



   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
                                                      REGISTRATION NO. 333-
===========================================================================
                     SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D.C. 20549

                           --------------------
                                  FORM S-1
                        REGISTRATION STATEMENT UNDER
                         THE SECURITIES ACT OF 1933

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

       DELAWARE                    5169                    06-1393453
   (State or other           (Primary Standard          (I.R.S. Employer
   jurisdiction of              Industrial           Identification Number)
   incorporation or         Classification Code
    organization)                 Number)

                       300 ATLANTIC STREET, SUITE 702
                          STAMFORD, CT 06901-3522
                               (203) 327-7050
     (Address, including zip code, and telephone number, including area
             code, of registrant's principal executive offices)

                         CHARLES W. GRINNELL, ESQ.
                            HUTH & GRINNELL, LLC
                           1055 WASHINGTON BLVD.
                             STAMFORD, CT 06901
  (Name, address, including zip code, and telephone number, including area
                  code, of registrant's agent for service)
                PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:

                             KENNETH ROSH, ESQ.
                  FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
                             ONE NEW YORK PLAZA
                             NEW YORK, NY 10004
                               (212) 859-8000
  Approximate date of commencement of proposed sale to public: As soon as
   practicable after the effective date of this Registration Statement.

                           --------------------
  If any of the securities  being registered on this form are to be offered
on a delayed or continuous  basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. |X|

  If this Form is filed to register  additional  securities for an offering
pursuant to Rule 462(b) under the  Securities  Act, check the following box
and list the Securities Act  registration  statement  number of the earlier
effective registration statement for the same offering. |_|

  If this Form is a post-effective  amendment filed pursuant to Rule 462(c)
under the  Securities  Act, check the following box and list the Securities
Act  registration  statement number of the earlier  effective  registration
statement for the same offering. |_|

  If this Form is a post-effective  amendment filed pursuant to Rule 462(d)
under the  Securities  Act, check the following box and list the Securities
Act  registration  statement number of the earlier  effective  registration
statement for the same offering. |_|

  If delivery  of the  prospectus  is expected to be made  pursuant to Rule
434, please check the following box. |_|

                           --------------------
<TABLE>
<CAPTION>
                                                  CALCULATION OF REGISTRATION FEE
==========================================================================================================================
                                                                PROPOSED MAXIMUM    PROPOSED MAXIMUM
           TITLE OF EACH CLASS OF              AMOUNT TO BE      OFFERING PRICE         AGGREGATE           AMOUNT OF
        SECURITIES TO BE REGISTERED             REGISTERED       PER SHARE (FN1)   OFFERING PRICE (FN1)  REGISTRATION FEE
--------------------------------------------- ---------------- ------------------- ------------------- -------------------
<S>                                           <C>              <C>                 <C>                 <C>
Rights to purchase shares of Series B
Convertible Preferred Stock, par value
$0.05 per share..............................     50,000              --                  --                -- (FN2)
--------------------------------------------- ---------------- ------------------- ------------------- -------------------
Series B Convertible Preferred Stock, par
value $0.05 per share........................     50,000             $74.25            $3,712,500          $1,095.19
--------------------------------------------- ---------------- ------------------- ------------------- -------------------
Common Shares, par value $0.05 per share.....    1,650,000             --                  --                -- (FN3)
==========================================================================================================================
<FN>
(1)  Estimated  solely for the purpose of calculating the  registration fee
     pursuant to Rule 457.

(2)  Pursuant to Rule 457(g),  no registration  fee is payable with respect
     to the  Rights  since  the  Rights  are being  registered  in the same
     registration  statement  as  the  securities  to be  offered  pursuant
     thereto.

(3)  Pursuant to Rule 457(i),  no registration  fee is payable with respect
     to the Common Shares since the Common  Shares are being  registered in
     the  same   registration   statement  as  the  securities   which  are
     convertible, for no additional consideration, into the Common Shares.

</FN>
</TABLE>

THE REGISTRANT  HEREBY AMENDS THIS  REGISTRATION  STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE  DATE UNTIL THE REGISTRANT
SHALL  FILE  A  FURTHER  AMENDMENT  WHICH  SPECIFICALLY  STATES  THAT  THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION  8(A) OF THE  SECURITIES  ACT OF 1933 OR  UNTIL  THIS  REGISTRATION
STATEMENT  SHALL BECOME  EFFECTIVE ON SUCH DATE AS THE  COMMISSION,  ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===========================================================================

             SUBJECT TO COMPLETION, DATED ______________, 1998

PROSPECTUS

                      CLEAN DIESEL TECHNOLOGIES, INC.

  50,000 RIGHTS TO ACQUIRE SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK

           50,000 SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK

                      1,650,000 SHARES OF COMMON STOCK

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

     Clean  Diesel   Technologies,   Inc.,  a  Delaware   corporation  (the
"Company"),  is  distributing  to holders (the  "Holders") of the Company's
outstanding  common shares, par value $0.05 per share (the "Common Shares")
of record at the close of business on __________,  1998 (the "Record Date")
transferable  rights (the "Rights") to subscribe  (the "Basic  Subscription
Privilege")  for and purchase an  aggregate  of up to 50,000  shares of the
Company's  Series B Convertible  Preferred Stock, par value $0.05 per share
(the "Series B Preferred  Stock" and with respect to the Series B Preferred
Stock underlying the Rights, the "Offering Shares"). The Rights will expire
at 5:00 p.m.,  Eastern Standard Time, on _______ ___, 1998, unless extended
as described herein (the "Expiration  Date"). The term "Rights Offering" or
"Offering" includes the distribution of the Rights and the issuances of the
Offering Shares upon the exercise of the Rights.

     A Holder  will  receive  the Right to  purchase  one share of Series B
Preferred  Stock for each 50 Common  Shares  held on the  Record  Date (the
"Underlying   Shares");   provided,   however,  that  Rights  will  not  be
distributed  to Holders who reside in  jurisdictions  where the  securities
offered  hereby (the  "Securities")  have not been  registered  or where an
exemption  from  registration  is not  available,  as described  more fully
below. Each Right will entitle the Holder to purchase one share of Series B
Preferred Stock for $_____ per share (the "Subscription  Price"),  and each
share of Series B Preferred  Stock will be immediately  convertible,  at no
cost to the Holder thereof,  into 33 Common Shares. No fractional Rights or
cash in lieu thereof will be distributed or paid by the Company. The number
of Rights distributed will be rounded down to the nearest whole number. The
Rights will be evidenced by transferable certificates;  provided,  however,
that the Oversubscription  Privilege (as defined below) is not transferable
and  transferees of Rights in  jurisdictions  where the Securities have not
been  registered or where an exemption from  registration  is not available
may not exercise the rights.

Cover continued on following page.

     THE RIGHTS  WILL ONLY BE GRANTED  TO,  AND MAY ONLY BE  EXERCISED  BY,
INVESTORS  RESIDING IN THE  FOLLOWING  JURISDICTIONS  WHERE THE  SECURITIES
OFFERED  HEREBY  HAVE  BEEN  REGISTERED  WITH  THE  APPROPRIATE  SECURITIES
REGULATORY  AUTHORITIES  OR WHERE AN EXEMPTION  FROM SUCH  REGISTRATION  IS
AVAILABLE:  OUTSIDE THE UNITED  STATES AND IN  COLORADO,  CONNECTICUT,  THE
DISTRICT OF COLUMBIA,  ILLINOIS,  INDIANA,  IOWA, KANSAS, MAINE,  MARYLAND,
MASSACHUSETTS,  NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND,
VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS
WHO RESIDE IN STATES  WHERE THE  SECURITIES  OFFERED  HEREBY  HAVE NOT BEEN
REGISTERED OR WHERE AN EXEMPTION FROM  REGISTRATION  IS NOT  AVAILABLE.  IN
ADDITION,  THE SERIES B PREFERRED STOCK MAY NOT BE TRANSFERRED TO RESIDENTS
OF  ANY  OF  THE  FOLLOWING  STATES:   ARIZONA,   FLORIDA,   GEORGIA,  OHIO,
PENNSYLVANIA OR TEXAS.

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

     ONCE A HOLDER HAS  EXERCISED  ANY  RIGHTS,  SUCH  EXERCISE  MAY NOT BE
REVOKED.  PRIOR TO  DECIDING  TO EXERCISE  OR SELL  RIGHTS,  ANY  POTENTIAL
INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH BELOW UNDER "RISK
FACTORS"  BEGINNING  ON PAGE 13 IN  ADDITION TO THE OTHER  INFORMATION  SET
FORTH IN THIS PROSPECTUS.

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

     THESE  SECURITIES  HAVE  NOT  BEEN  APPROVED  OR  DISAPPROVED  BY  THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,  NOR
HAS  THE  SECURITIES  AND  EXCHANGE  COMMISSION  OR  ANY  STATE  SECURITIES
COMMISSION  PASSED UPON THE  ACCURACY OR ADEQUACY OF THIS  PROSPECTUS.  ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

---------------------------------------------------------------------------
                                     Price to             Proceeds to
                                      Public              Company (FN1)
---------------------------------------------------------------------------
Per Share...................  $              --      $              --
---------------------------------------------------------------------------
Total Minimum...............  $ __________________   $ _________________
---------------------------------------------------------------------------
         Maximum............  $ __________________   $ _________________
---------------------------------------------------------------------------

(1)  Before offering and subscription expenses.

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

DELIVERY OF THE CERTIFICATES REPRESENTING THE RIGHTS IS EXPECTED TO BE MADE
ON OR ABOUT ____ _, 1998.

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

              THE DATE OF THIS PROSPECTUS IS __________, 1998

[RED HERRING]
Information  contained  herein is subject to  completion  or  amendment.  A
registration statement relating to these securities has been filed with the
Securities and Exchange  Commission.  These  securities may not be sold nor
may offers to buy be accepted prior to the time the registration  statement
becomes effective. This prospectus shall not constitute an offer to sell or
the  solicitation  of an offer to buy nor shall  there be any sale of these
securities in any State in which such offer,  solicitation or sale would be
unlawful prior to registration or  qualification  under the securities laws
of any such State.

     Each Holder may also subscribe ("the  Oversubscription  Privilege") at
the  Subscription  Price for some or all of the additional  Offering Shares
available  after  satisfaction of all  subscriptions  pursuant to the Basic
Subscription Privilege. The Oversubscription Privilege is not transferable.
A Holder of Rights may,  at the time of exercise of the Basic  Subscription
Privilege,  exercise the Oversubscription  Privilege for up to an aggregate
of  50,000  Offering  Shares  (the  "Maximum  Offering  Shares")  minus the
Offering  Shares  subscribed  for by  such  Holder  pursuant  to the  Basic
Subscription  privileges.  If an insufficient  number of Offering Shares is
available to satisfy fully all  elections to exercise the  Oversubscription
Privilege,  then the available  Offering Shares will be allocated among the
Holders  exercising  their  Oversubscription  Privilege such that each such
Holder will be entitled  to receive a number of  Offering  Shares  which is
equal  to the  number  of  Offering  Shares  subscribed  to by such  Holder
pursuant to the Oversubscription  Privilege  multiplied by a fraction,  the
numerator of which is the number of the then available  Offering Shares and
the  denominator  of which  is the  aggregate  number  of  Offering  Shares
subscribed to pursuant to the Oversubscription Privilege. If a proration of
the Offering  Shares results in a Holder  receiving  fewer Offering  Shares
than such Holder subscribed for pursuant to the Oversubscription Privilege,
then any  excess  funds paid by the  Holder as the  Subscription  Price for
shares  not issued  will be  returned  by the  Subscription  Agent  without
interest or deduction.

     The Company shall  terminate the Rights  Offering if on the Expiration
Date the Company receives aggregate cash proceeds of less than $2.0 million
from the exercise of Rights.  On June 30,  1998,  the last day on which the
Company's   Common  Shares  were  listed  on  the  Nasdaq  National  Market
("Nasdaq"),  the  average  of the high and low sales  prices of the  Common
Shares was $1.75 per share. As of July 1, 1998, the Company's Common Shares
are no longer  listed and traded on Nasdaq but  currently  trade on the OTC
Electronic  Bulletin  Board,  although no assurances can be given that such
shares will continue to trade thereon or in the over-the-counter market, in
what are commonly  referred to as the "pink  sheets." As of August 4, 1998,
the last sale price for the Common Shares as reported by the OTC Electronic
Bulletin  Board was $1.88 per  Common  Share.  Neither  the  Rights nor the
Series B Preferred Stock will be listed on an exchange.

     The Company shall pay broker-dealers fees for their soliciting efforts
(the "Soliciting  Fees") of ten percent of the Subscription  Price paid for
each Right which is  subscribed;  provided that such fees will only be paid
in respect of Rights exercised in those jurisdictions described under "PLAN
OF DISTRIBUTION -- Distribution  Arrangements." The Soliciting Fees will be
paid directly to the broker-dealer  designated on the applicable portion of
the  Rights   Certificate.   Soliciting  fees  will  not  be  paid  on  any
undesignated exercises of Rights.

     AN INVESTMENT  IN THE  SECURITIES  OFFERED  HEREBY IS  SPECULATIVE  IN
NATURE AND INVOLVES A HIGH DEGREE OF RISK. AN INVESTMENT IN THE  SECURITIES
SHOULD NOT BE MADE BY AN INVESTOR WHO CANNOT  AFFORD THE LOSS OF HIS OR HER
ENTIRE INVESTMENT.

     THE DISTRIBUTION OF THIS PROSPECTUS AND THE OFFERING OF THE SECURITIES
IN CERTAIN JURISDICTIONS MAY BE RESTRICTED BY LAW. NO ACTION HAS BEEN TAKEN
BY THE  COMPANY  THAT WOULD  PERMIT AN OFFERING  OF THE  SECURITIES  OR THE
CIRCULATION OR DISTRIBUTION OF THIS PROSPECTUS OR ANY OFFERING  MATERIAL IN
RELATION TO THE COMPANY OR THE SECURITIES IN ANY COUNTRY OUTSIDE THE UNITED
STATES WHERE ACTION FOR THAT PURPOSE IS REQUIRED.

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

     THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES  ACT OF 1933, AS AMENDED (THE  "SECURITIES
ACT"). DISCUSSION CONTAINING SUCH FORWARD-LOOKING  STATEMENTS WILL BE FOUND
IN THE MATERIAL SET FORTH UNDER "PROSPECTUS  SUMMARY," "RISK FACTORS," "USE
OF PROCEEDS,"  "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS WITHIN THE PROSPECTUS
GENERALLY.  ACTUAL RESULTS COULD DIFFER  MATERIALLY FROM THOSE PROJECTED IN
THE  FORWARD-LOOKING  STATEMENTS  AS A RESULT OF THE RISK FACTORS SET FORTH
UNDER  "RISK  FACTORS"  AND  THE  MATTERS  SET  FORTH  IN  THIS  PROSPECTUS
GENERALLY.  THE COMPANY  CAUTIONS  THE READER,  HOWEVER,  THAT THIS LIST OF
FACTORS MAY NOT BE EXHAUSTIVE.

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

                           AVAILABLE INFORMATION

     The Company  currently  reports under the  Securities  Exchange Act of
1934, as amended (the "Exchange Act"), and, in accordance therewith,  files
reports and other  information with the Securities and Exchange  Commission
(the "Commission"). Such reports and other information can be inspected and
copied at the public reference facilities  maintained by the Commission at:
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
Northwestern  Atrium Center, 500 West Madison Street,  Suite 1400, Chicago,
Illinois  60661;  and Seven World Trade Center,  13th Floor,  New York, New
York 10048.  Copies of such  material  also can be obtained from the Public
Reference Section of the Commission,  at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains
a web site that contains  reports,  proxy and  information  statements  and
other information  regarding  registrants that file electronically with the
Commission.  The address of such site is  http://www.sec.gov.  In addition,
through June 30, 1998,  the Company's  Common Shares were listed and traded
on Nasdaq  under the symbol  "CDTI",  but as of July 1, 1998 were  delisted
therefrom.  Reports and other information,  including proxy and information
statements,  for  periods  during  which the Common  Shares  were listed on
Nasdaq  can be  inspected  and  copies  can be made at the  offices  of the
National  Association  of Securities  Dealers,  Inc.  (the "NASD"),  1735 K
Street, N.W., Washington, D.C. 20006.

     The Company has filed with the  Commission,  450 Fifth  Street,  N.W.,
Washington,   D.C.  20549,  a  Registration  Statement  on  Form  S-1  (the
"Registration  Statement")  under the  Securities  Act, with respect to the
Securities  offered  hereby.  This  Prospectus  does  not  contain  all the
information  set  forth  in the  Registration  Statement  and the  exhibits
thereto,  as permitted by the Rules and Regulations of the Commission.  For
further information, reference is made to the Registration Statement and to
the exhibits filed therewith. Statements contained in this Prospectus as to
the contents of any contract or other  document  which has been filed as an
exhibit to the  Registration  Statement  are  qualified  in all respects by
reference  to such  exhibits  for a complete  statement  of their terms and
conditions.  The  Registration  Statement  and  exhibits  may be  inspected
without  charge and copied upon  payment of  prescribed  fees at the public
reference facilities  maintained by the Commission at the address set forth
above.

     The Company  intends to furnish the  Holders of the  Company's  Common
Shares with annual reports  containing  financial  statements audited by an
independent  public  accounting  firm and, in addition to filing  quarterly
reports on Form 10-Q with the  Commission,  the  Company  will issue  press
releases  containing  summary  financial  information for each of the first
three fiscal quarters of each fiscal year.


                             PROSPECTUS SUMMARY

     The  following  summary is provided  for  convenience  only and is not
intended to be  complete.  It is qualified in its entirety by and should be
read in  conjunction  with  the more  detailed  information  and  Financial
Statements  (including  the  Notes  thereto)  appearing  elsewhere  in this
Prospectus.  For  purposes of this  document,  (i)  "minimum  subscription"
assumes the  exercise in cash of a  sufficient  number of Holders such that
the  aggregate  cash  proceeds to the Company  equal $2.0  million and (ii)
"full  subscription"  assumes the  purchase of all of the  Offering  Shares
offered  hereby,  including  the  exercise in cash of the  Oversubscription
Privilege by certain  Holders to  compensate  for those  Holders who do not
exercise the Basic Subscription in full.


                                THE COMPANY

GENERAL

     The Company, a Delaware corporation with a principal place of business
at 300 Atlantic Street, Stamford, Connecticut 06901, is a development-stage
specialty  chemical company supplying advanced catalytic fuel additives and
systems that reduce  harmful  emissions  from internal  combustion  engines
while improving fuel economy.  The Company's two main technology  areas are
Platinum  Fuel  Catalysts  ("PFCs") for  emission  control and fuel economy
improvement  in diesel- and  gasoline-fueled  engines,  and nitrogen  oxide
("NOx")  reduction  systems and chemicals for control of NOx emissions from
diesel engines.

BACKGROUND

     The  Company  was  formed  in 1994 as a  wholly  owned  subsidiary  of
Fuel-Tech  N.V.  ("Fuel  Tech"),  which  had  conducted   fundamental  work
regarding the Company's technologies. The Company was spun off by Fuel Tech
in a rights  offering in December  1995 (the "1995 Rights  Offering"),  and
Fuel Tech currently owns 27.4% of the Company's  outstanding Common Shares.
The Company raised net proceeds of approximately  $10.5 million in the 1995
Rights  Offering  which,   following  the  repayment  of  $2.3  million  of
intercompany  loans to Fuel  Tech,  was  sufficient  to fund the  Company's
operations through May of 1998. The Company has since funded its operations
through the net proceeds received in connection with the issuance of bridge
loan notes (the "Bridge Loan Notes")  issued to Fuel Tech and certain other
lenders.

     At its inception, the Company had a limited number of patents for PFCs
licensed from Fuel Tech and limited  testing  results of PFCs.  The Company
currently  has 12  U.S.  and 38  International  patents  on  PFCs  and  NOx
reduction  systems and has another 83 U.S. and  International  applications
pending.  In addition,  the Company has completed  successful  testing of a
diesel  fuel  PFC  additive,  launched  the  marketing  of a  PFC  used  to
rejuvenate aged catalytic  converters in Europe, and developed the Advanced
Reagent  Injection  System  ("ARIS(TM)  2000")  for  use in  catalytic  NOx
reduction systems.

BUSINESS STRATEGY

     The Company's strategic objective is to become a leading developer and
supplier of (i) PFCs for emission  control and fuel economy  improvement in
diesel-  and  gasoline-fueled  engines and (ii) NOx  reduction  systems and
chemicals for control of NOx emissions from diesel engines. Key elements of
the Company's strategy include the following:

DEVELOPING MARKETS FOR PFCS AS A DIESEL FUEL ADDITIVE

     The Company  has  successfully  concluded  a study at Delft  Technical
University in the Netherlands  concerning the emission reduction effects of
PFCs used with ceramic filters for reduction in particulate  emission.  The
Company has also  demonstrated  improved  emission  reduction and increased
fuel  economy  from the use of PFCs  without  ceramic  filters in  separate
programs  at Ricardo  Consulting  Engineers  Ltd.  ("Ricardo")  and Cummins
Engine Co.  ("Cummins").  The  Company  seeks to  capitalize  on these test
results,  coupled with the increased regulation of emissions, by developing
a market for PFCs in the U.S. and abroad.

DEVELOPING MARKETS FOR PFCS AS A GASOLINE ADDITIVE

     The Company seeks to continue its marketing of PFCs used to rejuvenate
aged catalytic  converters,  and has begun to focus on selling this product
through  service   centers  in  Europe  in  conjunction   with  Holt  Lloyd
International  Ltd.  ("Holts").  The  Company  is  also  seeking  marketing
partners to help launch the gasoline product in the U.S. and Asia.

COMMERCIALIZING THE ARIS(TM) 2000

     The  Company  has  developed  a prototype  of the  ARIS(TM)  2000,  an
Advanced  Reagent  Injection  System to be used in the selective  catalytic
reduction  of NOx.  The  Company  believes  that  there is a market for the
ARIS(TM) 2000 as a result of increased  regulations  in California  and the
Northeast of NOx levels in new and existing large stationary  diesels.  The
Company  seeks to  commercialize  the  ARIS(TM)  2000  through  cooperative
ventures and licenses with engine manufacturers,  engine distributors,  and
catalyst and emission control companies.

     The Company  believes  that the net  proceeds of the Rights  Offering,
together with the net proceeds received in connection with the $1.4 million
bridge loan  financing  effected in 1998,  will be  sufficient  to fund the
foregoing  commercialization  efforts through  January 2000  (assuming full
subscription) and through April 1999 (assuming minimum  subscription).  See
"USE OF PROCEEDS" and "RISK FACTORS."

                            THE RIGHTS OFFERING

Rights............. The  Company  is  issuing  to each  Holder of record of
                    Common Shares on the Record Date one transferable Right
                    for each 50 Common Shares held; provided, however, that
                    Rights will not be distributed to Holders who reside in
                    jurisdictions  in which  the  Securities  have not been
                    registered or where an exemption from  registration  is
                    not  available,  as  described  more fully  below,  and
                    transferees  of  Rights  in  jurisdictions   where  the
                    Securities   have  not  been  registered  or  where  an
                    exemption  from  registration  is not available may not
                    exercise  the  Rights.   See  "THE  RIGHTS  OFFERING --
                    Jurisdictions in Which the Securities Are Offered." The
                    Rights will be  evidenced  by Rights  Certificates.  An
                    aggregate   of  up  to   50,000   Rights   will  be  so
                    distributed.  No  fractional  Rights  or  cash  in lieu
                    thereof will be distributed or paid by the Company. The
                    number of Rights  distributed  will be rounded  down to
                    the nearest  whole  number.  As  described  below under
                    "Amendment and Termination," the Company will terminate
                    the Rights Offering if on the Expiration Date less than
                    an aggregate of $2.0 million  worth of Rights have been
                    exercised  (calculated  based upon a per  Common  Share
                    price of $2.25,  a 12.5%  premium  over the average bid
                    and ask prices of such shares over the five most recent
                    business  days).  Accordingly,  assuming a Subscription
                    Price   of   $74.25,   a   minimum    subscription   of
                    approximately  26,937  Offering  Shares pursuant to the
                    exercise of the Rights is necessary to proceed with the
                    Rights  Offering.   See  "THE  RIGHTS  OFFERING --  The
                    Rights."


Basic Subscription
Privilege.......... Each Right will entitle the Holder  thereof to purchase
                    at  the  Subscription  Price  one  share  of  Series  B
                    Preferred Stock. Each share of Series B Preferred Stock
                    will  be  immediately  convertible,  at no  cost to the
                    Holder  thereof,  into 33 Common  Shares.  Certificates
                    representing  Offering Shares purchased pursuant to the
                    Basic  Subscription  Privilege will be delivered to the
                    subscribers as soon as practicable after the Expiration
                    Date and after all prorations contemplated by the terms
                    of the Rights  Offering  have been  effected.  See "THE
                    RIGHTS OFFERING -- Subscription Privileges."

Oversubscription
Privilege.......... Each  Holder  who  exercises  all of his or her  Rights
                    pursuant  to  the  Basic  Subscription   Privilege  may
                    indicate on the Rights Certificate additional shares of
                    Series B Preferred  Stock above the Basic  Subscription
                    Privilege up to the Maximum Offering Shares such Holder
                    would like to purchase at the  Subscription  Price. The
                    Oversubscription  Privilege is not transferable.  After
                    the  Expiration  Date,  the  Company  will issue  those
                    Offering   Shares  not  purchased   through  the  Basic
                    Subscription  Privilege  to the  Holders  who  wish  to
                    exercise  their  Oversubscription   Privilege.   If  an
                    insufficient  number of Offering Shares is available to
                    satisfy   fully   all   elections   to   exercise   the
                    Oversubscription Privilege, then the available Offering
                    Shares will be allocated  among the Holders  exercising
                    their  Oversubscription  Privilege  such that each such
                    Holder will be entitled to receive a number of Offering
                    Shares which is equal to the number of Offering  Shares
                    subscribed   to  by  such   Holder   pursuant   to  the
                    Oversubscription  Privilege  multiplied  by a fraction,
                    the  numerator  of  which  is the  number  of the  then
                    available  Offering Shares and the denominator of which
                    is  the  aggregate   number  of  the  Offering   Shares
                    subscribed   to   pursuant   to  the   Oversubscription
                    Privilege.  If  a  proration  of  the  Offering  Shares
                    results in a Holder  receiving  fewer  Offering  Shares
                    than  such  Holder   subscribed  for  pursuant  to  the
                    Oversubscription  Privilege, then any excess funds paid
                    by that Holder as the Subscription Price for shares not
                    issued  will  be  returned  by the  Subscription  Agent
                    without   interest  or   deduction.   See  "THE  RIGHTS
                    OFFERING -- Subscription Privileges."

Series B Preferred
Stock.............. Holders of the Series B Preferred Stock are entitled to
                    receive,  when,  as and if declared by the Board out of
                    funds of the Company legally available  therefor,  cash
                    dividends at the annual rate of 9% of the $________ per
                    share   price   and    liquidation    preference   (the
                    "Liquidation Preference");  provided,  however, that in
                    lieu of  making  dividends  in cash,  the  Company  may
                    elect,  by giving  written notice to each holder of the
                    Series B Preferred  Stock,  to pay dividends in kind at
                    the annual  rate of 11% of the  Liquidation  Preference
                    (cash  dividends  and dividends in kind are each deemed
                    "Preferred Dividends").

                    Shares of Series B Preferred  Stock are convertible (at
                    the  Liquidation  Preference of $______ per share),  in
                    whole or in part, at the option of the holders  thereof
                    ("Optional  Conversion"),   into  Common  Shares  at  a
                    conversion price of $____ per Common Share  (equivalent
                    to a conversion rate of 33 Common Shares for each share
                    of  Series  B  Preferred  Stock  so  converted),  which
                    conversion  price  will be  deemed to have been paid in
                    full, at no extra cost to the holder thereof,  with the
                    tendering of the Series B Preferred Stock in connection
                    with the conversion  thereof,  subject to adjustment as
                    set  forth  in  the  Certificate  of  Designation.  The
                    Company  can force the holder to  convert  his Series B
                    Preferred  Stock,  in  whole or in  part,  into  Common
                    Shares  at any  time on or  after  the  date  that  the
                    average Closing Price (as defined in the Certificate of
                    Designation)  of the  Common  Shares  equals or exceeds
                    $4.50 for 20 consecutive Trading  Days  (as defined  in
                    the Certificate of Designation).

                    In  the   event  of  any   voluntary   or   involuntary
                    liquidation, dissolution, or winding up of the Company,
                    and  subject  to the  rights  of  holders  of any other
                    series of Preferred  Stock,  the holders of outstanding
                    shares of Series B  Preferred  Stock  are  entitled  to
                    receive  the sum of $______  per share in cash for each
                    share of Series B  Preferred  Stock,  plus  accrued and
                    unpaid Preferred  Dividends thereon,  out of the assets
                    of  the   Company   available   for   distribution   to
                    stockholders, before any distribution of assets is made
                    to holders of Common  Shares or any other capital stock
                    ranking  junior to the  shares  of  Series B  Preferred
                    Stock and pari passu with holders of Series A Preferred
                    Stock upon a liquidation, dissolution, or winding up of
                    the  Company.  

                    Certificates  representing shares of Series B Preferred
                    Stock  will  include a legend to the  effect  that such
                    securities  may not be  transferred  to any resident of
                    any of the following states: Arizona, Florida, Georgia,
                    Ohio,  Pennsylvania  or  Texas.  See  "DESCRIPTION  OF
                    CAPITAL   STOCK  --   Preferred   Stock  --   Series  B
                    Convertible Preferred Stock."

Record Date........ _______________ __ , 1998

Subscription
Price.............. The Subscription Price is $_______ per Offering Share.

Expiration Date
for Rights......... The Rights  Offering will expire at 5:00 p.m.,  Eastern
                    Standard  Time,  on   _______________,   1998,   unless
                    extended by the Board of Directors  of the Company,  in
                    which case the term  "Expiration  Date"  shall mean the
                    latest  date and time to which the Rights  Offering  is
                    extended.

Exercise of
Rights............. The    Basic    Subscription    Privilege    and    the
                    Oversubscription Privilege may be exercised by properly
                    completing  the  Rights  Certificates   evidencing  the
                    Rights  and  forwarding   them,  with  payment  of  the
                    Subscription Price for each share of Series B Preferred
                    Stock subscribed for pursuant to the Basic Subscription
                    Privilege and the  Oversubscription  Privilege,  to the
                    Subscription Agent prior to the Expiration Date. If the
                    aggregate  Subscription  Price  paid  by an  exercising
                    Rights Holder is insufficient to purchase the number of
                    shares  of Series B  Preferred  Stock  that the  Holder
                    indicates are being subscribed for, or if an exercising
                    Rights  Holder does not specify the number of shares of
                    Series  B  Preferred  Stock to be  purchased,  then the
                    Rights Holder will be deemed to have exercised,  first,
                    the  Basic  Subscription  Privilege  and,  second,  the
                    Oversubscription Privilege to purchase shares of Series
                    B  Preferred  Stock to the full  extent of the  payment
                    tendered.  If the aggregate  Subscription Price paid by
                    an  exercising   Rights   Holder   exceeds  the  amount
                    necessary  to purchase the number of shares of Series B
                    Preferred   Stock  for  which  the  Rights  Holder  has
                    indicated an intention  to  subscribe,  then the Rights
                    Holder  will be deemed to have  exercised,  first,  the
                    Basic  Subscription  Privilege  (if not  already  fully
                    exercised) and, second, the Oversubscription  Privilege
                    to the full extent of the excess payment tendered. Once
                    a Rights Holder has  exercised  the Basic  Subscription
                    Privilege  or  the  Oversubscription   Privilege,  such
                    exercise may not be revoked.  See "THE RIGHTS  OFFERING
                    -- Exercise of Rights."  Any Rights not duly  exercised
                    prior to the  Expiration  Date will  expire  and become
                    worthless.

Amendment and
Termination........ The Board of Directors reserves the right to extend the
                    Expiration  Date and to amend the terms and  conditions
                    of the Rights Offering. Any extension, if made, will be
                    publicly  announced  through a release to the Dow Jones
                    News  Service and as otherwise  required by  applicable
                    law or  regulations.  In the event of a material change
                    in the terms of the Rights  Offering,  there will be an
                    affirmative  resolicitation  of the Rights  Offering by
                    means of a post-effective amendment to the Registration
                    Statement.  In the  event  of  such  a  resolicitation,
                    subscribing  Holders will be deemed to have effectively
                    revoked their  subscriptions  unless they affirmatively
                    confirm   their   intent   to   subscribe,   and  their
                    subscription  payments will be returned to them without
                    interest or  deduction.  The Board of  Directors of the
                    Company  in its  sole  discretion,  may  terminate  the
                    Rights Offering and revoke the Rights at any time prior
                    to the Expiration Date or thereafter. In any event, the
                    Company shall  terminate the Rights  Offering if on the
                    Expiration  Date the Company  receives  aggregate  cash
                    proceeds of less than $2.0 million from the exercise of
                    Rights. In the event of such  termination,  the Company
                    will  promptly  return to all  persons  that  exercised
                    Rights their subscription payments, without interest or
                    deduction.  See "THE RIGHTS  OFFERING -- Amendment  and
                    Termination."

Method of
Transferring
Rights............. Rights  may  be  purchased   or  sold   through   usual
                    investment channels, including banks and brokers. There
                    can be no assurance  that an active market will develop
                    for the Rights.  The Rights,  the underlying  shares of
                    Series B Preferred Stock and the Common Shares issuable
                    upon conversion of the Series B Preferred  Stock,  will
                    not be eligible for trading on Nasdaq.

                    The Rights evidenced by a single Rights Certificate may
                    be   transferred  in  whole  by  endorsing  the  Rights
                    Certificate   for  transfer  in  accordance   with  the
                    accompanying  instructions;  provided, that the related
                    Oversubscription  Privilege may not be exercised by the
                    transferee   thereof  and   transferees  of  Rights  in
                    jurisdictions   where  the  Securities  have  not  been
                    registered or where an exemption from  registration  is
                    not available.  A portion of the Rights  evidenced by a
                    single Rights Certificate (but not fractional Rights or
                    the   Oversubscription   Privilege  or  to  persons  in
                    jurisdictions   where  the  Securities  have  not  been
                    registered or where an exemption from  registration  is
                    not  available) may be transferred by delivering to the
                    Subscription  Agent  a  Rights   Certificate   properly
                    endorsed for transfer,  with  instructions  to register
                    such  portion  of the Rights  evidenced  thereby in the
                    name  of the  transferee  (and to  issue  a new  Rights
                    Certificate   to   the   transferee   evidencing   such
                    transferred  Rights).  In  such  event,  a  new  Rights
                    Certificate  evidencing  the balance of the Rights will
                    be issued to the Rights Holder or, if the Rights Holder
                    so  instructs,   to  an  additional   transferee.   The
                    Oversubscription Privilege is not transferable.

                    Holders of Rights  wishing to transfer all or a portion
                    of their Rights (subject to the  limitations  described
                    above)  should allow a sufficient  amount of time prior
                    to  the   Expiration   Date   for  (i)   the   transfer
                    instructions  to  be  received  and  processed  by  the
                    Subscription  Agent, (ii) a new Rights  Certificate for
                    the transferred  Rights to be issued and transmitted to
                    the  transferee  or   transferees   and  a  new  Rights
                    Certificate  for any  retained  Rights to be issued and
                    transmitted  to the  transferor  and (iii)  the  Rights
                    evidenced  by  such  new  Rights   Certificates  to  be
                    exercised or sold by the  recipients  thereof.  Neither
                    the Company nor the  Subscription  Agent shall have any
                    liability to a transferee  or  transferor  of Rights if
                    Rights  Certificates  are  not  received  in  time  for
                    exercise or sale prior to the Expiration Date.

                    Except for fees paid to  broker-dealers  and charged by
                    the  Subscription  Agent  that  will  be  paid  by  the
                    Company,  all  commissions,  fees  and  other  expenses
                    (including  brokerage  commissions  and transfer taxes)
                    incurred  in  connection  with  the  purchase,  sale or
                    exercise  of  Rights  will  be for the  account  of the
                    shareholder  transferor  of the Rights and none of such
                    commissions,  fees  or  expenses  will  be  paid by the
                    Company or the Subscription Agent.

                    The Rights will be eligible for transfer  through,  and
                    the exercise of the Rights may be effected through, the
                    facilities  of the  Transfer  Agent.  See  "THE  RIGHTS
                    OFFERING -- Method of Transferring Rights."

Jurisdictions
in Which the
Securities Are
Offered............ RIGHTS  WILL  ONLY  BE  GRANTED  TO,  AND  MAY  ONLY BE
                    EXERCISED  BY,  HOLDERS IN COLORADO,  CONNECTICUT,  THE
                    DISTRICT OF COLUMBIA,  ILLINOIS, INDIANA, IOWA, KANSAS,
                    MAINE, MARYLAND, MASSACHUSETTS, NEVADA, NEW JERSEY, NEW
                    YORK, NORTH CAROLINA,  RHODE ISLAND, VERMONT,  VIRGINIA
                    AND WASHINGTON AND OUTSIDE THE UNITED STATES.  See "THE
                    RIGHTS   OFFERING   --   Jurisdictions   in  Which  the
                    Securities Are Offered."

U.S. Tax
Consequences....... Holders  who  receive  Rights  will be  deemed to be in
                    receipt  of  property  in an  amount  equal to the fair
                    market  value (the  "Value")  of the Rights on the date
                    they are distributed.  Whether the receipt of Rights by
                    a  Holder  will  result  in  taxable   income  and  the
                    characterization  of  such  income,  if  any,  will  be
                    dependent  on whether the  Company  has current  and/or
                    accumulated earnings and profits ("E&P"), the tax basis
                    of the stock held by the  Holder,  and the Value of the
                    Rights.  Management  of the Company  believes  that the
                    Company will have no current and/or accumulated E&P for
                    the taxable  year in which the Rights are  distributed,
                    although  no  assurances  can be given in this  regard.
                    Neither the  exercise of the Rights nor  conversion  of
                    the Series B Preferred  Stock into Common  Shares would
                    result in a taxable event.  See "THE RIGHTS OFFERING --
                    Certain United States  Federal Income Tax  Consequences
                    to Holders."

Capital Stock
to be Outstanding
After Offering..... 2,516,666 Common Shares(FN1)
                    2,800 shares of Series A Preferred Stock(FN2)
                    50,000 shares of Series B Preferred Stock(FN3)

Net Cash Proceeds
from the
Offering(FN4)...... $3.1 million

Use of Proceeds ... The net  proceeds  of the  Offering  will be  used for:
                    marketing,  field trials and patents;  repayment  under
                    the Term Loan (as defined  below) to Fuel Tech; and the
                    balance  for  working  capital  and  general  corporate
                    purposes. See "USE OF PROCEEDS."

Subscription
Agent ............. ChaseMellon Shareholder Services, L.L.C.

Information Agent.. ChaseMellon Shareholder Services, L.L.C.

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

(1)  Excludes  427,784  Common Shares  issuable  under the Company's  stock
     option plan, 75,000 shares issuable upon exercise of certain warrants,
     933,324  Common  Shares  which would be issuable  upon  conversion  of
     Series A Preferred Stock which are expected to be issued to Holders of
     Bridge Loan Notes upon consummation of the Rights Offering,  and up to
     1,650,000 Common Shares issuable upon conversion of Series B Preferred
     Stock being offered  hereby  (assuming full  subscription)  or 888,921
     Common Shares  (assuming  minimum  subscription).  See "DESCRIPTION OF
     CAPITAL STOCK,"  "MANAGEMENT" and "CERTAIN  RELATIONSHIPS  AND RELATED
     TRANSACTIONS."

(2)  Assumes  conversion of the Bridge Loan Notes upon  consummation of the
     Rights  Offering  resulting in net proceeds to the Company of at least
     $1.75 million.

(3)  Assuming full  subscription.  Assuming  minimum  subscription,  26,937
     shares of Series B Preferred Stock will be outstanding.

(4)  Assuming full subscription of the Rights Offering at a price of $74.25
     per Right, after deducting  Soliciting Fees and expenses of the Rights
     Offering  payable  by the  Company  estimated  at  $600,000.  Assuming
     minimum  subscription  using  the  foregoing  assumptions,   net  cash
     proceeds would be approximately $1.4 million.

                                RISK FACTORS

     An investment in the Securities  offered hereby involves a high degree
of risk and should only be made by investors who can afford a loss of their
entire  investment.  Prospective  investors  should  carefully  review  and
consider the information set forth under the caption "Risk Factors."

                      SUMMARY SELECTED FINANCIAL DATA

     The following  summary  selected  financial  data for each of the five
years  ended  December  31,  1997 and for the period  from  January 1, 1992
through December 31, 1997 are derived from the audited financial statements
of the Company.  The summary  selected  financial  data for the three month
periods ended March 31, 1997 and 1998 are derived from unaudited  financial
statements.  The unaudited  financial  statements  include all adjustments,
consisting  of  normal  recurring  accruals,  which the  Company  considers
necessary for a fair presentation of the financial position and the results
of operations  for these  periods.  Operating  results for the three months
ended March 31, 1998 are not necessarily indicative of the results that may
be expected  for the entire  year ending  December  31,  1998.  The summary
selected  financial data should be read in conjunction  with  "Management's
Discussion  and Analysis of Financial  Condition and Results of Operations"
and the financial statements and notes thereto appearing elsewhere herein.

     The Company was  incorporated  on January 19, 1994,  as a wholly owned
subsidiary of Fuel Tech.  Predecessor  financial information included below
for the period from January 1, 1992, through January 18, 1994, reflects the
Company's operations prior to incorporation, at which time it was accounted
for as part of Fuel Tech.  Effective December 12, 1995, Fuel Tech completed
a Rights Offering of the Company's Common Shares,  with Fuel Tech retaining
a 27.6% ownership  interest in the Company (which as of March 31, 1998, has
declined to a 27.4%  interest  after giving effect to the exercise of stock
options).  The Company is a development-stage  enterprise,  and its efforts
from  January  1,  1992,  to the  present  time  have been  devoted  to the
research,  development  and  commercialization  of PFCs  and NOx  reduction
technologies  to  reduce  emissions  from  diesel  engines.  There  were no
material  activities  related to the  Company's  business  in 1990 or 1991.
Prior  to  1990,  the  activities  of  Fuel  Tech  were  focused  on  other
applications  of PFCs  that  are  unrelated  to the  Company's  present  or
contemplated  business and were not material to the overall  development of
the Company's products.  Therefore,  such costs have been excluded from the
determination  of the  Company's  development  costs  and from the  summary
selected financial data set forth below.

<TABLE>
<CAPTION>
                                                                                                    Period
                                                                          Period                     from
                                                                           from                    January 1,
                                            Year Ended                   January 1,  Three Months    1992,
                                           December 31,                    1992         Ended       through
                                                                          through     March 31, 
                                                                          December                  March 31,
                             1993     1994     1995     1996     1997     31, 1997  1997     1998     1998
                             ----     ----     ----     ----     ----     --------  ----     ----     ----
STATEMENT OF                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)
 OPERATIONS DATA:
<S>                          <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>       <C>  
Sales...................     $  --    $  --    $  --    $  --    $ 199    $ 199    $   40   $   --    $ 199
Operating expenses......       131    1,106    1,958    3,812    4,084    11,429    1,051      743    12,172
Net loss during
   development stage....       131    1,107    2,024    3,489    3,764    10,853      961      741    11,594
Basic and diluted loss
   per Common Share.....       N/A    $0.44   $ 0.81    $1.40    $1.50     N/A     $ 0.38   $ 0.29      N/A
Weighted-average shares
   outstanding..........       N/A    2,500    2,500    2,500    2,517     N/A      2,512    2,517      N/A
Ratio of earnings to
   combined fixed charges
   and preferred
   dividends (FN1)......        --       --       --       --       --       --        --       --       --
Cash dividends declared.        --       --       --       --       --       --        --       --       --

</TABLE>

<TABLE>
<CAPTION>
                                                                                     March 31, 1998
                                                                          ----------------------------------
                                                                                  As Adjusted   As Adjusted
                                                December 31,                       Assuming      Assuming
                                                                                      Full        Minimum
                                                                                  Subscription  Subscription
                             1993     1994     1995     1996      1997    Actual      (FN2)         (FN2)
                             ----     ----     ----     ----      ----    ------  ------------  ------------
BALANCE SHEET DATA:                                          (IN THOUSANDS)
<S>                          <C>      <C>      <C>      <C>      <C>       <C>         <C>           <C>   
Current assets..........     $ --     $ 513    $8,882   $5,595   $1,682    $  982      $5,494        $3,782
Total assets............       --       513     8,882    5,677    1,750     1,044       5,556         3,844
Working capital
   (deficit)............       --      (857)    8,395    4,109      788        53       4,565         2,853
Long-term debt..........       --        --       745       --      395       395         395           395
Series A Redeemable
   Preferred Stock......       --        --        --       --       --        --       1,400            --
Shareholders' equity
   (deficiency).........       --      (857)   7,650     4,191      461      (280)      2,832         1,120

<FN>

(1)  For the years ended December 31, 1993,  1994,  1995, 1996 and 1997 and
     for the period from January 1, 1992 through  December 31, 1997 and for
     the three  month  periods  ended  March 31,  1997 and 1998 and for the
     period from January 1, 1992  through  March 31,  1998,  the  Company's
     earnings were inadequate to cover fixed charges by  approximately  (in
     thousands) $131; $1,107; $2,024; $3,489; $3,764;  $10,853; $961; $741;
     and $11,594, respectively. On a pro forma basis, for the periods ended
     December 31, 1997 and March 31, 1998,  the  Company's  earnings  would
     have been  inadequate  to cover  combined  fixed charges and preferred
     stock  dividends  by (in  thousands)  $4,326  and $882  asumming  full
     subscription  and  that the  Series A  Preferred  Stock  and  Series B
     Preferred  Stock were  outstanding as of the beginning of such periods
     and $4,124 and $831 assuming minimum  subscription and that the Bridge
     Loan Notes and Series B  Preferred  Stock were  outstanding  as of the
     beginning of such periods, respectively.

(2)  Adjusted to reflect the  receipt by the Company of the  estimated  net
     proceeds from the sale of the Securities offered hereby, assuming full
     subscription  or  minimum  subscription,  as the case  may be,  of the
     Rights  Offering  at a price  of  $74.25  per  Offering  Share,  after
     deducting  Soliciting Fees and expenses of the Rights Offering payable
     by the Company estimated at $600,000, receipt of the proceeds from the
     Bridge Loan Notes and,  assuming full  subscription  and conversion of
     the Bridge Loan Notes into Series A Convertible Preferred Stock.


</FN>
</TABLE>

                                RISK FACTORS

     This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities  Act of 1933, as amended (the  "Securities
Act"). Discussion containing such forward-looking  statements will be found
in the material set forth under "Prospectus  Summary," "Risk Factors," "Use
of Proceeds,"  "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," as well as within the Prospectus
generally.  Actual results could differ  materially from those projected in
the  forward-looking  statements  as a result of the risk factors set forth
below and the matters set forth in this Prospectus  generally.  The Company
cautions  the  reader,  however,  that  this  list  of  factors  may not be
exhaustive.  The following risk factors  should be considered  carefully in
addition  to the other  information  contained  in this  Prospectus  before
purchasing the Securities offered hereby.

FACTORS RELATING TO THE COMPANY

INDEPENDENT AUDITOR'S REPORT

     The report of the Company's  independent  auditors with respect to the
financial  statements  of the Company for the year ended  December 31, 1997
contains an explanatory  paragraph as to the Company's  ability to continue
as a going  concern.  Among the  factors  cited by the  auditors as raising
substantial  doubt  as to the  Company's  ability  to  continue  as a going
concern is that, with respect to the periods covered,  the Company incurred
recurring  operating losses and its operations have not produced a positive
cash flow. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF  OPERATIONS",  and the financial  statements of the Company,
the notes thereto and the Report of Independent Auditors included therein.

LIQUIDITY AND CAPITAL REQUIREMENTS

     At the  date of this  prospectus,  the  Company  has  cash  resources,
including  the $1.4  million  Bridge Loan from Fuel Tech and certain  other
lenders,  estimated to be sufficient  for its needs through  November 1998.
The Company is actively seeking additional  financing of approximately $1.4
million to $3.1 million (net of estimated Subscription Fees and expenses of
the offering of $600,000) through the Rights Offering. Although the Company
believes that it will be successful in its capital raising  efforts,  there
is no  guarantee  that the  Company  will be able to raise such  capital on
terms  satisfactory to the Company.  Accordingly,  at March 31, 1998, there
continues to be substantial  doubt as to the Company's  ability to continue
as a going concern. See "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION  AND  RESULTS  OF  OPERATIONS,"  and the  Report  of  Independent
Auditors and the related  financial  statements and the notes thereto as of
December  31,  1996 and 1997 and for each of the three  years in the period
ended  December  31, 1997 and for the period from  January 1, 1992  through
December 31, 1997 (the "Annual  Financial  Statements")  and the  financial
statements  and the note thereto as of March 31, 1997 and 1998 and for each
of the three  months  ended March 31, 1997 and 1998 and for the period from
January  1,  1992   through   March  31,  1998  (the   "Interim   Financial
Statements").

CONTINUING OPERATING LOSSES

     The Company has had minimal  revenues  through March 31, 1998. Even if
the  Company   consummates  the  Rights  Offering  and/or  other  financing
alternative, the Company expects to incur operating losses through at least
the first half of 1999.  There can be no  assurance  that the Company  will
achieve or sustain significant revenues or profitability in the future. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."

COMPETITION

     Competition  in the diesel fuel  additive  market will come from large
additive suppliers.  The Company is not currently in competition with other
fuel additive manufacturers.  When active marketing of the Company's PFC is
in  progress,  the  Company  anticipates  competing  on the basis of price,
proprietary  technology,  effectiveness  and  ease  of use of the  PFC  and
efficiency of distribution. To the Company's knowledge, it does not compete
against any major gasoline  companies in the PFC market.  While the Company
intends to seek collaborative  arrangements with additive suppliers and oil
companies,   there  are  no  assurances  that  these  arrangements  can  be
negotiated.  Competition  may also come from  alternative  fuels  including
methanol and natural gas, as well as from new engine technology.

NO ASSURANCES OF ADDITIONAL FUNDING

     Based on the Company's  operating plan,  management  believes that the
proceeds from the Rights Offering,  together with the net proceeds received
in connection  with the $1.4 million Bridge Loan effected in 1998,  will be
sufficient  to meet the  Company's  anticipated  cash needs and finance its
operations  through January 2000  (assuming full  subscription) and through
April 1999 (assuming minimum  subscription),  although no assurances can be
given in this  regard.  Thereafter,  the  Company  anticipates  that it may
require  additional  funding in the form of a public or private offering of
the Company's  securities.  Any offering of the Company's equity securities
may result in immediate and significant dilution to the shareholders of the
Company.  The ability of the Company to consummate a public  offering or to
obtain  other  financing  will  depend  on  the  status  of  the  Company's
commercial  efforts and  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  when  needed or on terms
acceptable  to the Company.  If the Company is unable to obtain  sufficient
additional  financing,  its ability to meet its current plans for expansion
will be materially adversely affected,  and the Company will not be able to
continue as a going concern.  See "MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
FINANCIAL   CONDITION  AND  RESULTS  OF  OPERATIONS"   and  the  Report  of
Independent Auditors in the Annual Financial Statements.

LIMITED MARKETING EXPERIENCE

     To date,  the  Company  has had limited  experience  and has  expended
limited efforts in marketing its products.  The Company intends to sell its
PFCs to additive companies, oil companies, oil distributors and fleets. The
Company  intends  to sell  its  ARIS(TM)  2000  system  to  catalyst-system
suppliers  or  engine  companies.  While  the  Company  is  now  in  active
discussions  with third  parties to achieve  this and  believes  it will be
successful,  there can be no assurance  that the Company will  successfully
implement its plans.

RELATIONSHIP WITH FUEL TECH; CONFLICTS OF INTEREST

     Directors and officers of Fuel Tech and its  subsidiaries who are also
directors  and  officers  of the  Company,  and Fuel Tech as the  Company's
largest  shareholder,   are  in  positions  involving  the  possibility  of
conflicts of interest with respect to transactions  concerning the Company.
The  Company   currently  has  one  independent   director.   See  "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."

DEPENDENCE UPON THIRD PARTY TECHNOLOGY

     While the PFCs may be used  alone  for  moderate  levels  of  emission
control,  it is expected  that the product  will be  integrated  into other
systems using third party  technology to achieve  higher levels of control.
The  adoption  of the  use of  PFCs  in such  systems  will  depend  on the
effectiveness  of third party  technology,  the ability of third parties to
market their  products,  and the  compatibility  of the PFC and NOx control
products with their  systems.  Failure of these third party systems to gain
market  acceptance or failure of the PFCs and NOx control products to prove
compatible  and  effective  with third party  systems could have an adverse
effect  on  the  Company's   business,   operating  results  and  financial
condition. See "BUSINESS -- Products and Markets."

UNCERTAINTY OF MARKET ACCEPTANCE

     The  commercial  success of the  Company'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  the  Company's   ability  to
demonstrate the efficacy, cost-effectiveness, safety and ease of use of the
PFC and NOx control products of the Company.  The failure by the Company to
receive market  acceptance for the PFC and NOx control  products would have
an  adverse  effect  on  the  Company's  business,  operating  results  and
financial condition. See "BUSINESS -- Products and Markets."

NO ASSURANCE OF NECESSARY REGULATORY APPROVALS

     The Company's  products and  manufacturing  activities  are subject to
governmental regulation, principally by the Environmental Protection Agency
("EPA") and corresponding  foreign and state agencies.  The EPA administers
the Clean Air Act  Amendments of 1990  ("CAAA").  The Company is subject to
the  standards  and  procedures  contained in such act and the  regulations
promulgated  thereunder,  as  well as  similar  standards,  procedures  and
regulations  of  international  regulatory  authorities,  and is subject to
inspection by the EPA and other regulatory  bodies for compliance with such
standards,  procedures  and  regulations.  Failure to  receive  appropriate
approvals or to comply with the EPA and similar foreign  regulations  could
result  in  civil  monetary  or  criminal  sanctions,  restrictions  on  or
injunction against marketing of the Company's products,  as well as seizure
or  recall of the  Company's  products  or other  regulatory  actions.  The
Company  received  registration  for its PFC  from the EPA to be used as an
aftermarket treatment for individual vehicles and in bulk fuel supplies for
diesel.  The Company has  received  registration  status under the EPA fuel
additive  regulations for three  additional PFCs with the original PFC. The
Company has received  consent  from the U.K.  Ministry of Health for use of
the PFC in diesel fuel.  See "BUSINESS -- Regulations -- USA" and "BUSINESS
-- Regulations -- International."

     The Company has registered  the cerium  products and is in the process
of registering  platinum/cerium  bimetallic  products.  The Company will be
required to register  the  gasoline  product and apply for a waiver  before
this  product can be marketed in the U.S.  There can be no  assurance  that
such registrations will be obtained.

NO ASSURANCE OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

     The  Company  holds  licenses  to a number of  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 the Company'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 the Company will have adequate  remedies for disclosure of
its trade secrets or violations of its intellectual  property  rights.  See
"BUSINESS -- Protection of Proprietary Information."

RAW MATERIAL PRICE VOLATILITY

     The cost of raw  materials,  including  platinum,  rhodium and cerium,
will have a direct impact on the future  pricing and  profitability  of the
Company's  products.  Although  the Company  intends to minimize  this risk
through  various  purchasing  and  hedging  strategies,  there  can  be  no
assurance that the Company will be able to do so. A significant increase in
the price of these  materials  could have a material  adverse effect on the
Company's business, operating results and financial condition.

DEPENDENCE ON ATTRACTING AND RETAINING PERSONNEL

     The  success  of the  Company  will  depend,  in  large  part,  on the
Company's  ability to (i) retain  current key  personnel,  (ii) attract and
retain  qualified  sales and  marketing  personnel  and (iii)  develop  and
maintain   relationships  with  research  institutions  and  other  outside
consultants.  The loss of key personnel, or the inability of the Company to
hire or retain qualified personnel or the failure to assimilate effectively
such  personnel  could  have a  material  adverse  effect on the  Company's
business,  operating  results and  financial  condition.  See  "BUSINESS --
Employees."

FOREIGN CURRENCY RISK

     To date, sales,  marketing and testing of the Company's PFCs have been
limited  principally to Europe.  While the Company has not  experienced any
significant  foreign  currency  exposure  with respect to such  activities,
there can be no assurance  that exposure to currency  fluctuation  will not
have a significant  effect on the Company's  operations in the future.  The
Company  intends to manage the risk to such  exposure,  if any, by entering
into foreign currency futures and option contracts.

FACTORS RELATING TO THE SECURITIES

POSSIBLE ADVERSE FUTURE  ACCOUNTING  EFFECT ON EARNINGS PER SHARE ALLOCABLE
TO COMMON SHARES

     If, on issuance of the Series B Preferred  Stock,  its $____ per share
stated  value is less than the  then-current  market price of the 33 Common
Shares into which it is  convertible,  the excess of that market price over
$_____  multiplied  by the  number of shares  of Series B  Preferred  Stock
issued (the "Aggregate  Discount") will be treated under  accounting  rules
applicable  to the Company as analogous  to a dividend  with respect to the
Series B Preferred Stock. For accounting  purposes,  the Aggregate Discount
will increase the loss attributable to Common  Shareholders for purposes of
computation  of basic loss per share and may affect  the  diluted  loss per
share  computation  in the  fiscal  quarter  and year in which  the  Rights
Offering is completed.  The Company  cannot predict the market price of the
Common Shares on the date of issuance of the Series B Preferred  Stock, and
therefore it cannot now estimate  whether an Aggregate  Discount will exist
or, if it does exist, the amount of the Aggregate  Discount with respect to
any assumed  number of shares of Series B  Preferred  Stock to be issued in
the Transaction.

     Solely as an example of the accounting  effect,  assuming that (1) the
stated  value per Series B  Preferred  Stock was $74.25,  (2) the  reported
closing  price of Common  Shares at the time of  issuance  of the  Series B
Preferred Stock was $2.50 and (3) 50,000 shares of Series B Preferred Stock
were issued in the Transaction,  the Aggregate  Discount would be $412,500.
This  Aggregate  Discount would increase the annual basic loss per share by
$.16 per share (based upon 2,516,666  shares of the Company's  Common Stock
outstanding at March 31, 1998).

ACCOUNTING  CONSEQUENCES  PERTAINING  TO SERIES A CONVERTIBLE  PREFERRED
STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK

     Upon completion of the Rights  Offering,  the Series B Preferred Stock
will  initially  be  reflected in the  Company's  balance  sheet net of the
Soliciting  Fees and  expenses  of the  Rights  Offering  (estimated  to be
$600,000). Pursuant to applicable accounting rules and SEC regulations, the
Company will be required to accrete the carrying value of such stock to its
liquidation  value. Such accretion will be recognized over a period of five
years.  The  carrying  amount of such stock  shall be further  periodically
increased  by  amounts  representing  dividends  earned  but not paid.  The
aforementioned increases in carrying amount will decrease retained earnings
and will increase the loss per share attributable to common shareholders.

     Pursuant to applicable accounting  standards,  any dividends which are
paid in kind on the Series A  Preferred  Stock or on the Series B Preferred
Stock,  will be recorded in the  Company's  balance sheet as an increase to
the accumulated deficit or reduction in retained earnings,  as the case may
be, and an  increase  in the  carrying  value of such  stock.  Accordingly,
dividends  that  are  paid  in  kind  will  increase  the  loss  per  share
attributable to common  shareholders and will result in additional dilution
of ownership interest attributable to existing common shareholders.

TAX  CONSEQUENCES  TO  SHAREHOLDERS ON SALE OF RIGHTS OR SERIES B PREFERRED
STOCK

     The Company believes that the Rights Offering will result in a taxable
distribution  to  recipients  of  Rights.  However,  in  the  event  it  is
determined   that  the   distribution   of  the  Rights  is  a  non-taxable
distribution,  sale of the Rights and the Series B  Preferred  Stock may be
subject to certain restrictions.  See "CERTAIN UNITED STATES FEDERAL INCOME
TAX   CONSEQUENCES  TO  HOLDERS."  If  the  Rights  or  stock  acquired  is
characterized,  for federal income tax purposes, as being "stock other than
common  stock,"  then the  amount  realized  from the sale of such stock or
Rights may, in whole or in part, be treated as ordinary income. The Company
believes  that,  because the  conversion  rights  granted to holders of the
Series B Preferred Stock provide the  unrestricted  right to participate in
future corporate growth,  the Rights,  the Series B Preferred Stock and the
Common Shares  received as a result of conversion of the Series B Preferred
Stock  should be treated as common  stock for these  purposes.  There is no
clear  statutory  definition  of the term "stock  other than common  stock"
however, and it is possible for the Internal Revenue Service (the "IRS") to
challenge this position.

     Even if the Rights or the Series B Preferred  Stock are  classified as
"stock other than common  stock,"  there are several  methods  available to
shareholders  to avoid  the  adverse  tax  consequences  arising  from this
designation.  Ordinary  income  treatment  will not  apply on sale or other
disposition of the Rights or the Series B Preferred  Stock: (i) if the sale
terminates  the entire stock  interest of the  shareholder  in the Company;
(ii) if the Series B Preferred  Stock is converted to Common Shares and the
sale is of the Common Shares;  (iii) in transactions  where gain or loss to
the shareholder is not  recognized;  or (iv) where it is established to the
satisfaction  of the Secretary of the Treasury that the  transactions  were
not in  pursuance  of a plan  having  one of  its  principal  purposes  the
avoidance  of federal  income tax. If the Rights and the Series B Preferred
Stock are not treated as "stock other than common  stock," or if one of the
above  exceptions  apply,  then a  shareholder  who sells the Rights or the
Series  B  Preferred  Stock  will  recognize  gain  or  loss  equal  to the
difference between the sale proceeds and such shareholder's  basis (if any)
in the Rights or the Series B Preferred  Stock sold. Such gain or loss will
generally be capital gain or loss,  long or short-term,  depending upon the
holding  period for the security sold. For tax years ending after 1997, the
Internal  Revenue Service  Restructuring  and Reform Bill of 1998 generally
provides for a twelve month  holding  period for  qualification  of capital
gains as long-term.

DELISTING FROM NASDAQ

     Effective July 1, 1998, the Company's Common Shares were delisted from
Nasdaq  for  failing  to  meet  Nasdaq's  new  net  tangible   asset/market
capitalization/net  income  requirement.  As a result, the Company's Common
Shares  currently trade on the OTC Electronic  Bulletin Board,  although no
assurance  can be given that such shares will  continue to trade thereon or
that they will trade in the  over-the-counter  market, in what are commonly
referred to as the "pink sheets." Nasdaq's listing requirements have become
more stringent since the Company's  original  listing in December 1995, and
there can be no  assurance  that the  Company  will be able to  relist  its
Common Shares on Nasdaq.

POSSIBLE ADVERSE EFFECT OF PENNY STOCK  REGULATIONS ON THE LIQUIDITY OF THE
COMPANY'S SECURITIES

     In the absence of the Common  Shares being quoted on Nasdaq and for so
long as the Common  Shares  continue to trade at market  prices below $5.00
per share (see "PRICE RANGE OF COMMON  SHARES"),  the Common Shares will be
deemed to be "penny stock" under the Exchange Act. Accordingly,  trading in
the Common Shares is covered by Rule 15g-9  promulgated  under the Exchange
Act.  Under such rule,  broker-dealers  who  recommend  such  securities to
persons other than established customers and accredited investors must make
a special written  suitability  determination for the purchaser and receive
the purchaser's written agreement to a transaction prior to sale.

     The Commission adopted regulations that generally define a penny stock
to be any equity  security  that has a market  price of less than $5.00 per
share,  subject to certain  exceptions.  Such exceptions  include an equity
security listed on Nasdaq,  and an equity security issued by an issuer that
has (i) net tangible assets of at least $2,000,000, if such issuer has been
in  continuous  operation for three years,  (ii) net tangible  assets of at
least $5,000,000,  if such issuer has been in continuous operation for less
than three years, or (iii) average  revenue of at least  $6,000,000 for the
preceding  three years.  Unless an exception is available,  the regulations
require the delivery,  prior to any transaction involving a penny stock, of
a  disclosure  schedule  explaining  the penny  stock  market and the risks
associated therewith.

     For so  long as the  Common  Shares  are  subject  to the  regulations
applicable to penny stocks, the market liquidity for the Common Shares will
be severely  affected,  limiting the ability of  broker-dealers to sell the
Common  Shares and the ability of purchasers in this Offering to sell their
Common Shares in the secondary  market.  There is no assurance that trading
in the  Common  Shares  will not  continue  to be subject to these or other
regulations that would adversely affect the market for such securities.

UNCERTAIN MARKET FOR THE RIGHTS AND THE SERIES B PREFERRED STOCK

     The Series B  Preferred  Stock and the  Rights  will not be listed for
trading.  There  can be no  assurance  that a market  for the  Rights  will
develop prior to their  Expiration  Date; nor can there be assurance that a
market for the Series B Preferred Stock will develop.  If a market develops
for the Rights or the Series B Preferred Stock, there is no assurance as to
the price at which the Rights or Series B Preferred  Stock will trade.  Any
market that may develop may be volatile and unreliable.

     Following the Expiration Date, a subscribing  Holder may or may not be
able to sell shares of Series B  Preferred  Stock  purchased  in the Rights
Offering at a price equal to or greater than the Subscription  Price. There
can also be no assurance that the Common Shares issuable upon conversion of
the Series B Preferred Stock will trade at or above the Subscription Price.
When  made,  the  election  of a Holder to  exercise  Rights in the  Rights
Offering  is  irrevocable.  Moreover,  until  certificates  are  delivered,
subscribing  Holders may not be able to sell the Series B  Preferred  Stock
that they have purchased in the Rights Offering.

     As described herein,  the Series B Preferred Stock is convertible into
Common Shares which currently  trade on the OTC Electronic  Bulletin Board,
although no assurances can be given that such shares will continue to trade
thereon or in the over-the-counter market, in what are commonly referred to
as the "pink sheets." See "-- Delisting from Nasdaq" above.

POSSIBLE VOLATILITY OF STOCK PRICE; LOW TRADING VOLUME

     There has been significant volatility in the market prices of publicly
traded  shares of  emerging  growth  technology  companies,  including  the
Company's  Common  Shares.  Factors  such  as  announcements  of  technical
developments, establishment of strategic alliances, changes in governmental
regulation  and  developments  in patent or  proprietary  rights may have a
significant  effect on the market  price of the  Company's  securities.  In
addition,  there has been insignificant average daily trading volume of the
Company's  Common  Shares  (including  days  during  which no  trades  were
consummated)  since public trading of the Common Shares  commenced.  To the
extent this trading pattern  continues,  the price of the Common Shares may
fluctuate  significantly  as a result of relatively minor changes in demand
for such shares and sales of stock by Holders.

DILUTION

     Holders who do not exercise their Rights will experience a significant
decrease in their proportionate interest in the equity ownership and voting
power  of the  Company.  The  sale  of the  Rights  may  not  compensate  a
shareholder  for all or any part of any  reduction  in the market  value of
such  shareholder's  Common  Shares  resulting  from the  Rights  Offering.
Holders who do not exercise or sell their Rights will  relinquish any value
inherent  in  the  Rights.  As  described  herein,   Rights  will  only  be
distributed to, and may only be exercised by, Holders  residing outside the
United States and in certain states.

     After giving  effect to the exercise of the Rights and the  subsequent
conversion of the Series B Preferred Stock  (assuming full  subscription of
the Rights and not including the conversion of the Series A Preferred Stock
and  outstanding  stock  options  and  warrants),  the  Company  will  have
approximately  4,166,666  Common Shares issued and  outstanding  (3,405,587
assuming minimum subscription).

     Purchasers of Series B Preferred Stock will  experience  immediate and
substantial  dilution in the net tangible book value per share attributable
to  the  Common  Shares  underlying  the  Series  B  Preferred  Stock.  See
"DILUTION."

NO  DIVIDENDS  ON COMMON  SHARES,  SERIES A  PREFERRED  STOCK AND  SERIES B
PREFERRED STOCK

     The  Company has not paid  dividends  on its Common  Shares  since its
inception and does not intend to pay any dividends to its Holders of Common
Shares in the foreseeable future.

     Holders of the Series A Preferred  Stock and Series B Preferred  Stock
are entitled to receive, when, as and if declared by the Board out of funds
of the Company  legally  available  therefor,  cash dividends at the annual
rate of 9% of the $500  stated  value  and  liquidation  preference  of the
Series A Preferred  Stock price per share and 9% of the $_____ stated value
and liquidation preference of the Series B Preferred Stock price per share;
provided,  however,  that in lieu of making  dividends in cash, the Company
may  elect,  by  giving  written  notice  to each  holder  of the  Series A
Preferred  Stock and Series B Preferred  Stock, to pay dividends in kind at
the annual rate of 11% of the  Liquidation  Preference  (cash dividends and
dividends in kind are each deemed "Preferred Dividends"). Dividends payable
to the holders of the Series A Preferred Stock and Series B Preferred Stock
are payable  quarterly  in arrears,  on the first  business day of January,
April,  July and  October of each year  (each  such date being  hereinafter
referred  to as a  "Dividend  Payment  Date"),  commencing  July  1,  1998.
Preferred  Dividends  on shares of Series A  Preferred  Stock and  Series B
Preferred  Stock  shall be  cumulative  and shall  accrue  from the date of
original  issuance.  It is presently  anticipated that the Company will pay
dividends on shares of the Series A Preferred  Stock and Series B Preferred
Stock in  shares  of  Series A  Preferred  Stock  and  shares  of  Series B
Preferred  Stock,  respectively,  and any  earnings  which the  Company may
realize  in  the  foreseeable  future  will  be  retained  to  finance  the
development and expansion of the Company. See "DIVIDEND POLICY."

     Pursuant to applicable accounting  standards,  any dividends which are
paid in kind on the Series A  Preferred  Stock or on the Series B Preferred
Stock,  will be recorded in the  Company's  balance sheet as an increase to
the accumulated deficit or reduction in retained earnings,  as the case may
be, and an  increase  in the  carrying  value of such  stock.  Accordingly,
dividends  that  are  paid  in  kind  will  increase  the  loss  per  share
attributable to Common  Shareholders and will result in additional dilution
of ownership interest attributable to existing Common Shareholders.

FUTURE SALES OF COMMON SHARES

     The sale, or availability  for sale, of substantial  amounts of Common
Shares in the public market  subsequent  to this Offering  pursuant to Rule
144 under the Securities Act or otherwise could adversely affect the market
price of the Common Shares and could impair the Company's  ability to raise
additional  capital  through  the  sale of its  equity  securities  or debt
financing.

                            THE RIGHTS OFFERING

THE RIGHTS

     The  Company is issuing to each  Holder of record of Common  Shares on
the Record  Date one  transferable  Right for each 50 Common  Shares  held;
provided,  however, Rights will not be distributed to Holders who reside in
jurisdictions  in which the Securities have not been registered or where an
exemption  from  registration  is not  available,  as described  more fully
below, and transferees of Rights in jurisdictions where the Securities have
not  been  registered  or  where  an  exemption  from  registration  is not
available  may not  exercise  the Rights.  The Rights will be  evidenced by
Rights  Certificates.  An  aggregate  of up to  50,000  Rights  will  be so
distributed.  No  fractional  Rights  or  cash  in  lieu  thereof  will  be
distributed or paid by the Company.  The number of Rights  distributed will
be rounded  down to the nearest  whole  number.  As  described  below under
"Amendment and Termination," the Company will terminate the Rights Offering
if on the Expiration Date the Company  receives  aggregate cash proceeds of
less than $2.0 million from the exercise of Rights (calculated based upon a
per Common Share price of $2.25,  a 12.5%  premium over the average bid and
ask  prices  of such  shares  over the five  most  recent  business  days).
Accordingly,   assuming  a   Subscription   Price  of  $74.25,   a  minimum
subscription  of  approximately  26,937  Offering  Shares  pursuant  to the
exercise of the Rights is necessary to proceed with the Rights Offering.

Expiration Date

     The Rights will expire on ______________ _, 1998, at 5:00 p.m. Eastern
Standard  Time,  thirty days after the effective  date of this  Prospectus,
unless extended by the Board of Directors of the Company, in which case the
term  "Expiration  Date"  shall mean the latest  date and time to which the
Rights Offering is extended.  After the Expiration Date, unexercised Rights
will be null and  void.  The  Company  will not be  obligated  to honor any
purported  exercise of Rights received by the Subscription  Agent after the
Expiration Date, regardless of when the documents relating to that exercise
were sent, except pursuant to the procedures described below.

SUBSCRIPTION PRIVILEGES

     Basic Subscription Privilege

     Each Right will entitle the  registered  Holder thereof to purchase at
the Subscription Price one share of Series B Preferred Stock. Each share of
Series B Preferred Stock will be immediately  convertible at no cost to the
Holder thereof, into 33 Common Shares. Certificates representing Underlying
Shares  purchased  pursuant  to the Basic  Subscription  Privilege  will be
delivered to the  subscribers as soon as  practicable  after the Expiration
Date and  after all  prorations  contemplated  by the  terms of the  Rights
Offering have been effected.

     Oversubscription Privilege

     Each  Holder who  exercises  all of his or her Rights  pursuant to the
Basic  Subscription  Privilege  may  indicate  on  the  Rights  certificate
additional shares of Series B Preferred Stock above the Basic  Subscription
Privilege  up to the Maximum  Offering  Shares  such  Holder  would like to
purchase at the Subscription Price. The  Oversubscription  Privilege is not
transferable.  After the  Expiration  Date,  the  Company  will issue those
Offering Shares not purchased through the Basic  Subscription  Privilege to
the Holders who wish to exercise their  Oversubscription  Privilege.  If an
insufficient  number of Offering  Shares is available to satisfy  fully all
elections to exercise the  Oversubscription  Privilege,  then the available
Offering  Shares  will be  allocated  among the  Holders  exercising  their
Oversubscription  Privilege  such that each such Holder will be entitled to
receive  a number  of  Offering  Shares  which is  equal to the  number  of
Offering   Shares   subscribed   to  by  such   Holder   pursuant   to  the
Oversubscription Privilege multiplied by a fraction, the numerator of which
is the number of the then available  Offering Shares and the denominator of
which is the aggregate number of Offering Shares  subscribed to pursuant to
the  Oversubscription  Privilege.  If a proration  of the  Offering  Shares
results  in a Holder  receiving  fewer  Offering  Shares  than such  Holder
subscribed for pursuant to the Oversubscription  Privilege, then any excess
funds paid by that Holder as the  Subscription  Price for shares not issued
will be returned by the  Subscription  Agent without interest or deduction.
Certificates   representing  Offering  Shares  purchased  pursuant  to  the
Oversubscription  Privilege  will be  delivered to  subscribers  as soon as
practicable  after  the  Expiration  Date  and  after  all  prorations  and
adjustments  contemplated  by the terms of the  Rights  Offering  have been
effected.

SUBSCRIPTION PRICE

     The Subscription Price is $______ per Offering Share. The Subscription
Price is payable in cash or by check, money order or wire transfer,  all as
more  completely  set forth  under "THE  RIGHTS  OFFERING  --  Exercise  of
Rights."

METHOD FOR PRICING

     The terms of the Rights Offering,  including the Subscription Price of
$______,  were  determined by the Board of Directors of the Company.  Among
the factors  considered  in  determining  the  Subscription  Price are: the
recent  market  prices of the  Common  Shares,  the  terms of the  Series B
Preferred   Stock,   including   dividend  and   liquidation   preferences,
anticipated  market and  economic  conditions,  estimates  of the  business
potential  and  prospects  of  the  Company,  the  Company's  status  as  a
development-stage  company, the Company's prior investment in its products,
its future estimated cash requirements to commercialize  its products,  the
risks of the business, and consultation with financial advisors.

EXERCISE OF RIGHTS

     The Basic Subscription  Privilege and the  Oversubscription  Privilege
may be exercised by properly completing the Rights Certificates  evidencing
the Rights and forwarding them, with payment of the Subscription  Price for
each share of Series B Preferred Stock subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription  Privilege,  to ChaseMellon
Shareholder  Services,   L.L.C.,  the  Subscription  Agent,  prior  to  the
Expiration  Date.  Payment  may  only  be  made  (a) by  check  or  postal,
telegraphic  or express  money order,  payable to  ChaseMellon  Shareholder
Services,  L.L.C., as Subscription  Agent, or (b) by wire transfer of funds
to the  account  maintained  by the  Subscription  Agent for the purpose of
accepting  subscriptions  at ABA No.  021000021,  Chase Manhattan Bank, New
York,  New  York,   Reorganization   No.   323-213057,   for  Clean  Diesel
Technologies,  Inc., Attn: Evelyn O'Connor.  The Subscription Price will be
deemed  to have  been  received  by the  Subscription  Agent  only upon (i)
clearance of any uncertified  check, (ii) receipt by the Subscription Agent
of any certified check or cashier's check or of any postal,  telegraphic or
express  money  order,   or  (iii)  receipt  of  collected   funds  in  the
Subscription  Agent's  account  designated  above. If paying by uncertified
personal  check,  please note that the funds paid thereby may take at least
five (5) business days to clear.  Accordingly,  Holders who wish to pay the
Subscription Price by means of uncertified personal check are urged to make
payment  sufficiently in advance of the Expiration Date to ensure that such
payment is received and clears by such time and are urged to  consider,  in
the alternative,  payment by means of certified or cashier's  check,  money
order or wire  transfer  of funds.  All funds  received  in  payment of the
Subscription  Price shall be held by the Subscription Agent in a segregated
interest bearing account in the name of the Company. If Rights Certificates
are sent by mail, Rights Holders are urged to use insured, registered mail,
return receipt requested.

     If a Holder wishes to exercise  Rights,  but time will not permit such
Holder to cause the Rights  Certificates  evidencing  those Rights to reach
the  Subscription  Agent  prior to the  Expiration  Date,  such  Rights may
nevertheless  be  exercised  if  all  of  the  following   conditions  (the
"Guaranteed Delivery Procedures") are met:

          (i) the  Holder has  caused  payment in full of the  Subscription
     Price for each  Offering  Share being  subscribed  for pursuant to the
     Basic Subscription Privilege and the Oversubscription  Privilege to be
     received  (in the manner set forth  above) by the  Subscription  Agent
     prior to the Expiration Date;

          (ii)  the  Subscription  Agent  receives,  at  or  prior  to  the
     Expiration   Date,  a  guarantee   notice  (a  "Notice  of  Guaranteed
     Delivery"),  substantially  in the form provided with the Instructions
     as to Use of Clean Diesel Technologies,  Inc. Rights Certificates (the
     "Instructions")  distributed  with  the  Rights  Certificates,  from a
     member firm of a registered  national  securities exchange or a member
     of the National Association of Securities Dealers,  Inc. ("NASD"),  or
     from  a  commercial   bank  or  trust  company  having  an  office  or
     correspondent in the United States (each, an "Eligible  Institution"),
     stating  the name of the  exercising  Holder,  the  Number  of  Rights
     represented by the Rights  Certificate held by such Holder, the number
     of  Offering  Shares  being  subscribed  for  pursuant  to  the  Basic
     Subscription  Privilege,  if  any,  pursuant  to the  Oversubscription
     Privilege,  and guaranteeing the delivery to the Subscription Agent of
     the  Rights  Certificates  evidencing  those  Rights  within  five (5)
     trading days following the date of the Notice of Guaranteed  Delivery;
     and

          (iii) the properly completed Rights  Certificates  evidencing the
     Rights being exercised, with any signatures guaranteed as required, is
     received  by the  Subscription  Agent  within  five (5)  trading  days
     following  the date of the  Notice  of  Guaranteed  Delivery  relating
     thereto.  The Notice of  Guaranteed  Delivery  may be delivered to the
     Subscription  Agent in the same manner as Rights  Certificates  at the
     addresses set forth below,  or may be transmitted to the  Subscription
     Agent by telegram or  facsimile  transmission  (telecopier  no.  (201)
     296-4293).  Additional  copies  of the form of  Notice  of  Guaranteed
     Delivery are available upon request from the Subscription Agent at the
     address set forth below.

     If the  aggregate  Subscription  Price  paid by an  exercising  Rights
Holder  is  insufficient  to  purchase  the  number  of  shares of Series B
Preferred Stock that the Holder  indicates are being  subscribed for, or if
an exercising Rights Holder does not specify the number of shares of Series
B Preferred Stock to be purchased, then the Rights Holder will be deemed to
have exercised,  first, the Basic  Subscription  Privilege and, second, the
Oversubscription  Privilege to purchase  shares of Series B Preferred Stock
to the full extent of the payment tendered.  If the aggregate  Subscription
Price paid by an exercising  Rights Holder exceeds the amount  necessary to
purchase  the  number of shares of Series B  Preferred  Stock for which the
Rights  Holder has  indicated an intention  to  subscribe,  then the Rights
Holder  will be deemed to have  exercised,  first,  the Basic  Subscription
Privilege   (if   not   already   fully   exercised)   and,   second,   the
Oversubscription  Privilege  to  the  full  extent  of the  excess  payment
tendered.  Once a  Rights  Holder  has  exercised  the  Basic  Subscription
Privilege  or the  Oversubscription  Privilege,  such  exercise  may not be
revoked.  Any Rights not duly exercised  prior to the Expiration  Date will
expire and become worthless.

     Funds received in payment pursuant to the  Oversubscription  Privilege
will be held in a  segregated  account  pending  issuance  of the  Offering
Shares.

     Record  Holders  of  Common  Shares  such  as  brokers,   trustees  or
depositories  for  securities,  who hold  shares for the account of others,
should contact the respective  beneficial  owners of such shares as soon as
possible  to  ascertain  the  beneficial   owners'   intentions  to  obtain
instructions  with  respect  to  the  Rights.  If  a  beneficial  owner  so
instructs,  the record owner of Common Shares should  complete  appropriate
Rights  Certificates  and submit  them to the  Subscription  Agent with the
proper payment. The Company shall pay broker-dealers Soliciting Fees of ten
percent of the Subscription  Price paid for each Right which is subscribed;
provided that such fees will only be paid in respect of Rights exercised in
those  jurisdictions  described under "PLAN OF DISTRIBUTION -- Distribution
Arrangements." See "PLAN OF DISTRIBUTION." Additionally,  beneficial owners
of Common  Shares or  Rights  held  through  such a nominee  Holder  should
contact  the  nominee  Holder  and  request  the  nominee  Holder to effect
transactions in accordance with the beneficial owner's instructions.

     The Instructions  accompanying the Rights  Certificates should be read
carefully and followed in detail.  RIGHTS  CERTIFICATES SHOULD BE SENT WITH
PAYMENT TO THE SUBSCRIPTION  AGENT. DO NOT SEND RIGHTS  CERTIFICATES TO THE
COMPANY.

     THE  METHOD OF  DELIVERY  OF RIGHTS  CERTIFICATES  AND  PAYMENT OF THE
SUBSCRIPTION  PRICE TO THE  SUBSCRIPTION  AGENT WILL BE AT THE ELECTION AND
RISK OF THE RIGHTS  HOLDERS.  IF SENT BY MAIL,  RIGHTS HOLDERS ARE URGED TO
SEND RIGHTS CERTIFICATES AND PAYMENTS BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT  REQUESTED,  AND ARE URGED TO ALLOW A SUFFICIENT NUMBER
OF DAYS TO ENSURE  DELIVERY  TO THE  SUBSCRIPTION  AGENT AND  CLEARANCE  OF
PAYMENT PRIOR TO THE EXPIRATION DATE. BECAUSE  UNCERTIFIED  PERSONAL CHECKS
MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,  RIGHTS HOLDERS ARE STRONGLY
URGED TO PAY, OR ARRANGE FOR  PAYMENT,  BY MEANS OF  CERTIFIED OR CASHIER'S
CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.

     All  questions   concerning  the   timeliness,   validity,   form  and
eligibility  of any exercise of Rights will be  determined  by the Company,
whose  determinations  will be final and binding.  The Company, in its sole
discretion,  may waive any  defect or  irregularity,  or permit a defect or
irregularity  to be  corrected  within  such time as it may  determine,  or
reject the purported exercise of any Right. Rights Certificates will not be
deemed to have been received or accepted until all irregularities have been
waived or cured  within  such time as the Company  determines,  in its sole
discretion.  Neither the Company nor the  Subscription  Agent will be under
any duty to give  notification  of any defect or irregularity in connection
with the  submission  of  Subscription  Rights or incur any  liability  for
failure to give such notification.

     ANY  QUESTIONS OR REQUESTS  FOR  ASSISTANCE  CONCERNING  THE METHOD OF
EXERCISING  RIGHTS OR REQUESTS  FOR  ADDITIONAL  COPIES OF THIS  PROSPECTUS
SHOULD BE  DIRECTED  TO  CHASEMELLON  SHAREHOLDER  SERVICES,  L.L.C.  ("THE
INFORMATION  AGENT"),  AT THE ADDRESS  SET FORTH  BELOW UNDER  "INFORMATION
AGENT".

JURISDICTIONS IN WHICH THE SECURITIES ARE OFFERED

     THE RIGHTS  WILL ONLY BE GRANTED  TO,  AND MAY ONLY BE  EXERCISED  BY,
INVESTORS  RESIDING IN THE  FOLLOWING  JURISDICTIONS  WHERE THE  SECURITIES
OFFERED  HEREBY  HAVE  BEEN  REGISTERED  WITH  THE  APPROPRIATE  SECURITIES
REGULATORY  AUTHORITIES  OR WHERE AN EXEMPTION  FROM SUCH  REGISTRATION  IS
AVAILABLE:  OUTSIDE THE UNITED  STATES AND IN  COLORADO,  CONNECTICUT,  THE
DISTRICT OF COLUMBIA,  ILLINOIS,  INDIANA,  IOWA, KANSAS, MAINE,  MARYLAND,
MASSACHUSETTS,  NEVADA, NEW JERSEY, NEW YORK, NORTH CAROLINA, RHODE ISLAND,
VERMONT, VIRGINIA AND WASHINGTON. RIGHTS WILL NOT BE DISTRIBUTED TO HOLDERS
WHO RESIDE IN STATES  WHERE THE  SECURITIES  OFFERED  HEREBY  HAVE NOT BEEN
REGISTERED OR WHERE AN EXEMPTION FROM  REGISTRATION  IS NOT  AVAILABLE.  IN
ADDITION, THE SERIES B PREFERRED  STOCK MAY NOT BE  TRANSFERRED TO RESIDENTS
OF  ANY  OF  THE  FOLLOWING  STATES:  ARIZONA,   FLORIDA,   GEORGIA,  OHIO,
PENNSYLVANIA OR TEXAS.

NO REVOCATION

     ONCE A HOLDER OF RIGHTS HAS PROPERLY  EXERCISED THE BASIC SUBSCRIPTION
PRIVILEGE AND/OR THE OVERSUBSCRIPTION  PRIVILEGE,  SUCH EXERCISE MAY NOT BE
REVOKED.

AMENDMENT AND TERMINATION

     The Board of  Directors  reserves  the Right to extend the  Expiration
Date and to amend the terms and  conditions  of the  Rights  Offering.  Any
extension, if made, will be publicly announced through a release to the Dow
Jones  News  Service  and  as  otherwise  required  by  applicable  law  or
regulations.  In the event of a material  change in the terms of the Rights
Offering,  there  will  be an  affirmative  resolicitation  of  the  Rights
Offering  by  means  of a  post-effective  amendment  to  the  Registration
Statement. In the event of such a resolicitation,  subscribing Holders will
be deemed to have  effectively  revoked  their  subscriptions  unless  they
affirmatively  confirm  their intent to subscribe,  and their  subscription
payments will be returned to them without interest or deduction.  The Board
of  Directors  of the Company in its sole  discretion,  may  terminate  the
Rights  Offering and revoke the Rights at any time prior to the  Expiration
Date or thereafter.  In any event,  the Company shall  terminate the Rights
Offering if on the  Expiration  Date the Company  receives  aggregate  cash
proceeds of less than $2.0  million  from the  exercise  of Rights.  In the
event of such termination,  the Company will promptly return to all persons
that exercised Rights,  their  subscription  payments,  without interest or
deduction.

METHOD OF TRANSFERRING RIGHTS

     Rights may be  purchased or sold through  usual  investment  channels,
including  banks  and  brokers.  There can be no  assurance  that an active
market will develop for the Rights.  The Rights,  the underlying  shares of
Series B Preferred  Stock and the Common Shares issuable upon conversion of
the Series B Preferred Stock, will not be eligible for trading on Nasdaq.

     The Rights evidenced by a single Rights Certificate may be transferred
in whole by endorsing  the Rights  Certificate  for transfer in  accordance
with the accompanying instructions.  A portion of the Rights evidenced by a
single   Rights   Certificate   (but   not   fractional   Rights   or   the
Oversubscription  Privilege  or  to  persons  in  jurisdictions  where  the
Securities have not been registered or where an exemption from registration
is not  available)  may be  transferred  by delivering to the  Subscription
Agent  a  Rights   Certificate   properly   endorsed  for  transfer,   with
instructions  to register such portion of the Rights  evidenced  thereby in
the name of the  transferee  (and to issue a new Rights  Certificate to the
transferee evidencing such transferred Rights). In such event, a new Rights
Certificate  evidencing  the  balance of the  Rights  will be issued to the
Rights  Holder  or, if the Rights  Holder so  instructs,  to an  additional
transferee. The Oversubscription Privilege is not transferable.

     Holders of Rights wishing to transfer all or a portion of their Rights
(subject to the  limitations  described  above)  should  allow a sufficient
amount  of  time  prior  to  the  Expiration  Date  for  (i)  the  transfer
instructions to be received and processed by the Subscription Agent, (ii) a
new  Rights  Certificate  for  the  transferred  Rights  to be  issued  and
transmitted to the transferee or transferees  and a new Rights  Certificate
for any retained  Rights to be issued and transmitted to the transferor and
(iii) the Rights evidenced by such new Rights  Certificates to be exercised
or sold by the recipients thereof. Neither the Company nor the Subscription
Agent shall have any  liability to a transferee  or transferor of Rights if
Rights  Certificates are not received in time for exercise or sale prior to
the Expiration Date.

     EXCEPT FOR  CERTAIN  FEES PAID TO  BROKER-DEALERS  AND  CHARGED BY THE
SUBSCRIPTION AGENT THAT WILL BE PAID BY THE COMPANY, ALL COMMISSIONS,  FEES
AND OTHER EXPENSES  (INCLUDING  BROKERAGE  COMMISSIONS  AND TRANSFER TAXES)
INCURRED IN CONNECTION  WITH THE PURCHASE,  SALE OR EXERCISE OF RIGHTS WILL
BE FOR THE  ACCOUNT  OF THE  TRANSFERRING  HOLDER OF THE RIGHTS AND NONE OF
SUCH  COMMISSIONS,  FEES OR  EXPENSES  WILL BE PAID BY THE  COMPANY  OR THE
SUBSCRIPTION AGENT.

     The Rights will be eligible for transfer through,  and the exercise of
the Rights may be effected through, the facilities of the Transfer Agent.

NO RECOMMENDATION

     Neither the Company nor the Board of  Directors  of the Company  makes
any  recommendations  regarding  whether  Rights  Holders should sell their
Rights or whether Rights Holders should exercise their Rights.

PARTICIPATION BY FUEL TECH

     Fuel  Tech  has not yet made a  determination  as to  whether  it will
participate  in  the  Rights  Offering,   and  will  do  so  following  the
distribution  of the  Rights  based upon  several  factors,  including  the
offering price, Fuel Tech's financial  position and other factors.  If Fuel
Tech  were  to  participate,  it may  desire  to  participate  through  the
conversion of the outstanding  $495,000 loan by one of its  subsidiaries to
the Company.  Such a participation,  if agreed to in the sole discretion of
the Company,  would  represent a Basic  Subscription in respect of 31.9% of
the Common Shares currently owned by Fuel Tech.

SUBSCRIPTION AGENT

     The Company has engaged ChaseMellon  Shareholder  Services,  L.L.C. as
the Subscription  Agent for the Rights  Offering.  The Company will pay the
fees  and  expenses  of the  Subscription  Agent,  and has also  agreed  to
indemnify  the  Subscription  Agent from certain  liabilities  which it may
incur in connection with the Rights.

INFORMATION AGENT

     The Company has appointed ChaseMellon Shareholder Services,  L.L.C. as
Information  Agent for the Rights  Offering.  The Company will pay the fees
and expenses of the Information  Agent and has also agreed to indemnify the
Information Agent from certain  liabilities that it may incur in connection
with the Rights Offering.

     Any  questions or requests  for  assistance  concerning  the method of
exercising  Rights to purchase  Series B Preferred  Stock or for additional
copies of this Prospectus can be directed to the  Information  Agent in the
continental United States at ChaseMellon Shareholder Services,  L.L.C., 450
West 33rd Street,  New York,  NY 10001,  Phone:  (888)  224-2745 and in the
United Kingdom at Computershare Services,  P.L.C., P.O. Box, Consort House,
East Street, Bedminister, Bristol, BS 991XZ, Phone: 1179-370-672.


      CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS

     The following is a general  summary of certain  United States  Federal
income tax consequences  (the "Tax  Consequences") to the Company's Holders
who  are  citizens  or  residents  of the  United  States  of the  proposed
distribution  to such  Holders  of  Rights  to  acquire  shares of Series B
Preferred  Stock of the  Company.  This summary does not address any state,
local, foreign, estate or gift tax considerations. This summary is included
for general information only. This summary is based upon laws, regulations,
revenue rulings and decisions as of July 10, 1998, all of which are subject
to  change or  differing  interpretations;  any such  change  could  have a
retroactive  effect  and may  also  have a  negative  tax  impact.  The tax
treatment  of a Holder  may vary  depending  upon the  Holder's  particular
circumstances  and  certain  Holders  such  as  tax  exempt   corporations,
insurance  companies,  "S" corporations,  banks, foreign estates or trusts,
foreign  corporations  and persons who are not citizens or residents of the
United States,  may be subject to special rules not discussed  below.  This
summary is limited to Holders who are  citizens or  residents of the United
States or  corporations  organized  under the laws of a state of the United
States who will hold the Rights as "capital  assets"  within the meaning of
Section 1221 of the Internal Revenue code of 1986, as amended (the "Code").
HOLDERS  SHOULD  CONSULT  THEIR OWN TAX  ADVISORS  AS TO THE  SPECIFIC  TAX
CONSEQUENCES  TO THEM OF THE  OFFERING  AND THE  RIGHTS  IN  LIGHT OF THEIR
PARTICULAR CIRCUMSTANCES.

RECEIPT OF RIGHTS BY HOLDERS

     Code Section  305(b)(5)  provides that a  distribution  of convertible
preferred  stock is taxable under Code Section 301 as a dividend  unless it
is  established  that  such  distribution  will not have  the  result  of a
disproportionate  distribution.  Rights to  acquire  convertible  preferred
stock are treated the same as the stock  itself.  Holders in  jurisdictions
where  Securities  have not been  registered  or  where  an  exemption  for
registration is not available will not receive, or be able to exercise, the
Rights. Holders of less than fifty (50) Common Shares shall not receive any
Rights pursuant to this offering plan.  Additionally,  management  believes
that some Holders will exercise their Rights and some will not and there is
an  Oversubscription  Privilege.  Consequently,  the distribution of Rights
will be a  disproportionate  distribution and will be taxable as a dividend
pursuant to Code Section 301. Therefore,  a Holder who receives Rights will
(i) recognize ordinary income (treated as a dividend for Federal income tax
purposes)  equal to the  lesser of: (a) the Value of the Rights on the date
of receipt,  or (b) the Company's current and/or  accumulated  earnings and
profits  ("E&P") for the taxable year in which the Rights are  distributed;
(ii) reduce the adjusted tax basis of the Common Shares of the Company held
by the  Holder by the  excess of the Value of the  Rights  over the  amount
required to be treated as a dividend;  and (iii) recognize  capital gain to
the  extent  such  excess  Value  exceeds  the  adjusted  tax  basis of the
Company's Common Shares held by the Holder. Characterization of the capital
gain  recognized for Federal  income tax purposes,  if any, as long term or
short term capital  gain,  is  determined  by  reference  to each  Holder's
individual holding period for the Company Common Shares.  Management of the
Company  believes that the Company will have no current and/or  accumulated
E&P for the taxable year in which the Rights are distributed. Consequently,
Management  believes  that no  portion  of the  Rights  will be  taxable as
ordinary  income to  Holders.  No  attempt  has been made to  independently
verify whether  current and/or  accumulated E&P exist or are anticipated to
exist for the taxable year of the distribution of the Rights.  Accordingly,
there can be no assurance that current and/or accumulated E&P exist or will
exist for the taxable year of the distribution of the Rights. In any event,
the Company will provide each Holder with an  information  statement  after
the  close  of the  taxable  year  in  which  the  Rights  are  distributed
indicating the amount,  if any, of the distribution  that is required to be
treated as ordinary income under the foregoing rules.

DETERMINATION OF VALUE

     The  fair  market  value  of  property  is  a  question  of  fact  and
acknowledged  experts  may  disagree  as to  the  fair  market  value  of a
particular item of property.  In some  instances,  the fair market value of
property  may not be  ascertainable  for tax  purposes  which may  postpone
income  recognition  for  Federal  income tax  purposes.  The Rights  would
constitute a distribution or property. In the instant case, no appraisal of
the Rights will be obtained,  but it is anticipated that the Rights will be
purchased and sold through usual investment  channels and the selling price
thereof  at or near the date the  Rights  are  distributed  will  likely be
deemed the Value of the Rights.  No  assurance  can be given as to what the
Value of the Rights will be or that the Rights will be  considered  to have
an ascertainable fair market value.

TAX BASIS OF RIGHTS

     Holders  receiving Rights will have a tax basis therein equal to their
Value. As to Holders,  their basis in their shares will be reduced, but not
below zero, by an amount equal to the excess of such Value over the amount,
if any, treated as ordinary income under the rules discussed above.

SALE OF RIGHTS

     A  Holder  who  sells  Rights  prior  to  exercise  will  recognize  a
short-term  gain or loss equal to the  difference  between his tax basis in
the Rights sold and the amount realized on the sale.

EXERCISE OF RIGHTS; BASIS OF STOCK RECEIVED

     The exercise of Rights will not have any separate  Federal  income tax
consequences,  nor will the  receipt  of the  shares of Series B  Preferred
Stock upon such exercise. Such shares will have a basis equal to the amount
paid  therefor  on  exercise  plus the  Holder's  tax  basis in the  Rights
exercised.

LAPSE OF RIGHTS PRIOR TO EXERCISE

     If a Holder does not sell or  exercise  the Rights  received,  and the
Rights expire,  the Holder will realize a short-term  capital loss equal to
the tax basis of the  expired  Rights.  No  adjustment  to the basis of the
Company shares of a Holder will result.

CONVERSION OF PREFERRED STOCK

     Holders who convert their Series B Preferred  Stock into Common Shares
will not recognize any gain or loss upon such conversion.  A Holder's basis
in the Common Shares acquired through conversion will be equal to the basis
which the Holder  had in the Series B  Preferred  Stock so  converted.  The
Holding  period for such Common Shares shall include the holding period for
the converted Series B Preferred Stock.

NON-DISPROPORTIONATE DISTRIBUTION

     Treasury  Regulations Sections 1.305-6 provide that where a conversion
right (of preferred  into common  shares) may be exercised over a period of
many years and the dividend  rate is consistent  with market  conditions at
the time of distribution of the stock,  there is no basis for predicting at
what  time and the  extent  to  which  the  stock  will be  converted,  the
distribution  may  not  be  a   "disproportionate   distribution."  If  the
distribution of Rights is not a  disproportionate  distribution,  it may be
tax free  pursuant to Code  Section 305. In the event the  distribution  of
Rights is determined to be a tax-free transaction, several consequences may
result,  one of which is that the Series B Preferred  Stock received may be
treated as "Section  306 stock."  Although  the Company  believes  that the
preferred stock which would be received on exercise of the Rights would not
be Section 306 stock,  it is possible for the Internal  Revenue  Service to
challenge  this  position.  The effect of such a  designation  upon various
aspects of this offering are summarized below for information purposes.

     Code  Section  306   generally   provides  that  where  a  corporation
distributes preferred stock to its shareholders in a tax-free distribution,
the  shareholders  will  recognize  ordinary  income  at such  time as such
preferred stock is "disposed of."

     Code Section 306(c)(2)  provides that stock shall not be "Section 306"
stock if no part of the distribution would have been a dividend if, in lieu
of the stock (or rights) distribution,  a cash distribution would have been
made.  It  should  be  noted,  however,  that  dividend  consequences  of a
distribution  of cash are  determined  as of the end of the taxable year in
which the  distribution is made.  Although  management  believes that there
will be no  current  or  accumulated  E&P as of the end of the tax  year in
which the distribution  occurs, there can be no assurance that that will be
so. Therefore,  in the event there is any E&P, current or accumulated as of
the end of the year in which the  distribution  of Rights  occurs,  and the
distribution itself is determined to be a tax-free  distribution,  any gain
recognized on the disposition of the Rights or the preferred stock received
on  exercising  the Rights  would be taxable as ordinary  income and not as
capital gain.

     The basis and the  holding  period for  computation  of  long-term  or
short-term  capital  gain or loss of the Rights  would be  determined  with
reference to the basis of the  previously  owned Common  Shares.  The basis
provisions  of Code  Section  307 would  require a Holder to  allocate  the
adjusted basis of the previously owned Common Shares between the previously
owned  Common  Shares and the Rights  based on relative  fair market  value
(after the  distribution  of the Rights).  Code Section 307(b)  provides an
exception to the  allocation of basis  requirement if the fair market value
of the Rights are less than fifteen  (15%) percent of the fair market value
of the previously  owned stock.  In such cases,  the allocation of basis is
not  required  but becomes an election  available  to the  stockholder.  As
discussed  above,  no  representation  or assurances  can be made as to the
Value of the Rights.

     If a Holder's basis in the Rights is determined  with reference to his
previously  owned  Common  Shares,  lapse of the Rights  would  result in a
capital  loss  measured  by the  Holder's  basis  in  the  Rights  and  the
determination  of whether such loss is long-term or short-term would be the
same as the holding period of the previously owned Common Shares.

     A Holder who converts the Series B Preferred  Stock into Common Shares
will  not  recognize  gain  or  loss  on  such  conversion.  Under  certain
circumstances, sale of the Common Shares acquired thereby may be treated as
being sale of "stock other than common stock" such that any resulting  gain
would be treated as ordinary income rather than capital gain.

     Even if the Rights,  the Series B Preferred Stock or resultant  Common
Shares are treated as "stock  other than common  stock,"  there are several
methods available to Holders to avoid the adverse tax consequences  arising
from such  designation.  One such  method  would be the sale of the  entire
stock interest of the Holder.


      RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

     For the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and
for the period from January 1, 1992 through December 31, 1997 and for the
three month periods ended March 31, 1997 and 1998 and for the period from
January 1, 1992 through March 31, 1998, the Company's earnings were
inadequate to cover fixed charges by approximately (in thousands) $131;
$1,107; $2,024; $3,489; $3,764; $10,853; $961; $741; and $11,594,
respectively.

                              USE OF PROCEEDS

     The net  proceeds to be  received by the Company  from the sale of the
50,000 shares of Series B Preferred Stock offered  hereby,  are expected to
be  approximately  $3.1 million,  assuming an offering  price of $74.25 per
share,  estimated  Subscription  Fees and  expenses  of  $600,000  and full
subscription  of the Rights.  All of the net  proceeds of the  Subscription
Rights will be paid to the Company. Assuming minimum subscription using the
foregoing  assumptions,  net  cash  proceeds  would be  approximately  $1.4
million.  The  Company  expects  to use  the  net  proceeds  of the  Rights
Offering,  assuming  full  subscription,  and apply  them to the  following
budgeted  uses:  $1,700,000  for  marketing,   field  trials  and  patents;
repayment of $200,000  plus $45,000 of interest to Fuel Tech under the Term
Loan (as defined  below);  and the balance for working  capital and general
corporate  purposes.  The  Company  expects to use the net  proceeds of the
Rights  Offering,  assuming  minimum  subscription,  and apply  them to the
following budgeted uses: $750,000 for marketing,  field trials and patents;
repayment of $100,000  plus $26,000 of interest to Fuel Tech under the Term
Loan (as defined  below);  and the balance for working  capital and general
corporate purposes.

     The  allocation  of the net proceeds of this  offering set forth above
represents  the Company's  best  estimate  based upon its present plans and
certain assumptions  regarding general economic and industry conditions and
the Company's  future revenues and  expenditures.  The Company reserves the
Right to reallocate the proceeds within the above  described  categories or
to other purposes in response to, among other things, changes in its plans,
industry conditions, and the Company's future revenues and expenditures.

     Based on the Company's  operating plan,  management  believes that the
net proceeds from this offering, together with the $1.4 million Bridge Loan
effected in 1998, will be sufficient to meet the Company's anticipated cash
needs  and  finance its  operations  through  January  2000 (assuming  full
subscription)  and  through  April 1999  (assuming  minimum  subscription).
Thereafter,   the  Company  anticipates  that  it  may  require  additional
financing to meet its current or future plans. See "RISK FACTORS -- Factors
Relating to the Company -- Independent  Auditor's Report" and "-- Liquidity
and Capital Requirements" and "-- No Assurances of Additional Funding."

     Net proceeds not immediately required for the purposes described above
will be invested  principally  in U.S.  government  securities,  short-term
certificates  of  deposit,   money  market  funds,  or  other   high-grade,
short-term, interest-bearing investments.

     As described herein,  Fuel Tech has not yet made a determination as to
whether  it  will  participate  in the  Rights  Offering,  and  will  do so
following  the  distribution  of the  Rights  based upon  several  factors,
including  the offering  price,  Fuel Tech's  financial  position and other
factors.  If Fuel Tech were to  participate,  it may desire to  participate
through  the  conversion  of the  outstanding  $495,000  loan by one of its
subsidiaries to the Company. If Fuel Tech were to participate by converting
such loan (for which the Company's consent would be required) and, assuming
full subscription,  net cash proceeds, as well as outstanding  indebtedness
of  the  Company,  would  decrease  by  approximately  $495,000.  Any  such
conversion,  if agreed by the Company, would not be included in calculating
aggregate cash proceeds received by the Company in determining  whether the
minimum subscription has been met.

                        PRICE RANGE OF COMMON SHARES

     The  Company's  Common  Shares were listed on Nasdaq  under the symbol
"CDTI"  through June 30, 1998.  Effective  July 1, 1998,  the Common Shares
were delisted and currently  trade on the OTC  Electronic  Bulletin  Board,
although no assurances can be given that such shares will continue to trade
thereon or in the over-the-counter market, in what are commonly referred to
as the "pink sheets".  The following table sets forth the high and low sale
prices by quarter through June 30, 1998 as reported by Nasdaq, and for July
1 through July 29, 1998 in the OTC Electronic Bulletin Board.

                                                       High         Low
                                                       ----         ---
1st Quarter 1996................................       7 3/8         5
2nd Quarter 1996................................       6 3/8       4 3/8
3rd Quarter 1996................................         6         3 7/8
4th Quarter 1996................................       4 1/4         2
1st Quarter 1997................................       5 1/2         2
2nd Quarter 1997................................       4 1/2       3 1/4
3rd Quarter 1997................................       4 1/8       2 1/4
4th Quarter 1997................................       3 3/4      1 3/16
1st Quarter 1998................................       3 1/2       1 3/8
2nd Quarter 1998................................       1 3/4       1 3/4
3rd Quarter 1998 (through August 4, 1998).......         2         1 7/8

     As of August 4, 1998,  the last sale  price for the  Common  Shares as
reported by the OTC  Electronic  Bulletin Board was $1.88 per Common Share.
As of _______  __,  1998,  there  were ___  Holders of record of the Common
Shares.

                              DIVIDEND POLICY

     The Company has to date not paid  dividends  on its Common  Shares and
does not intend to pay any dividends to its Holders of Common Shares in the
foreseeable future.

     Holders of the Series A Preferred  Stock and Series B Preferred  Stock
are entitled to receive, when, as and if declared by the Board out of funds
of the Company  legally  available  therefor,  cash dividends at the annual
rate of 9% of the $500  stated  value  and  liquidation  preference  of the
Series A Preferred Stock price per share and 9% of the $______ stated value
and liquidation preference of the Series B Preferred Stock price per share,
respectively;  provided, however, that in lieu of making dividends in cash,
the  Company  may elect,  by giving  written  notice to each  holder of the
Series A Preferred Stock and Series B Preferred  Stock, as the case may be,
to pay  dividends  in kind  at the  annual  rate of 11% of the  Liquidation
Preference (cash dividends and dividends in kind are each deemed "Preferred
Dividends").  Dividends  payable to the  holders of the Series A  Preferred
Stock and Series B Preferred Stock are payable quarterly in arrears, on the
first business day of January,  April,  July and October of each year (each
such date being  hereinafter  referred  to as a "Dividend  Payment  Date"),
commencing  July 1,  1998.  Preferred  Dividends  on  shares  of  Series  A
Preferred  Stock and Series B Preferred Stock shall be cumulative and shall
accrue from the date of original issuance. It is presently anticipated that
the Company will pay  dividends  on shares of the Series A Preferred  Stock
and  Series B  Preferred  Stock in shares of Series A  Preferred  Stock and
Series B Preferred Stock, respectively,  and any earnings which the Company
may  realize in the  foreseeable  future  will be  retained  to finance the
development and expansion of the Company.

                               CAPITALIZATION

     The following table sets forth the capitalization of the Company as of
March 31,  1998,  and the as adjusted  capitalization  of the Company as of
March 31, 1998 after  giving  effect to (i) the issuance of $1.4 million of
Bridge Loan Notes,  (ii) the distribution of and the exercise of the Rights
by Holders of Common  Shares and the  contribution  of  approximately  $3.1
million (assuming full subscription,  net of estimated  Soliciting Fees and
expenses of the Rights Offering of $600,000),  to the Company's capital and
the conversion of the Bridge Loan Notes into Series A Convertible Preferred
Stock and (iii)  the  distribution  of and the  exercise  of the  Rights by
Holders of Common Shares and the contribution of approximately $1.4 million
(assuming  minimum  subscription,  net of  estimated  Soliciting  Fees  and
expenses of the Rights Offering of $600,000),  to the Company's capital, in
each case as if such  events  occurred  as of March 31,  1998.  See "USE OF
PROCEEDS."

<TABLE>
<CAPTION>
                                                                            March 31, 1998
                                                            --------------------------------------------
                                                                            (in thousands)
                                                                   AS ADJUSTED       AS ADJUSTED      AS ADJUSTED FOR
                                                                 FOR BRIDGE LOAN     FOR RIGHTS       RIGHTS OFFERING
                                                  ACTUAL                           OFFERING (FULL        (MINIMUM
                                                                                    SUBSCRIPTION)      SUBSCRIPTION)
                                              ------------        -----------       -------------       -----------
<S>                                           <C>                 <C>               <C>                 <C>        
Short-term Debt
    Current Portion Term Loan
    payable to Platinum Plus, Inc.            $        100        $       100       $         100       $       100
    (FN1)............................         ------------        -----------       -------------       -----------
       Total short-term debt.........                  100                100                 100               100
                                              ------------        -----------       -------------       -----------
Long-term Debt
    Term Loan payable to Platinum
       Plus, Inc. (FN1)..............                  395                395                 395               395
    Bridge Loan payable to Fuel Tech.                   --                500 (FN2)           -- (FN6)          500 (FN2)
    Bridge Loan payable to other                        --                900 (FN2)           -- (FN6)          900 (FN2)
    lenders .........................         ------------        ------------      ------------        -----------
       Total long-term debt..........                  395              1,795                 395             1,795
                                              ------------        ------------      -------------       -----------
Series A Redeemable Preferred
      Stock (FN3)....................                   --                 --               1,400                --
Shareholders' (Deficit) Equity
    Series B Preferred Stock (FN4)...                   --                 --               3,112             1,400
    Common Stock (FN5)...............                  126                126                 126               126
Additional Paid-in Capital...........               11,188             11,188              11,188            11,188
Deficit accumulated during the
   development stage.................              (11,594)           (11,594)            (11,594)          (11,594)
                                              ------------        ------------      --------------      ------------
Total Shareholders' (Deficit) Equity.                 (280)              (280)              2,832             1,120
                                              ------------        -------------     -------------       -----------
Total Capitalization.................         $        215        $     1,615       $       4,727       $     3,015
                                              ============        ============      =============       ===========

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

<FN>

(1)  Platinum Plus, Inc.  ("Platinum Plus") is a wholly owned subsidiary of
     Fuel Tech.  The principal  amount of the Term Loan is payable in three
     annual  installments  of $100,000  each on July 1 of each of the years
     1998  through  2000 with a final  installment  of  $195,000 on July 1,
     2001. On July 1, 1998, Platinum Plus elected to defer the repayment of
     the  $100,000 of  principal  which was payable on that date.  Platinum
     Plus has  reserved  the right,  however,  to call this  payment at any
     time.  As of the  date  of  this  prospectus,  Platinum  Plus  has not
     demanded  repayment.  Interest at a rate of 8% per annum is payable on
     the unpaid  balance  on each  principal  payment  date.  The  interest
     accrued  on the note as of July 1, 1998 was paid by the  Company.  See
     Note 7 to the Annual  Financial  Statements for information  regarding
     the loan payable by the Company. As described under "USE OF PROCEEDS,"
     Fuel  Tech has not yet  decided  whether  it will  participate  in the
     Rights  Offering.  If Fuel Tech were to participate by converting such
     loan (for  which the  Company's  consent  would be  required)  and the
     Rights  Offering  was fully  subscribed,  net cash  proceeds  from the
     Rights Offering,  as well as outstanding  indebtedness of the Company,
     would  decrease  by  approximately  $495,000.  If  Fuel  Tech  were to
     participate  and the Rights  Offering was  minimally  subscribed,  the
     outstanding   indebtedness   of  the   Company   would   decrease   by
     approximately  $495,000 and  shareholders'  equity  would  increase by
     approximately $495,000.

(2)  Assumes  receipt of the  proceeds  of the Bridge  Loan as of March 31,
     1998. See "CERTAIN  RELATIONSHIPS  AND RELATED  TRANSACTIONS -- Bridge
     Loan."

(3)  For a description of the Series A Convertible Preferred Stock issuable
     upon the  conversion  of the Bridge Loan Notes,  see  "DESCRIPTION  OF
     CAPITAL  STOCK -- Preferred  Stock -- Series A  Convertible  Preferred
     Stock" and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Terms of
     Series A Convertible  Preferred Stock." Shares of Series A Convertible
     Preferred  Stock,  once issued,  are  convertible at the option of the
     Holders thereof into Common Shares at a conversion  price of $1.50 per
     share,  which  conversion  price  will be  deemed to have been paid in
     full,  at no extra cost to the holder  thereof,  with the tendering of
     the  Series A  Preferred  Stock  in  connection  with  the  conversion
     thereof.  Series A  Convertible  Preferred  Stock is redeemable at the
     holder's option after four years.

(4)  For a description  of the Series B Convertible  Preferred  Stock,  see
     "DESCRIPTION   OF  CAPITAL  STOCK  --  Preferred  Stock  --  Series  B
     Convertible Preferred Stock." Shares of Series B Convertible Preferred
     Stock,  once  issued,  are  convertible  at the option of the  Holders
     thereof into 33 Common Shares at no cost to such Holder.

(5)  Based on the number of shares outstanding at March 31, 1998.  Excludes
     (i)  427,784   shares  of  Common  Stock  issuable  upon  exercise  of
     outstanding  options at a weighted average exercise price of $3.50 per
     share;  and (ii) 75,000 shares of Common Stock  issuable upon exercise
     of outstanding  warrants at a weighted average exercise price of $7.66
     per share.

(6)  Assumes  mandatory  conversion  of the Bridge Loan Notes into Series A
     Preferred  Stock.  In the event that the Rights Offering does not meet
     the minimum net subscription of $1.75 million required under the terms
     of the Bridge  Loan Notes to  automatically  convert  the Bridge  Loan
     Notes into Series A Preferred  Stock, the Bridge Loan may be converted
     at any time at the option of the Bridge Loan Lenders after January 31,
     1999. See "CERTAIN  RELATIONSHIPS  AND RELATED  TRANSACTIONS -- Bridge
     Loan."

</FN>
</TABLE>

                                  DILUTION

     At March 31,  1998,  the Company had a negative  tangible net worth of
$280,000 or $0.11 per Common  Share based on the  2,516,666  Common  Shares
outstanding. Negative tangible net worth per share represents the amount of
the  Company's  total assets less the amount of its  intangible  assets and
liabilities,  divided by the  number of Common  Shares  outstanding.  After
giving  effect to the receipt of net proceeds  (assuming a public  offering
price of $74.25 per share of Series B Preferred  Stock,  full,  minimum and
midpoint  subscription  of the Rights and the  immediate  conversion of the
foregoing  shares of Series B Preferred  Stock into shares of Common Stock)
from the sale of the securities  offered hereby, the pro forma net tangible
book value of the Company at March 31, 1998, would have been  approximately
$.83,  $.51 and $.68 per Common Share,  respectively.  This would result in
dilution to the new public  investors  (i.e.,  the  difference  between the
Offering Price of a Common Share  underlying  the Series B Preferred  Stock
offered  hereby and the net tangible book value thereof after giving effect
to this Offering) of approximately  $1.43, $1.74 and $1.57 per Common Share
(based on full,  minimum  and  midpoint  subscription),  respectively.  The
following table  illustrates the per share dilution under three  scenarios:
(i) full  subscription  of the Rights;  (ii)  minimum  subscription  of the
Rights; and (iii) a midpoint between the first two scenarios.

<TABLE>
<CAPTION>
                                                                                Minimum
                                                     Full Subscription        Subscription            Midpoint
                                                    --------------------  --------------------  --------------------
<S>                                                 <C>                   <C>                   <C>  
Public offering price per Common Share
   underlying the Series B Preferred Stock
   offered hereby at March 31, 1998 (FN1)....                      $2.25                 $2.25                 $2.25

Pro forma tangible book value per Common
   Share after Offering......................

   Negative tangible book value per Common
     Share at March 31, 1998.................         $(.11)                $(.11)                $(.11)

   Increase in net tangible book value per
     Common Share attributable to new
     investors...............................           .94          .83      .62          .51      .79          .68
                                                    -------    ---------  -------    ---------  -------    ---------

Dilution per Common Share to new investors
   (FN2)(FN3)(FN4)...........................                      $1.43                 $1.74                 $1.57
                                                    ====================  ====================  ====================
-------------------------
<FN>

(1)  Public  offering  price per Common Share is  calculated  as though the
     Series B Convertible  Preferred Stock is converted into the underlying
     Common Shares of the Company, pursuant to the conversion provisions of
     such stock discussed elsewhere herein.

(2)  At March 31, 1998,  427,784 Common Shares are issuable pursuant to the
     Company's  1994  Incentive  Plan (the  "Plan").  Options with exercise
     prices less than $2.25 per Common Share, subject to the Plan's vesting
     provisions,  will result in further dilution to new investors of $.01,
     $.01 and $.01 per Common Share  assuming  full  subscription,  minimum
     subscription and midpoint subscription, respectively.

(3)  The  dilution  amounts  set forth  above  under  "Full  Subscription",
     Minimum  Subscription"  and "Midpoint"  assume  subscription to 50,000
     shares,  26,937  shares  and  38,469  shares of  Series B  Convertible
     Preferred Stock, respectively.

(4)  If the  holders  of  the  Bridge  Loan  Notes  were  to  exercise  the
     conversion   provisions  of  such  notes  into  Series  A  Convertible
     Preferred  Stock and  convert  such  stock into the  Company's  Common
     Shares,  the amounts set forth above for "Dilution per Common Share to
     new  investors"  under  the  columns  "Full   Subscription",   Minimum
     Subscription"  and "Midpoint" would have been reduced to $1.33,  $1.57
     and $1.44, per share, respectively.

</FN>
</TABLE>

     The following table sets forth, as of the date of this Prospectus, the
number  of  Common  Shares  purchased,  the  percentage  of  Common  Shares
purchased, the total consideration paid (before expenses of the 1995 Rights
Offering  and  Subscription  Fees  and  expenses  of  this  Offering),  the
percentage  of total  consideration  paid and the  average  price per share
paid, by the existing shareholders of the Company and the investors in this
Offering  assuming  the maximum  proceeds  to the  Company  from the Rights
Offering (i.e. full subscription).

<TABLE>
<CAPTION>
                                          Shares Purchased                                         Average
                                     --------------------------                                   Price per
                                        Number      Percentage        Amount      Percentage        Share
                                     -----------    -----------    -----------    -----------    -----------
<S>                                  <C>            <C>            <C>            <C>            <C>
New Investors..................       1,650,000        39.6%       $ 3,712,500       22.8%       $    2.25

Existing Shareholders..........       2,516,666        60.4%        12,569,000       77.2%            4.99
                                     -----------    -----------    -----------    -----------    -----------

     TOTAL(FN2)................       4,166,666       100.0%       $16,281,500      100.0%            3.91 (FN1)
                                     ===========    ===========    ===========    ===========    ===========
------------------
<FN>

(1)  Assuming full  subscription of the Rights Offering,  conversion of the
     Bridge  Loan  Notes into  Series A  Preferred  Stock  and,  subsequent
     conversion of such Series A Preferred Stock into the Company's  Common
     Shares,  the average  price per share paid by all  shareholders  would
     decrease from $3.91 to $3.47 per share.

(2)  Excludes  any  conversion  of Series A  Preferred  Stock  into  Common
     Shares.

</FN>
</TABLE>

     The following table sets forth, as of the date of this Prospectus, the
number  of  Common  Shares  purchased,  the  percentage  of  Common  Shares
purchased, the total consideration paid (before expenses of the 1995 Rights
Offering  and  Subscription  Fees  and  expenses  of  this  Offering),  the
percentage  of total  consideration  paid and the  average  price per share
paid, by the existing shareholders of the Company and the investors in this
Offering  assuming  the minimum  proceeds  to the  Company  from the Rights
Offering (i.e. minimum subscription).

<TABLE>
<CAPTION>
                                          Shares Purchased                                         Average
                                     --------------------------                                   Price per
                                        Number      Percentage        Amount      Percentage        Share
                                     -----------    -----------    -----------    -----------    -----------
<S>                                  <C>            <C>            <C>            <C>            <C>
New Investors..................         888,921        26.1%       $ 2,000,100       13.7%       $    2.25

Existing Shareholders..........       2,516,666        73.9%        12,569,000       86.3%            4.99
                                     -----------    -----------    -----------    -----------               

     TOTAL.....................       3,405,587       100.0%       $14,569,100      100.0%            4.28
                                     ===========    ===========    ===========    ===========    ===========

</TABLE>


                      SUMMARY SELECTED FINANCIAL DATA

     The following  summary  selected  financial  data for each of the five
years in the period ended December 31, 1997 and for the period from January
1, 1992 through  December  31, 1997 are derived from the audited  financial
statements  of the Company.  The summary  selected  financial  data for the
three  month  periods  ended  March  31,  1997 and 1998  are  derived  from
unaudited  financial  statements of the Company.  The  unaudited  financial
statements   include  all  adjustments,   consisting  of  normal  recurring
accruals,  which the Company considers necessary for a fair presentation of
the  financial  position and the results of operations  for these  periods.
Operating  results  for the  three  months  ended  March  31,  1998 are not
necessarily  indicative  of the results that may be expected for the entire
year ending December 31, 1998. The summary  selected  financial data should
be read in  conjunction  with  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations" and the financial statements
and notes thereto appearing elsewhere herein.

     The Company was  incorporated  on January 19, 1994,  as a wholly owned
subsidiary of Fuel Tech.  Predecessor  financial information included below
for the period  January 1, 1992,  through  January 18,  1994,  reflects the
Company's operations prior to incorporation, at which time it was accounted
for as part of Fuel Tech.  Effective December 12, 1995, Fuel Tech completed
a Rights Offering of the Company's Common Shares,  with Fuel Tech retaining
at such time a 27.6%  ownership  interest in the Company (which as of March
31, 1998,  has  declined to a 27.4%  interest  after  giving  effect to the
exercise of stock options). The Company is a development-stage  enterprise,
and its efforts from January 1, 1992, to the present time have been devoted
to  the  research,  development  and  commercialization  of  PFCs  and  NOx
reduction  technologies to reduce emissions from diesel engines. There were
no material  activities  related to the Company's business in 1990 or 1991.
Prior  to  1990,  the  activities  of  Fuel  Tech  were  focused  on  other
applications  of PFCs  that  are  unrelated  to the  Company's  present  or
contemplated  business and were not material to the overall  development of
the Company's products.  Therefore,  such costs have been excluded from the
determination  of the  Company's  development  costs  and from the  summary
selected financial data set forth below.

<TABLE>
<CAPTION>
                                                                              Period                        Period
                                                                                from                         from
                                                                             January 1,                    January 1,
                                                                                1992,      Three Months      1992
                                              Years Ended                     through         Ended         through
                                              December 31,                   December 31,   March 31,      March 31,
                              1993      1994     1995      1996      1997       1997       1997     1998     1998
                              ------   ------    ------   ------    ------    ------      ------    -----   ------
STATEMENT OF
   OPERATIONS DATA:                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)

<S>                           <C>      <C>       <C>      <C>       <C>       <C>         <C>       <C>     <C>   
Sales.....................    $   --   $   --    $   --   $   --    $  199    $  199      $   40    $  --   $  199
Costs and expenses:
   Cost of sales..........        --       --        --       --       132       132          23       --      132
   General and
   administrative.........        --      507       963    1,842     1,730     5,042         496      451    5,493
   Research and 
   development............        86      441       796    1,747     1,985     5,317         457      236    5,553
   Patent filing and              45      158       199      223       237       938          75       56      994
   maintenance............    ------   ------    ------   ------    ------    ------      ------    -----   ------
Loss from operations......       131    1,106     1,958    3,812     3,885    11,230       1,011      743   11,973
Interest expense (income),
   net....................        --        1        66     (323)     (121)     (377)        (50)      (2)    (379)
                              ------   ------    ------   ------    ------    ------      ------    -----   ------
Net loss during
   development stage......    $  131   $1,107    $2,024   $3,489    $3,764    $10,853     $  961    $ 741   $11,594
                              ======   ======    ======   ======    ======    =======     ======    =====   =======
Basic and diluted loss per
   Common Share...........       N/A  $  0.44   $  0.81  $  1.40   $  1.50       N/A     $  0.38   $ 0.29      N/A
Weighted-average shares
   outstanding............       N/A    2,500     2,500    2,500     2,517       N/A       2,512    2,517      N/A
Ratio of earnings to
   combined fixed charges
   and preferred stock
   dividends (FN1)........        --       --        --       --        --        --          --       --       --
Cash dividends declared...        --       --        --       --        --        --          --       --       --

</TABLE>

<TABLE>
<CAPTION>
                                             December 31,                         March 31,
                            1993       1994        1995       1996        1997         1998
                            ----       ----        ----       ----        ----         ----
BALANCE SHEET DATA:
                                                 (IN THOUSANDS)

<S>                       <C>         <C>      <C>        <C>         <C>          <C>     
Current assets..........  $  --       $ 513    $  8,882   $ 5,595     $  1,682     $    982
Total assets............     --         513       8,882     5,677        1,750        1,044
Current liabilities.....     --       1,370         487     1,486          894          929
Long-term debt..........     --          --         745        --          395          395
Working capital
   (deficit)............     --       (857)       8,395     4,109          788           53
Shareholders'
   equity
   (deficiency).........     --       (857)       7,650     4,191          461        (280)

<FN>

(1)  For the years ended December 31, 1993,  1994,  1995, 1996 and 1997 and
     for the period from January 1, 1992 through  December 31, 1997 and for
     the three  month  periods  ended  March 31,  1997 and 1998 and for the
     period from January 1, 1992  through  March 31,  1998,  the  Company's
     earnings were inadequate to cover fixed charges by approximately $131;
     $1,107;  $2,024;  $3,489;  $3,764;  $10,853;  $961; $741; and $11,594,
     respectively.

</FN>
</TABLE>

                    MANAGEMENT'S DISCUSSION AND ANALYSIS
              OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The Company is a  development-stage  enterprise,  and its efforts from
January 1, 1992 (date of inception),  to the present time have been devoted
to the research, development and, to a limited extent, commercialization of
PFCs  and NOx  reduction  technologies  to  reduce  emissions  from  diesel
engines.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1997, VERSUS THREE MONTHS ENDED MARCH 31, 1998

     Sales and Cost of sales were  $40,000 and $23,000,  respectively,  for
the first quarter of 1997 and zero in the  comparable  period in 1998.  The
Company's products were purchased by Holts,  pursuant to a supply agreement
entered into in September  1996 (the  "September  1996 Supply  Agreement").
Holts  launched  the  Company's  PFC  products  for use  with  Holts'  fuel
additives  in the  aftertreatment  of fuel for  both  gasoline  and  diesel
engines in several European countries. In December 1997, Holts was acquired
by Prestone Products, Inc. ("Prestone"), a division of AlliedSignal.  Based
on management and product line changes at Holts resulting from the Prestone
acquisition, Holts did not order any product in the first half of 1998, and
the Company expect delays in sales to Holts in 1998.

     General and  administrative  expenses  decreased  from $496,000 in the
first  quarter of 1997 to $451,000 in the  comparable  period in 1998.  The
decrease is the result of the implementation of some of the Company's plans
to minimize expenses in order to conserve cash, pending securing additional
working capital. Such plans included reducing the administrative staff from
four to two, closing the Company's U.K. office and reducing management fees
charged to the Company by Fuel Tech. These efforts were partially offset by
the increased costs associated with obtaining financing.

     Research and  development  expenses were $457,000 in the first quarter
of 1997  versus  $236,000  in the  comparable  period in 1998.  The Company
significantly reduced research and development costs in 1998 due in part to
a  shift  in  emphasis   toward   commercialization   versus  research  and
development.   Other  factors   include  the  completion  of  a  number  of
fundamental  programs in 1997,  the deferral of certain field trials due to
the  Company's  diminishing  working  capital  position  and the  Company's
expanded participation in collaborative and consortium-based  programs with
potential customers and industrial partners for which it is responsible for
only a portion of the program costs.

     Patent filing and maintenance  expenses  decreased from $75,000 in the
first  three  months of 1997 to $56,000 in the  comparable  period in 1998.
Expenses  were higher in 1997 due to the costs  associated  with new patent
filings for the Company's NOx reduction technology.

     Interest  income  decreased  from $64,000 in the first three months of
1997 to  $13,000  in the  comparable  period  in 1998  as a  result  of the
Company's diminishing cash position.

     The Company is currently  taking steps to minimize  costs and expenses
in order to conserve cash pending securing additional working capital,  and
consequently,  expects costs and expenses to be lower in 1998 than in 1997,
although no assurances can be given in this regard.

1996 VERSUS 1997

     Sales and Cost of sales were zero in 1996 and $199,000  and  $132,000,
respectively,  in 1997 as the Company started  selling small  quantities of
product to Holts in 1997.  The Company's  products were purchased by Holts,
pursuant  to the  September  1996  Supply  Agreement.  Holts  launched  the
Company's  PFC  products  for  use  with  Holts'  fuel   additives  in  the
aftertreatment  of fuel for both  gasoline  and  diesel  engines in several
European  countries.  As described above, Holts was acquired by Prestone in
December 1997, and as a result the Company expects delays in sales to Holts
in 1998 . See "-- Results of  Operations  -- Three  Months  Ended March 31,
1997,  Versus Three  Months Ended March 31, 1998" and the Annual  Financial
Statements.

     As the Company begins selling product again,  gross margin is expected
to improve in the future as the PFC processing costs charged to the Company
will be reduced with subsequent production batches.

     General and administrative  expenses decreased from $1,842,000 in 1996
to  $1,730,000  in 1997.  The decrease was  primarily due to a reduction in
management fees charged by Fuel Tech as the Company hired its own personnel
and, in August 1996, terminated certain services furnished by Fuel Tech.

     Research  and  development  expenses  were  $1,747,000  in 1996 versus
$1,985,000 in 1997. The increase was primarily due to the costs  associated
with significant test programs on light-duty and heavy-duty engines and the
addition of three senior technical employees in mid-year 1996. The programs
included the use of the Company's PFC in gasoline and diesel vehicles,  the
testing  of  NOx  control   technologies  in  conjunction   with  Engelhard
Corporation   and  the  Nalco  Fuel  Tech  joint  venture   (which  is  now
wholly-owned  by Fuel Tech) and engine  testing of the PFC as  required  to
maintain registration with the U.S.  Environmental  Protection Agency. Some
of the  programs  relating  to  the  PFC  and  NOx  control  were  done  in
collaboration  with Cummins  Engine  Company,  a major U.S.  diesel  engine
manufacturer.  The Company announced that the use of the PFC in conjunction
with advanced  heavy-duty engine design techniques and a diesel particulate
filter had achieved U.S. federal emission levels for 2004. The Company also
developed a  platinum/cerium  bimetallic  fuel additive based on a platinum
and cerium compound. This product achieved emission reductions of 25-35% on
new light-duty  diesels.  Certification  testing of the bimetallic additive
for Taiwan buses equipped with  particulate  filters began in late 1997 and
field  trials are  expected to be  expanded in the second  quarter of 1998.
Discussions  with oil distribution  companies in the U.S.,  Europe and Asia
are  expected  to lead to engine  testing  and  field  trials of the PFC or
bimetallic  additive in the second half of 1998. Based on the extent of the
market  interest and the improved cost and  performance  of the  bimetallic
additive,  the Company entered into negotiations with a third party for the
supply of a cerium product based on the Company's specifications.

     In late 1997, the Company signed a development and marketing agreement
with  AMBAC  of  Springfield,  Massachusetts,  for the  fabrication  of the
ARIS(TM) 2000 urea injection  equipment  suitable for stationary and mobile
engine NOx control.  AMBAC is a major supplier of fuel injection  equipment
for diesel engine manufacturers worldwide. A prototype system was completed
in the second quarter of 1998.

     Patent  filing and  maintenance  expenses  remained  relatively  flat,
increasing from $223,000 in 1996 to $237,000 in 1997.

1995 VERSUS 1996

     General and administrative expenses increased from $963,000 in 1995 to
$1,842,000 in 1996.  The increase was due to expenses  associated  with the
Company  establishing  its own  offices,  the  recruitment  and  hiring  of
additional staff and increased management and administrative costs provided
by  Fuel  Tech  pursuant  to  a  management  and  services  agreement  (the
"Management  and Services  Agreement").  In the first six months of 1996, a
greater portion of Fuel Tech  management's  time was spent on the Company's
business  activities,   which  included  research  programs,   establishing
relationships  with  potential  marketing  partners and hiring  staff.  The
Company  established  its own  payroll  and hired  some of these  Fuel Tech
executives full-time in August 1996.

     Research  and  development  expenses  were  $796,000  in  1995  versus
$1,747,000 in 1996. The increase was primarily due to  significant  testing
on light-duty and heavy-duty engines using the Company's PFC alone and with
a catalytic  oxidizer.  These test programs were  conducted in  conjunction
with  potential  marketing  partners.  The Company  also hired three senior
technical  employees  during 1996, and its senior  officers,  who were Fuel
Tech employees in 1995, spent a greater percentage of their time developing
and managing research projects in 1996 than in 1995.

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

LIQUIDITY AND SOURCES OF CAPITAL

     The Company is a  development-stage  company and has  incurred  losses
since inception  (January 1, 1992) aggregating  $10,853,000 and $11,594,000
at December 31, 1997, and March 31, 1998, respectively. The Company expects
to incur losses through the  foreseeable  future as it further  pursues its
research,  development and commercialization  efforts. Although the Company
started  selling  product in 1997,  it sold no product in the first half of
1998 and continues to be dependent  upon sources  other than  operations to
finance its working capital requirements.

     In December 1995, the Company raised  approximately $10.5 million, net
of offering  expenses and broker-dealer  commissions of approximately  $1.3
million,  through the 1995 Rights  Offering of its shares by Fuel Tech. The
Company then repaid Fuel Tech  approximately  $2.3 million in  intercompany
loans.

     On February 17, 1998,  Fuel Tech agreed to provide the Company with up
to $500,000 in order to fund its cash  requirements  until such time as the
Company obtains the long-term financing it is seeking. On May 20, 1998, the
$500,000  commitment was converted into a bridge loan (the "Bridge  Loan"),
which constitutes  senior secured debt, bearing interest at the rate of ten
percent  per  annum  and  maturing   April  15,   2001.   The  Bridge  Loan
automatically  converts into Series A Convertible  Preferred Stock upon the
conclusion of a public or private  financing that contributes $1.75 million
of additional net proceeds to the Company  (including the Rights  Offering,
if consummated and assuming it meets such  conditions).  The Bridge Loan is
secured by all of the Company's intellectual property. The Company has also
received an  additional  $900,000 of  financing  under the same Bridge Loan
(having  the same terms and  conditions,  including  maturity  date,)  from
outside  investors.  As of July 1998,  the Company  received  $1.4 million,
representing all of the proceeds from the Bridge Loan.

     For the period  from  January 1, 1992,  through  March 31,  1998,  the
Company used cash of  $11,071,000  in operating  activities.  In 1997,  the
Company  repaid  $250,000 of a $745,000  promissory  demand  note  ("Demand
Note") with Fuel Tech and restructured the remaining amount into a $495,000
term note ("Term Note") with  Platinum  Plus,  Inc.  ("Platinum  Plus"),  a
wholly owned subsidiary of Fuel Tech. The principal amount of the Term Note
is payable in three annual  installments of $100,000 each on July 1 of each
of the years 1998 through 2000 with a final installment of $195,000 on July
1, 2001.  On July 1, 1998,  Platinum Plus elected to defer the repayment of
the $100,000 of principal which was payable on that date. Platinum Plus has
reserved the right,  however,  to call this payment at any time.  As of the
date of this prospectus, Platinum Plus has not demanded repayment. Interest
at a rate of eight  percent  per annum is payable on the unpaid  balance on
each principal payment date. The interest accrued on the note as of July 1,
1998 was paid by the Company. See "USE OF PROCEEDS."

     At December  31, 1996 and 1997,  and March 31,  1998,  the Company had
cash,   cash   equivalents   and  short-term   investments  of  $5,270,000,
$1,239,000, and $657,000, respectively.  Working capital at those dates was
$4,109,000,  $788,000, and $53,000, respectively. At December 31, 1996, the
Company owed Fuel Tech  $745,000  under the Demand Note,  while at December
31, 1997, and March 31, 1998, the Company owed Fuel Tech $495,000 under the
Term Note. In light of the Company's  diminishing cash and working capital,
the Company has taken steps to decrease expenditures in 1998, as more fully
discussed  in "Results of  Operations  -- Three Months Ended March 31, 1997
Versus Three Months Ended March 31, 1998."

     Effective  as of October 28,  1994,  Fuel Tech granted two licenses to
the Company for all patents and rights  associated with its PFC technology.
Effective  November 24,  1997,  the  licenses  were  canceled and Fuel Tech
assigned to the Company all such patents and rights on terms  substantially
similar to the licenses. In exchange for the assignment, the Company agreed
to pay Fuel Tech a royalty of 2.5% of its annual  gross  revenue from sales
of the PFC, commencing in 1998. The royalty obligation expires in 2008. The
Company may at any time terminate the royalty obligation by payment to Fuel
Tech in any year from 1998 through 2008 of amounts,  depending on the year,
declining  from $12 million in 1998 to $1.1 million in 2008. The Company as
assignee and owner will  maintain  the  technology  at its own expense.  To
date, no royalties have been paid to Fuel Tech. See "CERTAIN  RELATIONSHIPS
AND RELATED TRANSACTIONS -- Technology Assignments."

     In September  1996, the Company  entered into a supply  agreement with
Holts to sell the Company's  PFC under the Platinum Plus  trademark for use
with  Holts'  fuel   additives   in  the   consumer  car  care  market  for
aftertreatment  of fuel for both new and used diesel  engines in  vehicles.
The agreement covers  territories  worldwide except for North,  Central and
South America.  This  agreement has a 10-year term with extension  options.
The  exclusivity  of the  agreement is  determined  by the  attainment  (or
reasonable   effort  toward  the  attainment)  of   predetermined   minimum
performance  levels  for  each  territory  on a  calendar-year  basis.  The
agreement also provides for the marketing of a platinum-based gasoline fuel
additive by Holts on similar terms and in similar territories, if developed
by the Company.  The Company's PFC were test-marketed by Holts in Europe in
the fourth quarter of 1996, with commercial  sales  commencing in the first
quarter of 1997.  Based on jointly funded testing by Holts and the Company,
such a gasoline  product was developed by the Company and launched by Holts
in September 1997 under the Cat Guard name, with disappointing results. See
"BUSINESS -- Platinum Plus -- Europe and Asia." The exclusivity  granted to
Holts was revoked by the Company in the second quarter of 1998 due to lower
than  expected  performance  levels,  and the  Company may  terminate  this
agreement at its option after March 1999.

     As previously  noted,  the Company  anticipates  incurring  additional
losses through the  foreseeable  future as it further pursues its research,
development and commercialization efforts. Management anticipates, with the
proceeds of the $1.4 million Bridge Loan,  having  sufficient  resources to
fund its operations  through November 1998. The Company intends to fund its
future cash needs through the Rights Offering. Although management believes
that  it  will be  successful  in its  fund-raising  efforts,  there  is no
guarantee  that such funds will be available on terms  satisfactory  to the
Company.

     As discussed  elsewhere in this Prospectus,  if the Rights Offering is
fully  subscribed  or the minimum  subscription  is  obtained,  the Company
anticipates receiving $3.1 million and $1.4 million,  respectively,  net of
Soliciting Fees and expenses of the offering estimated to be $600,000.  The
Company  believes  that the net proceeds of the Rights  Offering,  together
with the net proceeds of $1.4 million from the bridge financing effected in
1998,  will  be  sufficient  for the  commercialization  of its PFC and NOx
products  through  January 2000  (assuming full  subscription)  and through
April 1999 (assuming minimum  subscription),  although no assurances can be
given in this  regard.  Thereafter,  the  Company  anticipates  that it may
require  additional  funding in the form of a public or private offering of
the Company's  securities.  Any offering of the Company's equity securities
may result in immediate and significant dilution to the shareholders of the
Company.  The ability of the Company to consummate a public  offering or to
obtain  other  financing  will  depend  on  the  status  of  the  Company's
commercial  efforts,  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  when  needed or on terms
acceptable to the Company. Absent a successful Rights Offering, and without
continued  sufficient  financing from an alternative  source, the Company's
ability  to meet  its  current  plans  for  expansion  will  be  materially
adversely affected, and the Company will not be able to continue as a going
concern  beyond  November  1998.  See  Note  1  to  the  Annual   Financial
Statements, the Report of Independent Auditors, and the Note to the Interim
Financial Statements.

     Holders of the Series A Preferred  Stock and Series B Preferred  Stock
are entitled to receive, when, as and if declared by the Board out of funds
of the Company  legally  available  therefor,  cash dividends at the annual
rate of 9% of the $500  stated  value  and  liquidation  preference  of the
Series A Preferred Stock price per share and 9% of the $______ stated value
and liquidation preference of the Series B Preferred Stock price per share,
respectively;  provided, however, that in lieu of making dividends in cash,
the  Company  may elect,  by giving  written  notice to each  holder of the
Series A Preferred Stock and Series B Preferred  Stock, as the case may be,
to pay  dividends  in kind  at the  annual  rate of 11% of the  Liquidation
Preference (cash dividends and dividends in kind are each deemed "Preferred
Dividends").  Dividends  payable to the  holders of the Series A  Preferred
Stock and Series B Preferred Stock are payable quarterly in arrears, on the
first business day of January,  April,  July and October of each year (each
such date being  hereinafter  referred  to as a "Dividend  Payment  Date"),
commencing  July 1,  1998.  Preferred  Dividends  on  shares  of  Series  A
Preferred  Stock and Series B Preferred Stock shall be cumulative and shall
accrue from the date of original issuance. It is presently anticipated that
the Company will pay  dividends  on shares of Series A Preferred  Stock and
Series B Preferred Stock in shares of Series A Preferred Stock and Series B
Preferred  Stock,  respectively,  and any  earnings  which the  Company may
realize  in  the  foreseeable  future  will  be  retained  to  finance  the
development and expansion of the Company.

IMPACT OF YEAR 2000

     The  Company is in the  process of  completing  an  assessment  of the
impact that the  millennium  may have on its computer  software so that its
computer  systems will function  properly with respect to dates in the year
2000 and  thereafter.  The project is estimated  to be completed  not later
than  December  31,  1998,  which is prior to any  possible  impact  on its
operating systems. The Company believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
any operational problems for its computer systems. Management believes that
the  cost  to  the  Company,   if  any,  related  to  this  issue  will  be
insignificant. In addition, during 1998, the Company intends to communicate
with its vendors to ascertain the status of their Year 2000 initiatives.

FOREIGN CURRENCY RISK

     To date, sales,  marketing and testing of the Company's PFCs have been
limited  principally to Europe.  While the Company has not  experienced any
significant  foreign  currency  exposure  with respect to such  activities,
there can be no assurance  that exposure to currency  fluctuation  will not
have a significant  effect on the Company's  operations in the future.  The
Company  intends to manage the risk of such  exposure,  if any, by entering
into foreign currency futures and option contracts.

                                  BUSINESS

GENERAL

     The Company, a Delaware corporation with a principal place of business
at 300 Atlantic Street, Stamford, Connecticut 06901, is a development-stage
specialty  chemical company supplying advanced catalytic fuel additives and
systems that reduce  harmful  emissions  from internal  combustion  engines
while improving fuel economy.  The Company's two main technology  areas are
Platinum  Fuel  Catalysts  ("PFCs") for  emission  control and fuel economy
improvement  in diesel- and  gasoline-fueled  engines,  and Nitrogen  Oxide
("NOx")  reduction  systems and chemicals for control of NOx emissions from
diesel engines.

BACKGROUND

     The Company was formed in 1994 as a wholly  owned  subsidiary  of Fuel
Tech,  which  had  conducted   fundamental  work  regarding  the  Company's
technologies. The Company was spun off by Fuel Tech in a rights offering in
1995 (the "1995 Rights  Offering"),  and Fuel Tech  currently owns 27.4% of
the Company's outstanding Common Shares. The Company raised net proceeds of
approximately  $10.5 million in the 1995 Rights Offering  which,  following
the  repayment  of $2.3  million of  intercompany  loans to Fuel Tech,  was
sufficient  to fund the  Company's  operations  through  May of  1998.  The
Company has since funded its operations  through the net proceeds  received
in  connection  with the  issuance of the Bridge Loan Notes  issued to Fuel
Tech and certain other lenders.

     At its inception,  the Company had patents for PFCs licensed from Fuel
Tech and limited testing results of PFCs. The Company currently has 12 U.S.
and 38  International  patents on PFCs and NOx  reduction  systems  and has
another 83 U.S. and International  applications  pending. In addition,  the
Company has  completed  successful  testing of a diesel fuel PFC  additive,
launched  the  marketing  of  a  PFC  used  to  rejuvenate  aged  catalytic
converters in Europe,  and developed the Advanced Reagent  Injection System
("ARIS(TM) 2000") for use in catalytic NOx reduction systems.

BUSINESS STRATEGY

     The Company's strategic objective is to become a leading developer and
supplier of (i) PFCs for emission  control and fuel economy  improvement in
diesel-  and  gasoline-fueled  engines and (ii) NOx  reduction  systems and
chemicals for control of NOx emissions from diesel engines. Key elements of
the Company's strategy include the following:

DEVELOPING MARKETS FOR PFCS AS A DIESEL FUEL ADDITIVE

     The Company  has  successfully  concluded  a study at Delft  Technical
University in the Netherlands  concerning the emission reduction effects of
PFCs used with ceramic filters for reduction in particulate  emission.  The
Company has also  demonstrated  improved  emission  reduction and increased
fuel  economy  from the use of PFCs  without  ceramic  filters in  separate
programs at Ricardo and Cummins.  The Company  seeks to capitalize on these
test  results,  coupled with the  increased  regulation  of  emissions,  by
developing a market for PFCs in the U.S. and abroad.

DEVELOPING MARKETS FOR PFCS AS A GASOLINE ADDITIVE

     The Company seeks to continue its marketing of PFCs used to rejuvenate
aged catalytic  converters,  and has begun to focus on selling this product
through service centers in Europe in conjunction with Holts. The Company is
also seeking marketing  partners to help launch the gasoline product in the
U.S. and Asia.

COMMERCIALIZING THE ARIS(TM) 2000

     The  Company  has  developed  a prototype  of the  ARIS(TM)  2000,  an
Advanced  Reagent  Injection  System to be used in the selective  catalytic
reduction  of NOx.  The  Company  believes  that  there is a market for the
ARIS(TM) 2000 as a result of increased  regulations  in California  and the
Northeast of NOx levels in large stationary  diesels.  The Company seeks to
commercialize the ARIS(TM) 2000 through  cooperative  ventures and licenses
with engine  manufacturers,  engine  distributors and catalyst and emission
control companies.

REGULATIONS - USA

DIESEL ENGINES

     1990. In the U.S.,  the EPA  established  specific  regulations  under
Title II of the CAAA pertaining to the control of NOx and particulates from
diesel  engines.  Existing  urban  buses in major  metropolitan  areas were
required  to reduce  particulate  emissions  during  engine  rebuild  as of
January 1995 and,  beginning in 1998, there will be new NOx level standards
in place for urban buses and new diesel engines.

     1995.  The EPA,  California  Air  Resources  Board  and  major  diesel
manufacturers  signed a Statement of Principles directed toward development
of low-NOx  engines to be in service by the year 2004,  which became law in
1997.   New  limits  are  2.5   g/bhp-hr  for  NOx  and  0.1  g/bhp-hr  for
particulates.

     1996.  The EPA and the  engine  manufacturers  signed a  Statement  of
Principles calling for a three-tiered progression to low emission standards
regarding  emission limits for new off-road  engines used in  construction,
agricultural and industrial equipment.

     1997. The EPA issued its proposed  regulatory program for all non-road
diesel engines except  locomotives,  mining  equipment and marine  engines.
These standards broadly parallel the transport engine standards and include
a voluntary  low-emission  engine  certification  standard to promote early
introduction of low-emitting  engines.  The EPA issued proposed regulations
for controlling  emissions from new and rebuilt diesel  locomotive  engines
that call for reductions in NOx emissions of 40%-60%  beginning in the year
2000.

     1998. The EPA is expected to announce  retrofit  guidelines to support
the use of emission control technologies on existing engines as part of the
states'  efforts to comply with ambient air quality  standards  and qualify
for emission  credit.  The EPA has sued one engine  manufacturer  and is in
negotiations  with  others over the use of "defeat  devices"  which the EPA
alleges  increases NOx emissions.  Management  believes that settlement may
require advanced or accelerated introduction of low-emission engines.

     1999 and  thereafter.  The EPA is required  to review the  progress of
emission  control  technology with a view toward further  tightening of the
2004 limits.  Industry  experts  generally agree that an integrated  system
approach  will be needed to meet these  regulations,  including  the use of
advanced  engine  design,  reformulated  fuel,  fuel  additives and exhaust
aftertreatment systems.

     Regulators are showing concern at recent  research  results which show
that while new engine  technology made great reduction in the total mass of
particulates,  the total number of particulates is not reduced. Indeed, the
number of ultra-fine  particles can increase.  Separate  research has shown
that diesel  emissions may be toxic and that  toxicity is  associated  with
soot particles.

     While no regulations  have yet been made as a result of these research
findings,  the Company  considers it probable  that there will be a further
tightening of regulations of particulate emissions; further, there may well
be regulation to reduce the very fine particles.

     Current  regulation in California  and the Northeast  states for large
stationary  diesel  engines sets NOx levels at a 50% to 90% reduction  from
normal levels  achieved  from current  production  engines under  federally
mandated Best Available Control  Technology  ("BACT") and Lowest Achievable
Emission Rate ("LAER") requirements in ozone non-attainment areas.

GASOLINE ENGINES

     Current  regulations  affecting new gasoline engine emissions  require
increasingly  lower  emissions,   longer  durability  and  enhanced  in-use
inspection of catalyst-equipped passenger vehicles, leading to the need for
technological advancements in catalytic converter design.

     Current regulation for inspection and maintenance of gasoline vehicles
is now leading  states to  introduce  programs  for testing of the existing
fleet  and  for  corrective  measures  to  be  taken  where  vehicles  fail
measurement of NOx,  Hydrocarbon  ("HC") or Carbon Monoxide  ("CO").  Based
upon  a  report  of  the  Manufacturers  of  Emission  Control  Association
("MECA"),  as of June 1998, 28 states have  implemented or were planning to
implement inspection and maintenance programs.

REGULATIONS - INTERNATIONAL

     Europe  has  similar  regulations  to  the  U.S.  but  with  different
measurement  standards,  and in general,  implementation  is one year later
than when the U.S. Euro III Vehicle Emission  Regulations  become effective
in the year 2000 and Euro IV Vehicle Emission Regulations in the year 2005.

     Current  regulations  for tunneling  and mining  equipment in Germany,
Switzerland and Austria now require the use of particulate filters.

     Japan,  Korea and Taiwan have  introduced  regulations for both diesel
and  gasoline  engines  which are not  identical  but tend to  follow  U.S.
practice.

MARKETS FOR PRODUCTS

     On-highway markets for the PFC are the consumer aftermarket, including
diesel  and  gasoline  fuel  additives;  truck  and bus  fleets;  bulk fuel
distributors;  and engine  manufacturers.  Off-road markets include mining,
construction,  agricultural,  railroad  and  marine.  Markets  for  the NOx
reduction  systems  are  engine  manufacturers  and  distributors  for both
stationary and mobile sources and catalyst manufacturers.

PLATINUM FUEL CATALYSTS

     These  are  fuel  additives  comprised  of  platinum,  rhodium  and/or
palladium,  which are used in minute  concentrations in fuel (selling for a
few (U.S.) cents per gallon of fuel treated) to improve combustion,  reduce
emissions and improve the performance  and reliability of emission  control
equipment.  The PFC may also be used in  conjunction  with  other  metallic
additives  such a copper,  iron,  manganese or cerium.  The Company's  test
programs  have shown the  bimetallic  additive of platinum and cerium to be
highly  effective  in  diesel  engines.   The  Company's  Platinum  Plus(R)
bimetallic  additive has been chemically  formulated to harness the synergy
between platinum and cerium at very low levels of metal. Levels as low as 5
ppm of metal in fuel have been found to be effective.

PLATINUM PLUS - EUROPE AND ASIA

     In September  1996, the Company  entered into an agreement with Holts,
the  world's  largest  car care  company,  to test market the PFC under the
Platinum Plus  trademark for diesel fuel in Europe and Asia.  The agreement
also pertains to a gasoline  product  launched by Holts in early 1997,  the
results of which were disappointing.  Holts reported that consumers did not
understand what the product did and indeed few consumers knew if their cars
even had a catalytic converter.  Test marketing by Holts concluded that the
product  should be sold as a  technical  sale  through  service  and repair
shops.  Holts is  considering  how to better  reposition  the product.  The
agreement with Holts is currently a non-exclusive  agreement for Europe and
certain Far East  markets and may be  terminated  at the  Company's  option
after March 1999.  For a further  discussion  of the terms of the agreement
with  Holts,  see  "MANAGEMENT'S   DISCUSSION  AND  ANALYSIS  OF  FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Sources of Capital."

PLATINUM PLUS - THE AMERICAS

     This market is not covered by the  agreement  with Holts.  Discussions
are  in  progress  with  several  potential   partners  for  the  blending,
distribution and marketing of Platinum Plus in the Americas. To sell in the
U.S.,  registration is required of the  platinum/cerium  bimetallic  diesel
product and the platinum/rhodium  gasoline product. The Company expects the
expense  of  the  gasoline   product   testing  and   registration   to  be
substantially borne by marketing partners.

     The Company anticipates shipping its catalytic  concentrates to one or
several  licensed  blenders  which will add  diluents,  solvents  and other
components to make additive formulations for sale to packagers and additive
resellers.  The Company may also have its  concentrates  blended for direct
sale by the Company or sales agents to large end users.

PFCS FOR PARTICULATE FILTERS AND CATALYTIC OXIDIZERS

     The most effective method of reducing diesel particulate (smoke) is by
particulate filter or catalytic oxidizer.  There are limitations when these
devices are used alone,  which the PFC have been proven to  ameliorate.  In
two separate tests on typical bus engines,  one on a Gardner engine and one
on a Cummins engine,  the  combination of the PFC and a catalytic  oxidizer
established  high  levels  of  performance  in both  cases.  This  work was
conducted in conjunction  with  Lubrizol's  Engine Control  Systems ("ECS")
subsidiary,  a leading  supplier  of  oxidizers  and traps.  The Company is
currently  evaluating  its  PFC  in  conjunction  with  ECS as  part  of an
industry-sponsored program for off-road equipment.

     A  program  has   successfully   been  concluded  at  Delft  Technical
University,   Netherlands,  into  the  fundamental  mechanism  of  metallic
additive in the  oxidation of diesel soot with a special  focus on a system
using platinum as part of a  bimetallic-catalyst  system.  The results show
that a  bimetallic  additive  catalyst of platinum and cerium in use with a
ceramic  filter in the diesel  exhaust  gives  performance  superior to any
system  known.  Furthermore,  it  gives  a  significantly  lower  oxidation
temperature  for the soot while using much lower  metal  levels in the fuel
than other known additive  filter system.  The PFC bimetallic was effective
at levels of 5.5 ppm versus 50-100 ppm required for other additives.

     The Company also reached agreement with Cummins'  Advanced  Technology
Group to evaluate the  applications of the PFC with oxidizers and traps for
a new  generation of  low-emission  engines.  Tests of the  Company's  fuel
additive/trap  system  conducted  with an advanced  Cummins  diesel  engine
design  cut  particulate  emissions  94%  while  achieving  a more than 50%
reduction  in NOx in  relation to current  standards  and met the year 2004
emission  limits for new engines.  The tests  confirm  results  reported by
Delft in the lowering of the oxidation temperature for soot.

     The Company  believes  that there is a market for the  platinum/cerium
additive in Taiwan where a bus fleet trial confirmed the performance of the
platinum/cerium filter system.

     The  Company  also   believes  that  a  medium  term  market  for  the
platinum/cerium additive is with filters for new vehicles, especially light
duty vehicles.  In this regard, PSA Peugeot,  France, has announced that it
intends  to  introduce  particulate  filters  on new  cars in  2000.  Other
manufacturers are considering the early introduction of filter systems. The
Company recently agreed to  additive/filter  programs with 3M and Englehard
Corporation, both of whom are looking for lower soot oxidation temperatures
through the use of fuel additives with their trap systems.

     Using the platinum/cerium additive in vehicles with filters presents a
potentially large market.  This is driven by increasing  concern about fine
particle  emissions;  whereas new engines  produce little smoke,  the total
number of particles has increased. Management believes that filters are the
preferred  remedy capable of removing more than 90% of the particles.  This
focus is given further weight by the probable  classification by California
of diesel  emissions as toxic.  The toxicity is most  associated  with soot
particles.  Once  collected  on the  filter,  the soot must be  oxidized to
prevent the filter from clogging, and that is where the additive is needed.

PFC FOR ENGINES WITHOUT PARTICULATE FILTERS OR CATALYTIC OXIDIZERS

PREMIUM DIESEL

     Tests of the Company's platinum/cerium additive have demonstrated that
emissions  are  significantly  reduced  on  both  heavy  duty  engines  and
automobile  engines  without  particulate  filters or catalytic  oxidizers.
Moreover,  the emission benefits are usually accomplished by a fuel economy
improvement.

     The Company  believes that there is a near-term  market  developing in
the U.S. for a combustion  catalyst (such as platinum and cerium) to reduce
smoke, gaseous and particulate emissions from the current fleet of engines.
This market is a result of pending EPA retrofit  guidelines  which  provide
for State  Implementation  Plans ("SIP") credits, as well as state programs
for  enforcement  of smoke  regulation,  which include random highway smoke
tests with substantial penalties for failure.

     The Company has its platinum product  registered with the EPA for sale
in bulk diesel fuel and has registered  with the EPA two families of cerium
products under "grouping" provisions of additive registration  regulations.
Currently,  it can sell  the  individual  products  to all  on-highway  and
off-road  applications  under  these  registrations.  However,  the Company
believes  the price  and  performance  of its  bimetallic  additive  is far
superior to either additive alone.

     The Company is required to complete  engine tests in order to register
the  combined  additive so that it can be sold as a  composite  package and
also  before the  combined  product  can be sold by  refiners  or  additive
companies.  The  Company  can sell the two  separate  products  directly to
fleets and oil distributors for use together in commercial tests and trials
while  undergoing  registration  of the combined  product with the EPA. The
Company   expects  to  complete  these  engine  tests  and  the  subsequent
registration  of the  platinum/cerium  additive in  September or October of
1998.  Off-road  applications of the bimetallic additive do not require EPA
registration.

     The Company intends to launch the  platinum/cerium  additive under the
Platinum  Plus label to oil  distributors  and fleets in the second half of
1998 as well as to  off-road  applications.  The  Company  intends to use a
network  of  experienced  additive  sales/service  agents  to  reach  these
markets, as well as establish a distribution  network through the Company's
blenders.

PFC FOR GASOLINE

     In a cooperative  program with Holts, the Company developed a platinum
and rhodium bimetallic additive for gasoline.  The function of the additive
is to rejuvenate  an aged  catalytic  converter.  Tests were carried out at
Ricardo to evaluate  different additive  formulations.  The tests concluded
that the platinum/rhodium  additive improved the reductions in emissions of
HC, CO and NOx.  The  reduction  in tail pipe  emissions  after one tank of
treated  fuel were long lived (5,000  miles) with a gradual  fall-off of CO
reduction.

     Holts  subsequently  marketed  the  product in the U.K. in 1997 in the
consumer   aftermarket   through  auto  part   stores.   The  results  were
disappointing.  Holts reported that  consumers did not understand  what the
product  did and  indeed  few  consumers  knew if  their  cars  even  had a
catalytic  converter.  Test  marketing by Holts  concluded that the product
should be sold as a technical sale through service and repair shops.  Holts
is considering  how to better  reposition  the product.  The agreement with
Holts is  currently a  non-exclusive  agreement  for Europe and certain Far
East  markets and may be  terminated  at the  Company's  option after March
1999.

     The Company has interest from marketing and distribution companies for
the gasoline product in the U.S.  Management  estimates that the population
of cars with catalytic converters in the U.S. is approximately 140 million.
Since the implementation of enhanced  inspection and maintenance  programs,
data from two states indicates that 5%-15% of those cars tested are failing
inspection and maintenance  tests. This is expected to increase as enhanced
inspection  and  maintenance  programs  are fully  implemented  in  certain
states.

     In order to sell the  product in the U.S.,  the Company is required to
conduct  engine  tests that  register  the  product and apply for a waiver.
There is also a need to  demonstrate  the  effectiveness  of the product on
U.S.  vehicles  under  U.S.  test  standards.  The  Company  is  seeking to
establish a  cooperative  program with one or more  marketing  companies to
fund the test and  registration  program with a view toward  launching  the
product in the U.S. in the second half of 1999,  although no assurances can
be given in this regard.

TOTAL MARKET FOR PFC

     Management  believes the total  worldwide usage of diesel and gasoline
fuels is approximately 350 billion gallons per annum of which approximately
150 billion gallons are diesel and 200 billion gallons are gasoline.  Based
upon this estimation, at a projected treatment cost of two cents (U.S.) per
gallon of fuel treatment, 1% of the market represents a $70 million revenue
opportunity.

HEALTH EFFECTS AND THE USE OF METALLIC ADDITIVES

     Certain metallic additives have come under scrutiny for their possible
effects on health. While the platinum additive is already registered in the
U.S.  and did not strictly  need to be  registered  in Europe,  the Company
considered it prudent to take a much more  proactive  view.  Therefore,  in
1996, the Company began  discussions with the Ministry of Transport and the
Ministry of Health,  regulatory  authorities in the United Kingdom,  asking
for specific consent to the use of platinum metal additives in diesel fuel.
In December  1996,  the  following  response was  received  from the United
Kingdom  Ministry of Health's  committee on Toxicity:  "The  Committee  was
satisfied  that the platinum  emissions  from  vehicles  would not be in an
allergenic form and that the concentrations  were well below those known to
cause human  toxicity." In the U.S.,  the Company has completed  additional
engine testing to maintain its EPA registration as required of all fuel and
fuel additive manufacturers.

     The Company has applied for and received registration for two families
of cerium  additives.  It does not expect to have to carry out engine tests
since EPA rules allow that when a metallic  additive is  registered  by one
company and engine tests are filed by that  company,  often  companies  may
file using the same engine data (grouping  provisions)  subject to agreeing
upon  payment  terms with the original  registrant.  In the case of cerium,
Rhodia Rare Earths, a subsidiary of Rhodia S.A., has conducted engine tests
and  registered.  While the Company has not yet agreed to terms with Rhodia
Rare Earths, it expects to do so in the near term.

PLATINUM AND CERIUM

     The  Company  is  required  to  make a  separate  registration  of the
platinum/cerium  combination  before it can blend the two products and sell
it for bulk fuel  blending  for  on-highway  use.  The Company can sell the
products without the  registration  for off-road  applications and can sell
the platinum and cerium  separately,  for use  together,  to fleets and oil
distributors  on a trial basis,  but not to refiners or additive  blenders.
Thus,  the Company has  determined to make a separate  registration  and to
carry out the  engine  tests on the  combined  additives.  This  program is
expected to be completed by October 1998.

GASOLINE ADDITIVES - PLATINUM AND RHODIUM

     The Company  will be required to carry out an engine  test,  register,
and  apply  for a  waiver  in  order  to sell  this  product  into the U.S.
aftermarket.

NOX REDUCTION SYSTEMS AND ADDITIVES

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

NOX REDUCTION PRODUCT - ARIS(TM) 2000

     The  Company  has  developed  an  Advanced  Reagent  Injection  System
(ARIS(TM)  2000).  This  system  injects  reagent--typically  urea--over  a
catalyst in the exhaust  system of a diesel engine to achieve NOx reduction
of up to 90%.  The  complete  system  of  ARIS(TM)  2000 plus  catalyst  is
generally  called "urea SCR." SCR means Selective  Catalytic  Reduction,  a
process widely used to reduce NOx from gas turbines and furnaces.

     While SCR  systems  are  available  for diesel  engines,  the  current
systems  are  uneconomical,  often  costing  as  much  as the  engine.  The
challenge has been to develop a simple, reliable, low-cost injection system
that  can be  produced  with  typical  automotive  components  which  could
eventually be mass produced. The catalysts are similar to those used in gas
turbines and boilers and are already made by such catalyst manufacturers as
Engelhard Corporation, Johnson Matthey, Mitsubishi and Siemens.

     Current  regulations in California and the Northeast  states for large
stationary  diesel  engines sets NOx levels at a 50% to 90% reduction  from
normal levels  achieved  from current  production  engines under  federally
mandated Best Available Control  Technology  ("BACT") and Lowest Achievable
Emission Rate ("LAER")  requirements in ozone  non-attainment  areas.  Cost
effective systems are not yet available. As a result, gas engines are being
installed,  which cost more to buy and to run than the ARIS(TM)  2000.  The
Company intends to sell the ARIS(TM) 2000 to total system suppliers, engine
companies,  engine  distributors,  or the  assemblers of  generation  sets,
compressors, pumps, etc.

     Currently  the Company has a  cooperative-development  agreement  with
AMBAC, West Springfield,  MA, to develop the injectors used in the ARIS(TM)
2000 system. A prototype  system has been built and tested.  The next stage
will be to complete  detailed  engineering of the production unit and carry
out durability testing. The Company expects to carry out this next stage in
cooperation with a system supplier or catalyst supplier.  While the Company
is in discussions  with several  parties,  there can be no assurance that a
system  supplier will wish to cooperate in  commercializing  ARIS(TM) 2000,
nor that detailed engineering and durability tests will be successful.

NOXOUT(TM) 3200 SCR REAGENT

     The Company,  working in  conjunction  with Fuel Tech,  has  developed
proprietary  specifications  and formulations  for NOxOUT 3200 reagent,  an
aqueous blend of urea and corrosion  inhibitors for use with urea-based SCR
systems for diesels.  While  especially  effective  with the ARIS(TM)  2000
injection  system,  NOxOUT 3200 is also suited for use with other injection
systems and is under  evaluation by several  engine and catalyst  companies
investigating  its performance with their engines and catalysts.  As agreed
with Fuel Tech,  the Company  will market the NOxOUT 3200 reagent to engine
companies,  catalyst  companies and  end-users.  The Company will receive a
royalty  on  sales  of  NOxOUT  3200  by Fuel  Tech  urea  licensees  and a
commission  on the  specialty  component  sales  by Fuel  Tech to the  urea
licensees  involved in blending of NOxOUT 3200. The agreement  between Fuel
Tech and the  Company is  subject to  consummation  of  detailed  terms and
conditions  between the two parties regarding  duration,  responsibilities,
and other terms.

SOURCES OF SUPPLY

     The Company has  outsourcing  arrangements  with two  companies in the
precious metal refining industry and may make arrangements with others. The
Company has made the product  itself in the past but considers  outsourcing
to a precious  metal  refinery  to be more cost  effective.  The Company is
negotiating  for a  source  of  cerium  to  use in  its  bimetallic  diesel
additive.

RESEARCH AND DEVELOPMENT

     The  Company  employs  five  full-time   individuals,   including  two
executive  officers,  in engineering and product development as of the date
of this report.  During the years ended  December 31, 1995,  1996 and 1997,
and for the three  months ended March 31, 1998 the  Company's  research and
development  expenses  exclusive  of  patent  costs  totaled  approximately
$796,000,  $1,747,000,  $1,985,000 and $236,000,  respectively. The Company
expenses all development costs as incurred.

PROTECTION OF PROPRIETARY INFORMATION

     The  Company  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 the Company'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 the Company will have adequate  remedies for disclosure of
its trade  secrets  or  violations  of its  intellectual  property  rights.

INSURANCE

     The Company maintains coverage for the customary risks inherent in its
operations.  Although  the Company  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 the Company.

EMPLOYEES

     The Company has seven full-time employees.  In addition, two executive
officers of Fuel Tech provide  management,  administrative,  financial  and
legal  services  for the Company  pursuant  to a  Management  and  Services
Agreement  between  Fuel Tech and the Company on an  as-needed  basis.  The
Company  also  retains  four  outside  technical  consultants  on  specific
projects related to platinum, engines and NOx reduction.

FACILITIES

     The Company  leased for  administrative  purposes 2,900 square feet of
office  space at 300  Atlantic  Street,  Stamford,  Connecticut,  effective
February 1, 1996,  through  February 28, 1999.  Annual base rent under this
lease is $65,250.

PATENTS AND TECHNOLOGY ASSIGNMENTS

     The Company'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. The assignment agreement
provides for running  royalties of 2.5% of gross revenues  derived from the
sale of the PFC,  commencing in 1998 and  terminating  in 2008. The Company
may at any time terminate the royalty obligation by payment to Fuel Tech in
any year from 1998 through 2008 amounts,  depending on the year,  declining
from $12 million in 1998 to $1.1 million in 2008.  The  Company,  as owner,
maintains the technology at its expense.

     The Company currently has 12 U.S. and 38 International patents on PFCs
and NOx  reduction  systems  and has  another  83  U.S.  and  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).

LEGAL PROCEEDINGS

     The Company is not involved in any legal proceedings.


                                 MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

     The directors and executive officers and key employees of the Company,
their positions held with the Company and their ages are as follows:

                   Name               Age               Position
                   ----               ---               --------

       Ralph E. Bailey               74    Chairman of the Board of
                                           Directors, Director

       Jeremy D. Peter-Hoblyn        58    President and Chief Executive
                                           Officer, Director

       James M. Valentine            44    Executive Vice President and Chief
                                           Operating Officer, Director

       Charles W. Grinnell           61    Vice President, General Counsel
                                           and Corporate Secretary, Director

       Scott M. Schecter             41    Vice President, Treasurer and
                                           Chief Financial Officer

       John A. de Havilland          60    Director

       Douglas G. Bailey             48    Director

     Directors  are  elected  each  year  for a  period  of one year at the
Company's  annual meeting of shareholders  and serve until their successors
are  duly  elected  by  the  shareholders.   Vacancies  and  newly  created
directorships  resulting  from any  increase  in the  number of  authorized
directors may be filled by a majority vote of the directors then in office.
Officers  are  elected  by,  and  serve at the  pleasure  of,  the Board of
Directors.  The Board has an Audit Committee comprised of Messrs.  Ralph E.
Bailey  and de  Havilland.  There are no other  committees  of the Board of
Directors.  Compensation  matters are determined by the full  membership of
the Board.

     The  following is a brief  summary of the  background of each director
and executive officer of the Company:

RALPH E. BAILEY

     Ralph E.  Bailey has been  Chairman of the Board and a director of the
Company  since July 1996.  He has been a director  and Chairman of American
Bailey  Corporation  ("ABC"),  a privately  owned business  acquisition and
development  company,  which owns a significant  equity stake in Fuel Tech,
since 1984. Mr. Bailey is the former Chairman and Chief  Executive  Officer
of Conoco, Inc. and a former Vice Chairman of E.I. du Pont de Nemours & Co.
Mr. Bailey is also a director and shareholder of Rowan Companies,  Inc. and
is Chairman of the Board,  Chief  Executive  Officer and a director of Fuel
Tech.

JEREMY D. PETER-HOBLYN

     Jeremy D.  Peter-Hoblyn  has been the  President  and Chief  Executive
Officer of the Company since its inception.  He also has been a director of
Fuel Tech since 1984 and was Chief  Executive  Officer of that company from
1993 to 1996.

JAMES M. VALENTINE

     James M.  Valentine  has  been  Executive  Vice  President  and  Chief
Operating Officer of the Company since its inception.  From the period 1990
through  1993,   Mr.   Valentine  was  the  head  of  his  own  energy  and
environmental  consulting  firm. Mr.  Valentine has been a director of Fuel
Tech since 1993.

CHARLES W. GRINNELL

     Charles W.  Grinnell  has been Vice  President,  General  Counsel  and
Corporate  Secretary of the Company  since its  inception  and has held the
same positions  with Fuel Tech since 1987. Mr.  Grinnell has been a partner
in the Stamford, Connecticut law firm of Huth & Grinnell, LLC since 1992.

SCOTT M. SCHECTER

     Scott M.  Schecter  has  served  as Vice  President,  Chief  Financial
Officer and  Treasurer of the Company and of Fuel Tech since  January 1994.
From June 1990 to January 1994, Mr.  Schecter was Senior Vice President and
Chief  Financial  Officer of American  Vision  Centers,  Inc. From May 1986
through June 1990, Mr. Schecter served as a corporate  development  officer
of W.R. Grace and Company.

JOHN A. DE HAVILLAND

     John A. de  Havilland  has been a director  of the  Company  since its
inception.  Mr. de Havilland was a director of J. Henry Schroder Wagg & Co.
Ltd.  from 1971 until his  retirement  in 1990 and a director  of Fuel Tech
from 1984 to 1998.

DOUGLAS G. BAILEY

     Douglas G. Bailey has been a director  of the Company  since March 31,
1998. Mr. Bailey, who is the son of Ralph E. Bailey, has been the President
and Chief  Executive  Officer of ABC since 1984. Mr. Bailey is Chairman and
Chief  Executive  Officer of Golden Casting  Corporation  and a Director of
DieselCast France S.A., both affiliates of ABC. Mr. Bailey is a director of
Fuel Tech.

EXECUTIVE COMPENSATION

     The table below sets forth  information  concerning  compensation  for
services in all  capacities  awarded to, earned by or paid to Mr. Jeremy D.
Peter-Hoblyn,   President  and  Chief  Executive  Officer,   Mr.  James  M.
Valentine, Executive Vice President and Chief Operating Officer and Eric N.
Balles, Vice President-Technology,  during the fiscal years ending December
31, 1995,  1996 and 1997,  the only  executive  officers of the Company who
earned total  compensation  in excess of $100,000  during  fiscal year 1997
(the "Named  Executive  Officers").  Mr.  Balles  resigned from the Company
effective  September 30, 1997.  Prior to August 1, 1996, for Mr.  Valentine
and  December  1,  1996,  for  Mr.  Peter-Hoblyn,  the  amounts  of  annual
compensation  shown  below  were  paid by Fuel  Tech and  allocated  to and
reimbursed by the Company to Fuel Tech.

<TABLE>
<CAPTION>
                         SUMMARY COMPENSATION TABLE
                                                                                  Long-Term
                                                                                  ---------
                                                                                   Shares
                                                                                  Underlying
                                                            Annual                 Options
Name and Principal Position            Year      Salary(FN1)      Other(FN2)      Granted (#)
---------------------------            ----      -----------      ----------      -----------
<S>                                    <C>        <C>               <C>              <C>   
Jeremy D. Peter-Hoblyn..............   1997       250,000           71,525           35,000
President and Chief                    1996       229,667           64,996               --
Executive Officer                      1995       162,500           35,500           17,200

James M. Valentine..................   1997       220,000           29,523           35,000
Executive Vice President               1996       209,833           26,727               --
and Chief Operating Officer            1995       165,000           24,923           10,000

Eric N. Balles......................   1997       120,000           12,625               --
Vice President-Technology              1996        56,910            4,776           25,000

----------------------
<FN>
(1)  Effective February 16, 1998, Mr. Peter-Hoblyn  voluntarily reduced his
     base  salary by  $62,500 to  $187,500.  Effective  July 1,  1988,  Mr.
     Peter-Hoblyn's  salary  reduction  became a deferral  of such  salary.
     Effective July 1, 1998, Messrs. Peter-Hoblyn and Valentine voluntarily
     reduced  their  salaries  by $10,000  each to $177,500  and  $210,000,
     respectively.  Reinstatement  of  the  $10,000  reduction  is  at  the
     discretion of the individual involved.

(2)  The  amounts  designated  "other"  in 1997,  1996  and  1995  include,
     respectively,  for  Mr.  Peter-Hoblyn,   pension  contributions  to  a
     purchased annuity of $45,200,  $45,833 and $32,500; for Mr. Valentine,
     401 (k) plan  contributions  of $9,550,  $8,793 and $7,313 and medical
     insurance premiums of $13,068,  $11,671 and $9,441; and for Mr. Balles
     medical insurance premiums of $9,475 and $3,376.

</FN>
</TABLE>

DIRECTORS' COMPENSATION

     The Company  provides an annual retainer of $15,000,  a meeting fee of
$2,000 per board  meeting and $1,000 per diem for  services  not  involving
board  meetings,  plus  associated  expenses  for  directors  who  are  not
employees of the Company.  Mr. Ralph E. Bailey,  however, is paid an annual
retainer  of  $15,000  and is  reimbursed  for his  expenses  of  attending
meetings and for office  expenses as Chairman of the Company.  Mr. Ralph E.
Bailey, commencing October 1997, Mr. de Havilland, commencing January 1998,
and Mr.  Douglas G. Bailey,  commencing in March 1998,  have deferred their
annual retainer  payments  pending  improvement in the Company's  financial
position. In addition, on June 5, 1998, the directors have elected to waive
their meeting fees pending improvement in the Company's financial position.
Where a  non-employee  director is employed or otherwise  compensated by an
affiliated  Company,  such as Fuel Tech,  the retainer and meeting fees are
paid to the affiliated  company,  unless  waived.  Fuel Tech was paid those
retainers  and fees for 1997 in the amount of  $56,850.  Directors  who are
employees  of the  Company  receive no  compensation  for their  service as
directors.

EMPLOYMENT AGREEMENTS

     Mr.  Peter-Hoblyn  has an employment  agreement with the Company which
provides that he will serve as the President and Chief Executive Officer of
the Company. Mr. Peter-Hoblyn's  employment agreement commenced on December
6, 1996 and continues  until  terminated by either party as described  more
fully  therein.  The  employment  agreement  provides for the payment of an
annual  base  salary  of  $250,000,   participation   in  benefit  programs
previously  extended to him by Fuel Tech or its  affiliates  (the Company's
predecessor) and payment of up to $50,000 for the annual premium for a U.K.
based  annuity (less any amounts  received  from the  Company's  benefit or
profit sharing plans).

     Mr.  Valentine  has an  employment  agreement  with the Company  which
provides  that he will  serve as the  Executive  Vice  President  and Chief
Operating  Officer of the Company.  Mr.  Valentine's  employment  agreement
commenced on August 1, 1996 and continues until  terminated by either party
as described more fully therein.  The employment  agreement provides for an
annual base salary of $220,000 and  participation in the Company's  benefit
plans.

     For a description of voluntary reductions by Messrs.  Peter-Hoblyn and
Valentine of their base salaries, see "Summary Compensation Table" above.

STOCK OPTION PLAN

     In 1994, the Board of Directors adopted and the shareholders  approved
the Company's 1994 Incentive Plan (the "Plan"). The Plan is intended to set
forth a flexible  structure  within  which the Company may utilize  various
compensation devices to recruit and retain the services of such key persons
as may be required to manage and carry out the Company's business.

     The Plan  provides  for the grant of options to  employees,  officers,
directors and  consultants  of the Company to purchase up to such number of
shares of Common  Shares as the Board of Directors  shall from time to time
determine,  provided  that such  shares in the  aggregate  shall not exceed
17.5% of the Company's issued and outstanding  shares.  At the date of this
Prospectus, 427,784 options under the Plan are outstanding.

     The Plan is designed so that awards  thereunder  may be settled in the
form of the Company's shares and in a manner complying with applicable U.S.
securities  laws.  Under  the  Plan,  the  Boards  of  Directors  may grant
incentive  awards  to  participants  in the  form  of  non-qualified  stock
options, stock appreciation rights,  restricted stock,  performance awards,
bonuses or any other form of share  based or  non-share  based award or any
combination  of  these  awards  (collectively  referred  to  herein  as the
"Award(s)").

     Share based Awards  shall at the time of grant have an exercise  price
of or be  valued  at not less  than  100% of the fair  market  value of the
shares on the date of the Award, as determined by the Administrator.

     Share based  Awards  shall be  outstanding  for a period of six months
prior to the exercise thereof or the receipt of benefits thereunder and may
not be outstanding for a period in excess of ten years.  Absent approval of
the Board of  Directors,  awards and  agreements  evidencing  Awards may be
assigned  or  transferred   only  pursuant  to  the  laws  of  descent  and
distribution,  and  during  the life of the  holder of an  Award,  only the
holder may exercise or receive the benefit of the Award.

OPTIONS GRANTED TO DATE UNDER THE PLAN

     The following table sets forth  information  concerning  stock options
granted from the inception of the Plan to date to those persons who are now
(i) the Named Executive  Officers,  (ii) all executive officers as a group,
(iii) each director,  (iv) all  non-executive  employees as a group and (v)
all employees,  including  executive officers as a group. On August 4, 1998
the closing price of the Company's  Common Shares was $1.88 per share.  All
stock options become exercisable upon a change of control as defined in the
Plan.

<TABLE>
<CAPTION>
                                                                       Number           Exercise            Expiration
                             Name                                    of Shares           Prices            Dates/Vesting
                             ----                                    ---------           ------            -------------
<S>                                                                    <C>                <C>                 <C>
Ralph E. Bailey..............................................          25,000             $4.50               2006(FN1)
                                                                        5,000             $4.625              2007(FN4)

Douglas G. Bailey............................................          15,000             $2.03               2008(FN4)

Eric N. Balles...............................................          25,000             $4.50               2006(FN5)

John A. de Havilland.........................................           7,500             $6.82               2005(FN2)
                                                                        5,000             $4.625              2007(FN4)

Charles W. Grinnell..........................................           6,250             $2.50               2002(FN2)
                                                                        5,750             $6.82               2005(FN2)
                                                                       10,000             $4.625              2007(FN4)
                                                                        7,500             $2.03               2008(FN4)

Jeremy D. Peter-Hoblyn.......................................          25,000             $0.20               2001(FN3)
                                                                       25,000             $2.00               2001(FN2)
                                                                       17,200             $6.82               2005(FN2)
                                                                       10,000             $4.625              2007(FN4)
                                                                       25,000             $4.625              2007(FN4)
                                                                        7,500             $2.03               2008(FN4)

James M. Valentine...........................................          25,000             $0.20               2001(FN2)
                                                                       25,000             $2.00               2001(FN2)
                                                                       10,000             $6.82               2005(FN2)
                                                                       10,000             $4.625              2007(FN4)
                                                                       25,000             $4.625              2007(FN4)
                                                                        7,500             $2.03               2008(FN4)

Executive officers as a group (four in number)...............         290,700        $0.20-$6.82      2001-2008(FN2)(FN3)(FN4)

All employees, including executive officers as a group                335,700        $0.20-$6.82      2001-2008(FN1)(FN2)(FN3)(FN4)
  (nine in number)...........................................

Non-executive employees as a group (five in number)..........          45,000        $2.03-$6.50      2002-2008(FN1)(FN4)

------------------------
<FN>
(1)  These options become first exercisable in three equal  installments on
     the first through the third anniversaries of grant.

(2)  These options are now vested and exercisable.

(3)  16,666 of these options were exercised in 1997 and the remaining 8,334
     shares are now exercisable.

(4)  These options become first exercisable in three equal  installments on
     the grant and on the first and second anniversaries of grant.

(5)  8,333 of these options are vested and exercisable,  the balance having
     been cancelled.

</FN>
</TABLE>

OPTION GRANTS IN THE LAST FISCAL YEAR

<TABLE>
<CAPTION>
                                                                                                    Potential Realizable
                                                                                                   Value of Assumed Annual
                                  Number of      % of Total                                         Rates of Stock Price
                                   Shares         Options                                         Appreciation for Option
                                 Underlying      Granted to     Exercise or                                 Term
                                   Options      Employees in    Base Price                                  ----
             Name                Granted (#)        1997          ($/Sh)      Expiration Date         5%           10%
             ----                -----------        ----          ------      ---------------         --           ---
<S>                              <C>                <C>           <C>         <C>                 <C>          <C>     
Jeremy D. Peter-Hoblyn.......       35,000           44%            $4.625         2/6/07         $102,000     $258,000
Eric N. Balles...............           --           --                --         --                 --          --
James M. Valentine...........       35,000           44%            $4.625         2/6/07         $102,000     $258,000

</TABLE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                          Number of        Number of
                                                         Securities        Securities        Value of          Value of
                                                         Underlying        Underlying       Unexercised      Unexercised
                                                         Unexercised      Unexercised      in-the-Money      in-the-Money
                                                         Options at        Options at       Options at        Options at
                                Shares                   Fiscal Year         Fiscal           Fiscal            Fiscal
                             Acquired on     Value          End/           Year End/         Year End/        Year End/
           Name               Exercises     Realized     Exercisable     Unexercisable      Exercisable     Unexercisable
           ----               ---------     --------     -----------     -------------      -----------     -------------
<S>                           <C>           <C>          <C>             <C>                <C>             <C>
Jeremy D.
Peter-Hoblyn...............     16,666      $50,832        62,200            23,334           $29,601             $0
James M. Valentine.........       0            $0          71,666            23,334           $66,900             $0
Eric N. Balles.............       0            $0           8,333              0                $0                $0

</TABLE>

                           PRINCIPAL SHAREHOLDERS

     The following  table sets forth  information  regarding the beneficial
ownership of Common  Shares as of June 30, 1998 by (i) each person known to
the Company to own  beneficially  more than five percent of the outstanding
Common Shares, (ii) each director of the Company, (iii) the named Executive
Officers, and (iv) all directors and executive officers as a group.


                                            Number of     Percentage of Class
                                             Shares                    After
                                          Beneficially      Before   Offering
Name and Address of Beneficial Owner         Owned         Offering    (FN1)
------------------------------------         -----         --------    -----
Fuel Tech (FN2).......................       689,147         27.4       16.5
Ralph E. Bailey (FN3)(FN4)............        26,666          1.1       (FN*)
Douglas G. Bailey (FN3)(FN4)..........         5,000         (FN*)      (FN*)
Eric N. Balles (FN3)..................         8,333         (FN*)      (FN*)
John A. de Havilland (FN3)............        10,833         (FN*)      (FN*)
Charles W. Grinnell (FN3).............        29,008          1.2       (FN*)
Jeremy D. Peter-Hoblyn (FN3)..........       121,918          4.8        2.9
James M. Valentine (FN3)..............        91,771          3.6        2.2
All Directors and Officers as a Group
  (seven persons) (FN3)...............       326,992         13.0        7.9

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

*    Less than one percent (1.0%)

(1)  Assumes full subscription of the Rights Offering,  no participation by
     management  or Fuel Tech and that all  shares  of  Series B  Preferred
     Stock are immediately  converted into Common Shares. Fuel Tech and the
     directors and executive  officers have not yet determined whether they
     will participate in the Rights Offering. Fuel Tech and management will
     make a  determination  as to  whether  to  participate  in the  Rights
     Offering  after the  distribution  of the Rights  based  upon  several
     factors,  including the Offering  Price,  their  respective  financial
     resources and, in the case of Fuel Tech, applicable covenants.

(2)  The  address of Fuel Tech is  Castorweg  22-24,  Curacao,  Netherlands
     Antilles and the address of each other  beneficial  owner is c/o Clean
     Diesel Technologies,  Inc., Suite 702, 300 Atlantic Street,  Stamford,
     Connecticut 06901.

(3)  Includes shares subject to options exercisable presently and within 60
     days for Mr. Ralph E. Bailey,  11,666  shares;  Mr. Douglas G. Bailey,
     5,000  shares;  Mr.  Balles,  8,333 shares;  Mr. de Havilland,  10,833
     shares; Mr. Grinnell, 21,166 shares; Mr. Peter-Hoblyn,  76,366 shares;
     Mr. Valentine,  85,832 shares; and for all directors and officers as a
     group, 251,529 shares.

(4)  For the  description of ABC which is controlled by Messrs.  Ralph and
     Doug Bailey,  see "CERTAIN  RELATIONSHIPS AND RELATED  TRANSACTIONS --
     Relationship with Fuel Tech; Conflicts of Interest."

               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT AND SERVICES AGREEMENT

     Effective  July 1995 and amended June 1996,  the Company and Fuel Tech
have entered into a Management and Services  Agreement (the "Management and
Services  Agreement")  under which Fuel  Tech's  corporate  staff  provides
certain administrative  services,  including legal advice, risk management,
tax advice and certain  technical  and other  services to the Company.  The
Company is assessed fees equal to, depending on the type of service,  3% or
10% of the Company's fixed reimbursable costs for these services. As of May
1998, the fee was fixed at 3% for all of the Company's  reimbursable costs.
The fee may be changed by mutual  agreement  of the  Company and Fuel Tech.
Management  believes  that the charges  under the  Management  and Services
Agreement are  reasonable and that the terms of the Management and Services
Agreement are fair to the Company.  The Management  and Services  Agreement
may be canceled by either party on or before May 15 in any year.

TECHNOLOGY ASSIGNMENTS

     The Company's technology is comprised of patents, patent applications,
trade or service marks,  data and know-how.  A substantial  portion of this
technology is held under  assignments of technology from Fuel Tech and Fuel
Tech affiliates.  The assignments  provide for running royalties payable to
Fuel  Tech  commencing  in  1998 of 2.5% of  gross  revenues  derived  from
platinum fuel catalysts.  The Company may at any time terminate the royalty
obligation  by payment to Fuel Tech in any year from 1998  through  2008 of
amounts,  depending on the year, declining from $12 million in 1998 to $1.1
million in 2008.

TERM LOAN

     Under an unsecured  promissory  note of November 5, 1997,  the Company
owes  approximately  $495,000 to Platinum Plus, Inc.  ("Platinum  Plus"), a
wholly owned subsidiary of Fuel Tech, repayable in installments of $100,000
on July 1 in each of the years 1998 through 2000 and approximately $195,000
on July 1, 2001,  bearing  interest at eight percent per annum.  On July 1,
1998,  Platinum  Plus  elected to defer the  repayment  of the  $100,000 of
principal  which was payable on that date.  Platinum  Plus has reserved the
right,  however,  to call this payment at any time.  As of the date of this
prospectus,  Platinum Plus has not demanded repayment. The interest accrued
on the  note as of July 1,  1998  was  paid  by the  Company.  See  "USE OF
PROCEEDS."

BRIDGE LOAN

     Fuel Tech and a group of London  based  investors  (the  "Bridge  Loan
Lenders")  executed a letter of intent  with the  Company  to  provide  the
Company  with a Bridge  Loan of $1.4  million at ten percent  interest  per
annum due April 15, 2001,  secured by all of the  intellectual  property of
the Company. A $500,000 short-term note and security agreement entered into
with Fuel Tech in  February  1998 was  canceled  and Fuel  Tech's  $500,000
portion of the Bridge Loan substituted for that instrument. The Bridge Loan
will, as a debt instrument and through its security interest,  be preferred
in liquidation over all other securities of the Company, debt or equity. No
class of debt  senior to the  Bridge  Loan may be issued  absent  the prior
consent of a majority in interest of the Bridge Loan Lenders.

     The Bridge Loan may be  converted  into up to 2,800 shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock") of the Company
at any time at the option of the Bridge Loan Lenders, but is required to be
converted  on  (i)  the  conclusion  of  a  public  or  private   financing
contributing $1.75 million of net proceeds to the Company (including, if it
meets this condition, the Rights Offering), or (ii) voluntary conversion of
60% of the Bridge Loan.

     John A. de  Havilland,  a director of the Company and of Fuel Tech, is
also a director  of The  Shimpling  Trust  Limited  which is a Bridge  Loan
Lender in the amount of $250,000.

TERMS OF SERIES A PREFERRED STOCK

     In connection  with the Company's  Bridge Loan,  the Board  designated
10,000 shares of Series A Preferred  Stock.  The Bridge Loan is convertible
into  the  Series  A  Preferred  Stock at the  lenders'  discretion  and is
mandatorily  convertible  upon  the  conclusion  of  a  public  or  private
financing  that  contributes  at least $1.75 million of net proceeds to the
Company.  Accordingly,  upon consummation of the Rights Offering,  assuming
subscription of at least 31,650 Rights pursuant to the Rights Offering at a
Subscription Price of $74.25 and estimated  Soliciting Fees and expenses of
$600,000,  the Bridge Loan Notes will be converted  into Series A Preferred
Stock.  Holders of the Bridge  Loan  Notes have  agreed not to convert  the
Bridge  Loan into  Series A  Preferred  Stock  prior to the  earlier of the
conclusion of a public or private financing that contributes at least $1.75
million of net proceeds to the Company  (including the Rights  Offering) or
January 31, 1999. See  "DESCRIPTION  OF CAPITAL STOCK -- Preferred Stock --
Series A Convertible Preferred Stock."

REGISTRATION RIGHTS

     The  Company  has  agreed  as  of  November  15,  1997  under  certain
circumstances  to provide  registration  rights to Fuel Tech for one demand
and  unlimited  incidental  registrations  at Company  cost for the sale of
Common  Shares held by Fuel Tech,  if such  registration  should be legally
required for Fuel Tech to sell such shares.

     The terms of the Bridge Loan provide that on  conversion of the Bridge
Loan Notes into Series A Preferred Stock, the holders of Series A Preferred
Stock may have three demand (each of $1 million in value and not more often
than one in any twelve months) and unlimited  incidental  registrations  at
Company cost for the Common Shares  underlying the Series A Preferred Stock
held by the holders,  if registration  should be legally  required for such
holders to sell such underlying Common Shares.

RELATIONSHIP WITH FUEL TECH; CONFLICTS OF INTEREST

     Directors and officers of Fuel Tech and its  subsidiaries who are also
directors  and  officers  of the  Company,  and Fuel Tech as the  Company's
controlling  shareholder,  are in positions  involving the  possibility  of
conflicts of interest with respect to transactions involving the Company.

     The Company and Fuel Tech have entered into  contractual  arrangements
governing  certain  transactions  and  relationships  between  them.  These
agreements were executed while the Company was a subsidiary or affiliate of
Fuel  Tech  and  were  not  the   result  of   arm's-length   negotiations.
Accordingly,  there is no assurance  that the terms and conditions of these
agreements are as favorable to the Company as might have been obtained from
independent third parties.

     Six of the Company's  officers or directors are employees or directors
to the Board of Fuel Tech. Three of these persons are also officers of Fuel
Tech and Fuel Tech subsidiaries. Although these persons seek to devote such
time to the affairs of the Company as the  Company's  needs  require,  they
must balance the Company's  need for their time with the needs of Fuel Tech
and its subsidiaries.

     Ralph E. Bailey and Douglas G. Bailey were elected Managing  Directors
of  Fuel  Tech  which  currently  owns  27.4  percent  of  the  issued  and
outstanding Common Shares of the Company. Pursuant to a Securities Purchase
Agreement  dated as of March 23, 1998 (the "Purchase  Agreement"),  certain
affiliates  and related  parties of ABC (the  "Investors")  purchased  4.75
million common shares of Fuel Tech and warrants to purchase an additional 3
million of such common  shares.  Under the terms of a related  shareholders
agreement, the Investors, for a period of ten years and so long as they own
not less than a certain  specified  minimum  percentage  of the  issued and
outstanding  common shares of Fuel Tech, will be entitled from time to time
to nominate two Managing Directors of Fuel Tech who are  representatives of
the Investors and one independent  director.  Also, during such period, the
Investors  will be entitled to nominate up to 50% of the  directors of Fuel
Tech, Inc., the operating  subsidiary of Fuel Tech which owns substantially
all of the operating assets of the Fuel Tech Group.

     The Company  expects to resolve  potential  conflicts of interest with
Fuel Tech on a  case-by-case  basis,  taking  into  consideration  relevant
factors including its existing agreements with Fuel Tech,  applicable stock
exchange rules and prevailing corporate practices.  Fuel Tech, however, may
exercise its influence in its own best interests.

NOXOUT(TM) 3200 SCR REAGENT

     For a description  of  arrangements  between the Company and Fuel Tech
regarding the development of proprietary  specifications  and  formulations
for NOxOUT 3200 SCR Reagent, see "BUSINESS -- NOxOUT(TM) 3200 SCR Reagent."

                        DESCRIPTION OF CAPITAL STOCK

     The following  summary  description of the Company's  capital stock is
qualified  in its entirety by reference  to the  Company's  Certificate  of
Incorporation,  as amended, the Certificate of Designation for the Series A
Preferred  Stock and the form of the  Certificate  of  Designation  for the
Series  B  Preferred   Stock,   which  are  attached  as  exhibits  to  the
Registration Statement.

COMMON SHARES

     The Company is  authorized to issue up to  15,000,000  Common  Shares,
$0.05 par value per  share.  As of the date of this  Prospectus,  2,516,666
Common Shares are issued and outstanding.

     Holders of Common  Shares are entitled to one vote for each share held
of record on each matter submitted to a vote of  shareholders.  There is no
cumulative voting for election of Directors. Subject to the prior rights of
any series of preferred  stock which may from time to time be  outstanding,
if any, Holders of Common Shares are entitled to receive ratably  dividends
when,  as, and if declared by the Board of Directors,  out of funds legally
available therefor and, upon the liquidation, dissolution, or winding up of
the Company,  are entitled to share ratably in all assets  remaining  after
payment of  liabilities  and payment of accrued  dividends and  liquidation
preferences on the Preferred  Stock, if any.  Holders of Common Shares have
no preemptive rights and have no rights to convert their Common Shares into
any other  securities.  The  outstanding  Common Shares are, and the Common
Shares to be outstanding  upon completion of this Offering will be, validly
authorized and issued, fully paid, and nonassessable.

PREFERRED STOCK

     The Company is authorized  to issue up to 100,000  shares of preferred
stock, $0.05 par value per share (the "Preferred Stock").

     The Preferred Stock may be issued in one or more series,  the terms of
which may be  determined at the time of issuance by the Board of Directors,
without  further  action by  shareholders,  and may include  voting  rights
(including  the  right  to  vote  as  a  series  on  particular   matters),
preferences as to dividends and liquidation,  conversion rights, redemption
rights, and sinking fund provisions.

SERIES A CONVERTIBLE PREFERRED STOCK

     On March 31, 1998, the Board of Directors designated 100,000 shares as
Series A  Convertible  Preferred  Stock,  $0.05 par  value  per share  (the
"Series A Preferred Stock").

RANKING

     Upon liquidation, dissolution and winding up, proceeds are distributed
to holders of Series A Preferred  Stock and Series B Preferred  Stock,  pro
rata,  based on the original  issue price of such shares,  and prior to the
Holders of Common Shares.

DIVIDENDS

     Holders of the Series A Preferred Stock are entitled to receive, when,
as and if  declared by the Board of  Directors  out of funds of the Company
legally available therefor,  cash dividends at the annual rate of 9% of the
$500.00  per  share  price and  liquidation  preference  (the  "Liquidation
Preference");  provided, however, that in lieu of making dividends in cash,
the  Company  may elect,  by giving  written  notice to each  holder of the
Series A Preferred  Stock,  to pay  dividends in kind at the annual rate of
11% of the Liquidation Preference (cash dividends and dividends in kind are
each deemed "Preferred Dividends"). Dividends payable to the holders of the
Series A Preferred  Stock are payable  quarterly  in arrears,  on the first
business  day of January,  April,  July and October of each year (each such
date  being  hereinafter   referred  to  as  a  "Dividend  Payment  Date"),
commencing  July 1,  1998.  Preferred  Dividends  on  shares  of  Series  A
Preferred  Stock  shall be  cumulative  and shall  accrue  from the date of
original issuance.

VOTING RIGHTS

     Holders of the Series A  Preferred  Stock are  entitled to vote on all
matters  as a class  with the  holders  of the  Common  Shares and Series B
Preferred  Stock and in such event are entitled to one vote for each Common
Share into which the Series A Preferred Stock is  convertible.  The holders
of Series A Preferred Stock are entitled to vote as a separate class on the
election of two directors.  In addition,  the approval of the holders of at
least 60  percent of the shares of Series A  Preferred  Stock,  voting as a
separate class, will be required to: (i) amend, alter, or repeal any of the
provisions of the Certificate of  Incorporation  so as to affect  adversely
the powers,  preferences or rights of the holders of the shares of Series A
Preferred  Stock  then  outstanding  or  reduce  the  minimum  time for any
required  notice to which the  holders of the shares of Series A  Preferred
Stock then  outstanding  may be  entitled;  (ii)  authorize  or create,  or
increase the  authorized  amount of, any  securities  ranking senior to the
shares of Series A Preferred  Stock or any  securities  that by their terms
rank pari passu with the shares of Series A Preferred  Stock,  either as to
the payment of dividends or the  distribution  of assets upon  liquidation,
dissolution  or winding up of the Company;  (iii)  authorize the payment of
dividends on the Common Shares;  (iv) repurchase any Common Shares,  except
in connection  with the termination of employment of a holder of such stock
or  otherwise  pursuant  to  the  terms  of  the  Plan;  (v)  enter  into a
transaction whose  consummation  results in a Change of Control (as defined
in the  Certificate  of  Designation)  of the  Company;  (vi)  authorize or
create,  or increase the number of authorized  shares of Series A Preferred
Stock; or (vii) other than to add two additional  board seats in connection
with the initial issuance of Series A Preferred Stock, increase the size of
the Board of Directors of the Company.

REDEMPTIONS AND CONVERSIONS

     The shares of Series A  Preferred  Stock  shall be  redeemable  at the
option of a holder of the Series A  Preferred  Stock,  in whole or in part,
from time to time out of funds legally  available for such purpose,  at any
time, on or after the fourth  anniversary  of the date of execution of this
Certificate of  Designation  at the  redemption  price of $500.00 per share
(which  conversion  price  will be deemed to have been paid in full,  at no
extra  cost to the  holder  thereof,  with the  tendering  of the  Series A
Preferred Stock in connection with the conversion  thereof),  plus, in each
case, an amount equal to all dividends  accrued and unpaid on the shares of
Series A  Preferred  Stock up to the date fixed for the  redemption  as set
forth in the Certificate of Designation.

     Shares of Series A Preferred Stock are convertible (at the Liquidation
Preference of $500.00 per share), in whole or in part, at the option of the
holders thereof ("Optional  Conversion"),  unless previously redeemed, into
Common Shares at a conversion  price of $1.50 per Common Share  (equivalent
to a  conversion  rate of 333.33  Common  Shares for each share of Series A
Preferred  Stock so converted),  which  conversion  price will be deemed to
have been paid in full,  at no extra cost to the holder  thereof,  with the
tendering of the Series A Preferred Stock in connection with the conversion
thereof,  subject  to  adjustment  as  set  forth  in  the  Certificate  of
Designation.

     The  Company  can force the holder to convert  his Series A  Preferred
Stock,  in whole or in part, into Common Shares at any time on or after the
date that the  average  Closing  Price (as  defined in the  Certificate  of
Designation)   of  the  Common  Shares  equals  or  exceeds  $4.50  for  20
consecutive  Trading  Days.  Such  conversion  may at the  election  of the
holders  of 60% of the  issued  and  outstanding  shares  of the  Series  A
Preferred  Stock be scheduled to occur,  on a pro rata basis quarterly over
18 months.

     Subject to the provision for adjustment  set forth in the  Certificate
of   Designation,   each  share  of  Series  A  Preferred  Stock  shall  be
automatically  converted  into a number of Common Shares at the  conversion
price set forth in the  Certificate  of  Designation  in the event that the
Company  consummates  the  sale  of  Common  Shares  in a bona  fide,  firm
commitment,   underwritten   public  offering   pursuant  to  an  effective
registration  statement  under  the  Securities  Act of 1933,  as  amended,
resulting in at least $10,000,000 of gross proceeds at a price per share of
at least 200% of the  Conversion  Price  being  received  by the Company (a
"Qualified  IPO"). In the event of such mandatory  conversion,  accrued and
unpaid dividends will also convert into Common Shares, on the same terms as
the underlying Series A Preferred Stock.

ANTI-DILUTION

     In the event that additional  Common Shares or securities  exercisable
or convertible into Common Shares are issued without  consideration or at a
price less than the applicable  conversion price for the Series A Preferred
Stock in effect on the date of and immediately  prior to such issue,  then,
subject to  certain  exceptions,  the  applicable  conversion  price of the
Series A Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction,  the
numerator  of which  shall  be the  number  of  Common  Shares  outstanding
immediately  prior to such issue plus the number of shares of Common Shares
which the  aggregate  consideration  received  by the Company for the total
number  of  additional  Common  Shares  so issued  would  purchase  at such
conversion  price;  and the  denominator  of which  shall be the  number of
shares of Common Shares  outstanding  immediately  prior to such issue plus
the number of such additional Common Shares so issued.

LIQUIDATION

     In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the  Company,  and subject to the rights of holders of any
other  series of  Preferred  Stock,  the holders of  outstanding  shares of
Series A  Preferred  Stock are  entitled  to receive the sum of $500.00 per
share in cash for each share of Series A Preferred Stock,  plus accrued and
unpaid  Preferred  Dividends  thereon,  out of the  assets  of the  Company
available for  distribution  to  stockholders,  before any  distribution of
assets is made to  holders  of Common  Shares  or any other  capital  stock
ranking  junior to the  shares of Series A  Preferred  Stock and pari passu
with holders of Series B Preferred Stock upon liquidation,  dissolution, or
winding up. If, upon any voluntary or involuntary liquidation, dissolution,
or winding up of the Company, the assets of the Company are insufficient to
permit the payment of the full preferential amounts payable with respect to
the shares of Series A Preferred  Stock, the Holders shall share ratably in
any  distribution  of  assets  of the  Company  in  proportion  to the full
respective preferential amounts to which they are entitled, in each case on
a per share  basis.  After  payment of the full  amount of the  liquidating
distribution to which they are entitled,  the holders shall not be entitled
to any further  participation in any distribution of assets by the Company.
A  consolidation  or merger of the  Company  with or into one or more other
Companies  (whether  or not  the  Company  is the  Company  surviving  such
consolidation  or  merger),  or  a  sale,  lease  or  exchange  of  all  or
substantially all of the assets of the Company, shall not be deemed to be a
voluntary or  involuntary  liquidation,  dissolution,  or winding up of the
Company.

SERIES B CONVERTIBLE PREFERRED STOCK

     In  connection  with the  Rights  Offering,  the  Board  of  Directors
designated 50,000 shares as Series B Convertible Preferred Stock, $0.05 par
value per share (the "Series B Preferred Stock").

RANKING

     Upon liquidation, dissolution and winding up, proceeds are distributed
to holders of Series A Preferred  Stock and Series B Preferred  Stock,  pro
rata,  based on the original  issue price of such shares,  and prior to the
holders of Common Shares.

DIVIDENDS

     Holders of the Series B Preferred Stock are entitled to receive, when,
as and if  declared by the Board of  Directors  out of funds of the Company
legally available therefor,  cash dividends at the annual rate of 9% of the
$________  per share price and  liquidation  preference  (the  "Liquidation
Preference");  provided, however, that in lieu of making dividends in cash,
the  Company  may elect,  by giving  written  notice to each  holder of the
Series B Preferred  Stock,  to pay  dividends in kind at the annual rate of
11% of the Liquidation Preference (cash dividends and dividends in kind are
each deemed "Preferred Dividends"). Dividends payable to the holders of the
Series B Preferred  Stock are payable  quarterly  in arrears,  on the first
business  day of January,  April,  July and October of each year (each such
date  being  hereinafter   referred  to  as  a  "Dividend  Payment  Date"),
commencing  January  1,  1999.  Preferred  Dividends  on shares of Series B
Preferred  Stock  shall be  cumulative  and shall  accrue  from the date of
original issuance.

VOTING RIGHTS

     Holders of the Series B  Preferred  Stock are  entitled to vote on all
matters  as a class  with the  holders  of the  Common  Shares and Series A
Preferred  Stock and in such event are entitled to one vote for each Common
Share into which the Series B Preferred Stock is convertible.

CONVERSIONS

     Shares of Series B Preferred Stock are convertible (at the Liquidation
Preference of $______ per share), in whole or in part, at the option of the
holders thereof ("Optional Conversion"), into Common Shares at a conversion
price of $____ per Common  Share  (equivalent  to a  conversion  rate of 33
Common  Shares for each share of Series B  Preferred  Stock so  converted),
which  conversion  price  will be deemed  to have been paid in full,  at no
extra  cost to the  holder  thereof,  with the  tendering  of the  Series A
Preferred  Stock in  connection  with the  conversion  thereof,  subject to
adjustment as set forth in the Certificate of Designation.

     The  Company  can force the holder to convert  his Series B  Preferred
Stock,  in whole or in part, into Common Shares at any time on or after the
date that the  average  Closing  Price (as  defined in the  Certificate  of
Designation)   of  the  Common  Shares  equals  or  exceeds  $4.50  for  20
consecutive Trading Days.

     Subject to the provision for adjustment  set forth in the  Certificate
of Designation  which will be filed with the Secretary of State immediately
prior to the  consummation  of the sale of the  Series  B  Preferred  Stock
offered   hereby,   each  share  of  Series  B  Preferred  Stock  shall  be
automatically  converted  into a number of Common Shares at the  conversion
price set forth in the  Certificate  of  Designation  in the event that the
Company  consummates  the  sale  of  Common  Shares  in a bona  fide,  firm
commitment,   underwritten   public  offering   pursuant  to  an  effective
registration  statement  under  the  Securities  Act of 1933,  as  amended,
resulting in a Qualified  IPO. In the event of such  mandatory  conversion,
accrued and unpaid  dividends will also convert into Common Shares,  on the
same terms as the underlying Series B Preferred Stock.

ANTI-DILUTION

     In the event that additional  Common Shares or securities  exercisable
or convertible into Common Shares are issued without  consideration or at a
price less than the applicable  conversion price for the Series B Preferred
Stock in effect on the date of and immediately  prior to such issue,  then,
subject to  certain  exceptions,  the  applicable  conversion  price of the
Series B Preferred Stock shall be reduced, concurrently with such issue, to
a price determined by multiplying such conversion price by a fraction,  the
numerator  of  which  shall  be the  number  of  shares  of  Common  Shares
outstanding  immediately  prior to such  issue plus the number of shares of
Common Shares which the aggregate consideration received by the Company for
the total number of additional  Common  Shares so issued would  purchase at
such conversion  price; and the denominator of which shall be the number of
Common Shares  outstanding  immediately prior to such issue plus the number
of such additional Common Shares so issued.

LIQUIDATION

     In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the  Company,  and subject to the rights of holders of any
other  series of  Preferred  Stock,  the holders of  outstanding  shares of
Series B  Preferred  Stock are  entitled  to receive the sum of $______ per
share in cash for each share of Series B Preferred Stock,  plus accrued and
unpaid  Preferred  Dividends  thereon,  out of the  assets  of the  Company
available for  distribution  to  stockholders,  before any  distribution of
assets is made to  holders  of Common  Shares  or any other  capital  stock
ranking  junior to the  shares of Series B  Preferred  Stock and pari passu
with holders of Series A Preferred Stock upon liquidation,  dissolution, or
winding up. If, the assets of the Company  are  insufficient  to permit the
payment of the full preferential amounts payable with respect to the shares
of Series B Preferred  Stock under such  circumstances,  the Holders  shall
share ratably in any distribution of assets of the Company in proportion to
the full  respective  preferential  amounts to which they are entitled,  in
each case on a per share  basis.  After  payment of the full  amount of the
liquidating  distribution to which they are entitled, the holders shall not
be entitled to any further  participation  in any distribution of assets by
the Company.  A consolidation  or merger of the Company with or into one or
more other Companies,  or a sale, lease or exchange of all or substantially
all of the assets of the Company,  shall not be deemed to be a voluntary or
involuntary liquidation, dissolution, or winding up of the Company.

     Certificates  representing  shares of Series B  Preferred  Stock  will
include a legend to the effect that such  securities may not be transferred
to any resident of any of the following states: Arizona,  Florida, Georgia,
Ohio, Pennsylvania or Texas.

                      SHARES ELIGIBLE FOR FUTURE SALE

     The Company  currently has 2,516,666 Common Shares  outstanding.  Upon
completion of this Offering (assuming full subscription),  the Company will
have  Series A and  Series B  Preferred  Stock  outstanding  which  will be
convertible   into  933,324  and  1,650,000   additional   Common   Shares,
respectively.  The Common Shares  underlying the Series B Preferred  Stock,
except for certain shares owned by  "affiliates,"  including Fuel Tech, are
or  will  be  freely  tradable  without  further   registration  under  the
Securities Act.

     In  general,  under  Rule 144 as  currently  in  effect,  a person (or
persons whose shares are aggregated),  including a person who may be deemed
to be an  "affiliate"  of the  Company  as that term is  defined  under the
Securities  Act,  will be entitled to sell within any three month  period a
number of shares  beneficially  owned for one year that does not exceed the
greater  of (i) 1% of the  then  outstanding  Common  Shares,  or (ii)  the
average weekly trading volume in the Common Shares during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements  as to the manner of sale,  notice,  and the  availability  of
current public information about the Company.  However, a person who is not
deemed  to  have  been  an  affiliate  of the  Company  during  the 90 days
preceding a sale by such  person,  and who has  beneficially  owned  Common
Shares for two years,  may sell such shares  without  regard to the volume,
manner of sale, or notice requirements of Rule 144.

     Following  this Offering,  the Company  cannot predict the effect,  if
any, that sales of Common Shares pursuant to Rule 144 or otherwise,  or the
availability  of such  shares  for  sale,  will  have on the  market  price
prevailing  from  time  to  time.   Nevertheless,   sales  by  the  current
shareholders  of substantial  amounts of Common Shares in the public market
could adversely affect  prevailing  market prices for the Common Shares. In
addition,  the  availability  for sale of a  substantial  amount  of Common
Shares acquired through the Rights could adversely affect prevailing market
prices for the Common Shares.

                            PLAN OF DISTRIBUTION

DISTRIBUTION ARRANGEMENTS

     Outside  of the  United  States,  and in  Colorado,  Connecticut,  the
District of Columbia,  Maryland,  New Jersey and New York, the Company will
pay  to  broker-dealers  registered  or  exempt  from  registration  in the
relevant  jurisdiction a fee for their soliciting  efforts (the "Soliciting
Fees").  Ten  percent  of the  Subscription  Price  paid  for the  Series B
Preferred   Stock   which   is   subscribed   for  will  be  paid  to  such
broker-dealers.   The  Soliciting   Fees  will  be  paid  directly  to  the
broker-dealer   designated  on  the   applicable   portion  of  the  Rights
Certificate.  Soliciting Fees will not be paid on any undesignated exercise
of Rights,  to any broker-dealer not registered or exempt from registration
in the relevant  jurisdiction,  or in the United States except with respect
to subscriptions by Holders in the states listed above.

TRANSFER AGENT

     The Company has appointed ChaseMellon Shareholder Services,  L.L.C. as
Transfer Agent for its Common Shares.


                               LEGAL MATTERS

     The validity of the Securities  offered hereby will be passed upon for
the Company by the law firm of Fried, Frank, Harris,  Shriver & Jacobson (a
partnership including professional corporations), New York, NY.

                                  EXPERTS

     The  financial  statements  of  Clean  Diesel  Technologies,  Inc.  at
December  31, 1996 and 1997,  and for each of the three years in the period
ended  December 31,  1997,  and for the period from January 1, 1992 through
December 31, 1997, appearing in this Prospectus and Registration  Statement
have been audited by Ernst & Young LLP, independent  auditors, as set forth
in their report thereon (which contains an explanatory paragraph describing
conditions  that raise  substantial  doubt about the  Company's  ability to
continue as a going concern as described in Note 1 to the Annual  Financial
Statements)  appearing  elsewhere herein, and are included in reliance upon
such report given upon the  authority of such firm as experts in accounting
and auditing.


INDEX TO FINANCIAL STATEMENTS                                             PAGE
-----------------------------                                             ----

Audited Financial Statements
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1996, and 1997.......................... F-3
Statements of Operations for the years ended
  December 31, 1995, 1996, and 1997 and for the period from
  January 1, 1992, through December 31, 1997.............................. F-4
Statements of Changes in Shareholders' Equity (Deficiency) for
  the years ended December 31, 1995, 1996, and 1997....................... F-5
Statements of Cash Flows for the years ended December 31, 1995,
  1996, and 1997 and for the period from January 1, 1992,
  through December 31, 1997............................................... F-6
Notes to Financial Statements............................................. F-7

Unaudited Interim Financial Statements
Balance Sheet as of March 31, 1998 (unaudited)............................ F-14
Statements of Operations for the three months ended
  March 31, 1997, and 1998, and for the period from
  January 1, 1992, through March 31, 1998 (unaudited)..................... F-15
Statements of Cash Flows for the three months ended
  March 31, 1997, and 1998, and for the period from January 1, 1992,
  through March 31, 1998 (unaudited)...................................... F-16
Note to Financial Statements (unaudited).................................. F-17

                       REPORT OF INDEPENDENT AUDITORS

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

We  have  audited  the   accompanying   balance   sheets  of  Clean  Diesel
Technologies,  Inc. (a  development-stage  company) as of December 31, 1996
and 1997, and the related  statements of operations,  shareholders'  equity
(deficiency),  and cash  flows  for each of the three  years in the  period
ended  December 31, 1997 and for the period from  January 1, 1992,  through
December 31, 1997. These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial statements referred to above present fairly,
in  all  material   respects,   the  financial  position  of  Clean  Diesel
Technologies,  Inc. at December  31, 1996 and 1997,  and the results of its
operations  and its cash  flows for each of the three  years in the  period
ended December 31, 1997,  and for the period from January 1, 1992,  through
December  31,  1997,  in  conformity  with  generally  accepted  accounting
principles.

The  accompanying  financial  statements have been prepared  assuming 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 its operations have not produced a positive cash flow. These conditions
raise  substantial doubt about the Company's ability to continue as a going
concern. (Management's plans as 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  classifications of liabilities that may result from the
outcome of this uncertainty.

                                          /s/  ERNST & YOUNG LLP

Stamford, Connecticut
February 26, 1998


CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)

<TABLE>
<CAPTION>

BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
                                                                                DECEMBER 31
                                                                       ------------------------------
                                                                         1996                  1997
                                                                       --------              --------
<S>                                                                   <C>                   <C>      
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................         $   3,270             $   1,239
Short-term investments.......................................             2,000                    --
Inventories..................................................               103                   205
OTHER CURRENT ASSETS.........................................               222                   238
                                                                      ---------             ---------
Total current assets.........................................             5,595                 1,682
Other assets.................................................                82                    68
                                                                      ---------             ---------

TOTAL ASSETS                                                          $   5,677             $   1,750
                                                                      =========             =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................         $     741             $     794
Loan payable to Fuel-Tech N.V................................               745                   100
                                                                      ---------             ---------

TOTAL CURRENT LIABILITIES....................................             1,486                   894

LOAN PAYABLE TO FUEL-TECH N.V.                                               --                   395

SHAREHOLDERS' EQUITY:
Preferred Stock, par value $0.05 per share, authorized
   100,000 shares, no shares issued and outstanding..........                --                    --
Common Shares, par value $0.05 per share, authorized
   5,000,000 shares, issued and outstanding 2,500,000 and
   2,516,666 shares..........................................               125                   126
Additional paid-in capital...................................            11,155                11,188
Deficit accumulated during development stage.................            (7,089)              (10,853)
                                                                      ---------             ---------

TOTAL SHAREHOLDERS' EQUITY...................................             4,191                   461
                                                                      ---------             ---------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................         $   5,677             $   1,750
                                                                      =========             =========
See accompanying notes.

</TABLE>
CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)
<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
                                                                                                                       
                                                                                                            Period from
                                                                                                            January 1,
                                                                                                               1992,  
                                                         For the years ended December 31                      through  
                                                  -------------------------------------------------        December 31,
                                                    1995                1996                1997                1997
                                                  ---------           ---------           ---------           ---------
<S>                                               <C>                 <C>                 <C>                 <C>      
Sales..................................           $      --           $      --           $     199           $     199
Costs and expenses:
Cost of sales..........................                  --                  --                 132                 132
General and administrative.............                 963               1,842               1,730               5,042
Research and development...............                 796               1,747               1,985               5,317
Patent filing and maintenance..........                 199                 223                 237                 938
                                                  ---------           ---------           ---------           ---------

Loss from operations...................               1,958               3,812               3,885              11,230
Interest income........................                 (33)               (383)               (165)               (581)
Interest expense to Fuel-Tech N.V......                  99                  60                  44                 204
                                                  ---------           ---------           ---------           ---------

NET LOSS DURING DEVELOPMENT STAGE                 $   2,024           $   3,489           $   3,764           $  10,853
                                                  =========           =========           =========           =========

BASIC AND DILUTED LOSS PER COMMON SHARE
                                                  $    0.81           $    1.40           $    1.50                 N/A
                                                  =========           =========           =========           =========

AVERAGE NUMBER OF COMMON SHARES OUTSTANDING           2,500               2,500               2,517                 N/A
                                                  =========           =========           =========           =========

See accompanying notes.

</TABLE>

CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)

<TABLE>
<CAPTION>

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)
                                                                                               Deficit
                                                                                               Deficit              
                                                                                              Accumulated        Total   
                                                     Common Shares             Additional       During       Shareholders'
                                                -------------------------       Paid-In       Development       Equity
                                                 Shares          Amount         Capital         Stage        (Deficiency)
                                                ---------       ---------       ---------      ---------       ---------
<S>                                             <C>             <C>             <C>            <C>             <C>       
BALANCE AT JANUARY 1, 1995.................         2,500       $     125       $     594      $  (1,576)      $    (857)
Net loss for year..........................            --              --              --         (2,024)         (2,024)
Fuel-Tech N.V. capital contribution........            --              --          10,531             --          10,531
                                                ---------       ---------       ---------      ---------       ---------

BALANCE AT DECEMBER 31, 1995...............         2,500             125          11,125         (3,600)          7,650
Net loss for year..........................            --              --              --         (3,489)         (3,489)
Issuance of stock purchase warrants........            --              --              30             --              30
                                                ---------       ---------       ---------      ---------       ---------

BALANCE AT DECEMBER 31, 1996...............         2,500             125          11,155         (7,089)          4,191
Net loss for year..........................            --              --              --         (3,764)         (3,764)
Issuance of stock purchase warrants........            --              --              30             --              30
Exercise of stock options..................            17               1               3             --               4
                                                ---------       ---------       ---------      ---------       ---------

BALANCE AT DECEMBER 31, 1997...............         2,517       $     126       $  11,188      $ (10,853)      $     461
                                                =========       =========       =========      =========       =========

See accompanying notes.

</TABLE>

CLEAN DIESEL TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY)

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
                                                                                                     PERIOD FROM
                                                                                                      JANUARY 1,
                                                                                                        1992,
                                                      FOR THE YEARS ENDED DECEMBER 31                  THROUGH
                                                ----------------------------------------------       DECEMBER 31,
                                                   1995               1996              1997              1997
                                                ---------          ---------         ---------         ---------
<S>                                             <C>                <C>               <C>               <C>       
OPERATING ACTIVITIES
Net loss...................................     $  (2,024)         $  (3,489)        $  (3,764)        $ (10,853)
Adjustments to reconcile net loss to net
 cash used in operating activities:
   Depreciation............................            --                 12                24                36
   Issuance of stock purchase warrants.....            --                 30                30                60
   Changes in operating assets and 
    liabilities:
     Inventories...........................           (15)               (88)             (102)             (205)
     Other current assets..................            (1)              (221)              (16)             (238)
     Accounts payable and accrued expenses.           230                320                53               794
     Other assets..........................            --                (18)               --               (18)
     Due to Fuel-Tech N.V..................            --                (66)               --               (66)
                                                ---------          ---------         ---------         ---------
Net cash used in operating activities......        (1,810)            (3,520)           (3,775)          (10,490)
                                                ---------          ---------         ---------         ---------
FINANCING ACTIVITIES
Proceeds from 1995 Rights Offering net of
   $630 of brokerage commissions...........         9,138              2,018                --            11,156
Expenses of 1995 Rights Offering...........          (425)                --                --              (425)
Repayment of expenses of 1995 Rights
   Offering paid by Fuel-Tech N.V..........          (200)                --                --              (200)
Issuance of Common Shares to parent........            --                 --                --               250
Net parent company investment..............            --                 --                --               469
Proceeds of loan from Fuel-Tech N.V........         1,695                 --                --             2,874
Repayment of loan to Fuel-Tech N.V.........        (2,063)                --              (250)           (2,313)
Proceeds from exercise of stock options....            --                 --                 4                 4
                                                ---------          ---------         ---------         ---------
Net cash provided from (used in) financing
   activities..............................         8,145              2,018              (246)           11,815
                                                ---------          ---------         ---------         ---------
INVESTING ACTIVITIES
Sale (purchase) of short-term investments..            --             (2,000)            2,000                --
Purchase of fixed assets...................            --                (76)              (10)              (86)
                                                ---------          ---------         ---------         ---------
Net cash provided by (used in) investing               --             (2,076)            1,990               (86)
   activities.............................      ---------          ---------         ---------         ---------
NET (DECREASE) INCREASE IN CASH AND CASH
   EQUIVALENTS.............................         6,335             (3,578)           (2,031)            1,239
Cash and cash equivalents at beginning of  
   period..................................           513              6,848             3,270                -- 
                                                ---------          ---------         ---------         ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD.     $   6,848          $   3,270         $   1,239         $   1,239
                                                =========          =========         =========         =========

Cash payments for interest to Fuel-Tech
   N.V.....................................     $      --          $      63         $      44         $     107

NON-CASH ACTIVITIES
Contribution of net parent company
   investment to capital of the Company....     $      --          $      --         $      --         $     469
Stock subscription receivable..............     $   2,018          $      --         $      --         $   2,018
Issuance of stock purchase warrants........     $      --          $      30         $      30         $      60

See accompanying notes.

</TABLE>

Clean Diesel  Technologies,  Inc. (A  Development-Stage  Company)
Notes to Financial Statements

1.   BASIS OF PRESENTATION

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

     The Company is a  development-stage  enterprise,  and its efforts from
January  1, 1992,  through  December  31,  1997,  have been  devoted to the
research,  development  and  commercialization  of Platinum Fuel  Catalysts
("PFC"),  some of which are  licensed  to the  Company  by Fuel  Tech,  and
nitrogen oxide ("NOx") reduction  technologies for diesel engines (see Note
6). There were no material  activities related to the Company's business in
1990 or 1991.  Prior to 1990,  the  activities of Fuel Tech were focused on
other  applications of the PFC that were unrelated to the Company's present
or contemplated  business and were not material to the overall  development
of the Company's  products.  Therefore,  such costs have been excluded from
the determination of the Company's development costs.

     The  Company  began  selling  its  PFC on a  commercial  basis  to the
consumer  car care  market in the  first  quarter  of 1997,  for use in the
aftertreatment  of fuel  (see  Note  8).  In order to sell the PFC in other
markets,  however,  additional  research  and  development  testing  may be
required.   The  Company's  NOx  control  technologies  will  also  require
additional  research and development  testing to determine their commercial
viability. The commercialization of these technologies will depend upon the
success  of  field  tests,   cost-effective   production  of  the  PFC  and
governmental regulations,  principally by the U.S. Environmental Protection
Agency 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.

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 a result of the  aforementioned  recurring  operating  losses,  the
Company has been unable to  generate a positive  cash flow.  The Company is
actively seeking additional financing in the amount of $5 million through a
private  placement or other arrangement and is currently in discussion with
several  interested  parties;  however,  the  Company  has not  received  a
commitment from any such party.  Although the Company believes that it will
be successful in its capital  raising  efforts,  there is no guarantee that
the Company will be able to raise such capital on terms satisfactory to the
Company.  The  Company  has  developed  contingency  plans in the event its
financing  efforts are not  successful.  Such plans include cost reductions
(both general and administrative  and research and development),  licensing
the  Company's   technologies  and  selling  its   intellectual   property.
Accordingly,  at December 31, 1997,  there is  substantial  doubt as to the
Company's ability to continue as a going concern.

     On February 17, 1998, the Company received a commitment from Fuel Tech
to provide short-term financing in the amount of up to $500,000. Borrowings
pursuant to this  agreement  will be secured by the Company's  intellectual
property.  The Company's management believes that, with this loan from Fuel
Tech, the Company has adequate  capital to fund its operations  through the
first half of 1998.

2.   SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS

     The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1996,  substantially  all  of  the  Company's  cash  and  cash  equivalents
consisted of a $1.5 million Eurodollar  deposit with a banking  institution
and $1.4  million in U.S.  Government  obligations.  At December  31, 1997,
substantially  all of the Company's cash and cash equivalents  consisted of
$1 million in U.S. Government obligations and a $0.2 million deposit with a
financial institution.

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

     Short-term  investments  at December  31,  1996,  consisted  of United
States  Government-backed  mortgages,  which  matured in 1997.  The Company
classified such investments as held to maturity and, accordingly, they were
carried at amortized cost in the accompanying balance sheet at December 31,
1996.

INVENTORIES

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

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,  salaries and related  costs,  consultancy  fees,  materials  and
certain testing  equipment.  The cost of patent filings and maintenance are
also  charged  to  operations  as they are  incurred.  Included  in accrued
expenses at December 31, 1997, are liabilities for research and development
expenses owing to Ricardo  Consulting  Engineers Ltd., Delft University and
Johnson Matthey of $166,533, $53,559 and $51,719, respectively.

STOCK-BASED COMPENSATION

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

BASIC AND DILUTED LOSS PER COMMON SHARE

     In 1997, SFAS No. 128,  Earnings per Share,  was issued.  SFAS No. 128
replaced the  previously  reported  primary and fully diluted  earnings per
share with basic and diluted earnings per share,  respectively.  Unlike the
previously reported primary earnings per share, basic  earnings  per  share
excludes the dilutive effects of stock options.  Diluted earnings per share
is similar to the  previously  reported  fully diluted  earnings per share.
Earnings per share amounts for all periods  presented have been  calculated
in  accordance  with and,  where  appropriate,  restated  to conform to the
requirements of SFAS No. 128.

3.   TAXATION

     The  Company   accounts  for  income  taxes  in  accordance  with  the
"liability  method." Prior to December 12, 1995,  the Company's  operations
were included in the  consolidated  U.S.  federal income tax return of Fuel
Tech, Inc.

     At December  31, 1996 and 1997,  the Company had tax losses  available
for offset against future years' earnings of approximately $6.4 million and
$10 million,  respectively.  Temporary differences were insignificant as of
such dates. Approximately $0.9 million, $2.0 million, $3.5 million and $3.6
million of the tax loss carryforwards  expire in 2009, 2010, 2011 and 2012,
respectively.   The  Company  has  not  recognized  any  benefit  from  the
aforementioned tax loss carryforwards.

     Under the  provisions  of the  United  States  Tax Reform Act of 1986,
utilization of the Company's U.S. federal tax loss  carryforwards  (for the
period  prior to  December  12,  1995)  may be  limited  as a result of the
ownership  change in excess of 50% related to the Fuel Tech Rights Offering
(see Note 4).

4.   SHAREHOLDERS' EQUITY

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

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

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

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

5.   STOCK OPTIONS AND WARRANTS

     The Company maintains a stock award plan, the 1994 Incentive Plan (the
"Plan").  Under the Plan, awards may be granted to participants in the form
of  non-qualified  stock options,  stock  appreciation  rights,  restricted
stock,  performance  awards,  bonuses  or other  forms  of  share  based or
non-share  based awards or combinations  thereof.  Participants in the Plan
may be such of the Company's directors,  officers,  employees,  consultants
and   advisors   (except   consultants   or  advisors  in   capital-raising
transactions)  as the  directors  determine  are key to the  success of the
Company's  business.   The  Company  includes  50%-owned   subsidiaries  or
affiliates.  In 1996, shareholders amended the Plan to increase from 10% to
12 1/2%  the  percentage  of  outstanding  shares  of the  Company  used to
determine  the  maximum  number  of awards to  participants.  In 1997,  the
percentage was further increased from 12 1/2% to 17 1/2%. 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 in 1997.

     If  compensation  expense for the Company'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, the  Company's  net
loss and basic and diluted loss per share would have been  increased to the
pro forma amounts indicated below:

                                        1995        1996        1997
                                        ----        ----        ----
   Net loss (000's):
   As reported..................       $2,024      $3,489      $3,764
   Pro forma....................        2,031       3,600       4,040

   Basic and diluted loss per share:
   As reported..................       $ 0.81      $ 1.40      $ 1.50
   Pro forma....................         0.81        1.44        1.59


     In  accordance  with the  provisions  of SFAS No.  123,  the pro forma
disclosures  include only the effect of stock options granted in 1995, 1996
and 1997. 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 the Company's  employee stock options have
characteristics  significantly  different  from those of traded options and
because changes in the subjective input  assumptions can materially  affect
the fair value estimate, in management's opinion the existing models do not
necessarily  provide a  reliable  single  measure  of the fair value of its
stock options.

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

                                        1995        1996        1997
                                        ----        ----        ----
       Expected dividend yield           0.0%        0.0%        0.0%
       Risk-free interest rate           6.4%        6.8%       5.72%
       Expected volatility              65.4%       54.3%       61.3%
       Expected life of option        4 years     4 years     4 years


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

<TABLE>
<CAPTION>
                                        1995                            1996                           1997
                            ---------------------------     ---------------------------    ---------------------------
                            OPTIONS    WEIGHTED-AVERAGE     OPTIONS    WEIGHTED-AVERAGE    OPTIONS    WEIGHTED-AVERAGE
                            (000'S)     EXERCISE PRICE      (000'S)     EXERCISE PRICE     (000'S)     EXERCISE PRICE
                            -------     --------------      -------     --------------     -------     --------------
<S>                         <C>         <C>                 <C>         <C>                <C>         <C>   
Outstanding, beginning of
   year...................       125         $ 1.10             222          $ 2.86             287         $ 3.25
Granted...................        97           5.13              65            4.59             115           4.61
Exercised.................        --             --              --              --             (17)          0.20
Forfeited.................        --             --              --              --             (20)          4.52
                                ----         ------        --------          ------            ----         ------
Outstanding, end of year..       222         $ 2.86             287          $ 3.25             365         $ 3.77
                                ====         ======         =======          ======            ====         ======
Exercisable, end of year..        63         $ 1.40             189          $ 3.11             259         $ 3.41
Weighted-average fair
   value of options
   granted during the 
   year...................                   $ 2.79                          $ 2.25                         $ 2.18

</TABLE>


     The  following  table  summarizes   information  about  stock  options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                     Options Outstanding                              Options Exercisable
                     ------------------------------------------------------      ------------------------------
                                    WEIGHTED-AVERAGE
RANGE OF EXERCISE    NUMBER OF          REMAINING          WEIGHTED-AVERAGE      NUMBER OF     WEIGHTED-AVERAGE
      PRICES          OPTIONS       CONTRACTUAL LIFE        EXERCISE PRICE        OPTIONS       EXERCISE PRICE
-----------------    ---------      ----------------       ----------------      ---------     ----------------
<S>                  <C>            <C>                    <C>                   <C>           <C>
  $.20  -  $2.00      108,334            3.5 years            $ 1.24              108,334          $ 1.24
  2.50  -   4.63      192,500            8.0                    4.21               91,663            3.82
  5.63  -   6.82       64,450            7.8                    6.70               59,449            6.75
-----------------    ---------      ----------------       ----------------      ---------     ----------------
  $.20  -  $6.82      365,284            5.8 years            $ 3.77              259,446          $ 3.41

</TABLE>

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

     In March  1997,  in  consideration  of his  undertaking  to assist the
Company in obtaining sources of permanent financing,  the Company granted a
director  of the  Company  a  warrant  to  purchase  25,000  shares  of the
Company's  Common  Shares for $10.00 per share (a 142%  premium over market
price on the date of  issue).  The  warrant  expires  on  March  17,  2004.
Included in the Company's  Financial  Statements is $30,000 of expense,  as
determined by utilization  of the  Black-Scholes  option pricing model,  in
1997, related to the issuance of these purchase warrants, which represented
the fair value of the services received.

6.   COMMITMENTS

     The Company is obligated under a sublease  agreement for its principal
office. Future minimum lease payments at December 31, 1997, are as follows:
1998--$65,000 and 1999--$11,000.  For the years ended December 31, 1996 and
1997, rental expense approximated $90,000 and $93,000  respectively.  Prior
to 1996,  the Company did not incur any rent expense as such  expenses were
included in management fees and allocations from Fuel Tech (see Note 7).

     Effective  as of October 28,  1994,  Fuel Tech granted two licenses to
the Company 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 the Company all such patents and rights
on  terms  substantially  similar  to the  licenses.  In  exchange  for the
assignment,  the Company 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. The Company may terminate the
royalty  obligation  to Fuel Tech by payment of $12 million  commencing  in
1998 and declining  annually to $1,090,910 in 2008. The Company as assignee
and owner will  maintain the  technology  at its own expense.  To date,  no
royalties have been paid to Fuel Tech.

7.   RELATED PARTY TRANSACTIONS

     On July 1, 1995, the Company entered into a $745,000 promissory demand
note  ("Demand  Note") with Fuel Tech  bearing an  interest  rate of 8% per
annum.  Pursuant to the Company's  agreement with Fuel Tech,  Fuel Tech did
not demand repayment during 1996. In the first quarter of 1997, the Company
repaid $250,000 of this note.  Throughout the life of the note, the Company
has made monthly  interest  payments on the unpaid balance.  On November 5,
1997,  the Company  entered into a $495,000  promissory  note ("Term Note")
with  Platinum  Plus,  Inc.  (a  wholly  owned  subsidiary  of  Fuel  Tech)
representing  the  unpaid  balance of the  Demand  Note on that  date.  The
principal  amount is payable in three annual  installments of $100,000 each
on July 1 of each of the years 1998 through  2000 with a final  installment
of $195,000 on July 1, 2001.  Interest at a rate of 8% per annum is payable
on the unpaid balance on each principal payment date.

     On February  17,  1998,  the Company  received a  commitment  of up to
$500,000  from Fuel Tech to fund its cash  requirements  until such time as
the Company  obtains the  long-term  financing it is seeking.  The $500,000
from Fuel Tech will be in the form of a grid note,  bearing interest at the
rate of 10% per annum.  The note will be  secured  by all of the  Company's
intellectual  property  and is  repayable,  in full,  on or before June 17,
1998.

     Average trade  balances due to Fuel Tech for the years ended  December
31, 1996 and 1997, approximated $183,000 and $69,000, respectively.

     On August 3,  1995,  the  Company  signed a  Management  and  Services
Agreement  with  Fuel  Tech.  According  to  the  agreement,   the  Company
reimburses Fuel Tech for management,  services and administrative  expenses
incurred  on behalf of the  Company.  Additionally,  Fuel Tech  charged the
Company a fee equivalent to an additional 10% of such costs.  In June 1996,
the Company  renegotiated  this  agreement.  Under the new  agreement,  the
Company  agreed to pay Fuel Tech a fee equal to an  additional 3% or 10% of
the costs paid on the Company's  behalf,  dependent  upon the nature of the
costs incurred.  Prior to the August 1995 agreement,  the Company paid Fuel
Tech a management  fee of $150,000 per quarter,  which  included the direct
costs and associated fees. The Company shares  facilities and certain other
resources  with Fuel Tech and costs are  allocated  between  the  companies
based on usage.  Certain of Fuel Tech's  officers  and  directors  serve as
officers and directors of the Company,  and the Company received management
and administrative support from Fuel Tech's staff. The Financial Statements
include allocations from Fuel Tech of certain management and administrative
costs,  which approximate  $904,000,  $1,232,000 and $403,000 for the years
ended December 31, 1995,  1996 and 1997,  respectively,  and $3,204,000 for
the  period  from  January  1,  1992,   through  December  31,  1997.  Cost
allocations  for such periods were based on the amount of  management  time
devoted to the  Company.  Certain  services  furnished  by Fuel Tech to the
Company were  terminated in mid-year  1996. In the opinion of the Company's
management,  such cost allocations are fair and reasonable and are on terms
no less favorable than could be obtained from a third party.

     During  1994,  Fuel Tech  contributed  $469,000 to the Company and the
Company issued 2,500,000 Common Shares to Fuel Tech for $250,000.

8.   MARKETING AND JOINT DEVELOPMENT AGREEMENTS

     In September  1996, the Company  entered into a supply  agreement with
Holt Lloyd  International  Ltd. ("Holts") of the United Kingdom to sell the
Company's  PFC under the  Company's  Platinum  Plus  trademark for use with
Holts's fuel additives in the  aftertreatment of fuel for both new and used
diesel  engines in the  consumer  car care  market.  The  agreement  covers
territories worldwide except for North, Central and South America. The term
of this agreement is 10 years with the possibility of a term extension. The
exclusivity of the agreement is determined by the attainment (or reasonable
effort toward the attainment) of predetermined  minimum  performance levels
for  each  territory  on a  calendar-year  basis.  The  Company's  PFC were
test-marketed  by Holts in  Europe  in the  fourth  quarter  of 1996,  with
commercial  sales  commencing in the first quarter of 1997.  This agreement
also  provides for  collaborative  testing of the Company's PFC product for
gasoline-fueled  vehicles,  which will be marketed  under  similar terms by
Holts.  This product was launched by Holts in Europe in late 1997 under the
Cat Guard name. In December 1997, Holts was acquired by Prestone  Products,
Inc.,  a division of  AlliedSignal.  Based on  management  and product line
changes at Holts, and as a result of the Prestone acquisition,  the Company
expects a delay in the buildup of sales to Holts in 1998.

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

9.   SUBSEQUENT EVENT

     On February 26,  1998,  the Company was notified by Nasdaq that it was
not   in   compliance    with   the   new   net   tangible    assets/market
capitalization/net  income  requirements.  As  such,  Nasdaq  informed  the
Company  that,  unless the Company  requests a temporary  exemption to this
requirement,  its  securities  will be delisted at the close of business on
March 16,  1998.  The Company has  requested a temporary  exemption to this
requirement, which will temporarily stay the delisting.

<TABLE>
<CAPTION>

BALANCE SHEET (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE DATA)
                                                                                   March 31,
                                                                                     1998
                                                                                  ------------
<S>                                                                               <C>
ASSETS
Current assets:
Cash and cash equivalents..........................................               $        657
Inventories........................................................                        203
Other current assets...............................................                        122
                                                                                  ------------
Total current assets...............................................                        982
Other assets.......................................................                         62
                                                                                  ------------
Total assets.......................................................               $      1,044
                                                                                  ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..............................               $        829
Loan payable to Fuel-Tech N.V......................................                        100
                                                                                  ------------
Total current liabilities..........................................                        929

Loan payable to Fuel-Tech N.V......................................                        395

Shareholders' equity (deficit):
Preferred Stock, par value $0.05 per share, authorized 100,000
   shares, no shares issued and outstanding........................                         --
Common Shares, par value $0.05 per share, authorized 5,000,000
   shares, issued and outstanding 2,516,666 shares.................                        126
Additional paid-in capital.........................................                     11,188
Deficit accumulated during development stage.......................                    (11,594)
                                                                                  ------------
Total shareholders' equity (deficit)...............................                       (280)
                                                                                  ------------
Total liabilities and shareholders' equity (deficit)...............               $      1,044
                                                                                  ============

See note to financial statements.

</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
                                                                                                         Period from
                                                                       Three Months Ended             January 1, 1992,
                                                                            March 31,                      through
                                                                    1997                1998           March 31, 1998
                                                                   -------            -------            ---------
<S>                                                                <C>                <C>                <C>      
Sales....................................................          $    40            $    --            $     199
Costs and expenses:
Cost of sales............................................               23                 --                  132
General and administrative...............................              496                451                5,493
Research and development.................................              457                236                5,553
Patent filing and maintenance............................               75                 56                  994
                                                                   -------            -------            ---------
Loss from operations.....................................            1,011                743               11,973
Interest income..........................................              (64)               (13)                (594)
Interest expense.........................................               14                 11                  215
                                                                   -------            -------            ---------

Net loss during development stage........................          $   961            $   741            $  11,594
                                                                   =======            =======            =========

Basic and diluted loss per common share..................          $  0.38            $  0.29                  N/A
                                                                   =======            =======            =========

Average number of common shares
   outstanding...........................................            2,512              2,517                  N/A
                                                                   =======            =======            =========

See note to financial statements.

</TABLE>

<TABLE>
<CAPTION>

STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
                                                                                                        Period from
                                                                    Three Months Ended               January 1, 1992,
                                                                         March 31                         through
                                                                1997                  1998            March 31, 1998
                                                           -------------        -------------         -------------
<S>                                                        <C>                  <C>                   <C>           
OPERATING ACTIVITIES
Net cash used in operating activities.................     $      (1,075)       $        (581)        $     (11,071)
                                                           -------------        -------------         -------------
FINANCING ACTIVITIES
Proceeds from 1995 Rights Offering, net of $630 of
   brokerage commissions..............................                --                   --                11,156
Expenses of 1995 Rights Offering......................                --                   --                  (425)
Repayment of expenses of 1995 Rights Offering
   paid by Fuel-Tech N.V..............................                --                   --                  (200)
Issuance of Common Shares to parent...................                --                   --                   250
Net parent company investment.........................                --                   --                   469
Proceeds of loan from Fuel-Tech N.V...................                --                   --                 2,874
Repayment of loan to Fuel-Tech N.V....................              (250)                  --                (2,313)
Proceeds from exercise of stock options...............                 3                   --                     4
                                                           -------------        -------------         -------------
Net cash (used in) provided from financing activities.              (247)                  --                11,815
                                                           -------------        -------------         -------------
INVESTING ACTIVITIES
Net cash used in investing activities.................                (5)                  (1)                  (87)
                                                           -------------        -------------         -------------
NET (DECREASE) INCREASE IN CASH
   AND CASH EQUIVALENTS...............................            (1,327)                (582)                  657
Cash and cash equivalents at beginning of
   period.............................................             3,270                1,239                    --
                                                           -------------        -------------         -------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                 $       1,943        $         657         $         657
                                                           =============        =============         =============

See note to financial statements.

</TABLE>

BASIS OF PRESENTATION

     The  accompanying   unaudited,   condensed,   consolidated   financial
statements  have  been  prepared  in  accordance  with  generally  accepted
accounting  principles for interim financial  information and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial  statements.  In  the  opinion  of  management,  all  adjustments
considered  necessary for a fair presentation have been included.  All such
adjustments are of a normal  recurring  nature.  Operating  results for the
three month period ended March 31, 1998, are not necessarily  indicative of
the results that may be expected for the year ending December 31, 1998. For
further  information,  refer to the accompanying  Financial  Statements and
footnotes thereto for the year ended December 31, 1997.

     Clean Diesel Technologies, Inc. (the "Company") is a development-stage
enterprise,  and its efforts from January 1, 1992,  through March 31, 1998,
have been devoted to the research,  development  and  commercialization  of
Platinum Fuel Catalysts ("PFCs"), some of which are licensed to the Company
by Fuel-Tech  N.V.  ("Fuel  Tech"),  and nitrogen  oxide ("NOx")  reduction
technologies for diesel engines.  There were no material activities related
to the Company's business in 1990 or 1991. Prior to 1990, the activities of
Fuel Tech were focused on other applications of the PFC that were unrelated
to the Company's present or contemplated  business and were not material to
the overall  development of the Company's products.  Therefore,  such costs
have been excluded  from the  determination  of the  Company's  development
costs.

     In the first  quarter of 1997,  the Company began selling its PFC on a
commercial   basis  to  the  consumer  car  care  market  for  use  in  the
aftertreatment of fuel. In order to sell the PFC in other markets, however,
additional research and development testing may be required.  The Company's
NOx  control   technologies  will  also  require  additional  research  and
development   testing  to  determine  their   commercial   viability.   The
commercialization  of these  technologies  will  depend upon the success of
field  tests,  cost-effective  production  of  the  PFC,  and  governmental
regulations,   principally  by  the  Environmental  Protection  Agency  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 more fully  described
under the  caption  "Related  Party  Transactions"  below,  the Company has
received a $1.4  million  bridge  loan and is actively  seeking  additional
funding. With the net proceeds of the bridge loan, the Company's management
believes that the Company has adequate capital to fund its operations up to
November  1998.  See  "Management's  Discussion  and  Analysis of Financial
Condition  and Results of  Operations  -- Liquidity and Sources of Capital"
elsewhere in this Prospectus.

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 a result of the Company's  recurring  operating losses, the Company
has been unable to generate a positive  cash flow.  In addition to the $1.4
million  bridge loan  mentioned  above,  the  Company is  actively  seeking
additional  financing of $2.0 million to $3.75  million  through the Rights
Offering.  Although the Company  believes that it will be successful in its
capital  raising  efforts,  there is no guarantee  that the Company will be
able  to  raise  such  capital  on  terms   satisfactory  to  the  Company.
Accordingly,  at March 31, 1998, there continues to be substantial doubt as
to the Company's ability to continue as a going concern.  See "Management's
Discussions  and Analysis of Financial  Condition and Results of Operations
-- Liquidity and Sources of Capital" elsewhere in this prospectus.

INVENTORIES

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

BASIC AND DILUTED LOSS PER COMMON SHARE

     In 1997, SFAS No. 128,  Earnings per Share,  was issued.  SFAS No. 128
replaced the  previously  reported  primary and fully diluted  earnings per
share with basic and diluted earnings per share,  respectively.  Unlike the
previously  reported primary  earnings per share,  basic earnings per share
excludes the dilutive effects of stock options.  Diluted earnings per share
is similar to the  previously  reported  fully diluted  earnings per share.
Earnings per share amounts for all periods  presented have been  calculated
in  accordance  with and,  where  appropriate,  restated  to conform to the
requirements of SFAS No. 128.

WARRANT TO PURCHASE COMMON SHARES

     In March  1997,  in  consideration  of his  undertaking  to assist the
Company in obtaining sources of permanent financing,  the Company granted a
director  of the  Company  a  warrant  to  purchase  25,000  shares  of the
Company's  Common  Shares for $10.00 per share (a 142%  premium over market
price on the date of  issue).  The  warrant  expires  on  March  17,  2004.
Included in the Company's March 31, 1997 Statement of Operations is $30,000
of  expense  related  to the  issuance  of  this  purchase  warrant,  which
represented  the  fair  value  of  services  received,   as  determined  by
utilization of the Black-Scholes option pricing model.

RELATED PARTY TRANSACTIONS

     On February 17, 1998,  Fuel Tech agreed to provide the Company with up
to $500,000 in order to fund its cash  requirements  until such time as the
Company  obtains  the  long-term  financing  it is  seeking.  The  $500,000
commitment has subsequently  been converted into a bridge loan (the "Bridge
Loan"),  which will constitute  senior debt, will bear interest at the rate
of ten percent per annum and will be due April 15, 2001. The Bridge Loan is
automatically  convertible  into Series A Convertible  Preferred Stock upon
the  conclusion of a public or private  financing  that  contributes  $1.75
million of  additional  net  proceeds  to the  Company.  The bridge loan is
secured by all of the Company's intellectual property.  Subsequent to March
31,  1998,  the Company  received  from  outside  investors  an  additional
$900,000 of financing under the same bridge loan.

     The Company believes that, with the $1.4 million Bridge Loan described
above,  it has  sufficient  cash  balances to fund its  operations  through
November 1998. The Company is actively seeking additional  financing in the
amount of $2.0  million  to $3.75  million  through  the  Rights  Offering.
Although the Company  believes  that it will be  successful  in its capital
raising  efforts,  there is no  guarantee  that the Company will be able to
raise such capital on terms satisfactory to the Company.

SUBSEQUENT EVENTS

     On February 26,  1998,  the Company was notified by Nasdaq that it was
not   in   compliance    with   the   new   net   tangible    assets/market
capitalization/net  income requirements.  As such, the Company's securities
were  delisted at the close of business on June 30, 1998.  Quotations as to
the  Company's  shares have  continued  to be available on the OTC Bulletin
Board.

     In May 1998,  the Company  received  $950,000 of the proceeds from the
$1.4  million  Bridge  Loan,  as more fully  described  in  "Related  Party
Transactions"  above. The remaining  proceeds of $300,000 and $150,000 were
received  in June and July 1998,  respectively.  The  Company is  currently
using the proceeds to fund its operations.

     On June 17, 1998,  the  shareholders  of the Company voted to increase
the  authorized  capital of the Company from  5,100,000  shares,  par value
$0.05, to 15,100,000  shares,  par value $0.05. Of the authorized  capital,
15,000,000  will be  designated  as Common  Shares and 100,000 as Preferred
Stock.

     On July 1,  Platinum  Plus,  Inc.  elected to defer  repayment  of the
$100,000 of principal  due on the  $495,000  Term Loan.  Platinum  Plus has
reserved the right,  however,  to call this payment at any time.  As of the
date of this  prospectus,  Platinum Plus, Inc. has not demanded  repayment.
The  interest  accrued  on the  note  as of July 1,  1998  was  paid by the
Company.

NO  DEALER,   SALESMAN,   OR  OTHER
PERSON HAS BEEN  AUTHORIZED TO GIVE
ANY  INFORMATION  OR  TO  MAKE  ANY
REPRESENTATION   NOT  CONTAINED  IN
THIS     PROSPECTUS,     AND    ANY
INFORMATION OR  REPRESENTATION  NOT
CONTAINED HEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN  AUTHORIZED  BY
THE COMPANY.  THIS  PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF ANY OFFER TO BUY,
ANY  OF  THE   SECURITIES   OFFERED
HEREBY IN ANY  JURISDICTION  TO ANY
PERSON  TO WHOM IT IS  UNLAWFUL  TO
MAKE  SUCH  OFFER OR  SOLICITATION.               CLEAN DIESEL
NEITHER   THE   DELIVERY   OF  THIS            TECHNOLOGIES, INC.
PROSPECTUS   NOR  ANY   SALE   MADE
HEREUNDER    SHALL,    UNDER    ANY
CIRCUMSTANCES,      CREATE      ANY     50,000 RIGHTS TO ACQUIRE SHARES OF
IMPLICATION  THAT  THE  INFORMATION    SERIES B CONVERTIBLE PREFERRED STOCK
HEREIN  IS  CORRECT  AS OF ANY DATE
SUBSEQUENT  TO THE DATE  HEREOF  OR
THAT  THERE  HAS BEEN NO  CHANGE IN
THE  AFFAIRS OF THE  COMPANY  SINCE
SUCH   DATE  OR,  IN  THE  CASE  OF
INFORMATION  INCORPORATED HEREIN BY
REFERENCE,  THE DATE OF FILING WITH
THE COMMISSION.

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

         TABLE OF CONTENTS

                               PAGE
                               ----

PROSPECTUS SUMMARY................3    50,000 SHARES OF SERIES B CONVERTIBLE
RISK FACTORS.....................13              PREFERRED STOCK
THE RIGHTS OFFERING..............20
USE OF PROCEEDS..................29
DIVIDEND POLICY..................30
CAPITALIZATION...................31
DILUTION.........................33
SUMMARY SELECTED FINANCIAL DATA..35      1,650,000 SHARES OF COMMON STOCK
  MANAGEMENT'S DISCUSSION AND
  ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS......37
BUSINESS.........................42
MANAGEMENT.......................51
PRINCIPAL SHAREHOLDERS...........57
CERTAIN RELATIONSHIPS AND
  RELATED TRANSACTIONS...........57
DESCRIPTION OF CAPITAL STOCK.....59                 ----------
SHARES ELIGIBLE FOR FUTURE SALE..65                 PROSPECTUS
PLAN OF DISTRIBUTION.............65                 ----------
LEGAL MATTERS....................65
EXPERTS..........................66
FINANCIAL STATEMENTS............F-1

                                               ___________, ____ 1998


                                  PART II

                   INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

     The  following is an  itemization  of all expenses  (subject to future
contingencies)  incurred  or  expected  to be  incurred  by the  Company in
connection  with the  issuance and  distribution  of the  securities  being
offered hereby other than  broker-dealer  commissions (items marked with an
asterisk (*) represent estimated expenses):

          Registration Fee..........................   $      1,100
          Blue Sky Filing Fees and Expenses*........   $     15,000
          Printing and Engraving Costs*.............   $     35,000
          Transfer Agent, Subscription Agent and
             Information Agent Fees*................   $     15,000
          Legal Fees and Expenses*..................   $    250,000
          Accounting Fees and Expenses*.............   $     50,000
          Miscellaneous*............................   $     33,900
                                                       ------------

               TOTAL*                                  $    400,000

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS

     Delaware  General  Corporation  Law,  Section  102(b)(7),   enables  a
corporation in its original  certificate of  incorporation  or an amendment
thereto  validly  approved by  shareholders  to eliminate or limit personal
liability  of  members  of its  Board  of  Directors  for  violations  of a
director's  fiduciary duty of care. However,  the elimination or limitation
shall not  apply  where  there  has been a breach  of the duty of  loyalty,
failure  to act in  good  faith,  engaging  in  intentional  misconduct  or
knowingly  violating  a  law,  paying  a  dividend  or  approving  a  stock
repurchase  which is deemed  illegal  or  obtaining  an  improper  personal
benefit.  In accordance  with Delaware  law, the Company's  Certificate  of
Incorporation   eliminates  in  certain   circumstances  the  liability  of
directors of the Company for monetary damages for breach of their fiduciary
duty as  directors.  This  provision  does not eliminate the liability of a
director (i) for a breach of the director's  duty of loyalty to the Company
or its shareholders, (ii) for acts or omissions by the director not in good
faith or which involve  intentional  misconduct  or a knowing  violation of
law, (iii) for a willful or negligent  declaration of an unlawful dividend,
stock  purchase  or  redemption  or (iv) for  transactions  from  which the
director derived an improper Personal benefit.

     In addition,  the  Company's  Certificate  of  Incorporation  includes
provisions  to  indemnify  its  officers and  directors  and other  persons
against  expenses,  judgments,  fines and  amounts  paid in  settlement  in
connection  with  threatened,  pending or  completed  suits or  proceedings
against  such  persons by reason of serving or having  served as  officers,
directors,  or in other  capacities,  except in  relation  to matters  with
respect to which such persons shall be determined not to have acted in good
faith,  unlawfully or in the best interests of the Company. With respect to
matters as to which the  Company's  officers and  directors  and others are
determined to be liable for misconduct or negligence in the  performance of
their  duties,  the Company's  Certificate  of  Incorporation  provides for
indemnification  only to the extent that the Company  determines  that such
person  acted  in good  faith  and in a  manner  not  opposed  to the  best
interests of the Company.

     Insofar as limitation of, or indemnification  for, liabilities arising
under the  Securities  Act may be  permitted  to  directors,  officers,  or
persons controlling the Company pursuant to the foregoing,  the Company has
been informed  that in the opinion of the  Commission,  such  limitation or
indemnification  is against  public  policy as expressed in the  Securities
Act, and therefore, unenforceable.

     The  Company's  officers and  directors  are, or may become,  in their
individual capacities, officers, directors, controlling shareholders and/or
partners of other entities engaged in a variety of businesses.  Thus, there
exists  potential  conflicts of interest,  including,  among other  things,
time, effort, and corporate opportunity,  incident to involvement with such
other business  entities.  The officers and directors have a fiduciary duty
of loyalty to the Company to disclose to the Company business opportunities
which  come  to  their  attention  which  may be in the  Company's  area of
interest, functionally and geographically.

     The  officers  and  directors  of the Company are not  precluded  from
contracting  or dealing with the Company or affiliated  entities,  subject,
however,  to fully  disclosing real or potential  conflicts and documenting
such  disclosures  in  corporate  minutes  and  obtaining  approval  from a
majority of the Company's disinterested directors.

     Delaware  General  Corporation Law, Section 145, permits a corporation
organized  under  Delaware law to  indemnify  directors  and officers  with
respect to any matter in which the director or officer  acted in good faith
and in a  manner  he  reasonably  believed  to be not  opposed  to the best
interests of the Company,  and,  with respect to any criminal  action,  had
reasonable cause to believe his conduct was lawful.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

     In May, June and July,  1998,  the Company  entered into a Bridge Loan
agreement  with certain  lenders,  including Fuel Tech, for an aggregate of
$1.4 million.  The Bridge Loan is convertible into 2,800 shares of Series A
Convertible  Preferred Stock at the lenders'  discretion or upon conclusion
of a  specified  public or private  financing.  The  issuance  of the notes
evidencing  the  Bridge  Loan  and  the  underlying  Series  A  Convertible
Preferred Stock were made in reliance on Section 4(2) of, and/or Regulation
S under, the Securities Act of 1933.

ITEM 16. EXHIBITS

     The following exhibits are filed herewith:

 Exhibit
   No.     Title
--------   -----
3(i)(a)    Certificate of Incorporation, as amended.

*3(i)(b)   Certificate of Designation of Series A Convertible Preferred Stock
           of the Company.

3(i)(c)    Form of Certificate of Designation of Series B Convertible
           Preferred Stock of the Company.

**3(ii)    By-Laws.

+++4a      Specimen Stock Certificate.

4b         Specimen Subscription Certificate.

4c         Instructions as to use of Subscription Certificates.

4d         Notice of Guaranteed Delivery (filed as Exhibit A to Instructions).

4e         Affidavit of Lost, Stolen, Destroyed or Mutilated Rights
           Certificate(s) (filed as Exhibit B to Instructions).

4f         Cover letter to Holders of Common Shares.

4g         Cover letter to securities dealers,  commercial banks,  brokers,
           trust companies and other nominees.

4h         Suggested   form  letter  to  clients  of  securities   dealers,
           commercial banks, brokers, trust companies and other nominees.

4i         Instruction to Record Date Holder.

4j         DTC Participant Oversubscription Exercise Form.

4k         Nominee Holder Certification.

+++5       Opinion Letter of Fried, Frank, Harris, Shriver & Jacobson as to
           legality of shares being registered.

***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 the
           Company as of November 5, 1997.

***10c     Assignment Agreement as of November 5, 1997 among Platinum Plus,
           Inc., Fuel-Tech N.V. and the Company.

++10d      The Company's 1994 Incentive Plan, as amended through August 8,
           1996.

+10e       Management Services Agreement between the Company, Fuel Tech Inc.
           and Fuel Tech, dated as of June 1, 1996.

**10f      Memorandum  of  Understanding  between  the  Company  and  Anglo
           American Platinum Corporation Ltd., dated August 15, 1995.

***10g     Promissory Note of the Company to Platinum Plus, Inc., dated
           November 5, 1997.

***10h     Grid Note and Security Agreement of the Company to Platinum Plus,
           Inc.,  dated  February  17, 1998 (data in Schedule A included in
           Schedules to Exhibits 10a, b and c).

****10i    Office Premises Lease of January 26, 1996.

***10j     Registration Rights Agreement between the Company and Fuel Tech of
           November 5, 1997.

**10k      License Agreement between Fuel Tech and the Company, effective
           October 28, 1994.

**10l      License Agreement between the Company and Platinum Plus, Inc.,
           effective October 28, 1994.

++++10m    Supply Agreement between the Company and Holt Lloyd International
           Ltd. dated September 12, 1996.

++++10n    Joint Development Agreement by and among Englehard Corporation, the
           Company, and Nalco Fuel Tech dated November 11, 1996.

++++10o    Cooperative-development Agreement by and between the Company and
           AMBAC International dated December 17, 1997.

*10p       Bridge  Loan  Agreement  between  the  Company  and the  several
           lenders set forth on Schedule A thereto dated May 8, 1998.

10q        Supplemental  Agreement dated as of July 10, 1998 to Bridge Loan
           Agreement dated as of May 8, 1998 among the Company, the Lenders
           under the Bridge Loan  Agreement and the Lenders who have agreed
           to become parties to the Supplemental Agreement.

10r        Second  Supplemental  Agreement to Bridge Loan Agreement dated as
           of August 3, 1998 among the Company, the Lenders under the Bridge
           Loan  Agreement and the Lenders who have agreed to become parties
           to the Supplemental Agreement.

10s        Agreement by and between Jeremy D.  Peter-Hoblyn and the Company
           dated as of December 2, 1996.

10t        Agreement  by and  between  James M.  Valentine  and the Company
           dated as of September 12, 1997.

+++10u     Subscription Agent Agreement by and between the Company and
           ChaseMellon Shareholder Services, L.L.C. dated ________ ___, 1998.

12         Statement Re:  Computation of Ratio of Earnings to Fixed Charges
           and Preferred Stock Dividends.

23a        Consent of Ernst & Young LLP.

+++23b     Consent of Fried, Frank,  Harris,  Shriver & Jacobson (contained
           in Opinion filed as Exhibit 5).

24         Power of Attorney (see page II-5).

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

*    Previously  filed as an  Exhibit to Form 8-K dated May 26,  1998,  and
     incorporated by reference herein.

**   Previously  filed as an Exhibit to Registration  Statement on Form S-1
     of August 16,  1995,  No.  33-95840,  and  incorporated  by  reference
     herein.

***  Previously  filed  as an  Exhibit  to Form  10-K  for the  year  ended
     December 31, 1997, and incorporated by reference herein.

**** Previously  filed  as an  Exhibit  to Form  10-K  for the  year  ended
     December 31, 1995, and incorporated by reference herein.

+    Previously  filed as an  Exhibit  to Form 10-Q for the  quarter  ended
     September 30, 1996, and incorporated by reference herein.

++   Previously  filed  as an  Exhibit  to Form  10-K  for the  year  ended
     December 31, 1996 and incorporated by reference herein.

+++  To be filed by amendment.

++++ Portions of these exhibits have been omitted pursuant to a request for
     confidential treatment.

ITEM 17. UNDERTAKINGS

     (a)  The undersigned Registrant hereby undertakes:

          (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

               (i)  To include any prospectus  required by Section 10(a)(3)
                    of the Securities Act of 1933;

               (ii) To  reflect  in the  prospectus  any  facts  or  events
                    arising  after the effective  date of the  Registration
                    Statement (or the most recent post-effective  amendment
                    thereof)  which,  individually  or  in  the  aggregate,
                    represent a fundamental  change in the  information  in
                    the Registration Statement; and

               (iii)To include any  material  information  with  respect to
                    the plan of  distribution  not previously  disclosed in
                    the  Registration  Statement or any material  change to
                    such information in the Registration Statement;

          (2) That, for the purpose of determining  any liability under the
Securities Act of 1933, each such post-effective amendment shall be treated
as a new registration statement relating to the securities offered therein,
and the offering of such  securities at that time shall be deemed to be the
initial bona fide offering thereof.

          (3) To  remove  from  registration  by means of a  post-effective
amendment any of the securities being registered which remain unsold at the
termination of the Offering.

          (4) The undersigned  registrant  hereby  undertakes to supplement
the prospectus,  after the expiration of the  subscription  period,  to set
forth the  results  of the  subscription  offer,  the  transactions  by the
underwriters  during the  subscription  period,  the amount of unsubscribed
securities  to be  purchased  by the  underwriters,  and the  terms  of any
subsequent  reoffering  thereof. If any public offering by the underwriters
is to be made on terms  differing from those set forth on the cover page of
the prospectus,  a post-effective  amendment will be filed to set forth the
terms of such offering.

          (5) For purposes of determining liability under the Act:

               (i)  The  information  omitted  from the form of  prospectus
                    filed as part of a  registration  statement in reliance
                    upon Rule 430A and  contained in the form of prospectus
                    filed by the  Registrant  pursuant to Rule 424(b)(1) or
                    (4) or 497(h)  under the Act shall be deemed to be part
                    of the  Registration  Statement  as of the  time it was
                    declared effective; and

               (ii) Each  post-effective  amendment that contains a form of
                    prospectus  shall be  deemed  to be a new  registration
                    statement  relating to the securities  offered therein,
                    and the offering of such  securities at that time shall
                    be deemed to be the initial bona fide offering thereof.

     (b)  Insofar as  indemnification  for  liabilities  arising  under the
Securities  Act of  1933  may be  permitted  to  directors,  officers,  and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise,  the  Registrant  has been advised that in the opinion of the
Securities and Exchange  Commission such  indemnification is against public
policy as expressed  in the Act and is,  therefore,  unenforceable.  In the
event that a claim for indemnification against such liabilities (other than
the payment by the  Registrant of expenses  incurred or paid by a director,
officer,  or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,  the
Registrant  will,  unless in the opinion of its counsel the matter has been
settled  by  controlling  precedent,  submit  to  a  court  of  appropriate
jurisdiction  the question  whether such  indemnification  by it is against
public  policy as  expressed  in the Act and will be  governed by the final
adjudication of such issue.


                                 SIGNATURES

     Pursuant  to the  requirements  of the  Securities  Act of  1933,  the
Registrant has duly caused this Registration  Statement to be signed on its
behalf by undersigned,  thereunto duly authorized, in the City of Stamford,
State of Connecticut, on August 7, 1998.

                                    CLEAN DIESEL TECHNOLOGIES, INC.


                                    By: /s/ Jeremy D. Peter-Hoblyn
                                       ------------------------------------
                                        Jeremy D. Peter-Hoblyn, President
                                          and Chief Executive Officer,
                                                    Director

     Pursuant  to the  requirements  of the  Securities  Act of 1933,  this
Registration  Statement  has been  signed by the  following  persons in the
capacities and on the dates indicated.

     WE,  THE   UNDERSIGNED   OFFICERS   AND   DIRECTORS  OF  CLEAN  DIESEL
TECHNOLOGIES,  INC.,  hereby  severally  constitute  and appoint  Jeremy D.
Peter-Hoblyn,  Scott M. Schecter and Charles W. Grinnell,  and each of them
singly,  our true and lawful attorneys with full power to them, and each of
them singly,  to sign for us and in our names in the  capacities  indicated
below,  the  Registration  Statement on Form S-1 filed herewith and any and
all  pre-effective  and  post-effective  amendments  to  said  Registration
Statement,  and  generally  to do all things in our names and behalf in our
capacities as officers and  directors to enable Clean Diesel  Technologies,
Inc.  to comply  with the  provisions  of the  Securities  Act of 1933,  as
amended,  and all  requirements of the Securities and Exchange  Commission,
hereby ratifying and confirming our signatures as they may be signed by our
said attorneys,  or any of them, to said Registration Statement and any and
all amendments thereto.

           Name                     Capacity                    Date
           ----                     --------                    ----

/s/ Jeremy D. Peter-Hoblyn
--------------------------
  Jeremy D. Peter-Hoblyn     President and Chief            August 7, 1998
                             Executive Officer,
                             Director (principal
                             executive officer)
/s/ James M. Valentine
--------------------------
    James M. Valentine       Executive Vice President       August 7, 1998
                             and Chief Operating
                             Officer, Director
/s/ Charles W. Grinnell
--------------------------
   Charles W. Grinnell       Vice President, General        August 7, 1998
                             Counsel and Corporate
                             Secretary; Director
/s/ Scott M. Schecter
--------------------------
    Scott M. Schecter        Vice President, Treasurer      August 7, 1998
                             and Chief Financial
                             Officer (principal
                             financial and accounting
                             officer)
/s/ John A. de Havilland
------------------------
   John A. de Havilland      Director                        August 7, 1998

/s/ Ralph E. Bailey
------------------------
     Ralph E. Bailey         Chairman of the Board,          August 7, 1998
                             Director

/s/ Douglas G. Bailey
------------------------
    Douglas G. Bailey        Director                        August 7, 1998



*By /s/ Charles W. Grinnell
   ------------------------------
        Charles W. Grinnell
         Attorney-in-Fact
