's
Proxy Statement related to the 2004 annual meeting of stockholders (the "Proxy
Statement") and is incorporated by reference herein.

Clean Diesel has adopted a code of Ethics and Business Conduct (the "Code")
that applies to all employees, officers and Directors, including the Chief
Executive Officer, Chief Financial Officer and Controller. A copy of the code
is available free of charge on written or telephone request to the Secretary of
the Company at the address or telephone number of the Company set out in Clean
Diesel's annual report to Stockholders.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item will be set forth under the caption
"Executive Compensation" in the Proxy Statement and is incorporated by reference
herein excluding, however, the information under the captions "Report of the
Board of Directors on Executive Compensation" and "Performance Graph," which is
not incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item will be set forth under the caption
"Principal Stockholders and Stock Ownership of Management" in the Proxy
Statement and is incorporated by reference herein.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item will be set forth under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated by reference herein.

ITEM 14. CONTROLS AND PROCEDURES

As of the date of this filing, an evaluation was performed under the
supervision and with the participation of the Company's management, including
its CEO and CFO, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Company's management, including its CEO and CFO concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2003.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
December 31, 2003.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) (1) FINANCIAL STATEMENTS

The Financial Statements identified below and required by Part II, Item 8
of this Form 10-K are set forth above.
Report of Independent Auditors
Balance Sheets as of December 31, 2003, and 2002
Statements of Operations for the years ended December 31, 2003, 2002,
and 2001
Statements of Changes in Stockholders' Equity(Deficit) for the years
ended December 31, 2003, 2002, and 2001
Statements of Cash Flows for the years ended December 31, 2003, 2002,
and 2001

(2) FINANCIAL STATEMENT SCHEDULES

Schedules have been omitted because of the absence of the conditions under
which they are required or because the required information where material
is shown in the financial statements or the notes thereto.

(3) EXHIBITS

Exhibit No. Title
------------ -----
*3(i) Certificate of Incorporation.
<><>3(ii) Certificate of Amendment of Certificate of
Incorporation effective June 22,1998.
*3(iii) By-Laws.
++3(iv) Certificate of Designation for Series A Convertible
Preferred Stock.
3(v) Certificate of Amendment of Certificate of Designation
for Series A Convertible Preferred Stock.
<><>3(vi) Second Certificate of Amendment of Certificate of
Designation for Series A Preferred Stock.
@(vii) Third Certificate of Amendment of Certificate of
Designation for Series A Preferred Stock
*4a Specimen Stock Certificate, Common Stock.
++4b Specimen Stock Certificate, Series A Convertible
Preferred Stock.
+10a Assignment of Intellectual Property Rights Fuel-Tech
N.V. to Platinum Plus, Inc. as of November 5, 1997.
+10b Assignment of Intellectual Property Rights Fuel Tech,
Inc. to Clean Diesel Technologies, Inc. as of November
5, 1997.
+10c Assignment Agreement as of November 5, 1997, among
Platinum Plus, Inc., Fuel-Tech N.V., and Clean Diesel
Technologies, Inc.
*****10d 1994 Incentive Plan, as amended through August 8, 1996.
<><>10e Amendment of Section 5.1 of 1994 Incentive Plan,
effective June 9, 1999.
****10f Management Services Agreement between Clean Diesel
Technologies, Inc., Fuel Tech, Inc., and Fuel-Tech N.V.
as of June 1, 1996.
***10g Office Premises Lease of January 26, 1996.
+10h Registration Rights Agreement between Clean Diesel
Technologies, Inc. and Fuel-Tech N.V. of November 5,
1997.
+++10i Registration Rights Agreement between Clean Diesel
Technologies, Inc. and the holders of Series A
Convertible Preferred Stock as of November 11, 1998.
++10j Bridge Loan Agreement between Clean Diesel
Technologies, Inc. and the several lenders set forth on
Schedule A thereto-dated May 8, 1998.
+++10k Loan Note Agreement between Clean Diesel Technologies,
Inc. and the several lenders set forth on Schedule A
thereto-dated November 11, 1998.
*+10l Material Foreign Patents.
++++10m License Agreement as of 31 January 2000 between Clean
Diesel Technologies, Inc. and RJM Corporation.
++++10n NOx Reduction Assets Purchase Agreement as of 31
January 2000 between Clean Diesel Technologies, Inc.
and RJM Corporation.
@10o Loan Facility Agreement of November 14, 2000 with
exhibits.
**23.1 Consent of Auditors, Eisner LLP.
99 Certification Pursuant to 18 U.S.C.Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
_________________
* Previously filed as Exhibit to Registration Statement on Form S-1
of August 16, 1995, No. 33-95840.
** Filed herewith.
*** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1995.
**** Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1996.
***** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1996.
<> Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1998.
+ Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1997.
++ Previously filed as Exhibit to Form 8-K dated May 26, 1998.
+++ Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1998.
<><> Previously filed as Exhibit to Forms 10-K for the year ended
December 31, 2000.
++++ Previously filed as Exhibit to Form 8-K dated February 1, 2000.
@ Previously filed as Exhibit to Form 10K for the year ended
December 31, 2002.

(b) REPORTS ON FORM 8-K

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Clean Diesel Technologies, Inc. has duly caused this
amendment to the report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.

CLEAN DIESEL TECHNOLOGIES, INC.

As of December 30, 2004 By:/s/ Bernhard Steiner
---------------------------- -----------------------------
Date Bernhard Steiner
Chief Executive Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons on behalf of Clean Diesel Technologies, Inc. and in the
capacities and on the date indicated have duly signed this report below.

/s/ Bernhard Steiner Chief Executive Officer and Director
-----------------------------
Bernhard Steiner

/s/ Jeremy D. Peter-Hoblyn Director
-----------------------------
Jeremy D. Peter-Hoblyn

/s/ David W. Whitwell Chief Financial Officer, Vice President, and
--------------------- Treasurer
David W. Whitwell (principal financial and accounting officer)

/s/ John A. de Havilland Director
----------------------------
John A. de Havilland

/s/ Derek R. Gray Director, Non-Executive Chairman of the Board
----------------- of Directors
Derek R. Gray

/s/ Charles W. Grinnell Director, Vice President, and Corporate
-------------------------- Secretary
Charles W. Grinnell

/s/ James M. Valentine Director and President
-------------------------
James M. Valentine

Dated: As of December 30, 2004