<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended March 31, 1997

                                       or

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

         Commission file number:      0-27432
                                      -------

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

         Delaware                                                06-1393453
         --------                                                ----------
(State of Incorporation)                                      (I.R.S. Employer
                                                             Identification No.)

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

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


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


                            Yes  [X]     No   [ ]

As of May 13, 1997, there were outstanding 2,516,666 shares of Common Stock,
par value $0.05 per share, of the registrant.


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

<PAGE>



                         CLEAN DIESEL TECHNOLOGIES, INC.
                          (A Development Stage Company)
                 Form 10-Q for the Quarter Ended March 31, 1997

                                      INDEX
<TABLE>
<CAPTION>

                                                                                           Page
                                                                                           ----

PART I.  FINANCIAL INFORMATION

Item 1.           Financial Statements (Unaudited)

<S>               <C>                                                                      <C>
                  Balance Sheets as of March 31, 1997                                        1
                  and December 31, 1996

                  Statements of Operations for the Three                                     2
                  Months Ended March 31, 1997 and 1996
                  and for the Period from January 1, 1992
                  through March 31, 1997

                  Statements of Cash Flows for the Three                                     3
                  Months Ended March 31, 1997 and 1996
                  and for the Period from January 1, 1992
                  through March 31, 1997

                  Note to Financial Statements                                               4

Item 2.           Management's Discussion and Analysis of                                    6
                  Financial Condition and Results of Operations


PART II. OTHER INFORMATION

Item 1.           Legal Proceedings                                                          8
Item 2.           Changes in Securities                                                      8
Item 3.           Defaults on Senior Securities                                              8
Item 4.           Submission of Matters to a Vote of Security Holders                        8
Item 5.           Other Information                                                          8
Item 6.           Exhibits and Reports on Form 8-K                                           8


SIGNATURES

</TABLE>

<PAGE>

Part I - FINANCIAL INFORMATION
Item 1.  Financial Statements


                         CLEAN DIESEL TECHNOLOGIES, INC.
                          (A Development Stage Company)
                                 BALANCE SHEETS
<TABLE>
<CAPTION>


                                                               March 31,            December 31,
                                                                 1997                   1996
                                                             ------------           -----------
                                                             (Unaudited)
Assets
Current assets:
<S>                                                          <C>                    <C>        
Cash and cash equivalents                                    $  1,943,000           $ 3,270,000
Short-term investments                                          2,029,000             2,000,000
Inventories                                                       118,000               103,000
Other current assets                                              303,000               222,000
                                                             ------------           -----------

Total current assets                                            4,393,000             5,595,000

Other assets                                                       81,000                82,000
                                                             ------------           -----------

Total assets                                                 $  4,474,000           $ 5,677,000
                                                             ============           ===========


Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses                        $    716,000           $   741,000
Loan payable to Fuel-Tech N.V.                                    495,000               745,000
                                                             ------------           -----------


Total current liabilities                                       1,211,000             1,486,000


Stockholders' equity:
Preferred stock, par value $.05 per share, authorized
   100,000 shares, no shares issued and outstanding                    --                    --
Common stock, par value $.05 per share, authorized
   5,000,000 shares, issued and outstanding
   2,516,666 and 2,500,000 shares                                 126,000               125,000
Additional paid-in capital                                     11,187,000            11,155,000
Deficit accumulated during development stage                   (8,050,000)           (7,089,000)
                                                             ------------           -----------

Total stockholders' equity                                      3,263,000             4,191,000
                                                             ------------           -----------

Total liabilities and stockholders' equity                   $  4,474,000          $  5,677,000
                                                             ============          ============

See note to financial statements.
</TABLE>

                                      -1-


<PAGE>


                         CLEAN DIESEL TECHNOLOGIES, INC.
                          (A Development Stage Company)
                            STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>


                                                                                           Period from
                                                          Three Months Ended             January 1, 1992
                                                                March 31                     through
                                                       1997              1996             March 31, 1997
                                                   -----------       -----------          --------------

<S>                                                <C>               <C>                  <C>         
Sales                                              $    40,000       $        --          $     40,000

Costs and expenses:
Cost of sales                                           23,000                --                23,000
General and administrative                             496,000           457,000             3,808,000
Research and development                               457,000           224,000             3,789,000
Patent filing and maintenance                           75,000            56,000               776,000
                                                   -----------       -----------           -----------

Loss from operations                                 1,011,000           737,000             8,356,000
Interest income                                        (64,000)         (116,000)             (480,000)
Interest expense to Fuel-Tech N.V.                      14,000            15,000               174,000
                                                   -----------       -----------           -----------

Net loss during development stage                  $   961,000       $   636,000          $  8,050,000
                                                   ===========       ===========          ============

Net loss per common share                          $      0.38       $      0.25                   N/A
                                                   ===========       ===========          ============

Average number of common shares
  outstanding                                        2,512,000         2,500,000                   N/A
                                                   ===========       ===========          ============


See note to financial statements.
</TABLE>

                                      -2-

<PAGE>



                         CLEAN DIESEL TECHNOLOGIES, INC.
                          (A Development Stage Company)
                            STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                                    Period from
                                                                      Three Months Ended          January 1, 1992
                                                                           March 31                  through
                                                                   1997              1996          March 31, 1997
                                                                ----------       -----------       --------------

Operating activities
<S>                                                             <C>              <C>                 <C>         
Net loss                                                        $ (961,000)      $  (636,000)        $(8,050,000)
Adjustments to reconcile net loss to
   net cash used in operating activities:
   Depreciation                                                      6,000             2,000              18,000
   Issuance of stock purchase warrants                              30,000                --              60,000
   Changes in operating assets and liabilities:
     Inventories                                                   (15,000)          (28,000)           (118,000)
     Other current assets                                          (81,000)          (76,000)           (303,000)
     Accounts payable and accrued expenses                         (25,000)          (57,000)            716,000
     Other assets                                                       --           (18,000)            (18,000)
     Due to Fuel-Tech N.V.                                              --           381,000                  --
                                                                ----------       -----------         -----------
Net cash used in operating activities                           (1,046,000)         (432,000)         (7,695,000)
                                                                ----------       -----------         -----------

Financing activities
Proceeds from Rights Offering, net of
  $630,000 of brokerage commissions
  in 1995                                                               --         2,018,000          11,156,000
Expenses of Rights Offering                                             --                --            (425,000)
Repayment of expenses of Rights Offering
   paid by Fuel-Tech N.V.                                               --                --            (200,000)
Issuance of common stock to parent                                      --                --             250,000
Net parent company investment                                           --                --             469,000
Proceeds of loan from Fuel-Tech N.V.                                    --                --           2,874,000
Repayment of loan to Fuel-Tech N.V.                               (250,000)               --          (2,379,000)
Proceeds from exercise of stock options                              3,000                --               3,000
                                                                ----------       -----------         -----------

Net cash (used in) provided from financing activities             (247,000)        2,018,000          11,748,000
                                                                ----------       -----------         -----------
  
Investing activities
Purchase of short-term investments                                      --                --          (2,000,000)
Accrued interest on short-term investments                         (29,000)               --             (29,000)
Purchase of fixed assets                                            (5,000)          (20,000)            (81,000)
                                                                ----------       -----------         -----------
Net cash used in investing activities                              (34,000)          (20,000)         (2,110,000)

Net (decrease) increase in cash
   and cash equivalents                                         (1,327,000)        1,566,000           1,943,000
Cash and cash equivalents at beginning
   of period                                                     3,270,000         6,848,000                  --
                                                                ----------       -----------         -----------

Cash and cash equivalents at
   end of period                                                $1,943,000       $ 8,414,000         $ 1,943,000
                                                                ==========       ===========         ===========

See note to financial statements.
</TABLE>

                                      -3-

<PAGE>


                         CLEAN DIESEL TECHNOLOGIES, INC.
                          NOTE TO FINANCIAL STATEMENTS
                                 MARCH 31, 1997
                                   (Unaudited)


BASIS OF PRESENTATION

         The accompanying unaudited, condensed, consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
All such adjustments are of a normal recurring nature. Operating results for
the three month period ended March 31, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1996.

         Clean Diesel Technologies, Inc. ("CDT" or the "Company") is a
development stage enterprise and its efforts from January 1, 1992 through March
31, 1997 have been devoted to the research and development of a platinum fuel
catalyst ("PFC") for internal combustion engines and NOx reduction systems for
diesel engines, some of which are licensed to the Company by Fuel Tech. There
were no material activities related to the Company's business prior to 1992.

         The Company's PFC technology will require additional research and
development testing to determine its commercial viability. The Company's
management believes that the Company has adequate capital to fund its
operations through March 31, 1998 but that additional financing will be
required in the future to commercialize its technologies.

         In 1996 and 1997 net loss per common share is based on the average
number of shares of common stock outstanding during each period. Common
equivalent shares are not included in the per share calculations where the
effect of their inclusion would be antidilutive.

EARNINGS PER SHARE

         In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company as of December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements, primary earnings per share will
be replaced with basic earnings per share. In computing basic earnings per
share the dilutive effect of stock options will be excluded. The impact of
Statement 128 on the computation of primary earnings per share (to be replaced
with basic earnings per share) and fully diluted earnings per share is not
expected to be material.

SHORT-TERM INVESTMENTS

         In June, 1996, the Company purchased a discount note of the United
States Federal Home Loan Bank. The note matures in June, 1997, and has a yield
to maturity of 5.84%. The Company intends to hold this investment until its
maturity.

INVENTORIES

         Inventories are stated at the lower of cost or market and consist of
finished product.

                                      -4-
<PAGE>


WARRANTS TO PURCHASE COMMON SHARES

         In March 1997, in consideration of his undertaking to assist the
Company in obtaining sources of permanent financing, the Company granted a
director of the Company a warrant to purchase 25,000 shares of the Company's
Common Stock for $10.00 per share, a 142% premium over fair value. The warrant
expires on March 17, 2004. Included in the Company's Statement of Operations
for the three months ended March 31, 1997 is $30,000 of expense related to the
grant of this warrant.



                                      -5-

<PAGE>




                         CLEAN DIESEL TECHNOLOGIES, INC.


Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations


FORWARD-LOOKING STATEMENTS

         Statements in this Form 10-Q which are not historical facts, so-called
"forward-looking statements," are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Investors are
cautioned that all forward-looking statements involve risks and uncertainties,
including those detailed in the Company's filings with the Securities and
Exchange Commission. See Item 1 "Risk Factors of the Business" and also Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Form 10-K for the year ended December 31, 1996.


RESULTS OF OPERATIONS

         Sales and Cost of Sales for the first quarter of 1997 related to the
Company's first commercial sale.

         General and administrative expenses increased to $496,000 in the first
quarter of 1997 from $457,000 in the first quarter of 1996. The increase was
due to a small increase in administrative personnel, management being
associated with the Company on a full-time basis, and the lease of the
Company's separate office for the entire first quarter of 1997.

         Research and development expenses for the first quarter of 1997
increased to $457,000 from $224,000 in the first quarter of 1996. In the 1997
period, the Company completed the testing on its PFC for gasoline-fueled
vehicles in conjunction with Holt Lloyd International Ltd., performed
additional engine testing on its PFC as required by the EPA of all fuel
additives, and funded the development and testing of certain NOx control
technologies. Additionally, the first quarter of 1997 included payroll and
related expenses of three senior technical employees hired during the last nine
months of 1996.

         Patent filing and maintenance expenses were $75,000 in the first
quarter of 1997, and $56,000 in the first quarter of 1996. The increase in the
first quarter of 1997 was due in part to the preparation and filing of new
patent applications, both in the United States and overseas.

         Interest income decreased to $64,000 in the first quarter of 1997 from
$116,000 in the first quarter of 1996. The decrease was due to lower cash
balances in the first quarter of 1997 versus 1996.


LIQUIDITY AND SOURCES OF CAPITAL

         The Company is a development stage company and has incurred losses
since inception aggregating $8,050,000 at March 31, 1997. The Company expects
to incur losses through the foreseeable future as it further pursues its
research and development efforts and the commercialization of its products. In
December 1995, the Company raised approximately $10.5 million, net of offering
expenses and broker dealer commissions of approximately $1.3 million, through a
Rights Offering of its shares by Fuel Tech. Approximately $2 million of this
amount was received in January, 1996.


                                      -6-
<PAGE>


         Total cash, cash equivalents and short-term investments were
approximately $4.0 million and $5.3 million at March 31, 1997 and December 31,
1996, respectively. Working capital at March 31, 1997 was approximately $3.2
million, a decrease of approximately $900,000 from December 31, 1996. The
decrease in cash, cash equivalents, short-term investments and working capital
was the result of funds used to fund the Company's operations in the first
three months of 1997.


         The Company believes that it has sufficient cash balances to fund its
requirements through March 31, 1998. The Company will, however, require
additional financing in the future, and expects to meet its future cash needs
through private placements or a secondary offering of its shares. The amount
management seeks to raise will depend on the Company's stock price, market
conditions, and the status of the development and commercialization of the
Company's technologies. However, there is no guarantee that the Company will be
able to raise such capital on terms satisfactory to the Company.





                                      -7-

<PAGE>


Part II. OTHER INFORMATION

Item 1.  Legal Proceedings
         None

Item 2.  Changes in Securities
         None

Item 3.  Defaults on Senior Securities
         None

Item 4.  Submission of Matters to a Vote of Security Holders
         None

Item 5.  Other Information
         None

Item 6.  Exhibits and Reports on Form 8-K
         a.       Exhibits
                  10(h) -  Management and Services
                           Agreement between Registrant and
                           Fuel Tech, Inc. as of June 1, 1996

         b.       Reports on Form 8-K
                  None


                                      -8-


<PAGE>


                         CLEAN DIESEL TECHNOLOGIES, INC.
                                   SIGNATURES



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



                         CLEAN DIESEL TECHNOLOGIES, INC.



Date:  May 13, 1997            By:  /s/Jeremy D. Peter-Hoblyn
                                    ------------------------------------------
                                    Jeremy D. Peter-Hoblyn
                                    President and Chief Executive Officer



Date:  May 13, 1997            By:  /s/Scott M. Schecter
                                    ------------------------------------------
                                    Scott M. Schecter
                                    Vice President and Chief Financial Officer