**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C.  20549


**_______________**





**FORM
      10-Q**


**_______________**





(Mark
      One)


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


For
      the
      quarterly period ended September 30, 2007





OR





 ̈
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934


For
      the
      transition period from ______ to ______





Commission
      file number: 001-33710







**CLEAN
      DIESEL TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)







Delaware
            06-1393453(State
                or other jurisdiction of incorporation or organization)
            (I.R.S.
                Employer Identification No.)








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





(203)
      327-7050


(Registrant’s
      telephone number, including area code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for shorter period that the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x****No
       ̈





Indicate
      by check mark whether the registrant is a large accelerated filer, accelerated
      filer, or a non-accelerated filer.  See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                Accelerated Filer ̈
            Accelerated
                Filer  ̈
            Non-Accelerated
                Filer x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes ̈ No x





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date:





As
      of
      November 12, 2007, there were 7,395,524 outstanding shares of common stock,
      par
      value $0.01 per share.












**CLEAN
      DIESEL TECHNOLOGIES, INC.**





Quarterly
      Report on Form 10-Q


For
      the
      Quarter Ended September 30, 2007





**INDEX**




PagePART
                  I.
              FINANCIAL
                  INFORMATIONItem
                  1.
              Condensed
                  Consolidated Financial
                  StatementsCondensed
                  Consolidated Balance Sheets as of September 30, 2007
                  (Unaudited) and December 31, 2006
              2Condensed
                  Consolidated Statements of Operations for the Three
                  and Nine Months Ended September 30, 2007 and 2006
                  (Unaudited)
              3Condensed
                  Consolidated Statements of Cash Flows for the Nine
                  Months Ended September 30, 2007 and 2006 (Unaudited)
              4Notes
                  to Condensed Consolidated Financial
                  Statements
              5Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              19Item
                  4.
              Controls
                  and Procedures
              19PART
                  II.
              OTHER
                  INFORMATIONItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              20Item
                  6.
              Exhibits
              20SIGNATURES
              21




***Index***





**PART
                I.**
            **FINANCIAL
                INFORMATION**


**Item
                1.**
            **Condensed
                Consolidated Financial
                Statements**





**CLEAN
      DIESEL TECHNOLOGIES, INC.**


**Condensed
      Consolidated Balance Sheets**


(in
      thousands, except share data)





**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**(Unaudited)**Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            1,251
            
            
            $
            5,314Investments
            
            
            11,825
            
            
            ─Accounts
                receivable, net of allowance of $49 and $34, respectively
            
            
            1,899
            
            
            
            100Inventories,
                net
            
            
            726
            
            
            
            365Other
                current assets
            
            
            124
            
            
            
            96Subscriptions
                receivable, net
            
            ─
            
            
            
            2,412**Total
                current assets**
            
            
            15,825
            
            
            
            8,287Patents,
                net
            
            
            765
            
            
            
            603Fixed
                assets, net of accumulated depreciation of $400 and $350,
                respectively
            
            
            112
            
            
            
            91Other
                assets
            
            
            37
            
            
            
            37**Total
                assets**
            
            $
            16,739
            
            
            $
            9,018**Liabilities
                and stockholders’ equity****Current
                liabilities:**Accounts
                payable
            
            $
            174
            
            
            $
            330Accrued
                expenses
            
            
            708
            
            
            
            740**Total
                current liabilities**
            
            
            882
            
            
            
            1,070**Stockholders’
                equity:**Preferred
                Stock, par value $0.01 per share; authorized 100,000 shares; no
                shares issued and outstanding
            
            ─
            
            
            ─Common
                Stock, par value $0.01 per share; authorized 12,000,000 shares;
              issued
                and outstanding 7,390,829 and 5,964,493 shares,
                respectively
            
            
            74
            
            
            
            60subscribed
                and to be issued 0 and 667,998 shares, respectively
            
            ─
            
            
            
            7Additional
                paid-in capital, net of subscriptions receivable of $0 and $1,901,
                respectively
            
            
            62,429
            
            
            
            52,854Accumulated
                other comprehensive income
            
            
            14
            
            
            
            4Accumulated
                deficit
            
            
            (46,660
            )
            
            
            (44,977
            )**Total
                stockholders’ equity**
            
            
            15,857
            
            
            
            7,948**Total
                liabilities and stockholders’ equity**
            
            $
            16,739
            
            
            $
            9,018





The
      accompanying notes are an integral part of the financial
      statements.





2
 ***Index***




**CLEAN
        DIESEL TECHNOLOGIES, INC.**
 **Condensed
        Consolidated Statements of Operations**
 (Unaudited;
        in thousands, except per share amounts)




**Three
                Months Ended September 30,**
            
            
            **Nine
                Months Ended September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue:Product
                sales
            
            $
            223
            
            
            $
            235
            
            
            $
            567
            
            
            $
            648Technology
                licensing fees and royalties
            
            
            2,237
            
            
            
            48
            
            
            
            3,352
            
            
            
            50Consulting
                and other
            
            ─
            
            
            
            56
            
            
            ─
            
            
            
            189Total
                revenue
            
            
            2,460
            
            
            
            339
            
            
            
            3,919
            
            
            
            887Costs
                and expenses:Cost
                of revenue
            
            
            167
            
            
            
            206
            
            
            
            388
            
            
            
            478Selling,
                general and administrative
            
            
            1,659
            
            
            
            1,157
            
            
            
            4,957
            
            
            
            3,872Research
                and development
            
            
            100
            
            
            
            52
            
            
            
            292
            
            
            
            447Patent
                amortization and other expense
            
            
            86
            
            
            
            53
            
            
            
            262
            
            
            
            146Operating
                costs and expenses
            
            
            2,012
            
            
            
            1,468
            
            
            
            5,899
            
            
            
            4,943Income
                (loss) from operations
            
            
            448
            
            
            
            (1,129
            )
            
            
            (1,980
            )
            
            
            (4,056
            )Other
                income (expense):Interest
                income
            
            
            204
            
            
            
            8
            
            
            
            298
            
            
            
            56Other
                income (expense)
            
            
            (1
            )
            
            
            7
            
            
            
            (1
            )
            
            
            113Income
                (loss) before provision/benefit for income taxes
            
            
            651
            
            
            
            (1,114
            )
            
            
            (1,683
            )
            
            
            (3,887
            )Provision/benefit
                for income taxes
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─Net
                income (loss)
            
            $
            651
            
            
            $
            (1,114
            )
            
            $
            (1,683
            )
            
            $
            (3,887
            )Income
                (loss) per common share:Basic
            
            $
            0.09
            
            
            $
            (0.21
            )
            
            $
            (0.25
            )
            
            $
            (0.75
            )Diluted
            
            $
            0.09
            
            
            $
            (0.21
            )
            
            $
            (0.25
            )
            
            $
            (0.75
            )Weighted-average
                number of common shares outstanding:Basic
            
            
            7,377
            
            
            
            5,232
            
            
            
            6,685
            
            
            
            5,197Diluted
            
            
            7,580
            
            
            
            5,232
            
            
            
            6,685
            
            
            
            5,197





The
      accompanying notes are an integral part of the financial
      statements.




3
 ***Index***





**CLEAN
      DIESEL TECHNOLOGIES, INC.**


**Condensed
      Consolidated Statements of Cash Flows**


(Unaudited;
      in thousands)





**Nine
                Months Ended September 30,****2007**
            
            
            **2006****Operating
                activities**Net
                loss
            
            $
            (1,683
            )
            
            $
            (3,887
            )Adjustments
                to reconcile net loss to cash used for operating
                activities:Depreciation
                and amortization
            
            
            100
            
            
            
            116Provision
                for doubtful accounts, net
            
            
            28
            
            
            
            26Compensation
                expense for stock options
            
            
            733
            
            
            
            155Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (1,827
            )
            
            
            (76
            )Inventories
            
            
            (361
            )
            
            
            (149
            )Other
                current assets and other assets
            
            
            (28
            )
            
            
            (31
            )Accounts
                payable and accrued expenses
            
            
            (47
            )
            
            
            196Net
                cash used for operating activities
            
            
            (3,085
            )
            
            
            (3,650
            )**Investing
                activities**Purchases
                of investments
            
            
            (11,825
            )
            
            ─Patent
                costs
            
            
            (212
            )
            
            
            (93
            )Purchase
                of fixed assets
            
            
            (71
            )
            
            
            (20
            )Net
                cash used for investing activities
            
            
            (12,108
            )
            
            
            (113
            )**Financing
                activities**Proceeds
                from issuance of common stock, net
            
            
            4,313
            
            
            
            488Proceeds
                from exercise of warrants, net
            
            
            6,867
            
            
            ─Proceeds
                from exercise of stock options
            
            
            83
            
            
            
            14Stockholder-related
                charges
            
            
            (143
            )
            
            ─Net
                cash provided by financing activities
            
            
            11,120
            
            
            
            502Effects
                of exchange rate changes on cash and cash equivalents
            
            
            10
            
            
            ─**Net
                decrease in cash and cash equivalents**
            
            $
            (4,063
            )
            
            $
            (3,261
            )Cash
                and cash equivalents at beginning of the period
            
            
            5,314
            
            
            
            4,513**Cash
                and cash equivalents at end of the period**
            
            $
            1,251
            
            
            $
            1,252**Supplemental
                non-cash activities:**Payment
                of accrued directors’ fees in common stock
            
            $
            140
            
            
            $
            94




The
      accompanying notes are an integral part of the financial
      statements.




4
 ***Index***





**CLEAN
      DIESEL TECHNOLOGIES, INC.**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(Unaudited)





**Note
      1.  Significant Accounting Policies**





***Basis
      of Presentation:***





In
      this
      Quarterly Report on Form 10-Q, the terms “CDT,” “Clean Diesel,” “Company,” “we,”
“us,” or “our” mean Clean Diesel Technologies, Inc. and its wholly-owned
      subsidiary, Clean Diesel International, LLC.





The
      accompanying unaudited consolidated financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (SEC) and in accordance with accounting principles generally accepted in the
      United States of America (GAAP) for interim financial
      information.  Certain information and note disclosures normally
      included in financial statements prepared in accordance with GAAP have been
      omitted or condensed.  These interim consolidated financial statements
      should be read in conjunction with Clean Diesel’s consolidated financial
      statements and notes thereto included in its Annual Report on Form 10-K for
      the
      year ended December 31, 2006.





The
      unaudited consolidated financial statements reflect all adjustments which,
      in
      the opinion of management, are necessary for a fair statement of the results
      of
      operations, financial position and cash flows for the interim periods
      presented.  All such adjustments are of a normal recurring
      nature.  The results for interim periods are not necessarily
      indicative of results which may be expected for any other interim period or
      for
      the full year.





***Reverse
      Split of Common Stock:***





On
      June
      15, 2007, the Company effected a five-for-one reverse split of its common stock
      (see Note 3).  All historical share numbers and per share amounts in
      these financial statements have been adjusted to give effect to this reverse
      split.





***Reclassifications:***





Some
      amounts in prior years’ financial statements have been reclassified to conform
      to the current year’s presentation.





***Revenue
      Recognition:***





The
      Company generates revenue from the sale of fuel-borne catalysts (included in
      product sales), including the Platinum Plus® fuel-borne
      catalyst
      products and concentrate; hardware (included in product sales) including our
      U.S. Environmental Protection Agency verified Purifier System, our advanced
      reagent injection system (ARIS®) injectors
      and
      dosing systems; technology licensing and royalty fees from the ARIS System
      and
      other technologies; and consulting fees and other.





Revenue
      is recognized when earned.  For technology licensing fees paid by
      licensees that are fixed and determinable, accepted by the customer and
      nonrefundable, revenue is recognized upon execution of the license agreement
      unless it is subject to completion of any performance criteria specified within
      the agreement, in which case it is deferred until such performance criteria
      are
      met.  Royalties are frequently required pursuant to license agreements
      or may be the subject of separately executed royalty
      agreements.  Revenue from royalties is recognized over the royalty
      period based upon periodic reports submitted by the royalty obligor or based
      on
      minimum royalty requirements.  Revenue from product sales is
      recognized when title has passed and products are shipped to customers, unless
      the purchase order or contract specifically requires us to provide installation
      for hardware purchases.  For hardware projects in which we are
      responsible for installation (either directly or indirectly by third-party
      contractors), revenue is recognized when the hardware is installed and/or
      accepted, if the project requires inspection and/or acceptance.  Other
      revenue primarily consists of engineering and development consulting
      services.  Revenue from technical consulting services is generally
      recognized and billed as the services are performed.





5
 ***Index***





***Patent
      Expense:***





Patents,
      which include all direct incremental costs associated with initial patent
      filings and costs to acquire rights to patents under licenses, are stated at
      cost and amortized using the straight-line method over the remaining useful
      lives, ranging from one to seventeen years.  During the nine months
      ended September 30, 2007, we capitalized $212,000 of patent
      costs.  Indirect and other patent-related costs are expensed as
      incurred.  Patent amortization expense for the three and nine months
      ended September 30, 2007 was $17,000 and $50,000, respectively, and for the
      three and nine months ended September 30, 2006 was $16,000 and $44,000,
      respectively.  At September 30, 2007 and December 31, 2006, the
      Company’s capitalized costs of its patents, net of accumulated amortization,
      were $765,000 and $603,000, respectively.





***Selling,
      General and Administrative Expense:***





Selling,
      general and administrative expense is summarized as the following:





(in
      thousands)





**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            91
            
            
            $
            49
            
            
            $
            733
            
            
            $
            155Severance
            
            ─
            
            
            ─
            
            
            ─
            
            
            
            357Compensation
                and benefits
            
            
            843
            
            
            
            572
            
            
            
            2,097
            
            
            
            1,746Total
                compensation and benefits
            
            $
            934
            
            
            $
            621
            
            
            $
            2,830
            
            
            $
            2,258Professional
                fees and services
            
            
            228
            
            
            
            178
            
            
            
            816
            
            
            
            610Travel
            
            
            145
            
            
            
            125
            
            
            
            441
            
            
            
            384Occupancy
            
            
            120
            
            
            
            100
            
            
            
            355
            
            
            
            296Sales
                and marketing expenses
            
            
            182
            
            
            
            97
            
            
            
            342
            
            
            
            186Depreciation
                and all other
            
            
            50
            
            
            
            36
            
            
            
            173
            
            
            
            138Total
                selling, general and administrative expense
            
            $
            1,659
            
            
            $
            1,157
            
            
            $
            4,957
            
            
            $
            3,872





Compensation
      expense for the three and nine months ended September 30, 2007 and 2006 includes
      stock-based compensation charges of $91,000, $733,000, $49,000 and $155,000,
      respectively (see Note 4).  Compensation expense for the three and
      nine months ended September 30, 2007 includes $309,000 and $382,000,
      respectively, for bonuses.  During the nine months ended September 30,
      2006, the Company recorded severance compensation expense of approximately
      $357,000 for the departure in January 2006 of its former president and chief
      operating officer, which amount was paid in twelve monthly
      installments.





***Investments:***





Investments
      represent auction rate securities which are highly liquid, variable-rate debt
      securities.  While the underlying security has a long-term nominal
      maturity, the interest rate is reset through dutch auctions that are typically
      held every 28 days.  As the Company expects to hold its auction rate
      securities for less than one year, they are classified as a current
      asset.  The securities trade at par and are callable at par on any
      interest payment date at the option of the issuer.  Interest is paid
      at the end of each auction period.  Our investments are classified as
      "available for sale" under the provisions of Statement of Financial Accounting
      Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
      Equity Securities."  The investments are reported at cost, which
      approximates fair value due to their variable interest rates.  All
      income generated from these investments were recorded as interest
      income.  Accrued interest receivable at September 30, 2007 was
      approximately $37,000.





***Income
      Taxes:***





At
      September 30, 2007, the Company had tax losses available for offset against
      future years’ taxable income of approximately $37.7 million, expiring between
      2009 and 2027.  Because the Company qualifies as a small corporation
      for Alternative Minimum Tax (AMT) purposes and small corporations are exempt
      from the AMT,subject to
      the change of control limitations discussed below, the Company may apply 100%
      of
      its net operating loss deduction to eliminate 2007 income taxes.





6
 ***Index***





Utilization
      of CDT's U.S. federal tax loss carryforwards for the period prior to December
      12, 1995 is limited as a result of the ownership change in excess of 50%
      attributable to the 1995 Fuel Tech rights offering to a maximum annual allowance
      of $734,500.  Utilization of CDT's U.S. federal tax loss carryforwards
      for the period after December 12, 1995 and before December 30, 2006
      is limited as a result of the ownership change in excess of 50%
      attributable to the private placement which was effective December 29, 2006
      to a
      maximum annual allowance of $2,518,985.   Utilization of CDT's tax
      losses subsequent to 2006 may be limited due to cumulative ownership changes
      in
      any future three-year period.  It is not anticipated that CDT's U.S.
      taxable income for the full calendar year 2007 will be in excess of the limited
      allowable loss carryforwards.





***Basic
      and Diluted Income (Loss) per Common Share:***





Basic
      and
      diluted income (loss) per share is calculated in accordance with SFAS No. 128,
      “Earnings Per Share.”  Basic income (loss) per share is computed by
      dividing net income (loss) by the weighted-average shares outstanding during
      the
      reporting period.  Diluted income (loss) per share is computed in a
      manner similar to basic earnings per share except that the weighted-average
      shares outstanding are increased to include additional shares from the assumed
      exercise of stock options and warrants, if dilutive, using the treasury stock
      method.  The Company’s computation of diluted net income (loss) per
      share for nine months ended September 30, 2007 and the three and nine months
      ended September 30, 2006 does not include common share equivalents as the result
      would be anti-dilutive.  Dilutive common share equivalents included in
      the diluted weighted-average shares outstanding for the three months ended
      September 30, 2007 consist of 128,896 related to stock options and 73,526
      related to warrants.





***Newly
      Adopted Accounting Standards:***





EffectiveJanuary 1, 2007, we
      adopted the provision of the Financial
      Accounting Standards Board (“FASB”) Interpretation No. 48,“Accounting
      for Uncertainty in Income
      Taxes, an interpretation of FASB Statement No. 109”(“FIN 48”).  FIN 48 clarifies
      the accounting for uncertainties in income taxes recognized in a company’s
      financial statements in accordance with Statement of Financial
      Accounting
      Standard (“SFAS”) No.109
      and prescribes a recognition threshold and measurement attributable for
      financial disclosure of tax positions taken or expected to be taken on a tax
      return.In
      addition, FIN 48 provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim periods, disclosure and transition. It is the Company's policy to
      record income tax related interest and penalties in general and administrative
      expense. The adoption of FIN 48 did nothave a materialimpactonour
      financial position, results of
      operations or cash flows.





We
      file our tax returns as prescribed by
      the tax laws of the jurisdictions in which we operate.  Our tax years
      ranging from 2004through 2006 remain open to examination
      by various taxing jurisdictions as the statute of limitations has not
      expired.





***New
      Accounting Standards:***





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.”  SFAS No. 157 defines fair value, establishes a
      framework for measuring fair value in generally accepted accounting principles
      and expands disclosures about fair value measurements.  Specifically,
      this Statement sets forth a definition of fair value, and establishes a
      hierarchy prioritizing the inputs to valuation techniques, giving the highest
      priority to quoted prices in active markets for identical assets and liabilities
      and the lowest priority to unobservable inputs.  The provisions of
      SFAS No. 157 are generally required to be applied on a prospective basis, except
      to certain financial instruments accounted for under SFAS No. 133, “Accounting
      for Derivative Instruments and Hedging Activities,” for which the provisions of
      SFAS No. 157 should be applied retrospectively.  The Company will
      adopt SFAS No. 157 in the first quarter of 2008 and is still evaluating the
      effect, if any, on its financial position or results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities - Including an amendment of
      FASB
      Statement No. 115.”  SFAS No. 159 permits an entity to elect fair
      value as the initial and subsequent measurement attribute for many financial
      assets and liabilities.  Entities electing the fair value option would
      be required to recognize changes in fair value in earnings.  Entities
      electing the fair value option are required to distinguish, on the face of
      the
      statement of financial position, the fair value of assets and liabilities for
      which the fair value option has been elected and similar assets and liabilities
      measured using another measurement attribute.  SFAS No. 159 is
      effective for the Company’s fiscal year 2008.  The adjustment to
      reflect the difference between the fair value and the carrying amount would
      be
      accounted for as a cumulative-effect adjustment to retained earnings as of
      the
      date of initial adoption.  We are currently evaluating the impact, if
      any, of SFAS No. 159 on the Company’s consolidated financial
      statements.





7
 ***Index***





**Note
      2.  Inventories**





Inventories
      are stated at the lower of cost or market with cost determined using the average
      cost method.  Inventories consist of the following:





(in
                thousands)**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**Finished
                Platinum Plus
            
            $
            101
            
            
            $
            144Platinum
                concentrate/metal
            
            
            481
            
            
            
            103Hardware
            
            
            79
            
            
            
            119Other
            
            
            80
            
            
            
            26$
            741
            
            
            $
            392Less:  inventory
                reserves
            
            
            (15
            )
            
            
            (27
            )Inventories,
                net
            
            $
            726
            
            
            $
            365





**Note
      3.  Stockholders’ Equity**





*Authorized
      Capital Stock; Reverse Split*





As
      of
      December 31, 2006, adjusted for the effect of the reverse split, the Company
      had
      9.1 million shares authorized, 9 million shares of which are $0.01 par value
      common stock and 100,000 of which are $0.01 par value preferred
      stock.  At the Company’s annual meeting of stockholders held on June
      7, 2007, the stockholders approved a five-for-one reverse split of the Company’s
      common stock, a reduction of the par value of the Company’s preferred and common
      stock from $0.05 per share to $0.01 per share and an increase in the number
      of
      shares of common stock the Company is authorized to issue from 9 million to
      12
      million.  Such actions became effective at the close of business on
      June 15, 2007 when the Company filed a Certificate of Amendment to its Restated
      Certificate of Incorporation with the Secretary of State of
      Delaware.  The historical share numbers and per share amounts in these
      financial statements have been adjusted to give effect to the reverse
      split.





In
      conjunction with the reverse split, we incurred costs aggregating approximately
      $25,000, primarily from our transfer agents and outside legal counsel which
      were
      charged to additional paid-in capital in the nine months ended September 30,
      2007.  We also charged an aggregate of $66,000 to additional paid-in
      capital for costs incurred to date in connection with our filing of a
      Registration Statement on Form S-1 with the SEC and approximately $52,000
      related to our initial listing on The NASDAQ Capital Market.  On
      October 3, 2007, our common stock began trading on The NASDAQ Capital Market
      under the symbol “CDTI.”





We
      acquired 86 shares of our common stock, held in treasury, from the fractional
      shares that will be paid in cash in lieu of fractional shares to stockholders
      as
      stockholders surrender old stock certificates for new stock
      certificates.  The cash value of the fractional shares was determined
      based upon the average of our high and low prices on June 15, 2007 on the OTCBB
      and AIM with the average AIM price translated at the foreign exchange rate
      then
      in effect.  The Company retired all treasury shares on August 9,
      2007.





At
      the
      Company’s annual meeting of stockholders held on June 15, 2006, the stockholders
      approved an amendment to increase the number of shares of common stock the
      Company is authorized to issue from 6 million to 9 million.  Such
      amendment became effective on June 21, 2006 when the Company filed a Certificate
      of Amendment to its Restated Certificate of Incorporation with the Secretary
      of
      State of Delaware.





*Issuance
      of Common Shares*





In
      the
      first nine months of 2007, the Company issued 667,998 shares of its common
      stock
      in consideration of approximately $4.5 million ($4.3 million, net of expenses)
      cash received from investors to settle stock subscriptions entered into pursuant
      to CDT’s December 2006 private placement.  In the December 2006
      placement, the Company secured commitments for the purchase of 1,400,000 shares
      of its common stock, par value $0.01, and warrants for the purchase of an
      additional 1,400,000 shares of common stock for aggregate gross cash proceeds
      of
      $9.5 million (net proceeds of approximately $9.0 million).  The
      securities were sold in investment units consisting of one share of common
      stock, one Class A Warrant and one Class B Warrant, each warrant entitling
      the
      holder to purchase one additional share of common stock for every two shares
      of
      common stock acquired in the offering at a purchase price of $6.75 per
      unit.  Of the aggregate cash proceeds, $5.0 million ($4.7 million,
      net) had been received by December 31, 2006 and comprised 732,001 shares of
      our
      common stock.  Of the remaining balance, $2.4 million, net, was paid
      by subscribers by March 23, 2007 and was classified in current assets as
      subscriptions receivable on the December 31, 2006 Consolidated Balance Sheet
      and
      $1.9 million, net, was paid by June 7, 2007 and was classified as a reduction
      of
      additional paid-in capital on the December 31, 2006 Consolidated Balance
      Sheet.  The aggregate placement fee we incurred for the funds
      generated by the December 2006 private placement was approximately
      $410,000.





8
 ***Index***





In
      the
      nine months ended September 30, 2007, the Company received approximately $6.9
      million, net of expenses, upon the exercise of warrants to acquire 709,383
      shares of our common stock (see Note 4).





On
      January 12, 2007, the Company issued 17,142 shares of its common stock to three
      non-executive members of the CDT board of directors as payment (or partial
      payment in the case of one director) of $115,000 in lieu of cash for directors’
fees earned in 2006.  On June 19, 2007, the Company issued 2,457
      shares of common stock to two non-executive members of the CDT board of
      directors as payment of $25,000 in lieu of cash for directors’ fees earned
      during the first quarter of 2007.  The number of shares of our common
      stock issued to the directors was determined based upon the average of our
      high
      and low prices during each quarter on the OTCBB and AIM.  The grant
      date for such shares of common stock for purposes of measuring compensation
      is
      the last day of the quarter of which the shares are earned, which is the date
      that the director begins to benefit from, or be adversely affected by,
      subsequent changes in the price of the stock.  Director’s compensation
      charged to operations did not materially differ from such
      measurement.





In
      the
      first nine months of 2007, CDT issued 29,441 shares of its common stock upon
      exercise of 42,201 stock options for aggregate proceeds to the Company of
      approximately $83,000.





During
      the first nine months of 2006, Clean Diesel received $487,500 cash (net of
      $12,500 in expenses) for subscriptions for 141,000 shares of its common stock
      pursuant to an offshore private placement completed in November
      2005.





**Note
      4.  Stock Options and Warrants**





*Stock
      Options*





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standard
      No. 123 (Revised 2004), “Share-Based Payment,” using the modified prospective
      transition method.  SFAS No. 123(R) requires the measurement and
      recognition of compensation cost for all share-based payment awards made to
      employees and directors, including grants of employee stock options, based
      on
      estimated fair values on the date of grant.





Share-based
      compensation cost recognized under SFAS 123(R) was approximately $91,000 and
      $733,000 for the three and nine months ended September 30, 2007, respectively,
      and approximately $49,000 and $155,000, respectively, for the three and nine
      months ended September 30, 2006.  Compensation costs for stock options
      which vest over time are recognized over the vesting period.  As of
      September 30, 2007, there was approximately $358,000 of unrecognized
      compensation cost related to stock options granted under the
      Plan.  The cost is expected to be recognized over a weighted-average
      period of 0.7 years.





The
      Company maintains a stock award plan approved by its stockholders, the 1994
      Incentive Plan (the “Plan”).  Under the Plan, awards may be granted to
      participants in the form of incentive stock options, non-qualified stock
      options, stock appreciation rights, restricted stock, performance awards,
      bonuses or other forms of share-based awards or cash, or combinations of these
      as determined by the board of directors.  Awards are granted at fair
      market value on the date of grant and typically expire ten years after date
      of
      grant.  Participants in the Plan may include the Company’s directors,
      officers, employees, consultants and advisors (except consultants or advisors
      in
      capital-raising transactions) as the board of directors may
      determine.  The maximum number of awards allowed under the Plan is
      17.5% of the Company’s outstanding common stock less the then outstanding
      awards, subject to sufficient authorized shares.





9
 ***Index***





The
      following table summarizes information concerning options outstanding including
      the related transactions under the options plans for the nine months ended
      September 30, 2007:





**Number
                of Shares**
            
            
            **Weighted
                Average Exercise Price**
            
            
            **Weighted
                Average Remaining Contractual Term in Years**
            
            
            **Aggregate
                Intrinsic Value**Options
                outstanding as of December 31, 2006
            
            
            648,087
            
            
            $
            10.082Granted
            
            
            125,000
            
            
            $
            9.100Exercised
            
            
            (42,201
            )
            
            $
            6.195Forfeited/cancelled
            
            
            (11,134
            )
            
            $
            5.
                819Expired
            
            
            (20,333
            )
            
            $
            23.018Options
                outstanding as of September 30, 2007
            
            
            699,419
            
            
            $
            9.833
            
            
            
            6.14
            
            
            $
            2,188,556Options
                exercisable as of September 30, 2007
            
            
            597,620
            
            
            $
            10.136
            
            
            
            5.64
            
            
            $
            1,736,121




The
      aggregate intrinsic value (market value of stock less option exercise price)
      in
      the preceding table represents the total pretax intrinsic value, based on the
      Company’s closing stock price on the last day of its third quarter (September
      28, 2007), which would have been received by the option holders had all option
      holders exercised their options as of that date.




Proceeds
      received from the exercise of stock options were approximately $83,000 in cash
      for the nine months ended September 30, 2007 (included in financing activities
      on the Company’s Condensed Consolidated Statements of Cash Flows) along with
      12,760 shares of common stock surrendered to finance cashless exercise of
      options.  The total intrinsic value of stock options exercised for the
      three and nine months ended September 30, 2007 was $151,000 and $261,000,
      respectively, and $0 and $3,000, respectively, for the three and nine months
      ended September 30, 2006.





On
      January 4, 2007, the board of directors granted 125,000 option shares to
      employees, directors and consultants at an exercise price of $9.10 per
      share.  The directors’ options are exercisable
      immediately.  The other options vest as to one-third, immediately upon
      grant and as to one-third, upon each of the first and second anniversaries
      of
      grant.  The weighted-average fair value at the date of grant for
      options granted in 2007 was $7.78 per share and was estimated using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions:





Expected
                term in years
            
            8.64Risk-free
                interest rate
            
            4.67%Expected
                volatility
            
            104.7%Dividend
                yield
            
            0%Forfeiture
                rate
            
            5.0%





The
      Company estimates the fair value of stock options using a Black-Scholes option
      pricing model.  Key input assumptions used to estimate the fair value
      of stock options include the expected term, expected volatility of the Company’s
      stock, the risk free interest rate, option forfeiture rates, and dividends,
      if
      any.  The expected term of the options is based upon the historical
      term until exercise or expiration of all granted options.  The
      expected volatility is derived from the historical volatility of the Company’s
      stock in the U.S. (effective October 3, 2007, on The NASDAQ Capital Market
      and
      prior to that, on the Over-the-Counter Bulletin Board) and in the U.K. on the
      Alternative Investment Market (AIM of the London Stock Exchange) for a period
      that matches the expected term of the option.  The risk-free interest
      rate is the constant maturity rate published by the U.S. Federal Reserve Board
      that corresponds to the expected term of the option.  SFAS No. 123R
      requires forfeitures to be estimated at the time of grant in order to estimate
      the amount of share-based awards that will ultimately vest.  The
      estimate is based on the Company’s historical rates of
      forfeitures.  SFAS No. 123R also requires estimated forfeitures to be
      revised, if necessary, in subsequent periods if actual forfeitures differ from
      those estimates.  The dividend yield is assumed as 0% because the
      Company has not paid dividends and does not expect to pay dividends in the
      future.





10
 ***Index***





*Warrants*





Warrant
      activity for the nine months ended September 30, 2007 is summarized in the
      following table:





**Number
                of Shares**
            
            
            **Weighted
                Average Exercise Price**Warrants
                outstanding and to be issued as of December 31, 2006
            
            
            1,557,424
            
            
            $
            10.98Issued
            
            
            74,142
            
            
            
            8.44Exercised
            
            
            (709,383
            )
            
            
            10.03Forfeited
            
            
            (27
            )
            
            
            11.49Expired
            
            
            (107
            )
            
            
            10.00Warrants
                outstanding and exercisable as of September 30, 2007
            
            
            922,049
            
            
            $
            11.51Weighted-average
                remaining contractual term in years
            
            
            1.25Aggregate
                intrinsic value
            
            $
            916,567





All
      of
      the outstanding warrants are exercisable.  In 2007, Clean Diesel
      Technologies issued the remaining number of warrants due to the placement agent
      for the December 2006 private placement (74,142 warrants).  In the
      third quarter of 2007, the Company received $2.6 million ($2.5 million, net
      of
      expenses) upon the exercise of 252,749 Class A Warrants and 9,500 Class B
      Warrants.  In June 2007, the Company received $4.5 million ($4.3
      million, net of expenses) upon the exercise of Class A Warrants to acquire
      447,134 shares of common stock.  The aggregate placement fee for the
      funds generated from the exercise of these warrants was $250,000.  The
      Class A and B Warrants had been issued in conjunction with the December 2006
      private placement (see Note 3).





The
      Class
      A Warrants entitled the holder until July 2, 2007 to purchase, at a price of
      $10.00 per share, one share of common stock for every two shares of common
      stock
      acquired in the December 2006 private placement.  The Class B Warrants
      entitle the holder until December 29, 2007 to purchase, at a price of $12.50
      per
      share, one share of common stock for every two shares of common stock acquired
      in the December 2006 private placement.  At September 30, 2007,
      there were 690,488 Class B Warrants outstanding.





**Note
      5.  Commitments**





The
      Company is obligated under a five-year sublease agreement through March 2009
      for
      its principal office (3,925 square feet) at an annual cost of approximately
      $125,000, including rent, utilities and parking.  The Company is
      obligated under a four-year lease through July 2008 for 2,750 square feet of
      warehouse space at an annual cost of approximately $21,000, including
      utilities.  In addition, the Company fulfilled its obligation under a
      lease that expired in September 2007 for 400 square feet of administrative
      space
      in the U.K. at an annual cost of approximately $33,000, including utilities
      and
      communication services, but continues to rent that space on a month-to-month
      basis.  We are in the process of negotiating a lease for other office
      space in the U.K.





Effective
      October 28, 1994, Fuel Tech, Inc., successor to Fuel-Tech N.V. (“Fuel Tech”),
      the company that spun CDT off in a rights offering in December 1995, granted
      two
      licenses to the Company for all patents and rights associated with its platinum
      fuel-based catalyst technology.  Effective November 24, 1997, the
      licenses were canceled and Fuel Tech assigned to CDT all such patents and rights
      on terms substantially similar to the licenses.  In exchange for the
      assignment commencing in 1998, the Company is obligated to pay Fuel Tech a
      royalty of 2.5% of its annual gross revenue attributable to sales of the
      platinum fuel-borne catalysts.  The royalty obligation expires in
      2008.  CDT may terminate the royalty obligation to Fuel Tech by
      payment of $2.2 million in 2007 or $1.1 million in 2008.  CDT, as
      assignee and owner, maintains the technology at its expense.  Royalty
      expense incurred under this obligation for each of the three months ended
      September 30, 2007 and 2006 was approximately $4,000, and for the nine months
      ended September 30, 2007 and 2006 was approximately $10,000 and $11,000,
      respectively.  Royalties payable to Fuel Tech at September 30, 2007
      and December 31, 2006 were approximately $10,000 and $15,000,
      respectively.





11
 ***Index***




**Note
      6.  Related Party Transactions**





The
      Company has a Management and Services Agreement with Fuel Tech that requires
      the
      Company to reimburse Fuel Tech for management, services and administrative
      expenses incurred on its behalf at a rate equal to an additional 3 to 10% of
      the
      costs paid on the Company’s behalf, dependent upon the nature of the costs
      incurred.  Currently, the Company reimburses Fuel Tech for the
      expenses associated with one Fuel Tech officer/director who also serves as
      an
      officer/director of CDT.  The Company’s Condensed Consolidated
      Statements of Operation include charges from Fuel Tech of certain management
      and
      administrative costs of approximately $18,000 in each of the three month periods
      ended September 30, 2007 and 2006 and $53,000 in each of the nine month
      periods ended September 30, 2007 and 2006 (classified as compensation
      within our selling, general and administrative expenses).  The Company
      believes the charges under this Management and Services Agreement are reasonable
      and fair.  The Management and Services Agreement is for an indefinite
      term but may be cancelled by either party by notifying the other in writing
      of
      the cancellation on or before May 15 in any year.





**Note
      7.  Technology Licensing Agreements and Other
      Revenue**





In
      2007,
      we have executed license agreements with new licensees and amended a license
      agreement with an existing licensee for our selective catalytic reduction (SCR)
      emission control (our patented ARIS technologies for control of oxides of
      nitrogen) and the combination of exhaust gas recirculation (EGR) with SCR
      technologies.  The agreements provide for up-front fees and quarterly
      royalty payments.  The licenses are non-exclusive and cover specific
      geographic territories.  The three- and nine-month periods ended
      September 30, 2007 include approximately $2.2 million and $3.4 million,
      respectively, in technology licensing fees and royalties, including
      approximately $0.1 million in each period from an existing licensee’s September
      2004 nonexclusive license.





*Consulting
      and Other*





The
      2006
      three- and nine-month periods include consulting fees from services rendered
      on
      various projects, including provision of certain consulting and market analysis
      services pursuant to a consulting contract.





**Note
      8.  Significant Customers**





For
      the
      three and nine months ended September 30, 2007 and 2006, revenue derived from
      certain customers comprised 10% or more of our consolidated revenue
      (“significant customers”) as set forth in the table below:




**Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months Ended**
                **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Customer
                  A
              *
              
              *
              
              *
              
              *Customer
                  B
              *
              
              16.5%
              
              *
              
              19.5%Customer
                  C
              *
              
              10.3%
              
              *
              
              13.0%Customer
                  D
              *
              
              *
              
              29.1%
              
              *Customer
                  E
              61.0%
              
              *
              
              38.3%
              
              *Customer
                  F
              24.3%
              
              *
              
              18.2%
              
              *




*
      Represents less than 10% revenue for that customer in the applicable
      period.  There were no other customers that represented 10% or more of
      revenue for the periods indicated.





In
      addition, at September 30, 2007, we had two customers, Customers D and E in
      the
      table above, that represented more than 10% of our gross accounts receivable
      balance.  Amounts due from Customers D and E, respectively, were
      approximately 12.3% and 77.0% of the September 30, 2007 gross accounts
      receivable.





12
 ***Index***








**Note
      9.  Comprehensive Income (Loss)**





Components
      of comprehensive income (loss) follow:





(in
                thousands)**Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                income (loss)
            
            $
            651
            
            
            $
            (1,114
            )
            
            $
            (1,683
            )
            
            $
            (3,887
            )Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            10
            
            
            
            
            
            
            10
            
            
            Comprehensive
                income (loss)
            
            $
            661
            
            
            $
            (1,114
            )
            
            $
            (1,673
            )
            
            $
            (3,887
            )





**Note
      10.  Geographic Information**





A
      geographic distribution of revenue consists of the following:





(in
                thousands)**Three
                Months Ended**
              **September
                30,**
            
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Revenue:**U.S.
            
            $
            1,370
            
            
            $
            221
            
            
            $
            2,239
            
            
            $
            565U.K./Europe
            
            
            1,034
            
            
            
            23
            
            
            
            1,603
            
            
            
            95Asia
            
            
            56
            
            
            
            95
            
            
            
            77
            
            
            
            227Total
            
            $
            2,460
            
            
            $
            339
            
            
            $
            3,919
            
            
            $
            887





The
      Company has patent coverage in North America, Europe, Asia and South
      America.  As of September 30, 2007, of our patents, net of accumulated
      amortization, approximately 25% are attributable to the U.S. patents and
      approximately 75% are attributable to corresponding foreign
      patents.





**Note
      11.  Subsequent Events**





During
      October 2007, we issued 4,695 shares of our common stock upon the exercise
      of
      7,547 stock options upon receipt of approximately $19,000 in cash and the
      surrender of 2,852 options.





13
 ***Index***




**Item2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**





**Forward-Looking
      Statements**





Statements
      in this Quarterly Report on Form 10-Q that are not historical facts, so-called
      “forward-looking statements,” are made pursuant to the safe harbor provisions of
      the Private Securities Litigation Reform Act of 1995.  Investors are
      cautioned that all forward-looking statements involve risks and uncertainties,
      including those detailed in the Company’s filings with the Securities and
      Exchange Commission.  See Item 1A, “Risk Factors,” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.





**Results
      of Operations**





*Three
      Months ended September 30, 2007 Compared to Three Months ended September 30,
      2006*





Total
      revenue in the three months ended September 30, 2007 was $2,460,000 compared
      to
      $339,000 in the three months ended September 30, 2006, an increase of
      $2,121,000, or 625.7%, due primarily to higher technology licensing fees and
      royalties.  Operating revenue in the three months ended September 30,
      2007 consisted of approximately 9.1% in product sales, 90.9% in technology
      licensing fees and royalties, and zero in consulting and other
      revenue.  Operating revenue in the three months ended September 30,
      2006 consisted of approximately 69.3% in product sales, 14.2% in technology
      licensing fees and royalties, and 16.5% in consulting and other
      revenue.





The
      mix
      of our revenue sources during any reporting period may have a material impact
      on
      our operating results.  In particular, our execution of technology
      licensing agreements, and the timing of the revenue recognized from these
      agreements, has not been predictable.





During
      the three months ended September 30, 2007, we made progress in our ongoing
      initiative to consummate technology license agreements with significant
      manufacturers and component suppliers, including execution of new and amended
      technology licensing agreements for the use of our ARIS® technologies for
      control of oxides of nitrogen (NOx) using our selective catalytic reduction
      (SCR) emission control, the combination of exhaust gas recirculation (EGR)
      with
      SCR technologies, and hydrocarbon injection for lean NOx traps, NOx catalysts
      and diesel particulate filter regeneration.





Product
      sales in the three months ended September 30, 2007 was $223,000 compared to
      $235,000 in the three months ended September 30, 2006, a decrease of $12,000,
      or
      5.1%, attributable to slight declines in all product lines compared to the
      same
      prior year period.  Technology licenses fees and royalties in 2007
      included license fees upon execution of new and amended agreements and royalties
      from existing licensees.  Consulting and other revenue was zero in the
      three months ended September 30, 2007 compared to $56,000 in the three months
      ended September 30, 2006 due to consulting projects we performed in
      2006.





Cost
      of
      revenue was $167,000 and $206,000, respectively, in the three months ended
      September 30, 2007 and 2006.  Gross margin as a percentage of product
      sales was 25.1% and 12.3% for the three months ended September 30, 2007 and
      2006, respectively, with the variation attributable to the mix of fuel-borne
      catalysts and hardware sales in the respective periods.





Selling,
      general and administrative expenses were $1,659,000 in the three months ended
      September 30, 2007 compared to $1,157,000 in the comparable 2006 period, an
      increase of $502,000, or 43.4%.  Selling, general and administrative
      expenses are summarized as follows:





14
 ***Index***








(in
                thousands)**Three
                Months Ended****September
                30,****2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            91
            
            
            $
            49Compensation
                and benefits
            
            
            843
            
            
            
            572Total
                compensation and benefits
            
            $
            934
            
            
            $
            621Professional
                fees and services
            
            
            228
            
            
            
            178Travel
            
            
            145
            
            
            
            125Occupancy
            
            
            120
            
            
            
            100Sales
                and marketing expenses
            
            
            182
            
            
            
            97Depreciation
                and all other
            
            
            50
            
            
            
            36Total
                selling, general and administrative expense
            
            $
            1,659
            
            
            $
            1,157





Compensation
      and benefit expense in the three months ended September 30, 2007 included
      $91,000 of non-cash charges for the fair value of stock options compared to
      $49,000 in non-cash stock option compensation expense in the three months ended
      September 30, 2006 in accordance with SFAS No. 123R, which we adopted in January
      2006.  The three-month period ended September 30, 2007 also includes
      approximately $309,000 in bonuses based upon achievement of certain 2007
      milestones and expectation that other incentive criteria will be met, whereas
      the comparable 2006 period did not include an accrual for bonus
      expense.





Professional
      fees include public relations, investor relations and financial advisory
      fees.  The increase in 2007 professional fees compared to the same
      2006 period is primarily due to Sarbanes-Oxley consultants.  Occupancy
      costs include office rents, insurance, telephone and communications, office
      supplies and related costs.  The 2007 sales and marketing expenses
      increased compared to 2006 primarily due to production of marketing material
      and
      increased use of outside services.





Research
      and development expenses were $100,000 in the three months ended September
      30,
      2007 compared to $52,000 in the three months ended September 30, 2006, an
      increase of $48,000, or 92.3%, due to the timing of initiation of our 2007
      projects which include field testing of emission control
      technologies.  The 2006 projects included testing related to diesel
      particulate filter technology and new bio-fuel technology.





Patent
      amortization and other patent costs increased to $86,000 in the three months
      ended September 30, 2007 from $53,000 in the comparable 2006 period, due to
      increased costs associated with the filing and prosecution of new CDT
      patents.





Interest
      income was $204,000 and $8,000, respectively, in the three months ended
      September 30, 2007 and 2006 due to higher yields and invested balances during
      the 2007 period.





*Nine
      months ended September 30, 2007 Compared to Nine months ended September 30,
      2006*





Total
      revenue for the nine months ended September 30, 2007 increased $3,032,000,
      or
      341.8%, to $3,919,000 from $887,000 in the nine months ended September 30,
      2006
      due primarily to technology licensing fees.  Operating revenue in the
      nine months ended September 30, 2007 consisted of approximately 14.5% in product
      sales and 85.5% in technology licensing fees and royalties, and zero in
      consulting and other revenue.  Operating revenue in the nine months
      ended September 30, 2006 consisted of approximately 73.1% in product sales,
      5.6%
      in technology licensing fees and royalties, and 21.3% in consulting and other
      revenue.  The mix of our revenue sources during any reporting period
      may have a material impact on our operating results.  In particular,
      our execution of technology licensing agreements, and the timing of the revenue
      recognized from these agreements, has not been predictable.





During
      the nine months ended September 30, 2007, we continued in our ongoing initiative
      to consummate technology license agreements with manufacturers and component
      suppliers.  During the period, we executed new and amended technology
      licensing agreements and recognized revenue from license fees for the use of
      our
      ARIS technologies for control of oxides of nitrogen (NOx) using our selective
      catalytic reduction (SCR) emission control, the combination of exhaust gas
      recirculation (EGR) with SCR technologies, and hydrocarbon injection for lean
      NOx traps, NOx catalysts and diesel particulate filter
      regeneration.





15
 ***Index***




Product
      sales in the nine months ended September 30, 2007 were $567,000 compared to
      $648,000 in the same prior year period, a decrease of $81,000, or 12.5%,
      attributable to declines in all product lines due, in part, to timing of
      projects.  The 2007 product sales comprise $407,000 in fuel-borne
      catalysts and $160,000 in hardware sales compared to $457,000 in additives
      and
      $191,000 in hardware sales in 2006.  Technology licensing fees and
      royalties in 2007 included fees upon execution of new agreements as noted above
      and royalties from licensees for use of our ARIS
      technologies.  Consulting and other revenue was zero in the nine
      months ended September 30, 2007 compared to $189,000 in the nine months ended
      September 30, 2006 due to consulting projects we performed in 2006.





Cost
      of
      revenue was $388,000 and $478,000, respectively, in the nine months ended
      September 30, 2007 and 2006.  Gross margin as a percentage of product
      sales was 31.6% and 26.2%, respectively, in the nine months ended September
      30,
      2007 and 2006.





Selling,
      general and administrative expenses were $4,957,000 in the nine months ended
      September 30, 2007 compared to $3,872,000 in the comparable 2006 period, an
      increase of $1,085,000, or 28.0%.  Selling, general and administrative
      expenses are summarized as follows:





(in
                thousands)**Nine
                Months Ended****September
                30,****2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            733
            
            
            $
            155Severance
            
            
            
            
            
            357Compensation
                and benefits
            
            
            2,097
            
            
            
            1,746Total
                compensation and benefits
            
            $
            2,830
            
            
            $
            2,258Professional
                fees and services
            
            
            816
            
            
            
            610Travel
            
            
            441
            
            
            
            384Occupancy
            
            
            355
            
            
            
            296Sales
                and marketing expenses
            
            
            342
            
            
            
            186Depreciation
                and all other
            
            
            173
            
            
            
            138Total
                selling, general and administrative expense
            
            $
            4,957
            
            
            $
            3,872





Compensation
      and benefit expense in the nine months ended September 30, 2007 included
      $733,000 of non-cash charges for the fair value of stock options compared to
      $155,000 in non-cash stock option compensation expense in the nine months ended
      September 30, 2006 in accordance with SFAS No. 123R, which we adopted in January
      2006.  The 2007 compensation includes approximately $382,000 bonus
      expense based upon achievement of certain milestones and expectation that other
      incentive criteria will be met, whereas the 2006 period did not include an
      accrual for bonus expense.  The 2006 period included approximately
      $357,000 of severance charges for the former president and chief operating
      officer who had been released from employment in January 2006.





Professional
      fees include public relations, investor relations and financial advisory
      fees.  The increase in 2007 professional fees compared to the same
      2006 period is primarily due to Sarbanes-Oxley consultants as well as increased
      use of services of investor and public relations firms.  Occupancy
      costs include office rents, insurance, telephone and communications, office
      supplies and related costs.  The 2007 sales and marketing expenses
      increased compared to 2006 primarily due to production of marketing literature
      and increased use of outside consultants.





Research
      and development expenses were $292,000 in the nine months ended September 30,
      2007 compared to $447,000 in the nine months ended September 30, 2006, a
      decrease of $155,000, or 34.7%, due to significant special costs incurred on
      a
      project that was substantially competed during the 2006 period and due to the
      timing of initiation of our 2007 projects.  The 2007 projects include
      field testing of emission control technologies.  The prior year
      projects included testing related to diesel particulate filter technology and
      new bio-fuel technology.





Patent
      amortization and other patent related expense was $262,000 in the nine months
      ended September 30, 2007 compared to $146,000 in the same prior year
      period.  The increase is attributable to higher fees required on
      foreign patents (annuities), higher maintenance (fees on U.S. patents) and
      increased amortization expense due to higher capitalized patent costs, as well
      as filing and prosecution of new CDT patents.





16
 ***Index***





Interest
      income was $298,000 in the nine months ended September 30, 2007 compared to
      $56,000 in the nine months ended September 30, 2006, an increase of $242,000,
      or
      432.1%, due to higher rates of return and higher invested balances during the
      2007 period.





**Liquidity
      and Sources of Capital**





At
      September 30, 2007 and December 31, 2006, we had cash and cash equivalents
      of
      $1,251,000 and $5,314,000, respectively, a decrease of
      $4,063,000.  The decrease in cash and cash equivalents was primarily
      due to investment of funds. Our investments were $11,825,000 at September
      30, 2007 compared to zero at December 31, 2006.  Our working capital
      was $14,943,000 at September 30, 2007 compared to $7,217,000 at December 31,
      2006, an increase of $7,726,000.





In
      the
      nine months ended September 30, 2007, operating activities used $3,085,000
      of
      cash primarily to fund the 2007 net loss of $1,683,000, adjusted for non-cash
      items.  Included in the 2007 non-cash items was stock option
      compensation expense of $733,000 accounted for in accordance with SFAS No.
      123R,
      which we adopted on January 1, 2006.





Accounts
      receivable, net, increased to $1,899,000 at September 30, 2007 from $100,000
      at
      December 31, 2006 due to technology licensing fees from new license agreements
      in 2007.





Inventory
      increased to $726,000 at September 30, 2007 from $365,000 at December 31, 2006
      primarily due to the timing of our platinum metal purchases and at a higher
      cost
      than the prior year.  In addition, we are maintaining higher inventory
      balances for our international operations.





We
      used
      $12,108,000 for investing activities in the nine months ended September 30,
      2007.  Our primary investing activity consisted of identifying and
      placing funds into appropriate investment instruments to maximize our returns
      while balancing our need for safety of principal.  At September 30,
      2007, we held $11.8 million in highly liquid auction rate securities. While
      the underlying securities have a long-term nominal maturity, the interest rate
      is reset through dutch auctions every 28 days.  As we expect to hold
      the auction rate securities for less than one year, they have been classified
      as
      a current asset.  The securities trade at par and are callable at par
      on any interest payment date at the option of the issuer.  Interest is
      paid at the end of each auction period.





Cash
      provided by financing activities was $11,120,000 in the nine months ended
      September 30, 2007 due to proceeds from collection of subscriptions from the
      2006 private placement and proceeds from the exercise of warrants.





During
      the nine months ended September 30, 2007, we collected approximately $4.3
      million, net of expenses, representing all of the remaining stock subscriptions
      from the December 2006 private placement.  In December 2006, we
      entered into definitive agreements with investors for the purchase by these
      investors of 1.4 million shares of our common stock and warrants for the right
      to acquire an additional 1.4 million shares of our common stock, for the total
      gross sales price of $9.5 million (proceeds, net of $410,000 in expenses, amount
      to approximately $9.0 million) of which $2.4 million, net of expenses, was
      classified in current assets as subscriptions receivable and $1.9 million,
      net
      of expenses, representing unpaid subscriptions receivable that remained unpaid
      as of March 23, 2007 were included as a reduction of stockholders’ equity on the
      Consolidated Balance Sheet at December 31, 2006.





In
      the
      December 2006 private placement, each investment unit was sold for $6.75 and
      was
      comprised of one share of our common stock, one Class A Warrant and one Class
      B
      Warrant, each warrant entitling the holder to acquire one additional share
      of
      common stock for every two shares purchased in the offering.  In the
      aggregate, the warrants comprised 0.7 million Class A Warrants and 0.7 million
      Class B Warrants.  The Class A Warrants were exercisable at a per
      share price of $10.00 and expired on July 2, 2007 (see below).  The
      Class B Warrants are exercisable at a per share price of $12.50 and expire
      on
      December 29, 2007.  We are using the proceeds from this private
      placement for general working capital purposes.  Of the total shares
      sold, 1,338,137 were sold to non-U.S. investors, primarily in the U.K., and
      the
      Company claimed the exemption from registration provided by Regulation S under
      the 1933 Securities Act.  Of the total shares sold, 61,863 were sold
      to investors in the U.S., and the Company claimed the exemption from
      registration provided by Regulation D under the Securities Act of
      1933.





17
 ***Index***





Through
      September 30, 2007, we had received approximately $6.9 million, net of expenses,
      upon exercise of warrants to acquire 709,383 shares of our common
      stock.





In
      connection with the December 2006 private placement, we undertook to apply
      for
      the listing of our outstanding shares on a recognized U.S. stock exchange at
      such time as we should satisfy the applicable listing
      requirements.  On June 29, 2007, we submitted an application for
      listing our common stock on The NASDAQ Capital Market and on September 27,
      2007,
      we were approved by NASDAQ.  On October 3, 2007, our common stock
      began trading on The NASDAQ Capital Market under the symbol
“CDTI.”  We paid an entrance fee of $50,000 to be listed on NASDAQ,
      which was charged to additional paid-in capital.





Also
      in
      conjunction with the December 2006 private placement, we undertook to file
      a
      registration statement under the Securities Act of 1933 covering the shares
      of
      common stock and the shares of common stock underlying the warrants following
      completion of the audit of our financial statements for the year
      2006.  On June 29, 2007, we filed a Registration Statement on Form S-1
      with the SEC covering these shares of common stock.  On October 4,
      2007, we filed an amendment to the Registration Statement that was declared
      effective at 5 pm on October 4, 2007.  To date, costs associated with
      the filing of the registration statement, including review by outside legal
      counsel and our registered public accountants, SEC filing fees and miscellaneous
      charges total approximately $66,000 and have been charged to additional paid-in
      capital.





Aggregate
      stockholder-related charges to additional paid-in capital were $143,000 and
      included the costs outlined above along with charges for services related to
      our
      five-for-one reverse stock split.  The reverse split was approved by
      our stockholders at the annual meeting held on June 7, 2007.  The
      reverse split became effective at the close of business on June 15,
      2007.





Our
      management believes that our available funds at September 30, 2007 will be
      sufficient to sustain our operations at current levels through December
      2008.  These funds consist of available cash, investments and the
      funding derived from our revenue sources.  There is also the
      possibility that some or all of the approximately 0.7 million warrants that
      expire in December 2007 may be exercised which could generate additional
      cash.





We
      have
      incurred losses since inception aggregating $46,660,000 which amount includes
      $4,752,000 of non-cash preferred stock dividends.  We expect to incur
      losses through the foreseeable future until our products and technological
      solutions achieve greater market penetration.  Although we have
      generated revenue from sales of our Platinum Plus fuel-borne catalyst, Purifier
      Systems, ARIS advanced reagent injector and dosing systems for selective
      catalytic reduction, and catalyzed wire mesh filters, and from technology
      licensing fees and royalties, our revenue prior to the third quarter of 2007
      has
      been insufficient to cover our operating expenses, and we have been dependent
      upon sources other than operations to finance our working capital
      requirements.  The Company can provide no assurance that it will be
      successful in any future financing effort to obtain the necessary working
      capital to support operations or if such financing is available, that it will
      be
      on acceptable terms.





In
      the
      event that our business does not generate sufficient cash and external financing
      is not available or timely, we would be required to substantially reduce our
      level of operations and capital expenditures in order to conserve cash and
      possibly seek joint ventures or other transactions, including the sale of
      assets.  These reductions could have an adverse effect on our
      relationships with our customers and suppliers.  Our long-term
      continuation is dependent upon the achievement of profitable operations and
      the
      ability to generate sufficient cash from operations, equity financings and
      other
      funding sources to meet our obligations.





No
      dividends have been paid on our common stock and we do not anticipate paying
      cash dividends in the foreseeable future.





We
      have
      no indebtedness, nor any standby credit arrangements.





***Capital
      Expenditures***





As
      of
      September 30, 2007, we had no commitments for capital expenditures and no
      material commitments are anticipated in the near future.





18
 ***Index***




**Item3.**
            **Quantitative
                and Qualitative Disclosures about Market
                Risk**





In
      the
      opinion of management, with the exception of exposure to fluctuations in the
      cost of platinum and certain foreign exchange rate, we are not subject to any
      significant market risk exposure.  We monitor the price of platinum
      and exchange rates and adjust our procurement strategies as needed.





Our
      transactions are primarily denominated in U.S. dollars.  We typically
      make certain payments in various foreign currencies for salary expense, patent
      annuities and maintenance, product tests and registration, local marketing
      and
      promotion, and consultation and outside services.





**Item
                4.**
            **Controls
                and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company maintains disclosure controls and procedures and internal controls
      designed to ensure that information required to be disclosed in the Company’s
      filings under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported within the time periods specified in the Securities
      and
      Exchange Commission’s rules and forms.  The Company’s management, with
      the participation of its principal executive and financial officers, has
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      as of the end of the period covered by this Quarterly Report on Form
      10-Q.  The Company’s principal executive and principal financial
      officers have concluded, based on such evaluation, that such disclosure controls
      and procedures were effective for the purpose for which they were designed
      as of
      the end of such period.





**Changes
      in Internal Controls**





There
      was
      no change in the Company’s internal control over financial reporting that was
      identified in connection with such evaluation that occurred during the period
      covered by this Quarterly Report on Form 10-Q that has materially affected,
      or
      is reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





19
 ***Index***





**PART
                II.**
            **OTHER
                INFORMATION**





**Item2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**





The
      Company received gross proceeds of approximately $7.1 million from the exercise
      of warrants to acquire seven-hundred nine thousand, three-hundred eighty-three
      (709,383) shares of its common stock, $0.01 par value. Total gross proceeds
      of
      $4.5 million were received in the Company’s second quarter for 447,134 common
      shares and $2.6 million gross proceeds for 262,249 shares of the Company’s
      common stock were received in July 2007.  The proceeds will be used
      for general corporate purposes.  The warrants were exercised by 35
      investors (31 non-U.S. investors and 4 U.S. investors).





The
      warrants exercised included 699,883 of the Company’s Class A Warrants and 9,500
      of the Company’s Class B Warrants.  The Class A Warrants expired on
      July 2, 2007 and were exercisable at a price of $10.00 per share (price adjusted
      for the reverse split effected at close of business on June 15,
      2007).  The Class B Warrants expire on December 29, 2007 and are
      exercisable at a price of $12.50 per share (price adjusted for the reverse
      split
      effected on September 15, 2007).





In
      connection with the exercise of the warrants, the Company incurred expenses
      including commissions to the placement agent of approximately
      $250,000.




These
      private placements qualified for the exemptions from registration under the
      Securities Act of 1933, as amended, (the “Act”) afforded by Regulation S and
      Regulation D under the Act.  Of the total shares sold, 678,085 were
      sold to offshore investors, and in connection therewith, the Company claimed
      the
      exemption from registration provided by Regulation S of the Act.  Of
      the total shares sold, 31,298 were sold to investors in the United States,
      and
      in connection therewith, the Company claimed the exemption from registration
      provided by Regulation D of the Act.  Directors and senior management
      invested $71,337 for a total of 7,133 common shares.





**Item
                6.**
            **Exhibits**





(a)
            ExhibitsExhibit
                Number
            
            Description31.1
            
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Exchange
                Act31.2
            
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Exchange
                Act32.1
            
            Certification
                Pursuant to 18 U.S.C. Section 1350





20
 ***Index***





**SIGNATURES**








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








**CLEAN
                DIESEL TECHNOLOGIES, INC.**(Registrant)Date:  November
                14, 2007
            By:
            /s/
                Bernhard SteinerBernhard
                SteinerDirector,
                President and Chief
                Executive OfficerDate:  November
                14, 2007
            By:
            /s/
                Ann B. RupleAnn
                B. RupleChief
                Financial Officer, Vice
                President and Treasurer







21