<PAGE>
                                                                      EXHIBIT 19
Clean Diesel Technologies, Inc.


1996 Annual Report



                                      LOGO
<PAGE>

LOGO
Clean Diesel Technologies(TM) (NASDAQ: CDTI)


The Company is developing and commercializing proprietary technologies, products
and systems to improve efficiency and to reduce emissions from diesel and
gasoline engines. 

The Company is focused on two areas: 
PLATINUM FUEL CATALYST (PFC)
The Company's PFCs are marketed under the Platinum Plus(R) trademark. They are
organo-metallic compounds of platinum group metals. Using the PFC, minute
amounts of platinum catalyst are continually deposited in the engine, thereby
improving combustion within the engine. They then travel through to the exhaust
where they increase the catalytic activity of the exhaust treatment system.

The PFCs enhance the performance of diesel catalytic oxidizers and particulate
traps as well as gasoline catalytic converters.

Sales of the Platinum Plus products have started in 1997 through a cooperative
marketing agreement with Holt Lloyd International Ltd., U.K.

The Company has several joint programs under way with engine companies, additive
companies, oil companies and emission control companies.

NOx CONTROL PRODUCTS 
In cooperation with others, the Company is developing the Selective Catalytic
Reduction (SCR) system for diesel engines using urea as the reagent. The system
reduces NOx by 65%-90% and allows the engine manufacturer to make significant
improvements in fuel economy.

Sales of these products are expected to start in 1998.

The Company has announced a cooperative partnership with the Engelhard
Corporation to develop and commercialize the urea SCR system for stationary
diesels. It may be expanded to mobile applications.



<PAGE>

Chairman's Letter

1996 was an excellent year for the Company. It continued development of its
technologies and was successful in building alliances with several of the
leading companies in its industry.

         At the start of 1996 the Company had $8.9 million in cash and
receivables from the Rights Offering and $0.7 million in debt. Expenses and
costs of technical and market development for the year at $3.8 million were
within budget, and as of January 1997 CDT had $5.3 million in cash and
short-term investments and $0.7 million in debt.

         The Company began selling its Platinum Fuel Catalysts for diesel
products under the Platinum Plus trademark early in 1997. Last year it also
developed a Platinum Plus gasoline product, which maintains or rejuvenates
catalytic activity of automotive catalytic converters -- a product unique in its
field. The Company expects its gasoline product to be launched in the near
future. The initial focus for both the diesel and gasoline products is the
after-market, for which the Company has entered into a marketing agreement with
Holt Lloyd International Ltd. for Europe and Asia. Further marketing agreements
for North, Central and South America are under discussion with interested
parties. The Company is also exploring opportunities for selling its fuel
additives to the premium fuels market through arrangements with fuel refineries
and additive companies.

         The Platinum Fuel Catalysts are proving to be synergistic with
"after-engine" emission control systems by enhancing performance and extending
durability of these systems. This applies to the catalytic oxidizers and
particulate traps for diesel engines, and to three-way catalytic converters
(autocat) for gasoline engines.

         In recent years diesel engine manufacturers have focused on reducing
emissions by changes in engine design. Great improvements have been achieved,
yet much more has to be done to meet the levels engine manufacturers have agreed
to meet in the future for reduction of nitrogen oxides (NOx). Engine design
changes which reduce NOx increase fuel consumption and output of particulates
(PM) and hydrocarbons (HC), so activity is shifting to after-engine NOx
reduction systems, allowing the engine to be tuned for fuel consumption
improvements. The Company is developing technology for after-engine NOx
reduction, and has formed

                                                                               1

<PAGE>
Chairman's Letter (continued)

a cooperative program with Engelhard and Nalco Fuel Tech to develop and
commercialize NOx reduction systems for stationary diesel engines. Joint engine
tests have shown the ability to reduce NOx by 65%-90%.

         Sales of these NOx systems may start in 1998 and will take time to
build up. The world production of diesel engines is now some 8 million units per
year, so the potential market is very significant, and there are also
substantial opportunities in the retrofit market to control emissions from
existing engines.

         We have been able to build up our staff by attracting some key
individuals from the industry. In addition, the Company continues to strengthen
its patent and intellectual property portfolio, a key asset for a technology
company. To all the staff (three of whom have been associated with the
technologies for several years) I offer my thanks as well as to the shareholders
who have supported the Company since its founding.

/s/ Ralph E. Bailey
---------------------------
Ralph E. Bailey, Chairman

2
<PAGE>

Operations Review

After completing the Rights Issue and spin-off from Fuel-Tech N.V. in December
1995, and repaying $2.1 million of debt, Clean Diesel Technologies, Inc. (CDT)
started last year with net cash and receivables from the Rights Offering of
about $8.9 million, to be primarily applied to research and development, field
trials, marketing, and patent prosecution and maintenance. During 1996 the
Company began exploring potential collaborations with engine manufacturers,
additive companies, catalyst companies and oil companies, and focused on
combining its technology with new engine designs. Efforts were also focused on
developing sales for the Platinum Fuel Catalyst (PFC) and on expanding the
technology into the control of nitrogen oxides (NOx) for diesel engines.

The Company made great progress in 1996 both in marketing its PFC and in proving
and extending its technologies. Marketing outlets were established for the PFC
under the Platinum Plus label for diesel fuels. The Company also developed a
Platinum Plus product for gasoline. Both Platinum Plus products are being
launched in Europe in the near term.

The Company made significant progress in establishing a second business line in
NOx reduction during 1996. The first focus is on NOx reduction for large
stationary engines for power generation. CDT formed a collaborative development
and marketing agreement with Engelhard and Nalco Fuel Tech to commercialize the
NOxOUT(R) SCR technology for stationary diesels. Diesel engine generators in the
1 to 10 Megawatt range that can be installed quickly are now a very
cost-effective means of generating power, so their use is expected to increase
substantially in the next few years. The Company is also exploring potential
collaborations to commercialize NOx control technologies in the heavy-duty
transport sector.

PLATINUM FUEL CATALYSTS

These are fuel additives comprised of platinum, rhodium or palladium which are
used in minute concentrations in fuel (costing a few cents per gallon of fuel
treated) to improve combustion, reduce emissions and improve the performance and
reliability of emission control equipment. 

PLATINUM PLUS - EUROPE AND ASIA
In September 1996 CDT entered into an agreement with Holt Lloyd International
Ltd., the world's largest car care company, to market the PFC under the Platinum
Plus trademark for diesel fuel in Europe and Asia. The product is now on sale in
the first market, France, as a packaged product sold to consumers through major
retail outlets and service stations. Rollout in additional markets is planned
through 1997/1998. 

The Holt Lloyd agreement provided for joint funding of the development of a
gasoline product. The consequent testing proved that PFCs significantly improve
the performance of catalytic converters in gasoline engines, especially when
they are aged. There are no similar products addressing this market. Holt Lloyd
now anticipates launching a gasoline product containing the Company's PFC in the
next few months. The Company considers the after-market to be a most valuable
market in which to create consumer awareness while generating near-term cash
flow. 

PLATINUM PLUS - THE AMERICAS 
This market is not covered by the agreement with Holt Lloyd. Discussions are in
progress with several potential partners for the distribution and marketing of
Platinum Plus in the Americas.

PFCS FOR PARTICULATE TRAPS AND CATALYTIC OXIDIZERS
The most effective method of reducing diesel particulate (smoke) is by
particulate trap or catalytic oxidizer. There are limitations when these devices
are used alone which the PFC has been proven to ameliorate. In December CDT
announced the results of two separate tests on typical London bus engines, one
on a Gardner engine and one on a Cummins engine. The combination of PFC and
catalytic oxidizer established new levels of performance in both

                                                                               3


<PAGE>

cases. This work was conducted in conjunction with Lubrizol's Engine Control
Systems subsidiary, a leading supplier of oxidizers and traps. Joint marketing
efforts to fleets are expected to commence in 1997. The company also reached
agreement in principle with Cummins Engine's Advanced Technology Group to
develop the application of the PFC with oxidizers and traps for a new generation
of low-emission engines. Work commences in 1997.

In recent years there has been growing focus on the application of particulate
traps to control emissions from diesel engines. Indeed, the U.K. Government
announced in the November 1996 budget a substantial rebate in excise duty for
vehicles using particulate traps beginning January 1998. The PFC significantly
improves the performance of particulate traps. Cooperative programs are under
way with several suppliers of trap systems. 

PREMIUM DIESEL 
The use of PFC in both gasoline and diesel engines is showing a consistent
pattern of increasing the activity of catalytic surfaces and thus increasing
their lives and reducing emissions overall. Discussions are under way in the
U.S., Europe and the Pacific Rim with oil companies interested in the PFC for
application across a range of engines, fuels and markets. Significant fleet
testing commenced in July 1996 and will continue in 1997 to support Premium
Diesel marketing efforts with oil companies. The effectiveness of the PFC in
engines not fitted with catalysts or traps is proving to be variable in fleet
tests, but many new vehicles are fitted with either oxidizers, converters or
traps where PFCs perform consistently. Engine manufacturers are increasingly
inclined to adopt one of these systems.

TOTAL MARKET FOR PFCS 
The total worldwide usage of diesel and gasoline fuels is in the order of 350
billion gallons per annum of which approximately 150 billion gallons are diesel
and 200 billion gallons are gasoline. At a projected treatment cost of 2 cents
(U.S.)/gallon of fuel, each 1% of the market represents a $70 million revenue
opportunity.


HEALTH EFFECTS AND THE USE OF METALLIC ADDITIVES
Certain metallic additives have come under scrutiny for their possible effects
on health. While PFCs are already registered in the U.S. and did not strictly
need to be registered in Europe, where there are no rules for testing such
additives, the Company considered it prudent to take a much more proactive view.
Therefore, in 1996 the Company began discussions with the Ministry of Transport
and the Ministry of Health, regulatory authorities in the United Kingdom, asking
for specific consent to the use of platinum metal additives in diesel fuel. In
December 1996 the following response was received from the United Kingdom
Ministry of Health's Committee on Toxicity: "The Committee is satisfied that the
platinum emissions from vehicles would not be in an allergenic form and that the
concentrations were well below those known to cause human toxicity." In the U.S.
the Company is planning for additional engine testing to maintain its EPA
registration as required of all fuel and fuel additive manufacturers. Engine
test results show that the amount of platinum emitted from use of the Company's
PFC is roughly equivalent to platinum attrition from automotive catalytic
converters. 

NOx REDUCTION SYSTEMS AND ADDITIVES
NOx emissions from diesel engines represent as much as half of the emissions
from the transport sector in some parts of the U.S. and Europe. Diesel engines
emit much more NOx than gasoline vehicles. The catalytic converter systems used
in gasoline engines to reduce NOx do not work in diesel engines. This presents a
great opportunity since, while much can be done by engine design changes, this
is not enough for many applications. CDT is working on two programs to
commercialize NOx reduction systems:

4

<PAGE>

NOx REDUCTION FOR HEAVY-DUTY DIESEL ENGINES
In December CDT reached an agreement with Engelhard and Nalco Fuel Tech to
commercialize a system of Selective Catalytic Reduction (SCR) for a manufacturer
of power-generation diesels. The technology for this system comprises a reagent
metering and gasification unit (CDT/Nalco Fuel Tech) followed by a catalyst
(Engelhard) and system reagent supply (CDT/Nalco Fuel Tech). Development
programs are in progress, and performance and durability tests are scheduled for
1997. This system has demonstrated up to 90% NOx reduction in joint engine test
programs. It is synergistic in that it will have the economic benefit of
allowing manufacturers to optimize fuel economy while also minimizing NOx and
particulate emissions. Furthermore, this system does not require very low-sulfur
fuel. Based on interest in the U.S. and Europe, the partners are exploring
expanding the agreement to the automotive sector.

RETROFIT NOx REDUCTION FOR HEAVY-DUTY DIESEL ENGINES
CDT conducted a cooperative program with the U.S. EPA and the Department of the
Navy in 1996 to demonstrate the application of LOE-NOx(TM) diesel fuel and
water emulsion technology as a retrofit technology for harbor vessels. The types
of engines used in these vessels are of similar size and type to heavy-duty
transport engines. The parties are exploring a move to shipboard evaluation in
1997. LOE-NOx technology involves the supply of blending equipment and specialty
chemicals to dispense water-in-oil and maintain lubricity. In addition, the
Company is working with another major U.S. engine manufacturer for application
of the LOE-NOx technology to stationary diesels used for power generation.

MARKET FOR NOx REDUCTION SYSTEMS AND ADDITIVES
CDT finds the NOx control market attractive; there are more than 8 million
diesel engines of all types manufactured annually. These new engines represent a
very large market initially for power generation, starting in 1998, and then for
off-road vehicles and heavy-duty transport vehicles after the year 2000. Since
the average life of a diesel engine is between 10 and 30 years, there are also
substantial markets for retrofit applications because older engines are high NOx
producers and regulations are tightening for existing vehicles as well.

TECHNOLOGY
During 1996 CDT filed an additional five patent applications and now has a total
of 24 patents granted and 21 patent applications. These patents and patent
applications cover means of controlling the four principal emissions from diesel
engines (NOx, particulates, CO and HC). CDT's focus is on integrating its
technologies with other emission control systems to work with the engine
manufacturers and emissions control companies in optimizing specific systems for
each engine type. This broad patent position supports and protects CDT in its
cooperative efforts with the major players in the market. Fundamental patents
were issued in 1996 covering the use of the PFC with oxidizers. Four new
applications were filed on advanced urea SCR technology for NOx reduction.

BUSINESS STRUCTURE 
The Company has outsourcing arrangements with two companies in the precious
metal refining industry and may make arrangements with others. The Company has
made the product itself in the past, but considers outsourcing to a precious
metal refinery to be more cost effective. 

The Company's strategy is to market its technologies indirectly through additive
companies, emission control (catalyst) companies, engine manufacturers and oil
companies by integrating its technologies into the new low-emission engine and
after-engine systems now being developed. If this strategy proves successful,
the Company will not likely need to make significant increases in its marketing
staff.

                                                                               5

<PAGE>

Clean Diesel Technologies, Inc.

Management's Discussion and Analysis of
Financial Condition and Results of Operations

The Company was incorporated on January 19, 1994, as a wholly owned subsidiary
of Fuel-Tech N.V. ("Fuel Tech"). Predecessor financial information included
below for the period January 1, 1992, through January 18, 1994, reflects the
Company's operations prior to incorporation, at which time it was accounted for
as part of Fuel Tech. Effective December 12, 1995, Fuel Tech completed a Rights
Offering of the Company's common shares, with Fuel Tech retaining a 27.6%
ownership interest in the Company. Net proceeds of the Rights Offering of $10.5
million were contributed to the Company by Fuel Tech. The Company is a
development stage enterprise and its efforts from January 1, 1992 (date of
inception), to the present time have been devoted to the research and
development of a Platinum Fuel Catalyst ("PFC") and nitrogen oxide ("NOx")
reduction technologies to reduce emissions from diesel engines. There were no
material activities related to the Company's business in 1990 or 1991. Prior to
1990, the activities of Fuel Tech (the Company's parent) were focused on other
applications of Platinum Fuel Catalysts that are unrelated to the Company's
present or contemplated business and were not material to the overall
development of the Company's product. Therefore, such costs have been excluded
from the determination of the Company's development costs.

RESULTS OF OPERATIONS
1996 VERSUS 1995
General and administrative expenses increased to $1,842,000 in 1996 from
$963,000 in 1995. The increase was due to expenses associated with the Company
establishing its offices, the recruitment and hiring of additional staff and
increased management and administrative costs provided by Fuel Tech pursuant to
a management and services agreement. In the first six months of 1996, a greater
portion of Fuel Tech management's time was spent on the Company's business
activities, which included research programs, establishing relationships with
potential marketing partners and hiring staff. The Company established its own
payroll and hired some of these executives full time in August 1996. The Company
anticipates a modest increase in general and administrative expenses in 1997,
primarily attributable to employees hired during 1996 being employed for the
full year in 1997, as well as a small increase in headcount required to support
an anticipated increase in commercial activities in 1997. 

Research and development expenses were $1,747,000 in 1996 versus $796,000 in
1995. The increase is primarily due to significant testing on light-duty and
heavy-duty engines using the Company's PFC alone and with a catalytic oxidizer.
These test programs were conducted in conjunction with potential marketing
partners. The Company also hired three senior technical employees during the
year, and its senior officers, who were Fuel Tech employees in 1995, spent a
greater percentage of their time developing and managing research projects in
1996 than in 1995. The Company anticipates an increase in research and
development expenses in 1997, primarily due to testing required by government
regulators on the health effects of the Company's PFC, as well as the
compensation of senior technical personnel, hired in 1996, who will be
developing and managing research programs for the full year in 1997.

Patent filing and maintenance expenses were $223,000 in 1996 versus $199,000 in
1995. The increase was primarily attributable to the preparation and filing of
new patent applications. 

1995 VERSUS 1994 
General and administrative expenses increased to $963,000 in 1995 from $507,000
in 1994. The increase was due to an increase in expenses for management and
administrative costs provided by Fuel Tech. In 1995 a greater portion of Fuel
Tech management's time was spent on the Company's business activities, which
included research programs, the development of sources of supply of the
Company's PFC in both the United States and South Africa, establishing
relationships and joint research programs with potential marketing partners,
raising funds through a public offering and patent filings.

Research and development expenses were $796,000 in 1995, compared with $441,000
in 1994. The increase was primarily due to charges related to the completion of
test programs that commenced in 1994 and significant testing of the Company's
PFC on light-duty diesel vehicles. Additionally, more of Fuel Tech management's
time was devoted to the planning, supervision and evaluation of these research
programs. 

Patent filing and maintenance increased to $199,000 in 1995 from $158,000 in
1994. The increase was primarily due to the preparation and filing of new patent
applications.


6

<PAGE>

LIQUIDITY AND SOURCES OF CAPITAL
The Company is a development stage company and has incurred losses since
inception aggregating $7,089,000 at December 31, 1996. The Company expects to
incur losses through the foreseeable future as it further pursues its research,
development and commercialization efforts. 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. 

For the years ended December 31, 1994, 1995 and 1996, and for the period from
January 1, 1992, through December 31, 1996, the Company used cash of $916,000,
$1,810,000, $3,520,000 and $6,715,000, respectively, in operating activities.
During 1996 the Company expended $76,000 for the purchase of furniture, fixtures
and computer equipment. In 1997 the Company expects such expenses to be less
than 1996. In 1997 the Company expects to hire additional technical and
marketing personnel. Additionally, the Company has budgeted increased spending
in 1997 and 1998 on research and development programs over 1996. Some of these
programs will be jointly funded by other companies. The Company believes that it
has sufficient cash balances to fund its requirements through March 31, 1998.
The Company does have the ability to control much of its research and
development costs to conserve cash, either by delaying or canceling certain
research programs. At December 31, 1996, the Company was committed to fund
$89,000 for research and development which will be completed in the first half
of 1997. The Company will, however, require additional financing in the future.
In order to meet such needs, management anticipates pursuing raising funds in
1997 through a private placement 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.

At December 31, 1995 and 1996, the Company had cash, cash equivalents and
short-term investments of $6,848,000 and $5,270,000, respectively. Working
capital at those dates was $8,395,000 and $4,109,000, respectively. In December
1995 the Company repaid Fuel Tech approximately $2.3 million in loans and
advances. At December 31, 1996, the Company owed Fuel Tech $745,000 under a
demand note, bearing interest at 8% per annum. Subsequent to December 31, 1996,
$250,000 of such amount was repaid.

Effective as of October 28, 1994, Fuel Tech licensed to the Company all patents
and rights associated with its Platinum Fuel Catalyst technology. In exchange
for the technology license, the Company will pay Fuel Tech a royalty of 2.5% of
its annual gross revenue from sales of the Platinum Fuel Catalyst, commencing in
1998. The license agreement expires in 2008, at which time the Company will have
the right to have Fuel Tech assign it the underlying technology. The Company may
purchase the technology subject to the license agreement at any time prior to
2008 for $12 million. The license agreement requires the Company to maintain the
technology at its own expense. 

In September 1996 the Company entered into a supply agreement with Holt Lloyd
International Ltd. ("Holt") of the United Kingdom to sell the Company's PFC
under the Platinum Plus(R) trademark for use with Holt's fuel additives in the
consumer car care market for aftertreatment of fuel for both new and used diesel
engines in vehicles. The agreement covers territories worldwide except for
North, Central and South America. This agreement has a 10-year term with
extension options. The exclusivity of the agreement is determined by the
attainment (or reasonable effort toward the attainment) of predetermined minimum
performance levels for each territory on a calendar-year basis. The Company's
PFC was test-marketed by Holt in Europe in the fourth quarter of 1996, with
commercial sales to commence in the first quarter of 1997. 

FORWARD-LOOKING INFORMATION
From time to time, information provided by the Company, statements made by its
employees or information included in its filings with the Securities and
Exchange Commission (including this Annual Report) may contain statements which
are not historical facts, so-called "forward-looking statements." These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company's actual
future results may differ significantly from those stated in any forward-looking
statements. Forward-looking statements involve a number of risks and
uncertainties, including, but not limited to, product demand, pricing, market
acceptance, litigation, risk of dependence on significant customers, third party
suppliers and intellectual property rights, risks in product and technology
development and other risk factors detailed in this Annual Report and in the
Company's other Securities and Exchange Commission filings.

                                                                               7
<PAGE>

Selected Financial Data                     (in thousands except per share data)

The Company was incorporated on January 19, 1994, as a wholly owned subsidiary
of Fuel Tech. Predecessor financial information included below for the period
January 1, 1992, through January 18, 1994, reflects the Company's operations
prior to incorporation, at which time it was accounted for as part of Fuel Tech.
Effective December 12, 1995, Fuel Tech completed a Rights Offering of the
Company's common shares, with Fuel Tech retaining a 27.6% ownership interest in
the Company. The Company is a development stage enterprise and its efforts from
January 1, 1992, to the present time have been devoted to the research and
development of a Platinum Fuel Catalyst and nitrogen oxide reduction
technologies to reduce emissions from diesel engines. There were no material
activities related to the Company's business in 1991. Prior to 1990, the
activities of Fuel Tech were focused on other applications of Platinum Fuel
Catalysts that are unrelated to the Company's present or contemplated business
and were not material to the overall development of the Company's product.
Therefore, such costs have been excluded from the determination of the Company's
development costs and from the selected financial data set forth below.

<TABLE>
<CAPTION>
                                                                                                                Period from
                                                                                                              January 1, 1992
                                                              For the years ended December 31                     through
                                                 ----------------------------------------------------------     December 31,
                                                  1996          1995        1994          1993        1992          1996
                                                  ----          ----        ----          ----        ----          ----
<S>                                              <C>           <C>         <C>            <C>         <C>          <C>   
STATEMENTS OF OPERATIONS DATA
Costs and expenses:
General and administrative...........            $1,842        $  963      $  507         $ --        $  --        $3,312
Research and development.............             1,747           796         441           86          262         3,332
Patent filing and maintenance........               223           199         158           45           76           701
                                                  -----        ------      ------         ----         ----        ------
Loss from operations.................             3,812         1,958       1,106          131          338         7,345
Interest (income) expense, net.......              (323)           66           1           --           --          (256)
                                                  -----        ------      ------         ----         ----        ------
Net loss during development stage....            $3,489        $2,024      $1,107         $131         $338        $7,089
                                                  =====        ======      ======         ====         ====        ======
Net loss per common share............            $ 1.40        $  .79      $  .43          N/A          N/A           N/A
Weighted average shares outstanding..             2,500         2,563       2,566          N/A          N/A           N/A
</TABLE>


<TABLE>
<CAPTION>
                                                                        December 31
                                                 -------------------------------------------------------------
                                                  1996          1995        1994          1993           1992
                                                  ----          ----        ----          ----           ----
<S>                                              <C>           <C>         <C>            <C>            <C> 
BALANCE SHEET DATA
Current assets.......................            $5,595        $8,882      $  513         $ --           $ --
Total assets.........................             5,677         8,882         513           --             -- 
Current liabilities..................             1,486           487       1,370           --             -- 
Long-term liabilities................                --           745          --           --             -- 
Working capital (deficit)............             4,109         8,395        (857)          --             -- 
Stockholders' equity (deficiency)....             4,191         7,650        (857)          --             -- 
</TABLE>                                

No dividends have been paid on the Company's common stock, and the Company does
not intend to pay dividends in the foreseeable future. The Company had
approximately 650 beneficial stockholders at December 31, 1996.


8

<PAGE>

Clean Diesel Technologies, Inc. (A Development Stage Company)

Balance Sheets                                  (in thousands except share data)

<TABLE>
<CAPTION>
                                                                                                     December 31
                                                                                                ----------------------
                                                                                                 1996            1995
                                                                                                ------          ------
<S>                                                                                             <C>             <C>   
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...........................................................            $3,270          $6,848
Short-term investments..............................................................             2,000              --
Inventories.........................................................................               103              15
Stock subscription receivable.......................................................                --           2,018
Other current assets................................................................               222               1
                                                                                                ------          ------
Total current assets................................................................             5,595           8,882
Other assets........................................................................                82              --
                                                                                                ------          ------
Total assets........................................................................            $5,677          $8,882
                                                                                                ======          ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:  
Accounts payable and accrued expenses...............................................            $  741           $ 421
Due to Fuel-Tech N.V................................................................                --              66
Loan payable to Fuel-Tech N.V.......................................................               745              --
                                                                                                ------          ------
Total current liabilities...........................................................             1,486             487
Loan payable to Fuel-Tech N.V.......................................................                --             745
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 million
        shares, issued and outstanding 2,500,000 shares.............................               125             125
Additional paid-in capital..........................................................            11,155          11,125
Deficit accumulated during development stage........................................            (7,089)         (3,600)
                                                                                                ------          ------
Total stockholders' equity..........................................................             4,191           7,650
                                                                                                ------          ------
Total liabilities and stockholders' equity..........................................            $5,677          $8,882
                                                                                                ======          ======
</TABLE>
See accompanying notes.

                                                                               9
<PAGE>

Clean Diesel Technologies, Inc. (A Development Stage Company)

Statements of Operations                    (in thousands except per share data)

                                 
                                 
                                 
                                 
<TABLE>
<CAPTION>
                                                                                                              Period from  
                                                                                                            January 1, 1992
                                                                 For the years ended December 31                 through    
                                                           -------------------------------------------         December 31,  
                                                             1996               1995              1994            1996      
                                                           -------           -------           -------           -------
<S>                                                        <C>               <C>               <C>               <C>    
Costs and expenses:
General and administrative ......................          $ 1,842           $   963           $   507           $ 3,312
Research and development ........................            1,747               796               441             3,332
Patent filing and maintenance ...................              223               199               158               701
                                                           -------           -------           -------           -------
Loss from operations ............................            3,812             1,958             1,106             7,345
Interest income .................................             (383)              (33)               --              (416)
Interest expense to Fuel-Tech N.V ...............               60                99                 1               160
                                                           -------           -------           -------           -------
Net loss during development stage ...............          $ 3,489           $ 2,024           $ 1,107           $ 7,089
                                                           =======           =======           =======           =======
Net loss per common share .......................          $  1.40           $   .79           $   .43               N/A
                                                           =======           =======           =======           =======
Average number of common shares outstanding......            2,500             2,563             2,566               N/A
                                                           =======           =======           =======           =======
</TABLE>
See accompanying notes.


10
<PAGE>

Clean Diesel Technologies, Inc. (A Development Stage Company)

Statements of Changes in                    (in thousands except per share data)
Stockholders' Equity (Deficiency)

<TABLE>
<CAPTION>
                                                                                    Deficit
                                                                                  Accumulated                     Total
                                                  Common Stock      Additional      During        Net Parent  Stockholders'
                                             --------------------     Paid-In     Development      Company        Equity
                                             Shares        Amount     Capital        Stage        Investment   (Deficiency)
                                             ------        ------     -------        -----        ----------   ------------
<S>                                          <C>           <C>       <C>           <C>              <C>         <C>     
Balance at January 1, 1994                      --         $ --      $    --       $   (469)        $ 469       $     --
Issuance of 2,500 common shares at
       $.10 per share to Fuel-Tech N.V.      2,500          125           125            --            --            250
Fuel-Tech N.V. capital contribution             --           --           469            --          (469)            --
Net loss for year                               --           --            --        (1,107)           --         (1,107)
                                             -----         ----       -------       -------          ----         ------
Balance at December 31, 1994                 2,500          125           594        (1,576)           --           (857)
Net loss for year                               --           --            --        (2,024)           --         (2,024)
Fuel-Tech N.V. capital contribution             --           --        10,531            --            --         10,531
                                             -----         ----       -------       -------          ----         ------
Balance at December 31, 1995                 2,500          125        11,125        (3,600)           --          7,650
Net loss for year                               --           --            --        (3,489)           --         (3,489)
Issuance of stock purchase warrants             --           --            30            --            --             30
                                             -----         ----       -------       -------          ----         ------
Balance at December 31, 1996                 2,500         $125       $11,155       $(7,089)         $ --         $4,191
                                             =====         ====       =======       =======          ====         ======
</TABLE>
See accompanying notes.


                                                                              11


<PAGE>

Clean Diesel Technologies, Inc. (A Development Stage Company)

Statements of Cash Flows                                          (in thousands)

<TABLE>
<CAPTION>
                                                                                                    Period from  
                                                                                                  January 1, 1992
                                                             For the years ended December 31           through   
                                                        --------------------------------------      December 31, 
                                                           1996           1995           1994           1996     
                                                           ----           ----           ----           ----     
<S>                                                     <C>            <C>            <C>            <C>      
OPERATING ACTIVITIES                                                                              
Net loss .........................................      $ (3,489)      $ (2,024)      $ (1,107)      $ (7,089)
Adjustments to reconcile net loss to net cash used
    in operating activities:
    Depreciation .................................            12             --             --             12
    Issuance of stock purchase warrants ..........            30             --             --             30
    Changes in operating assets and liabilities:
      Inventories ................................           (88)           (15)            --           (103)
      Other current assets .......................          (221)            (1)            --           (222)
      Accounts payable and accrued expenses ......           320            230            191            741
      Other assets ...............................           (18)            --             --            (18)
      Due to Fuel-Tech N.V .......................           (66)            --             --            (66)
                                                        --------       --------       --------       -------- 
Net cash used in operating activities ............        (3,520)        (1,810)          (916)        (6,715)
                                                        --------       --------       --------       -------- 
FINANCING ACTIVITIES
Proceeds from Rights Offering net of $630
    of brokerage commissions in 1995 .............         2,018          9,138             --         11,156
Expenses of Rights Offering ......................            --           (425)            --           (425)
Repayment of expenses of
    Rights Offering paid by Fuel-Tech N.V ........            --           (200)            --           (200)
Issuance of common stock to parent ...............            --             --            250            250
Net parent company investment ....................            --             --             --            469
Proceeds of loan from Fuel-Tech N.V ..............            --          1,695          1,179          2,874
Repayment of loan to Fuel-Tech N.V ...............            --         (2,063)            --         (2,063)
                                                        --------       --------       --------       -------- 
Net cash provided from financing activities ......         2,018          8,145          1,429       $ 12,061
                                                        --------       --------       --------       -------- 
INVESTING ACTIVITIES
Purchase of short-term investments ...............        (2,000)            --             --         (2,000)
Purchase of fixed assets .........................           (76)            --             --            (76)
                                                        --------       --------       --------       -------- 
Net cash used in investing activities ............        (2,076)            --             --         (2,076)
                                                        --------       --------       --------       -------- 
Net increase (decrease) in cash
    and cash equivalents .........................        (3,578)         6,335            513          3,270
Cash and cash equivalents at beginning of period .         6,848            513             --             --
                                                        --------       --------       --------       -------- 
Cash and cash equivalents at end of period .......      $  3,270       $  6,848       $    513       $  3,270
                                                        ========       ========       ========       ======== 
Cash payments for interest to Fuel-Tech N.V ......      $     63       $     --       $     --       $     63
NON-CASH ACTIVITIES
Contribution of net parent company
    investment to capital of the Company .........      $     --       $     --       $    469       $    469
Stock subscription receivable ....................      $     --       $  2,018       $     --       $  2,018
Issuance of stock purchase warrants ..............      $     30       $     --       $     --       $     30
</TABLE>
See accompanying notes.

12


<PAGE>

Notes to Financial Statements


1. BASIS OF PRESENTATION
Clean Diesel Technologies, Inc. (the "Company") was incorporated in the State of
Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V.
("Fuel Tech"). Predecessor financial information included in the accompanying
financial statements for the period January 1, 1992, through January 18, 1994,
reflects the Company's operations prior to incorporation, at which time it was
accounted for as part of Fuel Tech. As more fully discussed in Note 4, effective
December 12, 1995, Fuel Tech completed a Rights Offering of the Company's common
shares. Accordingly, at December 12, 1995, Fuel Tech held a 27.6% interest in
the Company's common shares. 

The Company is a development stage enterprise and its efforts from January 1,
1992, through December 31, 1996, have been devoted to the research and
development of Platinum Fuel Catalysts ("PFCs"), some of which were licensed to
the Company by Fuel Tech, and nitrogen oxide ("NOx") reduction technologies for
diesel engines (see Note 6). There were no material activities related to the
Company's business in 1990 or 1991. Prior to 1990, the activities of Fuel Tech
were focused on other applications of Platinum Fuel Catalysts that are unrelated
to the Company's present or contemplated business and were not material to the
overall development of the Company's product. Therefore, such costs have been
excluded from the determination of the Company's development costs. 

The Company expects to begin selling its PFCs on a commercial basis in the first
half of 1997, for use in the aftertreatment of fuel (see Note 8). In order to
sell the PFCs in other markets, however, additional research and development
testing will be required. The Company's NOx control technologies will also
require additional research and development testing to determine their
commercial viability. The commercialization of these technologies will depend
upon the success of field tests, cost-effective production of PFCs and
governmental regulations principally by the Environmental Protection Agency, and
corresponding foreign and state agencies. If the accomplishment of some or all
of these objectives is delayed, the Company may require additional capital to
continue the development of its technologies, and there can be no assurance that
such capital will be available. The Company's management believes that the
Company has adequate capital to fund its operations through the first quarter of
1998. The Company does have the ability to control much of its research and
development costs to conserve cash, either by delaying or canceling certain
research programs. The Company will, however, require additional financing in
the future. In order to meet such needs, management anticipates pursuing raising
funds in 1997 through a private placement 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.

2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the 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 could differ from those estimates.

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. At December 31, 1996,
substantially all of the Company's cash and cash equivalents consisted of a $1.5
million Eurodollar deposit with a banking institution and $1.4 million in U.S.
Government obligations. At December 31, 1995, substantially all of the Company's
cash and cash equivalents were on deposit with one banking institution.

All financial instruments are reflected in the accompanying balance sheets at
amounts which approximate fair value.

                                                                              13

<PAGE>
Notes to Financial Statements (continued)

Short-term investments consist of United States government-backed mortgages
which mature in June 1997. The Company has classified such investments as held
to maturity and, accordingly, they are carried at amortized cost in the
accompanying balance sheet. 

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

RESEARCH AND DEVELOPMENT COSTS
Costs relating to the research, design and testing of products are charged to
operations as they are incurred. These costs include test programs, salaries and
related costs, consultancy fees, materials and certain testing equipment. The
cost of patent filings and maintenance are also charged to operations as they
are incurred. 

STOCK-BASED COMPENSATION 
The Company accounts for stock option grants in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Under the Company's current plans, 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. In 1996 the Company adopted the
disclosure provisions of Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation.

NET LOSS PER COMMON SHARE 
Net loss per common share is based on the average number of shares of common
stock outstanding during each year. Common equivalent shares are not included in
the per share calculations where the effect of their inclusion would be
antidilutive, except that, in accordance with Securities and Exchange Commission
requirements, common and common equivalent shares issued during the 12-month
period prior to the registration of the Company's common stock on December 12,
1995 (effective date of the Rights Offering), have been included in the
calculation as if they were outstanding for all periods, using the treasury
stock method and the initial public offering price of $6.50 per share.

3. TAXATION
The Company accounts for income taxes in accordance with the "liability method"
and, effective December 12, 1995, the company files its own federal income tax
returns. Prior to such date, the Company's operations were included in the
consolidated income tax return of Fuel Tech, Inc. 

At December 31, 1996, the Company had tax losses available for offset against
future years' earnings of approximately $6.4 million and temporary differences
were insignificant as of such date. Approximately $0.9 million, $2.0 million and
$3.5 million of the tax loss carryforward expire in 2009, 2010 and 2011,
respectively. The Company has not recognized any benefit for the aforementioned
tax loss carryforward. 

Under the provisions of the United States Tax Reform Act of 1986, utilization of
the Company's federal tax loss carryforward (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 Fuel Tech Rights Offering (see Note 4).


14
<PAGE>

4. STOCKHOLDERS' EQUITY
The Company was incorporated in January 1994 and was capitalized by Fuel Tech's
subscription to all of the Company's common stock in exchange for $250,000 in
cash. Furthermore, in 1994 Fuel Tech made a $469,000 capital contribution to the
Company, which amount was equivalent to the Company's operating losses from
January 1, 1992, through December 31, 1993. 

On December 12, 1995, Fuel Tech completed a Rights Offering to its existing
shareholders of 72.4% of the Company's common shares, retaining 27.6% of the
common shares outstanding. Under the terms of the offering, each Fuel Tech
shareholder and holder of Fuel Tech's Nil Coupon Non-redeemable Convertible
Unsecured Loan Notes ("Note Holders") received a right to purchase one common
share of the Company for every 7.65 Fuel Tech shares (or notes convertible into
7.65 Fuel Tech shares) held for $6.50 per Company share. Holders of Fuel Tech
options were also allowed to participate, if requested, under the same terms.
Two million of the 2.5 million Company shares held by Fuel Tech were offered in
the Rights Offering. 

Approximately 1.8 million Company shares were purchased in the offering, which
raised net proceeds, after expenses and broker-dealer commissions aggregating
$1.3 million, of approximately $10.5 million, all of which was contributed by
Fuel Tech to the Company. In December 1995, after the offering was completed,
the Company paid Fuel Tech approximately $2.3 million, which represented the
repayment of certain loans made to the Company ($2.1 million), as well as
certain expenses of the Rights Offering paid by Fuel Tech ($200,000).

As a result of the Rights Offering, and Fuel Tech's capital contribution of the
net offering proceeds, the Company's additional paid-in capital increased by
approximately $10.5 million.

On December 26, 1995, the Company's common stock commenced trading on the
National Association of Securities Dealers Quotation System (NASDAQ) under the
symbol "CDTI."

5. STOCK OPTIONS AND WARRANTS
The Company maintains a stock award plan, the 1994 Incentive Plan (the "Plan").
Under the Plan awards may be granted to participants in the form of
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. Participants in the Plan may be such of the
Company's directors, officers, employees, consultants and advisors (except
consultants or advisors in capital-raising transactions) as the directors
determine are key to the success of the Company's business. The Company includes
50%-owned subsidiaries or affiliates. In 1996 stockholders amended the Plan to
increase from 10% to 12 1/2% the percentage of outstanding shares of the
Company used to determine the maximum number of awards to participants. The
policy of the Board has been to grant stock options vesting in three equal
portions on the first through third anniversaries of the grant date.


                                                                              15
<PAGE>

Notes to Financial Statements (continued)

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

                                 1996                   1995
                                -----------------------------
Net loss:        
As reported                     $3,489                 $2,024
Pro forma                        3,600                  2,031

Loss per share:
As reported                      $1.40                   $.79
Pro forma                         1.44                    .79

In accordance with the provisions of SFAS No. 123, the pro forma disclosures
include only the effect of stock options granted in 1995 and 1996. 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 Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its stock options. 

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:

                                   1996       1995 
                                   --------------- 
Expected dividend yield            0.0%       0.0% 
Risk-free interest rate            6.8%       6.4%
Expected volatility               54.3%      65.4% 
Expected life of option          4 years    4 years


16
<PAGE>

The following table presents a summary of the Company's stock option activity
and related information for the years ended December 31:
<TABLE>
<CAPTION>
                                                                1996                     1995                     1994
                                                  ------------------------------------------------------------------------
                                                              Weighted-                Weighted-                Weighted-
                                                               Average                  Average                  Average
                                                  Options     Exercise     Options     Exercise      Options     Exercise
                                                   (000)        Price       (000)        Price        (000)       Price
                                                  ------------------------------------------------------------------------
<S>                                                 <C>         <C>          <C>         <C>          <C>
Outstanding, beginning of year                      222         $2.86        125         $1.10          --        $  --
Granted                                              65          4.59         97          5.13         125         1.10
Exercised                                            --            --         --            --          --           --
Forfeited                                            --            --         --            --          --           --
                                                  ------------------------------------------------------------------------
Outstanding, end of year                            287         $3.25        222         $2.86         125        $1.10
                                                  ========================================================================
Exercisable, end of year                            189         $3.11         63         $1.40          21        $2.00
Weighted-average fair value of options
     granted during the year                                    $2.25                    $2.79                   $  --
</TABLE>

The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
                                      Options Outstanding                                 Options Exercisable              
----------------------------------------------------------------------------------------------------------------------------
                                                      Weighted-            Weighted-                             Weighted-
                                                      Average              Average                                Average
        Range of                Number of             Remaining             Exercise           Number of          Exercise
Exercise Prices                  Options           Contractual Life          Price              Options            Price
----------------------------------------------------------------------------------------------------------------------------
<C>                              <C>                  <C>                   <C>                 <C>                <C>  
$  .20 -  $2.00                  125,000              5.5 years             $1.10               104,164            $1.28
  2.50 -   4.50                   97,500              7.6                    3.65                29,166             2.50
  5.63 -   6.82                   64,450              8.8                    6.70                56,116             6.82
----------------------------------------------------------------------------------------------------------------------------
$  .20 -  $6.82                  286,950              6.9                   $3.25               189,446            $3.11
</TABLE>

Pursuant to a financial consulting agreement, an investment bank has the right
to purchase warrants covering 50,000 of the Company's common shares, with an
exercise price of $6.50 per share (an 18% premium over market price on the date
of issue). The warrants expire on March 1, 2001. Included in the Company's
Financial Statements is $30,000 of expense in 1996 related to the issuance of
these stock purchase warrants, which represented the fair value of services
received.

6. COMMITMENTS 

The Company is obligated under a sublease agreement for its principal office.
Future minimum lease payments at December 31, 1996, are as follows: 1997 --
$65,000; 1998 -- $65,000; and 1999 -- $11,000. For the year ended December 31,
1996, rental expense approximated $90,000. Prior to 1996, the Company did not
incur any rent expense as such expenses were included in management fees and
allocations from Fuel Tech (see Note 7).

As of October 28, 1994, Fuel Tech licensed to the Company all patents and rights
associated with its Platinum Fuel Catalyst and other internal combustion
emissions control technology. In exchange for the technology license, the
Company will pay Fuel Tech a royalty of 2.5% of its annual gross revenue from
sales of such Platinum Fuel Catalyst commencing in the year 1998. Under the
terms of such license agreement the Company, at its option, can purchase the
aforementioned technology for $12 million from Fuel Tech. The license agreement
expires in 2008, at which time the Company has the right to have Fuel Tech
assign it the technology.

                                                                              17

<PAGE>

Notes to Financial Statements (continued)


7. RELATED PARTY TRANSACTIONS 
On July 1, 1995, the Company entered into a $745,000 promissory demand note with
Fuel Tech bearing an interest rate of 8% per annum (the "Demand Note"). Pursuant
to the Company's agreement with Fuel Tech, Fuel Tech did not demand repayment
during 1996 and the Company made monthly interest payments on the unpaid
balance. Subsequent to December 31, 1996, the Company repaid $250,000 of this
note, and the balance is due upon demand. 

Average trade balances due to Fuel Tech for the years ended December 31,1995 and
1996, approximated $152,000 and $183,000, respectively.

On August 3, 1995, the company signed a Management and Services Agreement with
Fuel Tech. According to the agreement, the Company reimburses Fuel Tech for
management, services and administrative expenses incurred on behalf of the
Company. Additionally, Fuel Tech charged the Company a fee equivalent to an
additional 10% of such costs. In June 1996 the Company renegotiated this
agreement. Under the new agreement, the Company agreed to pay Fuel Tech a fee
equal to an additional 3% or 10% of the costs paid on the Company's behalf,
dependent upon the nature of the costs incurred. Prior to the August 1995
agreement, the Company paid Fuel Tech a management fee of $150,000 per quarter,
which included the direct costs and associated fees. The Company shares
facilities and certain other resources with Fuel Tech and costs are allocated
between the companies based on usage. Certain of Fuel Tech's officers and
directors serve as officers and directors of the Company and the Company
received management and administrative support from Fuel Tech's staff. The
financial statements include allocations from Fuel Tech of certain management
and administrative costs, which approximate $600,000, $904,000 and $1,232,000
for the years ended December 31, 1994, 1995 and 1996, respectively, and
$2,801,000 for the period from January 1, 1992, through December 31, 1996. Cost
allocations for such periods were based on the amount of management time devoted
to the Company. In the opinion of the Company's management, such cost
allocations are fair and reasonable. 

8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS
In September 1996 the Company entered into a supply agreement with
Holt Lloyd International Ltd. ("Holt") of the United Kingdom to sell the
Company's PFC for use with Holt's fuel additives in the aftertreatment of fuel
for both new and used diesel engines in the consumer car care market. The
agreement covers territories worldwide except for North, Central and South
America. The term of this agreement is 10 years with the possibility of a term
extension. The exclusivity of the agreement is determined by the attainment (or
reasonable effort toward the attainment) of predetermined minimum performance
levels for each territory on a calendar-year basis. The Company's PFC was
test-marketed by Holt in Europe in the fourth quarter of 1996, with commercial
sales expected to commence in the first quarter of 1997. This agreement also
provides for collaborative testing of the Company's PFC product for
gasoline-fueled vehicles, and will be marketed under similar terms by Holt.

On November 11, 1996, the Company entered into a joint development agreement
with Engelhard Corporation and Nalco Fuel Tech. The parties agreed to
collaborate on the commercialization of various diesel engine NOx control
technologies, both in the U.S. and abroad. The companies will demonstrate and
market technologies utilizing urea-based NOx catalyst systems.

9. SUBSEQUENT EVENTS 
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. The warrant expires on March 17, 2004.


18
<PAGE>


Report of Independent Auditors

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

We have audited the accompanying balance sheets of Clean Diesel Technologies,
Inc. (a development stage company) as of December 31, 1996 and 1995, and the
related statements of operations, stockholders' equity (deficiency), and cash
flows for each of the three years in the period ended December 31, 1996 and for
the period from January 1, 1992 through December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 and for
the period from January 1, 1992 through December 31, 1996, in conformity with
generally accepted accounting principles.

 
                                                  /s/ Ernst & Young LLP

Stamford, Connecticut
March 20, 1997


                                                                              19
<PAGE>

Corporate Information

DIRECTORS AND OFFICERS
--------------------------------------------------------------------------------
Ralph E. Bailey, Chairman, CDT, and Chairman, American Bailey Corporation
Jeremy D. Peter-Hoblyn, Director, President and Chief Executive Officer
John A. de Havilland, Director and Retired Director, J. Henry Schroder Wagg &
Co.
Charles W. Grinnell, Director, Vice President, General Counsel and Corporate
Secretary
James M. Valentine, Director, Executive Vice President and Chief Operating
Officer
Scott M. Schecter, Vice President, Chief Financial Officer and Treasurer

CORPORATE INFORMATION
--------------------------------------------------------------------------------
Clean Diesel Technologies, Inc.
300 Atlantic Street, Suite 702
Stamford, Connecticut 06901-3522
203-327-7050
Fax 203-323-0461

ANNUAL STOCKHOLDERS MEETING
--------------------------------------------------------------------------------
Wednesday, June 11, 1997, 10:00 A.M.
Stamford Sheraton
First Stamford Place
Stamford, CT 06901

INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
Ernst &Young LLP
Stamford, Connecticut

TRANSFER AGENT AND REGISTRAR
--------------------------------------------------------------------------------
Chase Mellon Shareholder Services
85 Challenger Road, Overpeck Centre
Ridgefield Park, New Jersey 07660
1-800-288-9541

STOCKHOLDER INFORMATION
--------------------------------------------------------------------------------
Stockholder inquiries should be directed to:
Clean Diesel Technologies, Inc.
203-327-7050

A copy of the company's Annual Report on Form 10K will be provided free of
charge upon written request directed to the Corporate Secretary at the
offices of Clean Diesel Technologies, Inc.

The company's shares are listed on the NASDAQ Stock Market, Inc. (Symbol
CDTI).

Stock price data:
                                                               HIGH     LOW
                                                               ----     ---
4th Quarter 1995, from December 26,.....................      7 1/4    6 3/8
1st Quarter 1996........................................      7 3/8    5
2nd Quarter 1996........................................      6 1/8    4 3/8
3rd Quarter 1996........................................      6        3 7/8
4th Quarter 1996........................................      4 1/4    2

20