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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002
OR

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

For the transition period from __________________ to ____________________

COMMISSION FILE NO. 0-27432

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

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

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

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

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

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

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

Yes X No
---- ----

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

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

Yes No X
---- -----

Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the average bid and asked prices of as of June 28, 2002:
$2.71 and as of March 19, 2003: $1.70

Indicate number of shares outstanding of each of the registered classes of
Common Stock at March 19, 2003: 11,968,387 shares Common Stock, $0.05 par
value.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Proxy Statement for the annual meeting of stockholders
to be held in 2003 are incorporated by reference into parts II, III and IV
hereof.
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TABLE OF DEFINED TERMS

TERM TERM DEFINITIONS
- ---- ----------------

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

AIM Alternative Investment Market of the London Stock Exchange

Bhphour Break horsepower per hour

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

CARB California Air Resources Board

CDT Clean Diesel Technologies, Inc.

CNG Compressed Natural Gas

CO Carbon Monoxide

CO2 Carbon dioxide

DOCs Diesel Oxidizing Catalysts

DPFs Diesel Particulate Filters

EGR Exhaust Gas Recirculation

FBC Fuel Borne Catalyst

Fuel Tech Fuel-Tech N. V., an affiliate of Clean Diesel Technologies

HC Hydrocarbons

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

NESCAUM North East States for Coordinated Air Use Management

NOx Nitrogen Oxide

PFCs Platinum Fuel Catalysts

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

PM Particulate Matter

SCR Selective Catalytic Reduction

US EPA United States Environmental Protection Agency

Usg US gallons

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



2

PART I

FORWARD-LOOKING STATEMENTS

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

ITEM 1. BUSINESS

GENERAL

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

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

Management has worked together for over 15 years in the chemical, power,
fuel and emission control fields and has brought Clean Diesel Technologies to
the commercialization stage on a cost effective basis by co-operative funding
for development and demonstration programs with industry partners. Clean Diesel
Technologies has a strong patent position with 26 US patents issued and 11 US
patent applications pending as well as 67 other international patents issued and
69 international patent applications pending.

TECHNOLOGIES AND PRODUCTS

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

PLATINUM PLUS(R)

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

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

Development of Platinum Plus was completed in 1999. In December of that
year, Clean Diesel Technologies received its US EPA registration of Platinum
Plus for use in bulk fuel by refiners, distributors and fleets. In 2000, CDT
completed the European VERT certification protocol for particulate filters and
additives for use with particulate filters and in 2001 BUWAL approved Platinum
Plus for use as a fuel borne catalyst with particulate filters. In 2002 CDT
applied for verification of Platinum Plus FBC with both CARB and the EPA.
Verification is needed for the end user of Platinum Plus to get emission
reduction credit from the EPA's voluntary retrofit program or CARB's mandatory
retrofit program.


3

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

ARIS(R) 2000

The ARIS 2000 (advanced reagent injection system) is a patented injection
system for the reduction of NOx emissions from diesel engines. The system
comprises a single fluid computer-controlled injector that provides precise
injection of non-toxic urea-based reagents into the exhaust of a stationary or
mobile engine where it converts NOx across a catalyst to nitrogen and water
vapor. The system has shown NOx reductions of up to 90% or more on a steady
state operation and of up to 85% in transient operations. This process, known
as selective catalytic reduction (SCR), has been in use for many years in power
stations and is considered by management to be well proven. ARIS 2000 is a
miniature version of the SCR injection system. It is designed for volume
production and is applicable to both stationary diesel engines for power
generation and mobile diesels used in trucks, buses, trains and boats.

In 1996, Clean Diesel Technologies recruited a small team to develop an
injection system for NOx control. CDT's target technical specifications for the
system were based on the assumption that new emission control requirements would
force NOx emission levels from diesel engines down very significantly to levels
similar to those required for gasoline engines fitted with auto catalysts. From
1997 to 1998, Clean Diesel Technologies investigated and patented several
methods of achieving this by using urea and other ammonia precursors in both
liquid and solid form. In 1998 and 1999, Clean Diesel Technologies produced
prototypes, which were tested both by potential customers and on a test rig.
Subsequently, pre-production units were made and supplied to engine
manufacturers for selected test programs. Clean Diesel Technologies sold the
first stationary commercial systems in late 1998 and in early 1999. During 1998
and 1999, CDT also produced prototypes of the mobile ARIS system. Both systems
use the same controls and injectors. Clean Diesel Technologies is seeking
partners to complete the development and commercialization of the mobile ARIS
system.

THE MARKET AND THE REGULATORY ENVIRONMENT

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

NEW DIESEL ENGINES

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

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

In the last two years, emissions regulations for new mobile diesel engines
in the major world markets have continued to tighten. Emission levels which
came into effect in 1999 for new vehicles were some 40% to 90% less than levels
of the mid 1980s. Regulations for introduction over the next seven years in
Europe, the United States and Japan should reduce emission levels by 85% to 99%
below the mid 1980s levels. The market for mobile NOx reduction systems is
expected by management to develop between 2004 and 2007 in conjunction with the
release of these new regulations, which are expected to call for particulate
emissions and NOx limits of 0.01 and 0.2g/bhp hour respectively on new engines.

In the opinion of management, the US market for diesel engines is expected
to grow significantly in the next few years based on fuel economy considerations
if NOx and particulate emissions can be controlled. Engine manufacturers have
indicated that the regulations for 2007 cannot be met without NOx and/or
particulate after treatment.

EXISTING DIESEL ENGINES AND THE RETROFIT MARKET

While much of the regulatory pressure and the response from engine
manufacturers has been focused on new engine emissions, there is increasing
concern over pollution from existing diesel engines which have a life of some 30


4

years or more and hence there is a growing interest in the potential for
retrofitting diesel engines with emission reduction systems. These include
stationary diesels, construction equipment and public transportation vehicles
such as buses as well as truck fleets.

In 1998, CARB declared diesel particulates to be toxic and in 2000 it
proposed reductions in particulate emissions from over one million existing
engines in California as well as more stringent controls for new engines. In
March 2000, the US EPA announced a program to provide emissions credits for
reduction in emissions from existing heavy-duty diesel engines. The US EPA has
stated its objective for retrofitting vehicles with particulate controls. In
response, areas such as Houston, Sacramento and Seattle are known to be
proposing retrofit programs.

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

MARKET OPPORTUNITY

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

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

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

Accordingly, there are two basic market drivers for CDT's products, namely
from customers who want fuel economy or customers who need to reduce emissions.
Most customers for Platinum Plus can be categorized as: OEM engine manufacturers
for emission control; retrofit of existing engines for emission control; and
fuel economy customers (fleets).

MARKETING STRATEGY AND COMMERCIALIZATION

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

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

Mitsui also exercised its option to exclusively license the ARIS technology
for mobile applications in Japan. Mitsui committed to pay $250,000 in mobile
license fees and invest an additional $200,000 in the development and testing of
mobile ARIS systems. CDT will also receive a per unit royalty on each mobile
ARIS system sold. CDT is in discussions with several companies to license the
mobile ARIS technology for retrofit and OEM opportunities in the United States
and Europe.

Clean Diesel Technologies has also entered into a number of marketing
distribution agreements with chemical additive companies and national fuel
delivery companies ("wet hosers"). CDT has licensed Baker Petrolite Corporation
(a division of Baker Hughes) for the non-exclusive distribution of Platinum Plus
to refiners and terminals in the United States and the Global Companies, LLC to
supply Platinum Plus to fleets in New England, as the exclusive refiner
distributor. CDT is also working with US Fleet Fueling Service and Shell Fuel
Services to supply Platinum Plus treated fuel directly to fleets.


5

HEALTH EFFECTS AND REGISTRATION OF ADDITIVES

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

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

Engine tests show that the amount of platinum emitted from the use of
Platinum Plus is roughly equivalent to platinum attrition from automotive
catalytic converters.

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

SOURCES OF SUPPLY

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

RESEARCH AND DEVELOPMENT

During 2002, Clean Diesel Technologies employed 3 individuals, including
two executive officers, in engineering and product development. During the years
ended December 31, 2002, 2001, and 2000, Clean Diesel Technologies's research
and development expenses exclusive of patent costs totaled approximately
$693,000, $365,000, and $534,000, respectively. Clean Diesel Technologies
expenses all research and development costs as incurred.

PROTECTION OF PROPRIETARY INFORMATION

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

INSURANCE

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

EMPLOYEES

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

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


6

RISK FACTORS OF THE BUSINESS

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

LIQUIDITY & CONTINUING OPERATING LOSSES

Prior to 2000, Clean Diesel Technologies was a development stage business
and has incurred losses since inception totaling $22,027,000 (excluding the
effect of non-cash preferred stock dividends). At the date of this report,
Clean Diesel Technologies has cash resources estimated to be sufficient for its
needs only through the third quarter 2003. See the text below under the captions
"Liquidity and Sources of Capital" in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," elsewhere herein.

Clean Diesel Technologies has had minimal revenues through December 31,
2002. CDT expects to continue to incur operating losses at least through 2003.
There can be no assurance that Clean Diesel Technologies will achieve or sustain
significant revenues or profitability in the future. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
elsewhere herein.

COMPETITION

Competition in the diesel fuel additive market is from other additive
suppliers, supplying other metallic additives. CDT competes on the basis of
effectiveness, price, proprietary technology, and ease of use of the PFCs.

Competition in the NOx control market is from other suppliers of
reagent-based post-combustion NOx control systems including large,
well-established catalyst and engine manufacturing companies. CDT has
proprietary technology.

NEED FOR REGISTRATION

Clean Diesel Technologies needs to comply with registration requirements
for each territory in which it sells its products. CDT received its
registration from USEPA under Tier 1 of 211(b) registration for its platinum -
cerium additive in December 1999. It can sell the product with its current
registration status, which provides for pass through rights for the additive
companies to use the product without further registration. However, there are
provisions in the Act under which EPA could require further testing. The EPA has
not exercised these provisions yet for any additive. In Europe, Clean Diesel
Technologies has registered in Switzerland and is registering in Germany.
Further testing could be needed in these or other territories.

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

NO ASSURANCES OF ADDITIONAL FUNDING

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

UNCERTAINTY OF MARKET ACCEPTANCE

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


7

NO ASSURANCE OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

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

PLATINUM PRICE

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

DEPENDENCE ON ATTRACTING AND RETAINING PERSONNEL

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

ITEM 2. PROPERTIES

FACILITIES

Clean Diesel Technologies has leased for administrative purposes 2,900
square feet of office space at 300 Atlantic Street, Stamford, Connecticut. CDT
has rights for up to one year to continue leasing the existing space through
December 2003, with 3 months notice to terminate during that period. The lease
has an annual cost of $116,000, which includes rent, utilities and parking.

PATENTS AND TECHNOLOGY ASSIGNMENTS

CDT's technology is comprised of patents, patent applications, trade or
service marks, data, and know-how. This technology was acquired by assignment
from Fuel Tech or developed internally. This assignment agreement provides for
running royalties of 2.5% of gross revenues derived from the sale of the PFCs,
commencing in 1998 and terminating in 2008. Clean Diesel Technologies may at any
time terminate this royalty obligation by payment to Fuel Tech of amounts in
2003 of $6.5 million and declining annually to $1.1 million in 2008. CDT, as
owner, maintains the technology at its expense.

During 2002, Clean Diesel Technologies filed 6 additional US patent
applications and 2 international patent applications. Clean Diesel Technologies
now has a total of 26 US patents granted and 67 international patents. There are
currently 11 US patent applications pending and 69 international applications
pending. These patents and patent applications cover the means of controlling
the four principal emissions from diesel engines (NOx, particulates, CO, and
HC).

ITEM 3. LEGAL PROCEEDINGS

Clean Diesel Technologies is not involved in any legal proceedings.

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

There were no submission of matters to a vote of security holders in
2002.

PART II

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

COMMON STOCK

Clean Diesel Technologies' Common Stock is traded in the US in the
over-the-counter (OTC) market and on the London Stock Exchange through the
Alternative Investment Market (AIM). Reports of transactions of Clean Diesel
Technologies' shares are available on the OTC Electronic Bulletin Board (Symbol


8

CDTI) and on the AIM (Symbol CDT and CDTS). At March 4, 2003, there are 181
registered holders and approximately 534 beneficial holders of Common Stock.

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

OTC LONDON STOCK EXCHANGE
BULLETIN BOARD AIM
(IN US$) (IN GBP)
STOCK PRICE DATE: HIGH LOW HIGH LOW
- ----------------- ---- ---- ---- ----
1st Quarter 2001 . . . . . . . . . . . . 1.19 0.81 -- --
2nd Quarter 2001 . . . . . . . . . . . . 2.38 1.48 -- --
3rd Quarter 2001 . . . . . . . . . . . . 2.15 1.50 -- --
4th Quarter 2001 . . . . . . . . . . . . 2.65 1.60 1.63 1.64
1st Quarter 2002 . . . . . . . . . . . . 3.50 2.10 2.55 1.56
2nd Quarter 2002 . . . . . . . . . . . . 4.00 2.60 2.35 1.40
3rd Quarter 2002 . . . . . . . . . . . . 2.60 1.30 1.60 0.97
4th Quarter 2002 . . . . . . . . . . . . 1.90 1.25 1.40 1.10


SALES AND USES OF UNREGISTERED SECURITIES DURING THE PERIOD

Pursuant to a Regulation S exemption with respect to an offshore placement,
Clean Diesel Technologies sold, effective October 1, 2002, 704,349 shares of its
Common Stock. The price of the Common Stock was 1.30 GBP per share
(approximately $2.00 per share). The proceeds of the Common Stock issuance,
$1.356 million, net of $69,000 in expenses, will be used for the general
corporate purposes of Clean Diesel Technologies.

Also Pursuant to a Regulation S exemption with respect to an offshore
placement and a Sec.4 (2) private placement exemption under the Securities Act
of 1933 (the "Act"), Clean Diesel Technologies sold, effective December 28,
2001, 2,580,664 shares of its Common Stock at a price of 1.40 GBP per share
(approximately $2.00 per share). Clean Diesel Technologies also converted 15,897
shares of Series A Preferred Stock into 5,934,829 shares of Common Stock, which
reflects a 12% premium (373.33 common shares per one Series A Preferred share).
The proceeds of the Common Stock issuance and Series A Preferred Stock
conversion of approximately $3.721 million (net of expenses and $0.817 million
in term loan re-payment) will be used for the general corporate purposes of
Clean Diesel Technologies.

Also pursuant to Regulation S and Sec.4 (2) exemptions from registration
under the Act, Clean Diesel Technologies, under a $1 million Loan Facility
Agreement effective November 14, 2000, issued to private lenders $500,000 of its
Senior Promissory Notes and Warrants to purchase 75,000 shares of CDT's Common
Stock. In March 2001, Clean Diesel Technologies issued an additional $500,000
of its Senior Promissory Notes and Warrants to purchase 25,000 shares of CDT's
Common Stock. In December 2001, in exchange for Common Stock, CDT retired
$750,000 of its Senior Promissory Notes including accrued interest of 10% per
annum.

ITEM 6. SELECTED FINANCIAL DATA

Clean Diesel Technologies was incorporated on January 19, 1994, as a wholly
owned subsidiary of Fuel TechEffective December 12, 1995, Fuel Tech completed a
Rights Offering of CDT's Common Stock, with Fuel Tech retaining a 27.6%
ownership interest in Clean Diesel Technologies. In 2002 and 2001, CDT obtained
$1.356 million and $3.721 million of proceeds, respectively, through private
placement sales of shares of its Common Stock As a result of the additional
stock transactions, Fuel Tech's 1,825,119 shares of CDT's Common Stock represent
approximately a 15.2% interest in Clean Diesel Technologies at December 31,
2002.

As discussed elsewhere herein, prior to 2000, Clean Diesel Technologies was
a development stage business. The following selected data are derived from the
financial statements of CDT. Ernst & Young LLP's report on the financial
statements for the year ended December 31, 2002, which appears elsewhere herein,
includes an explanatory paragraph which describes an uncertainty about Clean
Diesel's ability to continue as a going concern. The data should be read in
conjunction with the financial statements, related notes and other financial
information herein.


9



FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)

STATEMENTS OF OPERATIONS DATA
Product Revenue $ 142 $ 176 $ 199 $ 142 $ 46
License and Royalty Revenue 299 1,424 383 -- --
-------- -------- -------- -------- --------
Total Revenues 441 1,600 582 142 46
Costs and expenses:
Cost of product sales 86 117 133 81 29
General and administrative 2,291 1,858 1,799 1,585 1,515
Research and development 693 365 534 827 1,009
Patent filing and maintenance 43 196 152 134 156
-------- -------- -------- -------- --------
Loss from operations (2,672) (936) (2,036) (2,485) (2,663)
Interest income/(expense), net 30 (170) 35 44 (57)
Cost of withdrawn Rights Offering -- -- -- -- (264)
-------- -------- -------- --------- -------
Loss before preferred stock dividend (2,642) (1,106) (2,001) (2,441) (2,984)

Preferred Stock Dividend (non-cash) -- (621) (712) (393) --
One-time Preferred Stock conversion premium -- (1,276) -- -- --
One-time imputed non-cash preferred dividend -- -- -- (1,750) --
-------- -------- -------- -------- --------
Net loss attributable to common stockholders $(2,642) $(3,003) $(2,713) $(4,584) $(2,984)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.23) $ (1.08) $ (1.03) $ (1.77) $ (1.19)

Weighted-average shares outstanding
-average shares outstanding 11,419 2,777 2,631 2,594 2,517

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



DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA (in thousands)
Current assets $ 2,757 $ 4,612 $ 965 $ 1,311 $ 1,940
Total assets 2,979 4,658 1,057 1,346 1,985
Current liabilities 223 808 400 494 686
Long-term liabilities 418 368 808 196 --
Working capital 2,534 3,804 565 817 1,254
Stockholders' equity (deficit) 2,338 3,482 (151) 656 1,299


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

Prior to 2000, Clean Diesel Technologies was a development stage enterprise
and its efforts were devoted to the research and development of platinum fuel
catalysts and nitrogen oxide reduction technologies to reduce emissions from
diesel engines. During December 1999, CDT received its EPA registration for its
platinum-cerium product and in early 2000 completed its first commercial sales;
accordingly, in the opinion of management, Clean Diesel Technologies was no
longer a development stage enterprise.

The Company has been unable to generate positive cash flow and will require
additional capital in the future in order to fund its operations, as its current
cash position will not be sufficient to fund the Company's cash requirements.
The Company is, however, actively seeking additional financing through a private
placement in order to fund its commercialization efforts. Without any further
funding or revenues from sales, demonstration programs, or license fees, the
Company expects to be able to fund operations through the third quarter of 2003.
Although the Company believes that it will be successful in its capital-raising
efforts, there is no guarantee that it will be able to raise such funds on terms
that will be satisfactory to the Company. The Company has developed contingency
plans in the event its financing efforts are not successful. Based on such plans
CDT may be required to delay, scale back or severely curtail its operations,
which could have a material adverse effect on the business, operating results,
financial condition and long-term prospects. See discussions in Note 1 to the
Financial Statements.


10

RESULTS OF OPERATIONS
2002 VERSUS 2001

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

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

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

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

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

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

2001 VERSUS 2000

Revenues and cost of product sales were $1,600,000 and $117,000,
respectively, in 2001 versus $582,000 and $133,000, respectively, in 2000. The
2001 revenues consisted of Platinum Plus sales, ARIS 2000 system sales and ARIS
license revenue and royalties.

Clean Diesel Technologies has received its EPA registration of the
platinum-cerium additive. Field trials of the platinum-cerium additive started
in 2000 and continued in 2001. In 2001, sales of the platinum-cerium additive
totaled $114,000. Based on initial trial results and licensing agreements,
ongoing revenues from sales of its Platinum Plus additive are expected from
distributors, refiners, additive marketing companies and fleets.

Clean Diesel Technologies identified a market opportunity for urea
selective catalytic reduction (SCR) systems for use with stationary diesel
engines primarily for power generation. The ARIS 2000 is a single-fluid
injection and metering system complete with an electronic control unit that can
be integrated with engine electronic and diagnostic systems. CDT has licensed
the ARIS 2000 system for stationary diesel engines in North, South and Central
America to the RJM Corporation and completed a license with Mitsui for Japan
with an option on the mobile ARIS technology. Total sales of systems and
license/royalties of the ARIS 2000 in 2001 were $62,000 and $1,424,000,
respectively, versus $84,000 and $306,000 in 2000, respectively. CDT and its
licensee sold and installed over 100 systems. CDT believes that the ARIS 2000


11

NOx reduction system has applications for both stationary engines and mobile
engines. While the ARIS system for stationary use is being sold commercially,
the ARIS system for mobile applications needs further development from the
present prototype stage. CDT believes that the ARIS 2000 system can most
effectively be commercialized through licensing several companies with a related
business in these markets. Clean Diesel Technologies is actively seeking to
license the mobile technology and the stationary technology in Europe and Asia.

General and administrative expenses increased to $1,858,000 in 2001 from
$1,799,000 in 2000. The increase was the result of non-cash warrant expense
associated with investor relation activities partially offset by lower travel
expense in 2001. Research and development expenses decreased to $365,000 in 2001
from $534,000 in 2000. The continued reduction in 2001 was due to the shift in
focus from research and development to commercialization.

Patent filing and maintenance expenses increased to $196,000 in 2001 versus
$152,000 in 2000. The increase was due in part to maintaining the patents and
filing new applications. Interest income decreased to $11,000 in 2001 from
$38,000 in 2000. Interest expense increased to $181,000 in 2001 from $3,000 in
2000 due to interest expenses associated with the term loan financing
arrangement.

In 2001, Clean Diesel Technologies recorded $1,897,000 of in-kind preferred
stock dividends on its Series A Preferred Stock. In 2000, CDT recorded $712,000
of in-kind preferred stock dividends on its Series A Preferred Stock.

LIQUIDITY AND SOURCES OF CAPITAL

Prior to 2000, Clean Diesel Technologies was primarily engaged in research
and development and has incurred losses since inception aggregating $22,027,000
(excluding the effect of the preferred stock dividends). CDT expects to incur
losses through the foreseeable future as it further pursues its
commercialization efforts. Although CDT started selling limited quantities of
Platinum Plus additive in 2000 and 2001 and generating licensing revenue in
2000, sales and revenue to date have been insufficient to cover operating
expenses, and Clean Diesel Technologies continues to be dependent upon sources
other than operations to finance its working capital requirements.

For the years ended 2002, 2001 and 2000, Clean Diesel Technologies used
cash of $2,836,000, $725,000 and $1,872,000, respectively, in operating
activities.

At December 31, 2002, and December 31, 2001, Clean Diesel Technologies had
cash and cash equivalents of $2,083,000 and $4,023,000, respectively. The
decrease in cash and cash equivalents in 2002 from 2001 was due to increased
spending on marketing its products, research and development projects and
CARB/EPA certification programs. Working capital decreased to $2,534,000 at
December 31, 2002, from $3,803,000 at December 31, 2002. CDT anticipates
incurring additional losses through at least 2003 as it further pursues its
commercialization efforts.

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

Clean Diesel Technologies signed an agreement with the RJM Corporation on
February 2, 2000 that licensed RJM to sell CDT's ARIS 2000 NOx control system
for all stationary, marine and locomotive applications in North, Central and
South America. Under terms of the agreement CDT received an initial $360,000
license fee and inventory payment.

In April 2001, Clean Diesel Technologies amended its February 2000 ARIS
Stationary NOx Reduction license agreement with the RJM Corporation. Under the
amended terms of the license agreement, CDT received two fixed nonrefundable
payments of $412,500 each on June 1 and September 1 in lieu of potentially
receiving $1,040,000 on the second or third anniversary of the license
agreement. CDT will continue to receive unit royalties on future sales of
stationary, marine or locomotive applications by RJM.

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

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


12

to Common Stock. In January 2002, the remaining $250,000 and accrued interest
for the term loan was repaid.

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

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

As a result of its recurring operating losses, Clean Diesel Technologies
has been unable to generate a positive cash flow. In management's opinion, the
cash balance at December 31, 2002 will be sufficient to fund its operations
through the third quarter of 2003. CDT will require additional capital to fund
its future operations. Although CDT believes that it will be successful in its
capital-raising efforts, there is no guarantee that it will be able to raise
such funds on terms that will be satisfactory to Clean Diesel Technologies. The
Company has developed contingency plans in the event its financing efforts are
not successful. Based on such plans CDT may be required to delay, scale back or
severely curtail its operations, which could have a material adverse effect on
the business, operating results, financial condition and long-term prospects.
Accordingly, at December 31, 2002, there is substantial doubt as to the
Company's ability to continue as a going concern.

CRITICAL ACCOUNTING POLICIES

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

REVENUE RECOGNITION

Clean Diesel Technologies recognizes revenue from sales of Platinum Plus
fuel borne catalyst and ARIS systems upon shipment.

RESEARCH AND DEVELOPMENT COSTS

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

PATENT EXPENSE

Effective January 1, 2002, patent costs are capitalized and amortized over
the remaining life of each patent. Prior to this all patent costs were expensed
as incurred.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


13

ITEM 8. FINANCIAL STATEMENTS


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. as of December 31, 2002 and 2001, and the related statements of operations,
stockholders' equity, and cash flows for each the three years in the period
ended December 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clean Diesel Technologies, Inc.
at December 31, 2002 and 2001, and the results of its operations and its cash
flows for each the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that Clean
Diesel Technologies, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has incurred recurring operating losses and
will require additional capital in the future in order to fund its operations.
This condition raises substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.




/S/ ERNST & YOUNG LLP


Stamford, Connecticut
January 24, 2003


14



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


DECEMBER 31,
----------------------------
2002 2001
------------- -------------

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,083 $ 4,023
Accounts receivable 284 197
Inventories 314 296
Other current assets 76 96
------------- -------------
TOTAL CURRENT ASSETS 2,757 4,612
Other assets 222 46
------------- -------------
TOTAL ASSETS $ 2,979 $ 4,658
============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ -- $ 250
Accounts payable and accrued expenses 223 558
------------- -------------
TOTAL CURRENT LIABILITIES 223 808

Deferred compensation and pension benefits 418 368
------------- -------------
TOTAL LONG-TERM LIABILITIES 418 368

STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share,
authorized 80,000 , No shares issued and outstanding -- --
Series A Convertible Preferred Stock, par value $0.05 per share,
$500 per share liquidation preference, authorized 20,000 shares,
No shares issued and outstanding -- --
Common Stock, par value $0.05 per share, authorized
15,000,000 shares, issued and outstanding 11,968,387
and 11,214,280 shares 598 561
Additional paid-In capital 28,519 27,058
Accumulated deficit (26,779) (24,137)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,338 3,482
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,979 $ 4,658
============= =============



See accompanying notes.


15



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


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

Product revenue $ 142 $ 176 $ 199
License and royalty revenue 299 1,424 383
-------- -------- --------
Total revenue 441 1,600 582

Costs and expenses:
Cost of sales 86 117 133
General and administrative 2,291 1,858 1,799
Research and development 693 365 534
Patent filing and maintenance 43 196 152
-------- -------- --------

Loss from operations (2,672) (936) (2,036)
Interest income 39 11 38
Interest expense (9) (181) (3)
-------- -------- --------

Loss before preferred stock dividends (2,642) (1,106) (2,001)
Preferred Stock dividends (non-cash) -- (621) (712)
Preferred Stock conversion premium (non-cash) -- (1,276) --
-------- -------- --------

Net loss attributable to common stockholders $(2,642) $(3,003) $(2,713)
======== ======== ========
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.23) $ (1.08) $ (1.03)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,419 2,777 2,631
======== ======== ========



See accompanying notes.


16



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



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

BALANCE AT DECEMBER 31, 1999 11.1 $ 1 2,594 $ 130 $ 18,946 $( 18,421) $ 656
Net loss for year -- -- -- -- -- (2,001) (2,001)
Issuance of preferred stock dividends .7 -- -- -- -- -- - --
Sale of Series A Preferred Stock 1.4 -- -- -- 1,021 -- 1,021
Issuance of common stock warrants -- -- -- -- 122 -- 122
Stock options exercised -- -- 27 1 6 -- 7
Payment of directors' fees in
common stock -- -- 39 2 42 -- 44
Declared but not issued preferred
dividend 1.4 -- -- -- 712 (712) --
------- -------- ------ ------- --------- ---------- ----------------

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

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

BALANCE AT DECEMBER 31, 2002 -- $ -- 11,968 $ 598 $ 28,519 $( 26,779) $ 2,338
======= ======== ====== ======= ========= ========== ================



See accompanying notes.


17



CLEAN DIESEL TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------

OPERATING ACTIVITIES
Net loss attributable to common stockholder $(2,642) $(1,106) $(2,001)
Adjustments to reconcile net loss to cash used in operating activities
Depreciation 26 11 10
Amortization of deferred financing costs 8 91 --
Interest expense from term loans converted to common shares -- 65 --
Compensatory stock warrant 95 120 61
Changes in operating assets and liabilities:
Accounts receivable (87) (147) (4)
Inventories (18) (9) 34
Other current assets 20 (9) (35)
Accounts payable and accrued expenses (238) 259 63
-------- -------- --------

Net cash used in operating activities (2,836) (725) (1,872)
-------- -------- --------

INVESTING ACTIVITIES
Patent activities (122) -- --
Purchase of fixed assets (88) (17) (7)
-------- -------- --------
Net cash used in investing activities (210) (17) (7)

FINANCING ACTIVITIES
Proceeds from exercise of stock options -- 3 7
Proceeds from (repayment of) term loans (250) 500 500
Proceeds from issuance of common stock, net 1,356 3,721 1,021
-------- -------- --------

Net cash provided by financing activities 1,106 4,224 1,528
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,940) 3,482 (351)

Cash and cash equivalents at beginning of period 4,023 541 892
-------- -------- --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,083 $ 4,023 $ 541
======== ======== ========

NON-CASH ACTIVITIES

Preferred Stock dividend $ -- $ 621 $ 712
Preferred Stock conversion premium (non-cash) -- 1,276 --
Conversion of term loans and related interest into common stock -- 817 --


See accompanying notes.


18

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

1. BUSINESS

Clean Diesel Technologies, Inc. ("CDT") was incorporated in the State of
Delaware on January 19, 1994, as a wholly owned subsidiary of Fuel-Tech N.V.
("Fuel Tech"). Effective December 12, 1995, Fuel Tech completed a Rights
Offering of CDT's Common Stock, and reduced its ownership in CDT's Common Stock
to 27.6%. As a result of additional equity offerings in subsequent years, Fuel
Tech currently holds a 15.2% interest in CDT as of December 31, 2002.

Clean Diesel Technologies is a specialty chemical and energy technology
company supplying fuel additives and proprietary systems that reduce harmful
emissions from internal combustion engines while improving fuel economy. Prior
to 2000, CDT was a development stage enterprise devoted to research, development
and commercialization of platinum fuel catalysts (PFCs) and nitrogen oxide (NOx)
reduction technologies for diesel engines. During December 1999, CDT received
its EPA registration for its platinum-cerium product and in early 2000 recorded
its first commercial sales. Accordingly, in the opinion of management Clean
Diesel Technologies is no longer a development stage enterprise. The success of
CDT's technologies will depend upon the commercialization opportunities of the
technologies and governmental regulations, and corresponding foreign and state
agencies.

GOING CONCERN

The financial statements have been prepared assuming that the Company will
continue as a going concern and do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets and
the amount and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.

As more fully described elsewhere herein, the Company received net proceeds
of approximately $1.356 million in 2002 and $3.721 million in 2001 through
private placements of its Common Stock to assist in the pursuit of its
commercialization efforts. The success of the Company's technologies will depend
upon the commercialization opportunities of the technologies and governmental
regulations, and corresponding foreign and state agencies. The accomplishment of
these objectives by the Company will require additional capital and there can be
no assurance that such capital will be available.

As a result of the Company's recurring operating losses ($22,027,000 since
inception excluding non-cash preferred stock dividends), the Company has been
unable to generate a positive cash flow and will require additional capital in
the future in order to fund its operations, as its current cash position will
not be sufficient to fund the Company's cash requirements. The Company is,
however, actively seeking additional financing through a private placement in
order to fund its commercialization efforts. Without any further funding or
revenues from sales, demonstration programs, or license fees, the Company
expects to be able to fund operations through the third quarter of 2003.
Although the Company believes that it will be successful in its capital-raising
efforts, there is no guarantee that it will be able to raise such funds on terms
that will be satisfactory to the Company. The Company has developed contingency
plans in the event its financing efforts are not successful. Based on such plans
CDT may be required to delay, scale back or severely curtail its operations,
which could have a material adverse effect on the business, operating results,
financial condition and long -term prospects. Accordingly, at December 31,
2002, there is substantial doubt as to the Company's ability to continue as a
going concern.

2. SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

Clean Diesel Technologies considers all highly liquid investments with
maturity of three months or less when purchased to be cash equivalents. At
December 31, 2002, substantially all of CDT's cash and cash equivalents were on


19

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

deposit with one financial institution. All financial instruments are reflected
in the accompanying balance sheets at amounts that approximate fair market
value.

INVENTORIES

Inventories are stated at the lower of cost or market and consist of
finished product and platinum metal. Cost is determined using the first-in,
first-out (FIFO) method.

REVENUE RECOGNITION

Clean Diesel Technologies recognizes revenue from sales of Platinum Plus
fuel borne catalyst and ARIS systems upon shipment.

In February 2000, Clean Diesel Technologies completed a license agreement
with the RJM Corporation for CDT's ARIS 2000 NOx control system for all
stationary, marine and locomotive applications in North, Central and South
America. CDT received a $260,000 license payment in return for transferring the
ARIS 2000 technology to RJM. CDT also received $100,000 from RJM for the
remaining ARIS 2000 inventory. The license payment is non-refundable and
requires no significant ongoing services to be performed by CDT.

In April 2001, Clean Diesel Technologies amended its February 2000 ARIS
Stationary NOx Reduction license agreement with RJM. Under the amended terms of
the license agreement, CDT received two fixed nonrefundable payments of $412,500
each on June 1 and September 1 in lieu of potentially receiving $1,040,000 on
the second or third anniversary. CDT recognized the $825,000 as license revenue
in 2001. CDT receives unit royalties on all sales of stationary, marine or
locomotive applications by RJM.

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

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

Royalty fees are recognized by Clean Diesel Technologies when earned.

RESEARCH AND DEVELOPMENT COSTS

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

PATENT EXPENSE

Effective January 1, 2002, patent costs are capitalized and amortized over
the remaining life of each patent. Prior to this all patent related costs were
expensed as incurred.

STOCK-BASED COMPENSATION

Clean Diesel Technologies accounts for stock option grants in accordance
with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees." Under CDT's current plan, options may be granted at not
less than the fair market value on the date of grant and therefore no
compensation expense is recognized for the stock options granted to employees.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based


20

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

Compensation," to provide alternative methods of transition for a voluntary
change to the fair value- based method of accounting for stock-based employee
compensation. In addition, the Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the disclosure requirements of this Statement as of December 31,
2002.

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



2002 2001 2000
-------- -------- --------

Net loss attributable to common stockholders as reported $(2,642) $(3,003) $(2,713)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (591) (422) (364)
-------- -------- --------
Pro forma net loss attributable to common stockholders $(3,233) $(3,425) $(3,077)
Net loss per share:
Basic and diluted loss per common share-as reported $ (0.23) $ (1.08) $ (1.03)
Basic and diluted per common share-pro forma $ (0.28) $(1.23) $ (1.17)


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

The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that 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
CDT'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:

2002 2001 2000
-------- -------- --------
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 4.85% 4.66% 6.67%
Expected volatility 94.2% 94.2% 99.7%
Expected life of option 4 YEARS 4 years 4 years


BASIC AND DILUTED LOSS PER COMMON SHARE

Basic and diluted loss per share are calculated in accordance with SFAS No.
128, Earnings Per Share. Basic earnings per share are computed by dividing net
earnings by the weighted-average shares outstanding during the reporting period.
Diluted earnings per share are computed similar to basic earnings per share
except that the weighted-average shares outstanding are increased to include
additional shares from the assumed exercise of stock options and warrants, if
dilutive.

3. INCOME TAXES

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


21

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

At December 31, 2002 and 2001, Clean Diesel Technologies had tax losses
available for offset against future years' earnings of approximately $ 19.8
million and $17.2 million, respectively. Temporary differences were
insignificant as of such dates. CDT has provided a full valuation allowance to
reduce the related deferred tax asset to zero.

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

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

4. STOCKHOLDERS' EQUITY

During 2002, Clean Diesel Technologies received proceeds of $1.356 million
(net of expenses) through a private placement of 704,349 shares of its Common
Stock on the AIM of the London Stock Exchange. In 2001, CDT received proceeds of
$3.721 million (net of $0.644 million in expenses and $0.817 million in term
loan repayment) through a private placement of 2,580,664 shares of its Common
Stock. In 2000 and 1999 $1.021 million and $1.75 million was raised through a
private placement of 1,362 and 3,500 Series A Preferred Stock shares,
respectively. In 1998, $1.4 million of bridge loans and $.5 million of term
loans were converted into 2,800 and 1,029 shares of Series A Preferred Stock.
During 2001, $1,897,000 of dividends were declared for Series A Preferred Stock
and converted into CDT's Common Stock. On December 28, 2001, CDT converted all
outstanding Series A Preferred Stock (15,897 shares) including accrued stock
dividends, into Common Stock (5,934,829 shares).

In May 2002 and May 2001 CDT issued 22,658 and 25,676 shares, respectively,
of Common Stock to its Board of Directors in lieu of approximately $46,800 and
$40,800 of Director's fees pertaining to their services for the years ended
December 31, 2001 and 2000. The share price used represented the average of
CDT's quarter-end high and low trading prices. Such Director's fees had been
accrued and charged to expense during 2001 and 2000.

5. STOCK OPTIONS AND WARRANTS

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

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



2002 2001 2000
-------------------------- ------------------------- -------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
-------- --------------- -------- --------------- ------- -----------------

Outstanding, beginning
of year 1,139 $ 2.48 974 $ 2.54 760 $ 2.48
Granted 470 2.94 240 1.97 246 2.48
Exercised -- -- (12) .20 (27) .24
Forfeited (42) 2.97 (63) 2.00 (5) 1.93
---------------------------------------------------- ------------------------


22

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

Outstanding, end
of year 1,567 $ 2.60 1,139 $ 2.48 974 $ 2.54
==================================================== ========================
Exercisable, end
of year 1,220 $ 2.56 939 $ 2.55 744 $ 2.72
Weighted-average fair value of
options granted during the year $ 2.01 $ 1.38 $ 1.78


The following table summarizes information about stock options outstanding
at December 31, 2002:



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

$ .20 - $2.49 652,500 7.05 $ 1.55 585,833 $ 1.50
2.50 - 4.63 855,000 7.78 3.12 575,000 3.20
5.63 - 6.82 59,450 3.05 6.72 59,450 6.72
- ---------------------------------------------------------------- ----------------------------
$ .20 - $6.82 1,566,950 7.30 $ 2.60 1,220,283 $ 2.56


In March 1997, in consideration of his assistance to Clean Diesel
Technologies in obtaining sources of permanent financing CDT granted a director
a warrant to purchase 25,000 shares of CDT's Common stock for $10.00 per share,
which exceeded the fair market value of CDT's Common Stock at the date of grant.

In June 1999, in consideration of their undertaking to assist CDT in
obtaining sources of permanent financing, CDT granted warrants to two directors
for 58,333 and 29,167 shares at $1.50 per share, which exceeded the fair market
value of CDT's Common Stock at the date of grant and was included in the cost of
capital.

In March 2000, pursuant to a financial consulting agreement, Clean Diesel
Technologies granted an investment bank 25,000 warrants to purchase CDT's common
stock, at an exercise price of $3.00 per share. The value of such warrants was
$61,000 and was charged to earnings.

In April 2000, in consideration of their undertaking to assist CDT in
obtaining sources of permanent financing CDT granted warrants to two directors
for 27,675 and 12,150 shares at $2.25 per share. The value of such warrants was
$78,000 and was included in the cost of capital.

In November 2000, CDT granted the lenders a total of 100,000 warrants in
conjunction with a $1,000,000 term loan agreement. Fifty thousand of the
warrants were awarded in November 2000, 25,000 of the warrants were awarded in
December 2000 when $500,000 of the term loan was borrowed and the remaining
25,000 warrants were awarded when the remaining $500,000 was borrowed in March
2001. The warrants were priced at $2.00 per share. The value of the warrants
issued was $60,750 and has been capitalized as a deferred financing cost and
will be amortized over the life of the loan. The value of the 25,000 warrants
issued in March 2001 was $37,250 and has also been capitalized as a deferred
financing cost. In December 2001, CDT converted $750,000 of the outstanding
$1,000,000 loan into Common Stock and expensed $16,100 of the remaining
capitalized warrant expense.

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

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


23

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



CDT Warrants
2002 2001 2000
-------------------------- -------------------------- --------------------------
Warrants EXERCISE PRICE Warrants EXERCISE PRICE Warrants EXERCISE PRICE
(000'S) PER SHARE (000'S) PER SHARE (000'S) PER SHARE
-------------------------- -------------------------- --------------------------

Outstanding, beginning
of year 429 N/A 302 N/A 163 N/A
Granted - - 177 $ 1.50 - 2.00 139 $ 1.50 - 2.00
Exercised 50 $ 1.50 - 2.00 - - - -
Forfeited - - (50) $ 6.50 - -
-------------------------- -------------------------- --------------------------
Outstanding, end
of year 379 $ 1.50 - 10.00 429 $ 1.50 - 10.00 302 $ 1.50 - 10.00
========================== ========================== ==========================




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

$1.50 - $2.00 289,113 5.48 $ 1.76 289,113 $ 1.76
2.25 - 3.00 64,825 5.41 2.54 64,825 2.54
10.00 25,000 1.33 10.00 25,000 10.00
- ---------------------------------------------------------- ------------------------------
$1.50 - $10.00 378,938 5.19 $ 2.44 378,938 $ 2.44


6. COMMITMENTS

Clean Diesel Technologies is obligated under a sublease agreement for its
principal office. CDT has agreed to a six-month extension with three months'
notice for termination of the lease through December 2003, at an annual rate of
$116,000. CDT's minimum lease payments total $58,000 for 2003. For the years
ended December 31, 2002, 2001 and 2000, rental expense approximated $112,100,
$81,500 and $81,200, respectively.

Effective October 28, 1994, Fuel Tech granted two licenses to Clean Diesel
Technologies for all patents and rights associated with its platinum fuel
catalyst technology. Effective November 24, 1997, the licenses were canceled
and Fuel Tech assigned to CDT all such patents and rights on terms substantially
similar to the licenses. In exchange for the assignment, CDT will pay Fuel Tech
a royalty of 2.5% of its annual gross revenue from sales of the platinum fuel
catalysts commencing in 1998. The royalty obligation expires in 2008. CDT may
terminate the royalty obligation to Fuel Tech by payment of $6,545,455 in 2003
and declining annually to $1,090,910 in 2008. CDT as assignee and owner will
maintain the technology at its own expense. Minimum royalties were paid to Fuel
Tech in 2002 and royalties payable to Fuel Tech at December 31, 2002 were $795.

7. RELATED PARTY TRANSACTIONS

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

Clean Diesel Technologies has a Management and Services Agreement with Fuel
Tech. The agreement requires CDT to reimburse Fuel Tech for management, services
and administrative expenses incurred on behalf of CDT. CDT agreed to pay Fuel
Tech a fee equal to an additional 3-10% of the costs paid on CDT's behalf,
dependent upon the nature of the costs incurred. One Fuel Tech officer/director
serves as an officer/director of Clean Diesel Technologies. The financial
statements include charges from Fuel Tech of certain management and
administrative costs, which approximate $69,000, $70,000 and $77,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. In the opinion of
CDT's management, such costs are fair and reasonable and are on terms not less
favorable than could be obtained from a third party.

Balances due to Fuel Tech for the years ended December 31, 2002 and 2001,
approximated $0 and $6,000, respectively.



24

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

Clean Diesel Technologies had a deferred salary plan with its Chief
Executive Officer in which he deferred $62,500 of his annual salary until CDT
reaches $5 million in revenue. This agreement was terminated in March 2001 and
the executive's salary was returned to full pay. For the years ended December
31, 2002 and 2001, $0 and $10,400 of expense was accrued in connection with such
arrangement. At December 31, 2002 and 2001, total obligations were $135,400 in
both years pertaining to this plan.

Clean Diesel Technologies makes annual pension payments or accruals
pursuant to a deferred compensation plan on behalf of its Chief Executive
Officer. For the three years ended December 31, 2002, $50,000 of expense was
recognized each year in connection with the plan. At December 31, 2002 and
2001, total obligations were $282,700 and $232,700, respectively, pertaining to
this plan.

8. MARKETING AND JOINT DEVELOPMENT AGREEMENTS

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

9. RECENT ACCOUNTING PRONOUNCEMENTS

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

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



1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/02 Ended 6/30/02 Ended 9/30/02 Ended 12/31/02 Total Year
Unaudited Unaudited Unaudited Unaudited 2002
---------------------------------------------------------------------------------

TOTAL REVENUE $ 71 $ 19 $ 51 $ 300 $ 441
GROSS PROFIT 27 7 34 287 355
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS (662) (860) (717) (403) (2,642)
BASIC LOSS PER COMMON SHARE (0.06) (0.08) (0.06) (0.03) (0.23)

DILUTED LOSS PER COMMON SHARE (0.06) (0.08) (0.06) (0.03) (0.23)


25

CLEAN DIESEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
---------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Ended 3/31/01 Ended 6/30/01 Ended 9/30/01 Ended 12/31/01 Total Year
Unaudited Unaudited Unaudited Unaudited 2001
---------------------------------------------------------------------------------
Total revenue $ 24 $ 919 $ 499 $ 158 $ 1,600
Gross profit 17 868 449 149 1,483
Net profit/(loss) attributable to
common stockholders (760) 44 (364) (1,923) (3,003)
Basic profit/(loss) per common
share (0.29) 0.02 (0.13) (0.63) (1.08)
Diluted profit/(loss) per common
share (0.29) 0.01 (0.13) (0.63) (1.08)
---------------------------------------------------------------------------------



Note: The sum of the quarters' earnings per share may not equal the full year
per share amounts


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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and executive officers of CDT will be set
forth under the captions "Election of Directors", "Directors and Executive
Officers of Clean Diesel Technologies" and "Committees of the Board" in CDT's
Proxy Statement related to the 2003 annual meeting of stockholders (the "Proxy
Statement") and is incorporated by reference herein.

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. CONTROLS AND PROCEDURES

As of the date of this filing, an evaluation was performed under the supervision
and with the participation of the Company's management, including its CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including its CEO and CFO concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2002.


26

PART IV

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

(a) (1) FINANCIAL STATEMENTS

The Financial Statements identified below and required by Part II, Item 8
of this Form 10-K are set forth above.
Report of Independent Auditors
Balance Sheets as of December 31, 2002, and 2001
Statements of Operations for the years ended December 31, 2002, 2001,
and 2000
Statements of Changes in Stockholders' Equity(Deficit) for the years
ended December 31, 2002, 2001, and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001,
and 2000

(2) FINANCIAL STATEMENT SCHEDULES

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


27



(3) EXHIBITS


Exhibit No. Title
- ----------- -----

*3(i) Certificate of Incorporation.
3(ii) Certificate of Amendment of Certificate of Incorporation effective June
22,1998.
*3(iii) By-Laws.
++3(iv) Certificate of Designation for Series A Convertible Preferred Stock.
3(v) Certificate of Amendment of Certificate of Designation for Series A
Convertible Preferred Stock.
3(vi) Second Certificate of Amendment of Certificate of Designation for Series A
Preferred Stock.
at(vii) Third Certificate of Amendment of Certificate of Designation for Series A
Preferred Stock
*4a Specimen Stock Certificate, Common Stock.
++4b Specimen Stock Certificate, Series A Convertible Preferred Stock.
+10a Assignment of Intellectual Property Rights Fuel-Tech N.V. to
Platinum Plus, Inc. as of November 5, 1997.
+10b Assignment of Intellectual Property Rights Fuel Tech, Inc. to Clean Diesel
Technologies, Inc. as of November 5, 1997.
+10c Assignment Agreement as of November 5, 1997, among Platinum Plus, Inc.,
Fuel-Tech N.V., and Clean Diesel Technologies, Inc.
*****10d 1994 Incentive Plan, as amended through August 8, 1996.
10e Amendment of Section 5.1 of 1994 Incentive Plan, effective June 9, 1999.
****10f Management Services Agreement between Clean Diesel Technologies, Inc. and
Fuel Tech, Inc., and Fuel-Tech N.V. as of June 1, 1996. ,
***10g Office Premises Lease of January 26, 1996.
+10h and Fuel-Tech N.V. of November 5, 1997.
+++10i and the holders of Series A Convertible Preferred Stock as of November 11,
1998.
++10j and the several lenders set forth on Schedule A thereto-dated May 8, 1998.
+++10k several lenders set forth on Schedule A thereto-dated November 11, 1998.
*+10l Material Foreign Patents.
++++10m Technologies, Inc. and RJM Corporation.
++++10n between Clean Diesel Technologies, Inc. and RJM Corporation.
at10 o Loan Facility Agreement of November 14, 2000 with exhibits.
**23.1 Consent of Auditors, Ernst & Young LLP.
99 Certification Pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.


- ---------------
* Previously filed as Exhibit to Registration Statement on Form S-1
of August 16, 1995, No. 33-95840.
** Filed herewith.
*** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1995.
**** Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1996.
***** Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1996.
[] Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1998.
+ Previously filed as Exhibit to Form 10-K for the year ended
December 31, 1997.
++ Previously filed as Exhibit to Form 8-K dated May 26, 1998.
+++ Previously filed as Exhibit to Form 10-Q for the quarter ended
September 30, 1998.
[][] Previously filed as Exhibit to Forms 10-K for the year ended
December 31, 2000.
++++ Previously filed as Exhibit to Form 8-K dated February 1, 2000.
at Previously filed as Exhibit to Form 10K for the year ended
December 31, 2002.


(b) REPORTS ON FORM 8-K

CDT filed Form 8-K describing the issuance of new stock in the fourth
quarter of 2001.


28

SIGNATURES

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

CLEAN DIESEL TECHNOLOGIES, INC.



March 25, 2003 By: /s/ Jeremy D. Peter-Hoblyn
- -------------------------- -----------------------------
Date Jeremy D. Peter-Hoblyn
Chief Executive Officer and
Chairman of the Board of Directors


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



/s/ Jeremy D. Peter-Hoblyn Chief Executive Officer and Chairman of the
- --------------------------- Board of Directors (principal executive officer)
Jeremy D. Peter-Hoblyn


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


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


/s/ Derek R. Gray Director
- ---------------------------
Derek R. Gray


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


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




Dated: March 25 , 2003


29

SIGNATURES AND CERTIFICATES

I, Jeremy D. Peter-Hoblyn, certify that:

1. I have reviewed this annual report on Form 10-K of Clean Diesel
Technologies, Inc.;

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 25, 2003 By: /s/ Jeremy D. Peter-Hoblyn
---------------------------
Jeremy D Peter-Hoblyn
Chairman and Chief Executive Officer


31

I, David W. Whitwell, certify that:

1. I have reviewed this annual report on Form 10-K of Clean Diesel
Technologies, Inc.;

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weakness in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 25, 2003 By: /s/ David W. Whitwell
------------------------
David W. Whitwell
Chief Financial Officer, Vice Present and Treasurer


32