**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 June 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: 0-27432
  **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
        August 13, 2007, there were 7,382,829 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 June 30, 2007





**INDEX**








PagePART
                I.
            FINANCIAL
                INFORMATIONItem
                1.
            Condensed
                Consolidated Financial StatementsCondensed
                Consolidated Balance Sheets as of June 30, 2007
                (Unaudited) and December 31, 2006
            2Condensed
                Consolidated Statements of Operations for the Three
                and Six Months Ended June 30, 2007 and 2006
                (Unaudited)
            3Condensed
                Consolidated Statements of Cash Flows for the Six
                Months Ended June 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
            13Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            18Item
                4.
            Controls
                and Procedures
            18PART
                II.
            OTHER
                INFORMATIONItem
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            19Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            19Item
                6.
            Exhibits
            20SIGNATURES
            21




1
 *Index*


**PART
      I.          FINANCIAL
      INFORMATION**


**Item
      1.            Condensed Consolidated Financial Statements**





**CLEAN
      DIESEL TECHNOLOGIES, INC.**


**Condensed
      Consolidated Balance Sheets**


(in
      thousands, except share data)





**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**(Unaudited)**Assets****Current
                assets:**Cash
                and cash equivalents
            
            $
            10,778
            
            
            $
            5,314Accounts
                receivable, net of allowance of $63 and $34, respectively
            
            
            1,031
            
            
            
            100Inventories,
                net
            
            
            609
            
            
            
            365Other
                current assets
            
            
            103
            
            
            
            96Subscription
                receivable, net
            
            ─
            
            
            
            2,412**Total
                current assets**
            
            
            12,521
            
            
            
            8,287Patents,
                net
            
            
            638
            
            
            
            603Fixed
                assets, net of accumulated depreciation of $385 and $350,
                respectively
            
            
            74
            
            
            
            91Other
                assets
            
            
            37
            
            
            
            37**Total
                assets**
            
            $
            13,270
            
            
            $
            9,018**Liabilities
                and stockholders’ equity****Current
                liabilities:**Accounts
                payable
            
            $
            174
            
            
            $
            330Accrued
                expenses
            
            
            457
            
            
            
            740**Total
                current liabilities**
            
            
            631
            
            
            
            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
                7,115,232 and 5,964,493 shares, respectively
            
            
            71
            
            
            
            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
            
            
            59,875
            
            
            
            52,854Treasury
                stock, 86 and 0 shares, respectively, of common stock, at
                cost
            
            
            (1
            )
            
            ─Accumulated
                other comprehensive income
            
            
            5
            
            
            
            4Accumulated
                deficit
            
            
            (47,311
            )
            
            
            (44,977
            )**Total
                stockholders’ equity**
            
            
            12,639
            
            
            
            7,948**Total
                liabilities and stockholders’ equity**
            
            $
            13,270
            
            
            $
            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**
              **June
                30,**
            
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue:Product
                sales
            
            $
            139
            
            
            $
            218
            
            
            $
            344
            
            
            $
            413Technology
                licensing fees and royalties
            
            
            1,104
            
            
            
            1
            
            
            
            1,115
            
            
            
            2Consulting
                and other
            
            ─
            
            
            
            60
            
            
            ─
            
            
            
            133Total
                revenue
            
            
            1,243
            
            
            
            279
            
            
            
            1,459
            
            
            
            548Costs
                and expenses:Cost
                of revenue
            
            
            105
            
            
            
            156
            
            
            
            221
            
            
            
            272Selling,
                general and administrative
            
            
            1,495
            
            
            
            1,186
            
            
            
            3,298
            
            
            
            2,715Research
                and development
            
            
            150
            
            
            
            177
            
            
            
            192
            
            
            
            395Patent
                amortization and other expense
            
            
            79
            
            
            
            50
            
            
            
            176
            
            
            
            93Operating
                costs and expenses
            
            
            1,829
            
            
            
            1,569
            
            
            
            3,887
            
            
            
            3,475Loss
                from operations
            
            
            (586
            )
            
            
            (1,290
            )
            
            
            (2,428
            )
            
            
            (2,927
            )Other
                income (expense):Interest
                income
            
            
            67
            
            
            
            21
            
            
            
            94
            
            
            
            48Other
                income (expense)
            
            ─
            
            
            
            79
            
            
            ─
            
            
            
            105Net
                loss
            
            $
            (519
            )
            
            $
            (1,190
            )
            
            $
            (2,334
            )
            
            $
            (2,774
            )Basic
                and diluted loss per common share
            
            $
            (0.08
            )
            
            $
            (0.23
            )
            
            $
            (0.37
            )
            
            $
            (0.54
            )Basic
                and diluted weighted-average number of common shares
                outstanding
            
            
            6,550
            
            
            
            5,222
            
            
            
            6,333
            
            
            
            5,179





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)





**Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006****Operating
                activities**Net
                loss
            
            $
            (2,334
            )
            
            $
            (2,774
            )Adjustments
                to reconcile net loss to cash used in operating
                activities:Depreciation
                and amortization
            
            
            68
            
            
            
            79Provision
                for doubtful accounts, net
            
            
            30
            
            
            
            18Compensation
                expense for stock options
            
            
            642
            
            
            
            106Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (961
            )
            
            
            (57
            )Inventories
            
            
            (244
            )
            
            
            (161
            )Other
                current assets and other assets
            
            
            (7
            )
            
            
            (44
            )Accounts
                payable and accrued expenses
            
            
            (298
            )
            
            
            381Net
                cash used for operating activities
            
            
            (3,104
            )
            
            
            (2,452
            )**Investing
                activities**Patent
                costs
            
            
            (68
            )
            
            
            (62
            )Purchase
                of fixed assets
            
            
            (18
            )
            
            ─Net
                cash used for investing activities
            
            
            (86
            )
            
            
            (62
            )**Financing
                activities**Proceeds
                from issuance of common stock, net
            
            
            4,313
            
            
            
            488Proceeds
                from exercise of warrants, net
            
            
            4,346
            
            
            ─Proceeds
                from exercise of stock options
            
            
            40
            
            
            
            14Stockholder-related
                charges
            
            
            (45
            )
            
            ─Net
                cash provided by financing activities
            
            
            8,654
            
            
            
            502**Net
                increase (decrease) in cash and cash equivalents**
            
            $
            5,464
            
            
            $
            (2,012
            )Cash
                and cash equivalents at beginning of the period
            
            
            5,314
            
            
            
            4,513**Cash
                and cash equivalents at end of the period**
            
            $
            10,778
            
            
            $
            2,501**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 our products are shipped to our customer,
      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 six months
      ended June 30, 2007, we capitalized $68,000 of patent costs.  Indirect
      and other patent-related costs are expensed as incurred.  Patent
      amortization expense for the three and six months ended June 30, 2007 was
      $16,600 and $33,100, respectively, and for the three and six months ended June
      30, 2006 was $11,000 and $28,100, respectively.  At June 30, 2007 and
      December 31, 2006, the Company’s patents, net of accumulated amortization, were
      $638,000 and $603,000, respectively.





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





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





(in
                thousands)**Three
                Months Ended**
            
            
            **Six
                Months Ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            91
            
            
            $
            53
            
            
            $
            642
            
            
            $
            106Severance
            
            ─
            
            
            ─
            
            
            ─
            
            
            
            357Compensation
                and benefits
            
            
            653
            
            
            
            582
            
            
            
            1,254
            
            
            
            1,174Total
                compensation and benefits
            
            $
            744
            
            
            $
            635
            
            
            $
            1,896
            
            
            $
            1,637Professional
            
            
            365
            
            
            
            231
            
            
            
            588
            
            
            
            432Travel
            
            
            158
            
            
            
            135
            
            
            
            296
            
            
            
            259Occupancy
            
            
            123
            
            
            
            95
            
            
            
            235
            
            
            
            196Sales
                and marketing expenses
            
            
            72
            
            
            
            42
            
            
            
            160
            
            
            
            89Depreciation
                and all other
            
            
            33
            
            
            
            48
            
            
            
            123
            
            
            
            102Total
                selling, general and administrative expense
            
            $
            1,495
            
            
            $
            1,186
            
            
            $
            3,298
            
            
            $
            2,715





Compensation
      expense for the three and six months ended June 30, 2007 and 2006 includes
      stock-based compensation charges of $91,000, $642,000, $53,000 and $106,000,
      respectively (see Note 4).  During the six months ended June 30, 2006,
      the Company recorded severance compensation expense of $357,475 for the
      departure of its former president and chief operating officer, which amount
      was
      paid in twelve monthly installments.





***Newly
      Adopted Accounting Standards:***





Effective
      January 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.  The adoption of FIN 48
      did not have a material impact on our 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 2003
      through 2006 remain open to examination
      by various taxing jurisdictions as the statute of limitations has not
      expired.




6
 *Index*





***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.





**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)**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**Finished
                Platinum Plus
            
            $
            151
            
            
            $
            144Platinum
                concentrate/metal
            
            
            312
            
            
            
            103Hardware
            
            
            122
            
            
            
            119Other
            
            
            39
            
            
            
            26$
            624
            
            
            $
            392Less:  inventory
                reserves
            
            
            (15
            )
            
            
            (27
            )Inventories,
                net
            
            $
            609
            
            
            $
            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
      $21,000, primarily from our transfer agents and outside legal counsel which
      were
      charged to additional paid-in capital in the six months ended June 30,
      2007.  We also charged an aggregate of $24,000 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 on June 29, 2007 and our
      submission of an application for listing on the NASDAQ Capital Market on June
      29, 2007.




7
 *Index*


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 markets with the average AIM price translated at the foreign exchange
      rate then in effect.





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 six months of 2007, the Company issued 667,993 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 were approximately
      $410,000.





In
      the
      six months ended June 30, 2007, the Company received approximately $4.3 million,
      net of expenses, upon the exercise of Class A Warrants to acquire 447,134 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.  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 of 2006 on the OTCBB and AIM markets.





On
      June
      19, 2007, the Company issued 2,457 shares of common stock, valued at $25,000,
      to
      two non-executive members of the Board of Directors in lieu of fees for services
      rendered 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 the first quarter of 2007 on the OTCBB and
      AIM
      markets.





In
      the
      first six months of 2007, CDT issued 16,007 shares of its common stock upon
      exercise of stock options for aggregate proceeds to the Company of approximately
      $40,000.





During
      the first six 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.


8
 *Index*





**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
      $642,000 for the three and six months ended June 30, 2007, respectively, and
      approximately $53,000 and $106,000, respectively, for the three and six months
      ended June 30, 2006.  Compensation costs for stock options which vest
      over time are recognized over the vesting period.  As of June 30,
      2007, there was approximately $449,000 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 0.8 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.





The
      following table summarizes information concerning options outstanding including
      the related transactions under the options plans for the six months ended June
      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
            
            
            (21,785
            )
            
            $
            6.776Forfeited/cancelled
            
            
            (13,550
            )
            
            $
            5.075Expired
            
            
            (20,333
            )
            
            $
            23.018Options
                outstanding as of June 30, 2007
            
            
            717,419
            
            
            $
            9.717
            
            
            
            6.36
            
            
            $
            3,250,407Options
                exercisable as of June 30, 2007
            
            
            610,620
            
            
            $
            10.017
            
            
            
            5.88
            
            
            $
            2,599,366




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 June 30, 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 $40,000 in cash
      for the six months ended June 30, 2007 (included in financing activities on
      the
      Company’s Condensed Consolidated Statements of Cash Flows) along with 5,778
      shares of common stock surrendered and 2,416 shares cancelled to finance
      cashless exercise of options.  The total intrinsic value of stock
      options exercised for the three and six months ended June 30, 2007 was $79,795
      and $110,348, respectively, and $0 and $3,000, respectively, for the three
      and
      six months ended June 30, 2006.




9
 *Index*


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 $7.775 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 on the U.S. Over the Counter market and the U.K. 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.





***Warrants***





Warrant
      activity for the six months ended June 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
            
            
            (447,134
            )
            
            
            10.00Forfeited
            
            
            (27
            )
            
            
            11.49Expired
            
            ─
            
            
            ─Warrants
                outstanding and exercisable as of June 30, 2007
            
            
            1,184,405
            
            
            $
            11.20Weighted-average
                remaining contractual term in years
            
            
            1.17Aggregate
                intrinsic value
            
            $
            3,443,412





All
      of
      the outstanding warrants are exercisable.  In 2007, Clean Diesel
      Technologies issued the remaining amount of warrants due the placement agent
      for
      the December 2006 private placement.  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 Company
      received $2.6 million ($2.5 million, net of expenses) after June 30, 2007 upon
      the exercise of 252,749 Class A Warrants and 9,500 Class B
      Warrants.  The aggregate placement fee for the funds generated from
      the exercise of these warrants was $250,000 of which approximately $158,000
      was
      allocated to the funds received during the Company’s second quarter and $92,000
      was allocated to the funds received during the third quarter.  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.




10
 *Index*


**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 is obligated under a lease
      through 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.





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 the three months ended June 30,
      2007
      and 2006 was $3,751 and $3,631, respectively, and for the six months ended
      June
      30, 2007 and 2006 was $6,528 and $7,387, respectively.  Royalties
      payable to Fuel Tech at June 30, 2007 and December 31, 2006 were approximately
      $6,500 and $14,500, respectively.





**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, and for the last three years, the Company has
      reimbursed 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 months ended June 30, 2007 and 2006 and $35,000
      in
      each of the six months ended June 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**





During
      the three months ended June 30, 2007, we executed license agreements with two
      licensees 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 licenses expire upon expiration of the licensed
      patented 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 six-month periods
      ended June 30, 2007 include approximately $1.0 million in technology licensing
      fees attributable to the new agreements.





Also
      included in the three and six months ended June 30, 2007 are technology
      licensing fees from an existing licensee’s September 2004 nonexclusive ARIS
      stationary license for the U.S. market representing $50,000 of the total
      $150,000 fee (approximately $50,000 will be paid in each of the next two fiscal
      quarters).




*Consulting
      and Other*





The
      2006
      three- and six-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.


11
 *Index*


**Note
      8.  Significant Customers**





For
      the
      three and six months ended June 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**
              **June
                30,**
            
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Customer
                A
            
            
            *
            
            
            
            17.9%
            
            
            
            *
            
            
            
            *Customer
                B
            
            
            *
            
            
            
            21.1%
            
            
            
            *
            
            
            
            21.4%Customer
                C
            
            
            *
            
            
            
            16.5%
            
            
            
            *
            
            
            
            14.6%Customer
                D
            
            
            80.4%
            
            
            
            *
            
            
            
            68.5
            
            
            
            *





*
            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 June 30, 2007 Clean Diesel had one customer, Customer D in the
      table above, that represented approximately 91.4% of its gross accounts
      receivable balance.





**Note
      9.  Comprehensive Loss**





Components
      of comprehensive loss follow:





(in
                thousands)**Three
                Months Ended**
            
            
            **Six
                Months Ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                loss
            
            $
            (519
            )
            
            $
            (1,190
            )
            
            $
            (2,334
            )
            
            $
            (2,774
            )Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            1
            
            
            
            
            
            
            1
            
            
            Comprehensive
                loss
            
            $
            (518
            )
            
            $
            (1,190
            )
            
            $
            (2,333
            )
            
            $
            (2,774
            )





**Note
      10.  Geographic Information**





A
      geographic distribution of revenue consists of the following:





(in
                thousands)**Three
                Months Ended**
              **June
                30,**
            
            
            **Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Revenue:**U.S.
            
            $
            710
            
            
            $
            166
            
            
            $
            869
            
            
            $
            344U.K./Europe
            
            
            533
            
            
            
            54
            
            
            
            569
            
            
            
            72Asia
            
            ─
            
            
            
            59
            
            
            
            21
            
            
            
            132Total
            
            $
            1,243
            
            
            $
            279
            
            
            $
            1,459
            
            
            $
            548





The
      Company has patent coverage in North America, Europe, Asia and South
      America.  As of June 30, 2007, of our patents, net of accumulated
      amortization, approximately 30% are attributable to the U.S. patents and
      approximately 70% are attributable to corresponding foreign
      patents.





**Note
      11.  Subsequent Events**





As
      outlined in Note 4 - Warrants, after June 30, 2007, we received approximately
      $2.6 million in cash ($2.5 million, net of expenses) upon the exercise of
      warrants to acquire 262,249 shares of our common stock.





During
      July 2007, we issued 5,434 shares of our common stock upon the cashless exercise
      of 10,000 options.


12
 *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 June 30, 2007 Compared to Three Months ended June 30,
      2006*





Total
      revenue in the three months ended June 30, 2007 was $1,243,000 compared to
      $279,000 in the three months ended June 30, 2006, an increase of $964,000,
      or
      345.5%, due to higher technology licensing fees and royalties, lower product
      sales and lower consulting and other revenue.  Operating revenue in
      the three months ended June 30, 2007 consisted of approximately 11.2% in product
      sales and 88.8% in technology licensing fees and royalties and zero in
      consulting and other revenue.  Operating revenue in the three months
      ended June 30, 2006 consisted of approximately 78.1% in product sales, 0.4%
      in
      technology licensing fees and royalties and 21.5% 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 June 30, 2007, we made substantial progress in our
      ongoing initiative to consummate technology license agreements with significant
      manufacturers and component suppliers.  We executed two new technology
      licensing agreements during the three months ended June 30, 2007 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.





Product
      sales in the three months ended June 30, 2007 was $139,000 compared to $218,000
      in the three months ended June 30, 2006, a decrease of $79,000, or 36.2%,
      attributable to declines in all product lines compared to the same prior year
      period due to order pattern shifts in customer and distributor product
      sales.  The 2007 period did not include any revenue from hardware
      sales compared to $73,000 in the 2006 period due to timing of projects and
      our
      focus during the period on development of other revenue
      sources.  Revenue from sales of our fuel-borne catalysts was slightly
      behind the 2006 period.  Technology licenses fees and royalties in
      2007 included fees upon execution of new agreements as noted above and minimum
      royalties from an existing licensee for use of our mobile ARIS technologies
      in
      the U.S.  Consulting and other revenue was zero in the three months
      ended June 30, 2007 compared to $60,000 in the three months ended June 30,
      2006
      due to consulting projects we performed in 2006.





Cost
      of
      revenue was $105,000 and $156,000, respectively, in the three months ended
      June
      30, 2007 and 2006.





Selling,
      general and administrative expenses were $1,495,000 in the three months ended
      June 30, 2007 compared to $1,186,000 in the comparable 2006 period, an increase
      of $309,000, or 26.1%.  Selling, general and administrative expenses
      are summarized as follows:


13
 *Index*





(in
                thousands)**Three
                Months Ended****June
                30,****2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            91
            
            
            $
            53Compensation
                and benefits
            
            
            653
            
            
            
            582Total
                compensation and benefits
            
            $
            744
            
            
            $
            635Professional
            
            
            365
            
            
            
            231Travel
            
            
            158
            
            
            
            135Occupancy
            
            
            123
            
            
            
            95Sales
                and marketing expenses
            
            
            72
            
            
            
            42Depreciation
                and all other
            
            
            33
            
            
            
            48Total
                selling, general and administrative expense
            
            $
            1,495
            
            
            $
            1,186





Compensation
      and benefit expense in the three months ended June 30, 2007 included $91,000
      of
      non-cash charges for the fair value of stock options compared to $53,000 in
      non-cash stock option compensation expense in the three months ended June 30,
      2006 in accordance with SFAS No. 123R, which we adopted in January
      2006.  The three month period ended June 30, 2007 also includes
      $77,500 in bonuses based upon achievement of certain 2007 milestones, 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 as well as increased
      use of services of investor 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 $150,000 in the three months ended June 30, 2007
      compared to $177,000 in the three months ended June 30, 2006, a decrease of
      $27,000, or 15.3%, 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 $79,000 in the three months
      ended June 30, 2007 from $50,000 in the comparable 2006 period, due to higher
      capitalized costs being amortized and increased costs associated with the filing
      and prosecution of new CDT patents.





Interest
      income was $67,000 and $21,000, respectively, in the three months ended June
      30,
      2007 and 2006 due to higher yields and balances during the 2007
      period.





*Six
      Months ended June 30, 2007 Compared to Six Months ended June 30,
      2006*





Total
      revenue for the first half of 2007 increased $911,000, or 166.2%, to $1,459,000
      from $548,000 in the first half of 2006 due primarily to technology licensing
      fees.  Operating revenue in the six months ended June 30, 2007
      consisted of approximately 23.6% in product sales and 76.4% in technology
      licensing fees and royalties and zero in consulting and other
      revenue.  Operating revenue in the six months ended June 30, 2006
      consisted of approximately 75.4% in product sales, 0.4% in technology licensing
      fees and royalties and 24.3% 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 six months ended June 30, 2007, we made substantial progress in our ongoing
      initiative to consummate technology license agreements with significant
      manufacturers and component suppliers.  During the period, we executed two
      new 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.




14
 *Index*


Product
      sales in the six months ended June 30, 2007 were $344,000 compared to $413,000
      in the same prior year period, a decrease of $69,000, or 16.7%, attributable
      to
      declines in all product lines due to timing of projects, order pattern shifts
      in
      customer and distributor product sales and our focus during the period on
      developing other revenue sources.  The 2007 product sales comprise
      $261,000 in fuel-borne catalysts and $83,000 in hardware sales compared to
      $296,000 in additives and $117,000 in hardware sales in
      2006.  Technology licensing fees and royalties in 2007 included fees
      upon execution of new agreements as noted above and minimum royalties from
      an
      existing licensee for use of our mobile ARIS technologies in the
      U.S.  Consulting and other revenue was zero in the six months ended
      June 30, 2007 compared to $133,000 in the six months ended June 30, 2006 due
      to
      consulting projects we performed in 2006.





Cost
      of
      revenue was $221,000 and $272,000, respectively, in the six months ended June
      30, 2007 and 2006.





Selling,
      general and administrative expenses were $3,298,000 in the six months ended
      June
      30, 2007 compared to $2,715,000 in the comparable 2006 period, an increase
      of
      $583,000, or 21.5%.  Selling, general and administrative expenses are
      summarized as follows:





(in
                thousands)**Six
                Months Ended****June
                30,****2007**
            
            
            **2006**Non-cash
                stock-based compensation
            
            $
            642
            
            
            $
            106Severance
            
            
            
            
            
            357Compensation
                and benefits
            
            
            1,254
            
            
            
            1,174Total
                compensation and benefits
            
            $
            1,896
            
            
            $
            1,637Professional
            
            
            588
            
            
            
            432Travel
            
            
            296
            
            
            
            259Occupancy
            
            
            235
            
            
            
            196Sales
                and marketing expenses
            
            
            160
            
            
            
            89Depreciation
                and all other
            
            
            123
            
            
            
            102Total
                selling, general and administrative expense
            
            $
            3,298
            
            
            $
            2,715





Compensation
      and benefit expense in the six months ended June 30, 2007 included $642,000
      of
      non-cash charges for the fair value of stock options compared to $106,000 in
      non-cash stock option compensation expense in the six months ended June 30,
      2006
      in accordance with SFAS No. 123R, which we adopted in January
      2006.  The 2007 compensation expense includes $77,500 bonus expense
      based upon milestones, whereas the 2006 period did not include an accrual for
      bonus expense.  The six months ended June 30, 2006 included $357,475
      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 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 $192,000 in the six months ended June 30, 2007
      compared to $395,000 in the six months ended June 30, 2006, a decrease of
      $203,000, or 51.4%, 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 2006 projects included
      testing related to diesel particulate filter technology and new bio-fuel
      technology.





Patent
      amortization and other patent related expense was $176,000 in the six months
      ended June 30, 2007 compared to $93,000 in the same prior year
      period.  The increase is attributable to higher fees required on
      foreign patents (annuities) and maintenance (fees on U.S. patents) and
      amortization expense due to higher capitalized patent costs, as well as filing
      and prosecution of new CDT patents.





Interest
      income was $94,000 in the six months ended June 30, 2007 compared to $48,000
      in
      the six months ended June 30, 2006, an increase of $46,000, or 95.8%, due to
      higher rates of return and higher invested balances during the 2007
      period.




15
 *Index*


**Liquidity
      and Sources of Capital**





At
      June
      30, 2007 and December 31, 2006, we had cash and cash equivalents of $10,778,000
      and $5,314,000, respectively, an increase of $5,464,000 primarily due to the
      collection of subscription receivables and the cash infusion upon exercise
      of
      warrants.  Our working capital was $11,890,000 at June 30, 2007
      compared to $7,217,000 at December 31, 2006, an increase of
      $4,673,000.





In
      the
      six months ended June 30, 2007, operating activities used $3,104,000 of cash
      primarily to fund the 2007 net loss of $2,334,000, adjusted for non-cash
      items.  Included in the 2007 non-cash items was stock option
      compensation expense of $642,000 accounted for in accordance with SFAS No.
      123R,
      which we adopted on January 1, 2006.





Accounts
      receivable, net, increased to $1,031,000 at June 30, 2007 from $100,000 at
      December 31, 2006 due to technology licensing fees.  As of July 24,
      2007, all but $211,000 of those fees have been paid.





Inventory
      increased to $609,000 at June 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.





Our
      June
      30, 2007 accrued expenses include $158,000 of the aggregate $250,000 fee due
      to
      the placement agent for the exercise of warrants through June 30,
      2007.





We
      used
      $86,000 for investing activities in the six months ended June 30, 2007,
      primarily for investments in our patents.  We expect to continue to
      invest in our patents.





Cash
      provided by financing activities was $8,654,000 in the six months ended June
      30,
      2007 due to proceeds from collection of subscriptions from the 2006 private
      placement and proceeds from the exercise of warrants.





During
      the six months ended June 30, 2007, we collected approximately $4.3 million,
      net
      of expenses, representing all of the remaining 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 comprise 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 claims 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 claims the exemption from registration
      provided by Regulation D under the Act.





In
      connection with this 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.  In connection with submission of that application, we paid an
      initial fee of $5,000 which was charged to additional paid-in
      capital.  If we are approved for listing on the NASDAQ Capital Market,
      additional listing fees will be required.





Also
      in
      conjunction with this 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.  We estimate that the 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 may total approximately $50,000.  To date, we have incurred
      approximately $19,000 which was charged to additional paid-in
      capital.




16
 *Index*


Aggregate
      stockholder-related charges to additional paid-in capital were $45,000 and
      included the costs outlined above along with approximately $21,000 incurred
      to
      date 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 and has helped us meet
      the
      requirements for listing on the NASDAQ Capital Market.





Our
      management believes that our available funds at June 30, 2007 and the additional
      funds from the July 2007 exercise of warrants will be sufficient to sustain
      our
      operations at current levels through December 2008.  These funds
      consist of available cash 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.





Through
      June 30, 2007, we had received approximately $4.3 million, net of expenses,
      upon
      exercise of Class A warrants to acquire 447,134 shares of our common
      stock.  In July 2007, we received approximately $2.6 million, net of
      expenses, upon exercise of warrants to acquire 262,549 shares of our common
      stock.





We
      have
      incurred losses since inception aggregating $47,311,000 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 awareness.  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, catalyzed wire mesh filters and from technology licensing fees and
      royalties, revenue to date has been insufficient to cover our operating
      expenses, and we continue to be 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
      June 30, 2007, we had no commitments for capital expenditures and no material
      commitments are anticipated in the near future.


17
 *Index*





**Item
                3.**
            **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 the U.K. 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 consultants.





**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.


18
 *Index*


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





**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds**





Through
      July 2, 2007, the Company issued shares of its common stock, $0.01 par value,
      upon the exercise of warrants.  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.  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 June 15, 2007).





In
      connection with the exercise of the warrants, the Company incurred expenses
      including commissions to the placement agent of approximately $250,000 of which
      approximately $158,000 was allocated to the funds received in the Company’s
      second quarter and $92,000 was attributed to the funds received in the Company’s
      third quarter.




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 claims
      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 claims 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
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders**





At
      the
      June 7, 2007 Annual Meeting of Stockholders of CDT, the holders of 4,233,996
      (21,169,981 on a pre-split basis) shares of CDT’s common stock were present in
      person or by proxy.  This attendance was 65.8% of the total of
      6,439,001 (32,195,008 on a pre-split basis) shares of common stock outstanding
      as of the record date of April 9, 2007.





The
      results of matters submitted to a vote of the stockholders were as
      follows:





(i)  the
      proposal to elect six nominees as directors was approved by a vote, adjusted
      to
      effect the reverse split, with respect to each individual, as
      follows:


Shares
              
              SharesName
              
              For
              
              WithheldJohn
                  A. de Havilland
              
              4,211,830
              
              22,116Derek
                  R. Gray
              
              4,229,689
              
              4,306Charles
                  W. Grinnell
              
              4,232,530
              
              1,466John
                  J. McCloy II
              
              4,229,689
              
              4,306David
                  F. Merrion
              
              4,232,530
              
              1,466Bernhard
                  Steiner
              
              4,229,689
              
              4,306





(ii)  the
      proposal to ratify the appointment of Eisner LLP as the Company’s independent
      registered public accounting firm for the year 2007 was approved by a vote,
      adjusted to effect the reverse split, of 4,233,496 for, 400 shares against
      and
      100 abstentions.





(iii)  the
      proposal to amend the Company’s Restated Certificate of Incorporation to reduce
      the authorized capital to 12,100,000 shares, to reduce the par value of shares
      to $0.01 per share, and to effect the reverse stock split of common stock at
      an
      exchange ratio of five to one was approved by a vote, adjusted to effect the
      reverse split, of 4,219,432 for, 13,161 against and 1,402
      abstentions.


19
 *Index*


**Item6.**
            **Exhibits**





(a)
            ExhibitsExhibit
              Number
            
            Description#3(i)(b)
            
            Certificate
                of Amendment to Restated Certificate of Incorporation dated as of
                June 15,
                2007 (incorporated by reference to Exhibit 3(i)(b) to Registration
                Statement on Form S-1 filed on June 29, 2007 [File No.
                333-144201]).31.1
            
            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:  August
                14, 2007
            
            By:
            /s/
                Bernhard SteinerBernhard
                SteinerDirector,
                President and Chief Executive OfficerDate:  August
                14, 2007
            
            By:
            /s/
                Ann B. RupleAnn
                B. RupleChief
                Financial Officer, Vice President and Treasurer






21